Q2 2024 Conagra Brands Inc Earnings Call

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Speaker Change: Good morning and welcome to the Khan Agro Brands 2nd quarter fiscal 2024 earnings call. Our participants will be in

Good morning, and welcome to the Conagra brands second quarter fiscal 2024 earnings call.

All participants will be in listen only mode.

Speaker Change: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

Speaker Change: After today's presentation, there will be an opportunity to ask questions.

After todays presentation, there will be an opportunity to ask questions.

Speaker Change: To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.

To ask a question you May press Star then one on your telephone keypad to.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

Speaker Change: I would now like to turn the conference over to Bailey Ellis, Manager of Investor Relations.

I would now like to turn the conference over to Bally Ellis manager of Investor Relations. Please go ahead.

Bailey Ellis: Good morning and thanks for joining us for the ConAgra Brand second quarter and first half fiscal 2024 earnings.

Good morning, and thanks for joining us for the Conagra Brands' second quarter and first half fiscal 2024 earnings call.

Bailey Ellis: Sean Connolly, our CEO , and Dave Marburger, our CFO , will first discuss our business performance and then we'll open up the call for Q&A. We will be making some forward-looking statements today. And while we are making those statements in good faith, we do not have any guarantee about the results we will achieve. Descriptions of our risk factors are included in the documents we filed with the SEC.

Sean Connolly, our CEO and Dave Marburger, our CFO will first discuss our business performance and then we'll open up the call for Q&A.

We will be making some forward looking statements today and while we are making those statements in good faith, we do not have any guarantee about the results. We will achieve descriptions of our risk factors are included in the documents we filed with the SEC.

Bailey Ellis: We will also be discussing some non-GAAP financial measures, including adjusted numbers that exclude items management believes impact the comparability for the period reference.

We'll also be discussing some non-GAAP financial measures, including adjusted numbers that exclude items management believes impact the comparability for the period referenced please see the earnings release and the slides for GAAP to non-GAAP reconciliation and information on our comparability items, which can be found in the Investor Relations section of our website.

Bailey Ellis: Please see the earnings release and the slides for gap to non gap reconciliation and information on our comparability items, which can be found in the investor relation section of our website. I'll now turn the call.

I'll now turn the call over to Sean.

Bailey Ellis: Thanks, Bailey. Good morning, everyone, and Happy New Year. Thank you for joining our second quarter Fiscal 24 earnings call.

Good morning, everyone and happy New year. Thank you for joining our second quarter fiscal 'twenty four earnings call.

Bailey Ellis: Let's start with the Q2 headlines shown here on slide five. At a macro level, the industry-wide shifts in U.S. consumer behavior that we discussed on last quarter's call persisted into the second quarter. These behavior shifts continued to pressure volume and mix.

Let's start with the Q2 headlines shown here on slide five.

At a macro level the industry wide shift in U S consumer behavior that we discussed on last quarter's call persisted into the second quarter.

Behavior shifts continued to pressure volume and mix.

Bailey Ellis: However, while the consumer is still deploying some value-seeking tactics when they shop, we are seeing clear progress when it comes to volume recovery. In Q2, that progress was most notable in our refrigerated and frozen segment, in particular our frozen bid.

However, while the consumer is still deploying some value seeking tactics when they shop, we are seeing clear progress when it comes to volume recovery.

In Q2 that progress was most notable in our refrigerated and frozen segment in particular, our frozen business.

Bailey Ellis: This inflection was helped by investments on key brands as we were seeking to understand consumer readiness to revert back to more typical purchase behavior.

This inflection which helped by investments on key brands as we were seeking to understand consumer readiness to revert back to more typical purchase behaviors.

Bailey Ellis: We saw outstanding responsiveness that will inform our back half actions. More on that in a moment.

We saw outstanding responsiveness that will inform our back half actions more on that in a moment.

Bailey Ellis: The net result was a clear improvement in volume trends with domestic retail volume loss that was half of what we saw in Q1.

The net result, with a clear improvement in volume trends with domestic retail volume loss that was half of what we saw in Q1.

Bailey Ellis: We delivered solid margins and EPS, as well as excellent free cash flow conversion. Our productivity initiatives remain on track, although we also saw some absorption impact from our volume decline.

We delivered solid margins and EPS as well as excellent free cash flow conversion.

Our productivity initiatives remain on track, although we also saw some absorption impact from our volume declines.

Bailey Ellis: As we look ahead to the second half, we have a robust investment plan in place reflecting our increased confidence in consumer responsiveness to brand building leverage.

As we look ahead to the second half we.

We have a robust investment plan in place, reflecting our increased confidence in consumer responsiveness to brand building levers are.

Bailey Ellis: Our goal is to continue to build momentum with our consumers as we move through the back half of the fiscal year and then enter fiscal 25 in a position of strength.

Our goal is to continue to build momentum with our consumers as we move through the back half of the fiscal year and then enter fiscal 'twenty five in a position of strength.

Bailey Ellis: I will share more on our multifaceted action plan in a few minutes.

I will share more on our multifaceted action plan in a few minutes.

Bailey Ellis: Finally, we are updating our guidance for fiscal 24, reflecting both the consumer environment and the additional brand investments in the second half of the year.

Finally, we are updating our guidance for fiscal 'twenty, four reflecting both the consumer environment and the additional brand investments in the second half of the year.

Bailey Ellis: After tremendous initial resilience in the face of a record inflation super cycle, U.S. consumer behavior shifts did emerge last spring in our industry as the cumulative effect of inflation caused consumers to begin to stretch their budget.

After tremendous initial resilience in the face of a record inflation Super cycle U S consumer behavior shifts did emerge last spring and our industry as the cumulative effect of inflation caused consumers to begin to stretch their budgets.

Bailey Ellis: This resulted in a reprioritization of food choices as shoppers adjusted purchase behavior towards more stretchable meals.

This resulted in a re prioritization of food choices as shoppers adjusted purchase behavior towards more stretch of all meals.

Bailey Ellis: This slide reprises some of those shifts we discussed last quarter.

This slide Reprises some of those shifts we discussed last quarter.

Bailey Ellis: at that time, we told you that we expected these trends to be transitory. We still believe that to be the case.

At that time.

We told you that we expected these trends to be transitory, we still believe that to be the case.

Bailey Ellis: But the pace of the shift back to normal consumer behavior has been slower than we initially expected, and that pressured our volume performance and mix in the second quarter. That said, the tide.

But the pace of the shift back to normal consumer behavior has been slower than we initially expected and that pressured our volume performance and mix in the second quarter.

That said the tide appears to be turning.

Bailey Ellis: When we discussed these behavior shifts last quarter, frozen was one of our most impacted businesses, specifically our frozen single-serve meal.

When we discussed these behavior shifts last quarter frozen was one of our most impacted businesses specifically our frozen single serve meals.

Bailey Ellis: After five years of consistent strength, we saw some consumers looking to alternatives such as multi-serve meals and scratch cooking to stretch their budget.

After five years of consistent strength, we saw some consumers looking to alternatives such as multi serve meals and scratch cooking to stretch their budgets.

Bailey Ellis: We didn't expect that trend to be lasting as the unshakable consumer demand for convenience combined with ConAgra driven product innovation has generated strong frozen demand for a long time now.

We didn't expect that trend to be lasting as the unshakable consumer demand for convenience combined with Conagra driven product innovation as generated strong frozen demand for a long time now.

Bailey Ellis: As I noted in my opening remarks, we believe it's important to understand consumer readiness to resume more typical shopping behaviors before more fully ramping up investments to facilitate the process.

As I noted in my opening remarks, we believe it's important to understand consumer readiness to resume more typical shopping behaviors before more fully ramping up investments to facilitate the process we.

Bailey Ellis: We want to be confident that our investments will have the desired impact.

We want to be confident that our investments will have the desired impact.

Bailey Ellis: With that in mind, during the second quarter, we did invest in certain key businesses to assess consumer response to increased brand building stimulus.

With that in mind during the second quarter, we did invest in certain key businesses to assess consumer response to increased brand building stimulus.

Bailey Ellis: Most noteworthy was our largest frozen business, Single Serve Meals, where we deployed high-quality merchandising nationally.

Most noteworthy was our largest frozen business single serve meals, where we deployed high quality merchandising nationally.

Bailey Ellis: We're very encouraging with lifts up 60%.

The results.

Were very encouraging with lifts up 60%.

Bailey Ellis: These lifts ultimately drove meaningful gains in our market share, as you can see on this slide, RQ2 share in this business approached 51%, eclipsing last year's gains, and also setting a new record.

These lifts ultimately drove meaningful gains in our market share as.

As you can see on this slide our Q2 share in this business approached 51% eclipsing last year's gains and also setting a new record.

Bailey Ellis: The net of this is while the consumer is still stretched, they are responding to high-quality brand-building stimulus.

The net of this is while the consumer is still stretched they.

We are responding to high quality brand building stimulus.

Bailey Ellis: And when you look at volume trends, while not yet positive, you can see that progress is clearly underway.

And when you look at volume trends, while not yet positive you can see that progress is clearly underway.

Bailey Ellis: Slide 9 shows volume results in our key U.S. retail segments both separately and combined.

Slide nine shows volume results in our key U S retail segments, both separately and combined.

Bailey Ellis: I'll draw your attention to the chart on the left where you can really see the impact of our investment action.

I'll draw your attention to the chart on the left where you can really see the impact of our investment actions.

Bailey Ellis: As a result of these investments, refrigerated and frozen segment volume went from minus 10.5% in the first quarter to minus 3.3% in the second quarter, coming in line with volumes in grocery and snacks.

As a result of these investments refrigerated and frozen segment volume went from minus 10, 5% in the first quarter to minus three 3% in the second quarter coming in line with volumes in grocery and snacks.

Overall, our targeted investments in Q2 helped cut the total domestic retail volume decline in half compared to the first quarter not all the way back but good progress.

Bailey Ellis: I'm also pleased to report that we continue to deliver momentum in our international and food service businesses, which together account for approximately 18% of total Q2 revenue.

I'm also pleased to report that we continued to deliver momentum in our international and foodservice businesses, which together account for approximately 18% of total Q2 revenue.

International grew organic net sales by five 6% in the quarter, while our two largest markets, Mexico and Canada.

Delivered organic net sales growth above 9%.

Bailey Ellis: This was a result of our international team's outstanding execution, including strong brand activation, improved point-of-sale performance, innovation that is resonating with our customers, and expanded distribution in Mexico.

This was a result of our international team's outstanding execution, including strong brand activation improved point of sale performance.

Innovation that is resonating with our customers.

And expanded distribution in Mexico.

Our Mexican business has now delivered four consecutive quarters of volume growth.

In foodservice, we delivered organic net sales growth of four 3% in the quarter driven largely by favorable price mix as well as expanded distribution and our frozen portfolio, which accounted for roughly half of our total foodservice business.

Bailey Ellis: Slide 11 details our second quarter results, including organic net sales of approximately 3 billion, which is down 3.4% compared to last year.

Slide 11 details our second quarter results, including organic net sales of approximately $3 billion, which is down three 4% compared to last year.

Bailey Ellis: Adjusted gross margin of 26.9% was down 129 basis points from last year, reflecting our targeted investments and the absorption impact associated with the volume decline.

Adjusted gross margin of 26, 9% was down 129 basis points from last year, reflecting our targeted investments and the absorption impact associated with the volume decline.

Bailey Ellis: Adjusted operating margin of 15.9% was down 108 basis points compared to last year and adjusted earnings per share of 71 cents was down approximately 12% versus last year.

Adjusted operating margin of 15, 9% was down 108 basis points compared to last year and adjusted earnings per share of <unk> 71 was.

It was down approximately 12% versus last year.

Bailey Ellis: Importantly, we delivered strong free cash flow during the second quarter. Dave will cover this in more detail shortly, but as you can see on slide 12, free cash flow in the first half of fiscal 24.

Importantly, we delivered strong free cash flow during the second quarter.

Dave will cover this in more detail shortly but as you can see on slide 12 free cash flow in the first half of fiscal 'twenty four.

Bailey Ellis: was almost six times what it was in the first half of fiscal 23.

Was almost six times what it was in the first half of fiscal 'twenty three.

Bailey Ellis: We used some of that free cash flow to pay down debt, bringing our net leverage ratio to 3.55 times in the second quarter.

We used some of that free cash flow to pay down debt, bringing our net leverage ratio to 355 times in the second quarter.

Bailey Ellis: As I mentioned earlier, we have a robust and multifaceted investment plan in place for the second half of the year, reflecting our confidence in consumer responsiveness to our brand building.

As I mentioned earlier, we have a robust and multifaceted investment plan in place for the second half of the year, reflecting our confidence in consumer responsiveness to our brand building efforts.

Bailey Ellis: In slide 13, you can see images from our new advertising investments focused on our biggest brands, including Bird's Eye, Healthy Choice, and Slim Gem.

On Slide 13, you can see images from our new advertising investments focused on our biggest brands, including birdseye healthy choice and Slim Jim.

Bailey Ellis: We may have already seen some of the terrific work we've done this year with Slim Jim and the WWE building on the heritage and built-in awareness of our long-term partnership with wrestling legend Randy Macho Man Savage.

You may have already seen some of the terrific work we've done this year with slim Jim and the WWE E building on the heritage and built in awareness of our long term partnership with Wrestling legend, Randy Macho Man Savage.

Bailey Ellis: Fiscal 24 is one of our biggest innovation slates yet. We are backing those launches with meaningful increases in slotting, in-store, and other sales support versus the prior year.

Fiscal 'twenty four is one of our biggest innovation slates yet.

We are backing those launches with meaningful increases in slotting in store and other sales support versus the prior year.

Bailey Ellis: Slide 14 highlights some of the exciting innovation we've recently launched.

Slide 14 highlights some of the exciting innovation, we've recently launched.

Bailey Ellis: If we have any chili lovers on the call, I highly recommend our Wendy's chili. You can get the true restaurant taste of this beloved chili at home.

If we have any chili levers on the call I highly recommend our Wendy's Chile, you can get the true restaurant taste of this beloved Chile at home.

Bailey Ellis: Finally, slide 15 highlights the investments we're making in high-quality merchandising. Our efforts are focused on reengaging consumers with our existing products to capture market share as well as introducing consumers to our new innovations.

Finally, slide 15 highlights the investments, we're making in high quality merchandising. Our efforts are focused on re engaging consumers with our existing products to capture market share as well as introducing consumers to our new innovation.

Bailey Ellis: The targeted investments we made during the second quarter give us confidence that our multifaceted brand building investments in the second half of the year will drive momentum going into 2025.

The targeted investments we made during the second quarter give us confidence that our multifaceted brand building investments in the second half of the year will drive momentum going into 2025.

Bailey Ellis: We're updating our guidance for fiscal 24, reflecting both the consumer environment and the additional brand investments in the second half of the year. Our new guidance includes organic net sales decrease between 1 and 2 percent compared to fiscal 23, adjusted operating margin of approximately 15.6 percent, and adjusted EPS between $2.60 and $2.65.

We are updating our guidance for fiscal 'twenty, four reflecting both the consumer environment and the additional brand investments in the second half of the year, our new guidance includes organic net sales decrease between 1% and 2%.

Compared to fiscal 'twenty, three adjusted operating margin of approximately 15, 6%.

And adjusted EPS between $2 60.

And $2 65.

Bailey Ellis: Overall, we remain confident in our brands, plans, people, and agility as we continue to navigate this shifting consumer environment. With that, I'll pass the call over to Dave to cover the financials in more detail.

Overall, we remain confident in our brands plans people and agility as we continue to navigate the shifting consumer environment with that I'll pass the call over to Dave to cover the financials in more detail.

Thanks, Sean and good morning, everyone.

Dave Marberger: Slide 18 highlights our results from the quarter. Overall, our team executed well as we continue to navigate consumer behavior shifts that pressured our volume and mix.

Slide 18 highlights our results from the quarter overall, our team executed well as we continue to navigate consumer behavior shifts that pressured our volume and mix.

Dave Marberger: In Q2, net sales were 3.2 billion. As you all discussed earlier, this reflects a 3.4% decrease in organic net sales driven primarily from lower year-over-year volume.

In Q2, net sales were $3 2 billion.

As Sean discussed earlier this reflects a three 4% decrease in organic net sales driven primarily from lower year over year volumes. However, this is the third quarter in a row, where the rate of volume change versus the prior year quarter improved.

Dave Marberger: However, this is the third quarter in a row where the rate of volume change versus the prior year quarter improved.

Dave Marberger: Amid these broader macroeconomic challenges and increased brand investments, we delivered solid margins in EPS, along with strong free cash flow during the second quarter.

Amid these broader macroeconomic challenges and increased brand investments, we delivered solid margins and EPS, along with strong free cash flow during the second quarter.

Dave Marberger: adjusted gross profit decreased by 7.6% in the quarter, as the positive impact from productivity initiatives was offset by cost of goods sold inflation, unfavorable operating leverage, lower organic net sales, and increased trade investment.

Adjusted gross profit decreased by seven 6% in the quarter as the positive impact from productivity initiatives was offset by cost of goods sold inflation unfavorable operating leverage lower organic net sales and increased trade investment adjusted.

Dave Marberger: Adjusted operating profit decreased 9.3%, and adjusted EBITDA decreased 7%, largely driven by the decrease in adjusted gross profit, partially offset by an increase in equity earnings driven by continued strong operating performance in our Ardent Mills joint venture.

Operating profit decreased nine 3% and adjusted EBITDA decreased 7%.

Largely driven by the decrease in adjusted gross profit.

Partially offset by an increase in equity equity earnings driven by continued strong operating performance in our ardent mills joint venture.

Dave Marberger: we delivered Q2 adjusted net income of $341 million or $0.71 per diluted share.

We delivered Q2, adjusted net income of $341 million or <unk> 71 per diluted share.

Dave Marberger: Slide 19 provides a breakdown of our net sales for Q2.

Slide 19 provides a breakdown of our net sales for Q2.

Dave Marberger: 3.4% decrease in organic net sales was primarily driven by the consumer dynamics just discussed.

The three 4% decrease in organic net sales was primarily driven by the consumer dynamics just discussed.

Dave Marberger: Further contributing to the decline was a 0.5% decline in price mix, which reflects an increase in strategic trade investments made during the period and an unfavorable mix impact from selling a higher percentage of lower sales dollar per unit items.

Further contributing to the decline was up <unk>, 5% decline in price mix, which reflects an increase in strategic trade investments made during the period.

And an unfavorable mix impact from selling a higher percentage of lower sales dollar per unit items.

Dave Marberger: This was partially offset by price increases taken on our tomato-based products, given the continued high inflation.

This was partially offset by price increases taken on our tomato based products given the continued high inflation.

Dave Marberger: We also saw a small benefit from foreign exchange, which is reflected in our net sales decline of 3.2 percent.

We also saw a small benefit from foreign exchange, which is reflected in our net sales decline of three 2%.

Dave Marberger: Slide 20 outlines the top-line performance for each segment in Q2.

Slide 20 outlines the topline performance for each segment in Q2.

Dave Marberger: While organic net sales were down in our domestic retail segments, we delivered sequential volume progress that benefited from the targeted strategic investment Sean discussed earlier.

While organic net sales were down in our domestic retail segments, we delivered sequential volume progress that benefited from the targeted strategic investment Sean discussed earlier.

Dave Marberger: We also continued the strong momentum in our international and food service segments, which delivered Q2 organic growth of 5.6% and 4.3% respectively.

We also continued the strong momentum in our international and foodservice segments, which delivered Q2 organic growth of five 6% and four 3% respectively.

Dave Marberger: Slide 21 shows our Q2 Adjusted Margin Bridge.

Slide 21 shows our Q2 adjusted margin bridge.

Dave Marberger: While our productivity initiatives remain on track, our margin was negatively affected by the continued impact of overhead absorption from our lower volume.

While our productivity initiatives remain on track our margin was negatively affected by the continued impact of overhead absorption from our lower volumes.

Dave Marberger: Cost of goods sold inflation was a headwind of 1.7%, and price mix was a 0.6% headwind, which reflects the retailer investments made during the period.

Cost of goods sold inflation was a headwind of one 7% and price mix was up <unk>, 6% headwind, which reflects the retailer investments made during the period.

Dave Marberger: These factors combined drove the decline in adjusted gross margin for the quarter.

These factors combined drove the decline in adjusted gross margin for the quarter.

Dave Marberger: adjusted operating margin benefited from small year-over-year favorability in A&P and SG&A.

Our adjusted operating margin benefited from small year over year favorability in A&P and SG&A.

Dave Marberger: Slide 22 details our margin performance by segment for Q2.

Slide 22 details our margin performance by segment for Q2.

Dave Marberger: Adjusted operating margin in both our grocery and snacks and refrigerated and frozen segments decreased due to the margin drivers I just discussed, although inflation impacted the grocery and snack segment at a higher rate than refrigerated and frozen.

Adjusted operating margin in both our grocery and snacks and refrigerated and frozen segments decreased due to the margin drivers I just discussed although inflation impacted the grocery <unk> snacks segment at a higher rate than refrigerated and frozen.

Dave Marberger: We were pleased that our food service adjusted operating margin expanded 193 basis points, and our international segments adjusted operating margin expanded 30 basis points, both driven by higher organic net sales and productivity as both segments are showing consistent improvement.

We were pleased that our foodservice adjusted operating margin expanded 193 basis points and our international segment's adjusted operating margin expanded 30 basis points.

Both driven by higher organic net sales and productivity as both segments are showing consistent improvement.

Dave Marberger: Food service also benefited from comparison to prior year Q2, which included supply chain disruption.

<unk> service also benefited from comparison to prior year Q2, which included supply chain disruptions.

Dave Marberger: Our Q2 adjusted EPS performance of $0.71, with $0.10 below the prior year quarter, primarily from the decline in adjusted gross profit and in pension income, and higher interest expectancy.

Our Q2, adjusted EPS performance of <unk> 71.

Was <unk> <unk> below the prior year quarter, primarily from the decline in adjusted gross profit and pension income and higher interest expense.

Dave Marberger: This was partially offset by slightly lower A and P and adjusted SGNA expense, along with increased equity method investment earnings driven by ardent mills.

This was partially offset by slightly lower A&P and adjusted SG&A expense, along with increased equity method investment earnings driven by ardent mills.

Dave Marberger: The A&P change was timing related as we expect to increase A&P spending in the second half and the decline in SG&A was primarily the reduction in incentive compensation versus the prior year.

The A&P change was timing related as we expect to increase A&P spending in the second half and.

And the decline in SG&A was primarily the reduction in incentive compensation versus the prior year.

Dave Marberger: Slide 24 displays the significant progress we made in the quarter and first half on free cash flow and our net leverage ratio.

Slide 24, displace the significant progress we made in the quarter and first half on free cash flow and our net leverage ratio.

Dave Marberger: Over the first half of fiscal 24, we delivered a $532 million improvement in free cash flow, with a conversion rate of approximately 97 percent, the highest first-half conversion rate over the past five years.

Over the first half of fiscal 'twenty, four we delivered a $532 million improvement in free cash flow with a conversion rate of approximately 97% the highest first half conversion rate over the past five years.

Dave Marberger: Our focus on managing inventory levels and improvement in accounts payable directly contributed to these strong results. In addition, we had strong cash distributions from Ardent Mills in the second quarter, reflecting the strong profit and cash flow performance of Ardent Mills the last few years.

Our focus on managing inventory levels and improvement in accounts payable directly contributed to these strong results. In addition, we had strong cash distributions from ardent mills in the second quarter.

Reflecting the strong profit and cash flow performance of ardent mills the last few years.

Dave Marberger: Our strong free cash flow has helped us deliver debt reduction during the period.

Our strong free cash flow has helped us deliver debt reduction during the period.

Dave Marberger: At the end of Q2, our net leverage ratio was 3.55 times, reflecting debt repayment of more than $500 million over the last 12 months.

At the end of Q2, our net leverage ratio was 355 times.

Reflecting debt repayment of more than $500 million over the last 12 months.

Dave Marberger: Looking ahead to the remainder of fiscal 24, we expect to continue our debt reduction efforts as we prioritize our long-term leverage target of three times.

Looking ahead to the remainder of fiscal 'twenty four we expect to continue our debt reduction efforts as we prioritize our long term leverage target of three times.

Dave Marberger: We chose not to repurchase any shares in the quarter as we continue to prioritize paying down debt this fiscal year.

We chose not to repurchase any shares in the quarter as we continued to prioritize paying down debt this fiscal year.

Dave Marberger: We will continue to evaluate the best use of capital to optimize shareholder value as we progress through the fiscal year.

We will continue to evaluate the best use of capital to optimize shareholder value as we progress through the fiscal year.

Dave Marberger: As mentioned, we are updating our guidance for fiscal 24 to reflect our year-to-date results, expectations for the slower pace of volume recovery, and the additional brand investments in the second half.

As mentioned, we are updating our guidance for fiscal 'twenty four to reflect our year to date results expectations for the slower pace of volume recovery.

And the additional brand investments in the second half.

Dave Marberger: Slide 25 outlines our expectations for our three key metrics, including

Slide 25 outlines our expectations for our three key metrics, including.

Dave Marberger: Organic net sales to decrease between 1 and 2 percent compared to fiscal 23 with volumes continuing to improve through the back half of the year.

Organic net sales to decrease between 1% and 2% compared to fiscal 'twenty three with volumes continuing to improve through the back half of the year.

Dave Marberger: Adjusted operating margin of approximately 15.6 percent.

Adjusted operating margin of approximately 15, 6%.

Dave Marberger: and adjusted EPS between $2.60 and $2.65.

And adjusted EPS between $2 60, and $2 65.

Dave Marberger: Turning to slide 26, I'd like to take a minute to walk through the considerations and assumptions behind our guidance.

Turning to slide 26, I'd like to take a minute to walk through the considerations and assumptions behind our guidance.

Dave Marberger: We expect net inflation to moderate through the remainder of the fiscal year, resulting in an inflation rate of approximately 3% for fiscal 24.

We expect net inflation to moderate through the remainder of the fiscal year, resulting in an inflation rate of approximately 3% for fiscal 'twenty four.

Dave Marberger: Regarding pricing, there are a few dynamics currently at play.

Regarding pricing there are a few dynamics currently at play.

Dave Marberger: With our estimated 3% inflation rate, we are seeing areas that are still highly inflationary, such as tomatoes and starches, which are up above the average, and areas that are deflationary, such as edible oils and dairy, which are below the average.

With our estimated 3% inflation rate, we are seeing areas that are still highly inflationary such as tomatoes, and starches, which are up above the average.

In areas that are deflationary, such as edible oils, and dairy which are below the average.

Dave Marberger: These dynamics have resulted in both inflation-justified pricing actions and select pass-through price reductions included in our outlook.

These dynamics have resulted in both inflation justified pricing actions and select pass through price reductions included in our outlook.

Dave Marberger: We expect that these dynamics combined with our increased second half investments will result in price mix being down versus prior year in the second half.

We expect the spec that these dynamics combined with our increased second half investments will result in price mix being down versus prior year in the second half.

Dave Marberger: We now anticipate capex spend of approximately $450 million in fiscal 24, as we continue to make investments to support our growth and productivity priorities with a focus on capacity expansion and automation.

We now anticipate capex spend of approximately $450 million in fiscal 'twenty four as we continued to make investments to support our growth and productivity priorities with a focus on capacity expansion and automation.

Dave Marberger: As a result, we continue to expect to achieve gross productivity savings of approximately 300 million by the end of fiscal 24.

As a result, we continue to expect to achieve gross productivity savings of approximately $300 million by the end of fiscal 'twenty four.

Dave Marberger: We expect interest expense to approximate $440 million, primarily due to a higher weighted average interest rate on outstanding debt.

We expect interest expense to approximate $440 million.

Primarily due to a higher weighted average interest rate on outstanding debt.

Dave Marberger: While we do not expect to receive any benefit from pension income, we expect Arnett Mills to contribute approximately $170 million to our bottom line due to its continued strong performance.

While we do not expect to receive any benefit from pension income.

We expect ardent mills to contribute approximately $170 million to our bottom line due to its continued strong performance.

Dave Marberger: Our full year tax rate estimate remains approximately 24%.

Our full year tax rate estimate estimate remains approximately 24%.

Dave Marberger: As I discussed, we are prioritizing our debt reduction efforts and expect to further reduce our outstanding net debt in the second half.

As I discussed we are prioritizing our debt reduction efforts and expect to further reduce our outstanding net debt in the second half.

Dave Marberger: longer term, we remain on track to reach our three times net leverage ratio target by the end of fiscal 25.

Longer term, we remain on track to reach our three times net leverage ratio target by the end of fiscal 'twenty six.

Speaker Change: 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.

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.

Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

Speaker Change: If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question...

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

Speaker Change: At this time, we will pause momentarily to assemble the roster.

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

Speaker Change: And our first question will come from Andrew Lazar of Barclays. Please go ahead. Great.

And our first question will come from Andrew Lazar of Barclays. Please go ahead.

Great Good morning, everybody.

Good morning, good morning.

Andrew Lazar: Sean, I know that I think investor concern for the group as a whole, right, has been sort of building that there would ultimately be a need for sort of greater price investment to deliver volume improvement and that it could get to the point where it could start to more negatively impact sort of margin profiles. So, I guess my question is, how can we be comfortable that the investments being made are sort of ROI or value enhancing rather than, let's say, money being spent to simply flatter volume at the expense of margins and sort of disrupt the broader competitive environment?

Sean I know that.

I think investor concern for the group as a whole right has been sort of building that they would ultimately be a need for sort of greater price investment to deliver volume improvement and that it could get to the point, where it could start to more negatively impacts sort of margin profiles. So I guess my question is how can we be comfortable that the investments being made are sort of ROI or a value enhancing.

Rather than let's say money being spent to simply flatter volume at the expense of margins and sort of disrupt the broader competitive environment.

Sean: Well, I think, Andrew, in terms of how we think about return on investment, let me be very clear around what we are and what we are not doing in support of our brand.

Well I think Andrew in terms of how we think about return on investment let me be very clear around what we are and what we're not doing in support of our brands.

Sean: Number one, as you heard in our prepared remarks, we've got a multifaceted investment plan that spans advertising, innovation support, merchandising support, and more. Number two, we've got an ROI mindset in everything we do. This company has worked very hard to expand our operating margins over the last nine years, and we did not get there by being frivolous.

Number one as you heard in our prepared remarks, we've got a multifaceted investment plan that spans advertising innovation support merchandising support and more on.

Number two we've got an ROI mindset in everything we do this company has worked very hard to expand our operating margins over the last nine years, and we did not get there by being frivolous.

Sean: Number three, with respect to merchandising, you know, I've consistently pointed out that there was room to do more in a high quality way, operative words, high quality. Now that the supply chain is humming again.

Three with respect to merchandising <unk>.

Consistently pointed out that there was room to do more in a high quality way operative words high quality now that the supply chain is humming again, especially on key brands and around key merchandising windows.

Sean: especially on key brands and around key merchandising windows. As you know, ConAgra's merchandising today is very different from a decade ago. Our overall merchandising levels are below peers, and our depth of discount is extremely reasonable. It's been over the last several years more of a frequency strategy.

And as you know conagra's merchandising today is very different from a decade ago. Our overall merchandising levels are below peers and our depth of discount is extremely reasonable it's been it's been over the last several years more of a frequency strategy. The last point I'll make is that part of our ROI mindset is understanding where the.

Sean: The last point I'll make is that part of our ROI mindset is understanding where the consumer is in terms of their readiness to re-engage with more typical purchase behaviors. And it was important that we test that a bit in Q2. And as you heard in our remarks, we liked what we saw. So I think all of this adds up to a deliberate plan in the second half to smartly invest, to build momentum with consumers.

<unk> in terms of their readiness to reengage with more typical purchase behaviors and it was important that we test that a bit in Q2 and as you heard in our remarks, we liked what we saw so so I think all of this adds up to a deliberate plan in the second half to smartly inverse.

To build momentum with consumers set ourselves up for a nice fiscal 'twenty five and be very responsible in terms of the types of activities, we engage in and again, it's everything from merchandising to advertising but.

Sean: set ourselves up for a nice fiscal 25 and be very responsible in terms of the types of activities we engage in. And again, it's everything from merchandising to advertising.

Speaker Change: But that, I think that's kind of the response I give you to that question. Thank you for that. And then, you know, the assumption I think was that consumer behavior by now, or the initial assumption anyway, was that consumer behavior by now would have started to improve. And as you talked about, it seems the timing of that's been pushed out a bit. I guess, what are you embedding in terms of consumer behavior into your sort of new guidance that's coming out of that?

I think thats kind of the response I'd give you to that question.

Thank you for that and then the assumption I think it was that consumer behavior by by now or the initial assumption anyway was that consumer behavior by now would have started to improve and as you talked about it seems the timing of that has been pushed out a bit I guess what are you embedding in terms of consumer behavior into your sort of new guidance at this stage.

Speaker Change: Yeah, great question. Here's how to think about where we are big picture. Yes, the macro environment has challenged volumes for the group a bit longer than expected. And yes, we would all like to get back on growth algorithms ASAP. But in the simplest sense, before you can return to volume growth, you have to sunset the volume declines and get them into your base.

Yes, great question, Here's how to think about where we are big picture, yes. The macro environment has challenged volumes for the group a bit longer than expected and yes, we would all like to get back on growth algorithms Asap, but in the simplest sense before you can return to volume growth.

You have to sunset, the volume declines and get them into your base and that's why we've been very focused on tracking volume trends and as you saw in our deck those trends have improved significantly, particularly where we have invested to reengage lapsed consumers in fact conagra's trend.

Speaker Change: And that's why we've been very focused on tracking volume trends. And as you saw in our deck, those trends have improved significantly, particularly where we have invested to re-engage lapsed consumers. In fact, ConAgra's trend bend in Q2 has been one of the better ones in the group.

And in Q2 has been one of the better ones in the group. So given the consumer response, we saw in Q2, the associated increase in <unk> investments and the easier comps. We've got an <unk>, we fully expect that the volume declines will further sunset in the second half but to be clear.

Speaker Change: So given the consumer response we saw in Q2, the associated increase in H2 investments and the easier comps we've got in H2, we fully expect that the volume declines will further sunset.

Speaker Change: in the second half. But to be clear and to answer your question, we are not banking on a major improvement in the macro or are we signing up for huge volumes. The goal at this juncture is to build momentum, move the volumes back toward growth as we approach fiscal 25 and make sure that we deliver along the way without signing up for anything heroic. And I think that kind of best describes where we are.

And to answer your question, we are not banking on a major improvement in the macro or are we signing up for huge volumes. The goal at this juncture is to build momentum move the volumes back toward growth as we approach fiscal 'twenty five and make sure that we deliver along the way without.

Signing up for anything heroic and I think that kind of best describes where we are.

Got it thanks, so much.

Speaker Change: The next question comes from Peter Galbo of Bank of America. Please go ahead. Hey, guys. Good morning. Thanks for taking the question.

The next question comes from Peter Galbo of Bank of America. Please go ahead.

Hey, guys. Good morning, Thanks for taking the question good morning, good morning.

Peter GALA: Dave, just in your commentary around price mix, both on the quarter and into the back half of the year, I think you spoke a bit about not only the incremental investment, but also just some of the pass-through nature.

Dave just in your commentary around kind of price mix, both both on the quarter and into the back half of the year.

Thank you you spoke a bit about not only the incremental investment, but also just some of the pass through nature just.

Peter GALA: Is there any way to elaborate more or dimensionalize just how much of the price mix decline is really that pass-through component relative to maybe

Is there any way to elaborate more dimensionalize just how much of the price mix decline is really that pass through component relative to maybe some of the incremental investments youre, making are retailers.

Speaker Change: Yeah, let me let me try to give you some color and kind of unwind the price mix. Let me start with Q2.

Yes, let me let me try to give you some color.

And kind of.

While the price mix, let me start with Q2, so our price mix for the quarter was <unk>.

Speaker Change: So our price mix for the quarter was minus 0.5%. There were several dynamics to that. So if you start with our tailwinds.

Minus <unk>, 5% there were several dynamics of that so if you start with our tailwind as I mentioned, we did take pricing. We thought we have high inflation and Tomatoes, we took tomato pricing in our domestic retail and foodservice business. We did have some other pricing in international.

Speaker Change: As I mentioned, we did take pricing. We thought we have high inflation in tomatoes. We took tomato pricing in our domestic retail and food service business. We did have some other pricing in international. That was partially offset by some pass-through pricing we have basically in our oil-based businesses, which is our spreads business.

That was partially offset by some pass through pricing, we have basically in our oil based businesses, which is our spreads business. So when you net those together pricing was actually a tailwind. So it was positive and that price mix. The other component was investment in slotting slotting was pretty significant this quarter.

Speaker Change: So when you net those together, pricing was actually a tailwind. So it was positive in that price mix.

Speaker Change: The other component was investment in slotting. Slotting was pretty significant this quarter. It was about 30 basis points year-on-year of investment to support our large slate of innovation, which we talked about in the prepared remarks. Another piece that was negative this quarter

It was about 30 basis points year on year of investment to support our large slate of innovation, which we talked about in the prepared remarks.

Another piece that was negative this quarter was mix and.

Speaker Change: You know, this, this is simply selling a higher percentage of our lower sales dollar per unit item. So, for example.

This is simply selling a higher percentage of our lower sales dollar per unit items. So for example, lower sales on our multi serve meal like bertolli relative to higher sales on our banquet pot pie that is just that.

Speaker Change: lower sales on a multi-serve meal like Bertolli relative to higher sales on a banquet pot pie.

Speaker Change: That is just a negative sales myth that that's a timing thing, Peter. So.

Negative sales mix, that's a timing thing Peter so.

Speaker Change: Over the course of the year, that tends to work out, but quarter to quarter, it can flip a little positive or a little negative. So that was negative in this quarter, and then the remaining pieces is the trade and merchandising investment. And.

Over the course of the year that tends to work out but quarter to quarter. It can flip a little positive or a little negative. So that was negative in this quarter and then the remaining pieces is the trade in merchandising investment.

And that was that was.

Speaker Change: That was, you know, less than the slotting investment for the second quarter. So, there's a lot in there that gets to that 0.5. I did comment that in the second half, we do expect price mix to be down. Those dynamics are pretty much the same. We would expect less negative impact from mix in the second half.

Less than the slotting investment for the second quarter. So there's a lot in there that gets to that 0.5 I did comment that in the second half, we do expect price price mix to be down.

Those dynamics are pretty much the same.

We would expect less negative impact from mix in the second half and more increase in kind of the trade and merchandising investment.

Speaker Change: and more increase in kind of the trade in merchandising investment. So the second half price

So the second half price mix will be a little bit down a little bit more than we saw in Q2, but directionally in that in that area. So that hopefully that gives you some color on price mix.

Speaker Change: It will be a little bit down, a little bit more than we saw in Q2, but directionally in that area. So, hopefully, that gives you some color on price management.

Speaker Change: Yeah, no, that's very helpful. Thank you for that. And then maybe just secondly, on the leverage piece, guys, you have the bond that comes due in May.

Yes.

That's very helpful. Thank you for that.

And then maybe just.

Secondly, like.

On the leverage piece guys you have the bond that comes due in may.

Speaker Change: you know the leverage at least has had kind of stabilized but but with the earnings coming down to just how are you thinking about uh... that paid out of a billion dollars relative to

Yeah.

The leverage at least has kind of stabilized, but with the earnings coming down just how are you thinking about.

Debt pay down to the $1 billion relative to refinance at this point.

As we kind of go forward here.

Speaker Change: So, we're always looking at all of our options. Obviously, we have our commercial paper. We have a lot of liquidity. As you saw in the first half, our free cash flow was very strong. Usually, this company, we don't deliver a really strong free cash flow in the first half. Our conversion is usually very low with all the free cash flow coming in the second half.

Sure. So we're always looking at all of our options. Obviously, we have our commercial paper we have.

A lot of liquidity as you saw in the first half our free cash flow was very strong usually this company, we don't deliver a really strong free cash flow in the first half our conversion is usually very low with all the free cash flow coming in the second half well given our focus on working capital in ardent mills cash distributions, we had a very strong first.

Speaker Change: Well, given our focus on working capital and Ardent Mill's cash distributions, we had a very strong first half.

Speaker Change: And we expect the second half free cash flow to be very strong as well. So it puts us in a nice position where come May when the bonds do, we're going to have strong free cash flow. We have access to our commercial paper. And then obviously we're always looking at the capital markets to see if there's an opportunity to refinance, you know, rates seem to be coming down. We watch them very closely. So we look at all the options and we figure out what's the best combination. You know, maybe we use our free cash flow to, to repay down some of it and refinance the other part. But we'll, we'll look at all our options as we go forward. But I like where we are given our strong free cash.

Half and we expect the second half free cash flow to be very strong as well. So it puts it puts us in a nice position where come may when the bonds do we're going to have strong free cash flow, we have access to our commercial paper and then obviously, we're always looking at the capital markets to see if theres an opportunity to refinance at a rate seem to be coming down we.

Watch them very closely so we look at all the options and we figure out what's the best combination maybe we use our free cash flow to pay down some of it and refinance the other part we will look at all our options as we go forward, but I like where we are given our strong free cash flow.

Speaker Change: Great. Thanks, guys.

Great. Thanks, guys.

Speaker Change: The next question comes from Robert Hosko of KD Cowan. Please go ahead.

The next question comes from Robert Cosco of TD Cowen. Please go ahead.

Robert Hosco: Hi, thanks for the question. I guess it's a two-parter. One is, I think the guidance at the start of the year for advertising was to grow it as a percentage of sales to be consistent.

Hi, Thanks for the question I guess, a two parter.

One is I think the guidance at the start of the year for advertising was to grow at.

As a percentage of sales to be consistent.

Speaker Change: with what it was last year. And so I guess the first part of the question is now that you've cut your sales guide, does that mean that the advertising, it sounds like you're keeping advertising the same. So does that mean that it will be higher as a percentage of sales for the year? Or do you have to cut the A and P commensurate with the sales growth?

With what it was last year and so I guess the first part of the question is now that you've cut your sales guide does that mean that the advertising it sounds like youre keeping advertising. The same so does that mean that it will be higher as a percentage of sales for the year or do you have to cut the A&P commensurate.

With the sales growth.

Speaker Change: Yeah, Rob, so let me answer that a couple different ways. So if you just look at the total year, our guide, our operating margin guide is approximately 15.6%. That's where we came in in fiscal 23.

Yeah, Rob So let me, let me answer that a couple of different ways. So if you just look at the total year. Our guide our operating margin guide is approximately 15, 6%, that's where we came in in fiscal 'twenty three and when you look at gross margin you look at A&P and SG&A.

Speaker Change: And when you look at gross margin, you look at AMP and SG&A, we generally expect to be in line with where we were prior year. So, to your question, if we were 2.4% last year, if we come in again at 2.4%, dollar wise, that's a little bit lower than where we were. And we're still looking at that. There's opportunity to spend up if we want to. The way we look at it, though, is if you look at AMP,

Generally expect to be in line with where we were prior year. So to your question. If we were at two 4% last year. If we come in again at two 4% dollar wise, that's a little bit lower than where we were and we're still looking at that there is opportunity to spend up if we want to the way we look at it though is if you look at A&P.

First half versus second half, our A&P spending is going to be up around 20% in the second half relative to the first half. So we're just looking at what's the run rate on spend out and what is it going to be in the second half to support the advertising that Sean talked about and our other kind of digital advertising that we've been doing so we feel good.

About the second half.

And the trajectory of the A&P relative to the first half robot is Sean I will just add a point on there as we talk to our team about delivering this year, we said at the beginning of the year two things, we're going to have to demonstrate as a team and those things are agility and resilience and part of the agility piece from the beginning of the year has been really trying.

Speaker Change: and those things are agility and resilience. And part of the agility piece from the beginning of the year has been really trying to understand the consumer readiness to resume more typical purchase behaviors after we saw some of the shifts emerge in the spring. And so you may recall on last quarter's call, I mentioned that our assessment was the consumer wasn't quite ready to engage in that. So we were fairly conservative in Q1 and Q2 in terms of deploying some of these dollars.

To understand the consumer readiness to resume more typical purchase behaviors. After we saw some of the shifts emerge in the spring and so you may recall on last quarter's call I mentioned that our assessment was the consumer wasn't quite ready to engage in that so we were fairly conservative in Q1 and Q2 in terms of.

Flooring some of these dollars because we wanted to kind of keep those those funds for the back half of the year, where we had more confidence that the consumer was really going to be ready and we as we mentioned in our prepared remarks, we deliberately tried to SaaS that readiness in Q2, and we really were quite encouraged by what we.

Speaker Change: Because we wanted to kind of keep those funds for the back half of the year, where we had more confidence that the consumer was really going to be ready. And we, as we mentioned in our prepared remarks, we deliberately tried to assess that readiness in Q2, and we really were quite encouraged by what we saw. So now that we've got.

So now that we've got a lot of our powder is still dry for the back half of the year. We've got some easier comps and we've got consumers that are demonstrating a real willingness to kind of reengage their more typical purchase behaviors with a little bit of a nudge from us across this multifaceted investment plan, we like where we sit in terms of.

Speaker Change: A lot of our powders still dry for the back half of the year. We've got some easier comps and we've got consumers that are demonstrating a real willingness to kind of re-engage their more typical purchase behaviors with a little bit of a nudge from us.

Speaker Change: across this multifaceted investment plan. We like where we sit in terms of the fullness of the support for the back half of the year.

The full fullness of the support for the back half of the year.

Speaker Change: Got it. Second part is, it sounds like you're very happy with the lifts you've seen in the promotional activity behind Frozen. Sean, can you speak more broadly about whether the food industry and retailers overall are happy with the lifts that they're seeing on a more broad-based basis? I think I hear kind of some dissatisfaction from certain big retailers about the lifts.

Got it second part is.

It sounds like you're very happy with the lift you've seen in.

In the promotional activity behind frozen.

Sean can you speak more broadly about.

Whether it's the food industry and retailers overall are happy with the lift that they're seeing on a more broad based basis.

I think I hear kind of some dissatisfaction from certain big retailers about the lifts.

Speaker Change: and that the rollbacks haven't gotten the response that they fully expected.

And that the rollbacks haven't gotten the response that they fully expected.

Speaker Change: Is it possible to speak more broadly about what you're seeing? Yeah, I'll give you a sense of it, Rob, because we've got a pretty large scope here at ConAgra. So if you look at where we invest and where we want to get good lifts, we're super selective, right? We pick our spots. We're not out there spending money trying to drive lifts on Manwich or a business like that. We're driving lifts. We're focusing our dollars on those categories where we know the consumer really wants to buy the category.

Is it possible to speak more broadly about what youre seeing I'll give you a sense of it Rob because we've got a pretty we've got a pretty large scope here at conagra and and so if you look at where we invest and where we want to get good lifts were super selective right. We pick our spots we're not out there spending money trying to drive lifts on manned which are.

Business like that we're driving lifts, we're focusing our dollars on those categories, where we know the consumer really wants to buy the category, but for other reasons, particularly the objective of trying to stretch their budget they've made a short term sacrifice and thats. The way they described to us when we talk to them they are depriving themselves.

Speaker Change: But for other reasons, particularly the objective of trying to stretch their budget, they've made a short term sacrifice. And that's the way they describe it to us when we talk to them. They're depriving themselves.

Speaker Change: they're sacrificing, particularly on convenience items. So if you look at a product like frozen single serve meals, where we saw such tremendous lift in Q2, what you've got going on here is some consumers who are really financially stretched were basically forced.

Theyre sacrificing, particularly on convenience items. So so if you look at a product like frozen single serve meals, where we saw such tremendous lift in Q2, what you've got going on here is some consumers who are really financially stretched where basically forced to give up on some of that buying rate they didn't stop buying the category.

Speaker Change: to give up on some of that buying rate. You know, they didn't stop buying the category. They reduced their buying rate and they started doing things like scratch cooking, rice and beans and ground beef. They do not want to do that. I can assure you, I've been in food for 30 years. That's the last thing they want to do. They don't like to cook. They don't like to clean. They don't like any of that. They'd rather be buying our stuff. But when they've got to make some short-term trade-offs.

They reduce their buying rate and they started doing things like scratch cooking rice and beans, and ground beef. They do not want to do that I can assure you I have been in food for 30 years. That's the last thing they want to do they don't like to Cook. They don't like to clean they don't like any of that they'd rather be buying our stuff, but when they've got to make some short term trade offs, especially over the course of the summer when they were spending their money on.

Speaker Change: especially over the course of the summer when they were spending their money on things like travel, they'll do it short term. But when you give consumers with that kind of a headset, a bit of a stimulus to re-engage, they're super responsive to it.

Things like travel they'll do it short term, but when you give consumers with that kind of a headset a bit of a stimulus to reengage their super responsive to it but again not every category is created equal. So if it's a if it's more of a staple category, where there is another alternative where they were trading down to a store brand, maybe youre not going to get a lift but that's.

Speaker Change: But again, not every category is created equal. So if it's a, if it's more of a staple category where there's another alternative, where they were trading down to a store brand, maybe you're not going to get a lift. But that's not the kind of investments we're talking about. Those are not the kind of events or categories where we're focusing our energy.

Not the kind of investments we're talking about those are not the kind of events or categories, where we're focusing our energy.

Makes sense. Thank you.

The next question comes from Pamela Kaufman of Morgan Stanley. Please go ahead.

Hi, good morning, happy new year.

Good morning.

Can you give some more color on the drivers behind your reduced top.

Topline guidance for the year, how much of it is a change.

Your expectation for volumes versus greater price investment and then just.

Mentioned that in the second half you'll see price declines can you frame the magnitude of the declines relative to the second quarter.

Pam It's Sean let me make just a quick comment upfront I'll flip it over to Dave.

The macro environment that we talked about in Q1, I mentioned again today. It persisted into Q2. So we've just seen fewer purchases in our first half than we would have assumed at the beginning of the year. So that's part of the call down the top line. The second part of it is I don't want to sign us up at this.

<unk> for any kind of heroic volume recovery in the back half of the year, because I think the mood of our investors is let's let's be prudent let's be up the middle of fairway, let's put some targets out there that are not making any grand assumptions that we can meet or beat and thats kind of whats what's behind it.

Does.

We like the momentum we saw in the second quarter. We have every intention of further driving that momentum in the second half and we have a high degree of confidence that we're going to get what we expect in that at this point that's really what we're focused on is fiscal 'twenty five setting up a really nice fiscal 'twenty five and exiting this year with momentum and.

The sales outlook that we've given for the balance of the last year kind of as is right in that vein Dave over to you. Yes. So Pam if you just take the midpoint of our guide for the year on organic net sales that implies a second half organic net sales of minus 1%.

And that's going to be a combination based on the way, we forecasted it and incorporating the comments the important comment Sean just made is a combination of price mix slightly negative price mix and slightly negative volume a combination of those two to get to the minus 1% organic that's H two and that's an improvement on total <unk>.

<unk> and volumes as we've seen Q1 to Q2, and then <unk>, we expect that improvement to continue.

So that as we.

We continue to track towards growth by the time, we get to the end of fiscal 'twenty four.

Okay. Thanks Thats helpful.

And then just to clarify on that.

Adoption in your operating margin guidance for the year, how much of that is a reflection of your expectations for lower gross margins versus increased operating expenses.

Laura.

Okay and investment.

Yes, so if you look at.

The second half.

Gross margins if you look at where we landed the first half and gross margins we were at.

27.2, I think as our first half gross margin our second half should be.

Generally in line with that maybe a little bit below that so the second half where youre going to see the reduction in operating margin is coming from the higher investment in A&P as a percentage of sales and the timing of SG&A being higher in <unk> than it was in each one so that's really the second half reduction and operate.

Margin so when the dust settles and you look at the full year, we've guided to $15 six operating margin that will be in line with fiscal 'twenty three and if you look at kind of where we land with margin A&P and SG&A will be pretty close to where we were prior year.

Got it. Thank you that's helpful Al patents.

Thanks.

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

Can I ask about innovation.

Intensive.

I guess during the pandemic and also during the period of supply chain disruption I imagine that the pace of innovation was dramatically reduced.

How quickly is it recovering can you give us any numbers on how quickly the pace of innovation is likely to pick up over the course of the next few quarters.

Sure Alexia.

So let me take us back to kind of the pandemic for a minute when we got hit with the pandemic, we fully expected that we would hit the pause button on innovation, even though we had the pipeline ready to launch to our surprise.

Our customers.

Asked us.

Very convincing way not to do that and so we slowed innovation launches modestly during the pandemic, but only modestly and if in fact, if you look at the amount of innovation, we continued to put into the marketplace through the pandemic. It was probably the highest are among the highest in.

Our peer group.

So we really didn't pause the way we expected when we kept we kept the momentum there since then last year.

As a much bigger launch was one of our biggest launches yet and we had tremendous performance in terms of productivity per TBD and overall <unk> and this year is perhaps our biggest innovation slate yet so.

<unk>.

We'll share some metrics when we're at Cagny.

Just to give you a kind of what we track historically, we track this thing called renewal rate, which as a percentage of our annual sales. It comes from items. We've launched in the last three years 10 years ago, we were probably 88%.

And then over the last five years, we've probably hit a high watermark of 15%. So that's kind of the ballpark, we like to be in is that 13% to 15% depending upon what we've got coming into the marketplace and again. This year is our biggest launch year, yet and we've also as Dave pointed out.

Back to that with customer investments and slotting investments both in the front half and very very materially in the second half of this year and we'll do the full parade of innovation for you.

In a month or so at Cagny. So you can see it we hit some of the highlights today in our prepared remarks I think the fund one is this wendy's chili business, because we're always focused on frozen and snacks around here and this thing has just emerged from zero to be a major player in that category. So more to come on that in Cagny, but net net it's a very significant year for us.

On innovation front.

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

Thank you.

The next question comes from Nik Modi of RBC capital markets. Please go ahead.

Thank you good morning, everyone.

Two quick questions.

I don't think it has an impact with all the drama going on in the Red Sea just want to make sure. There is no issue with freight rates or some of the temporary spikes that we're seeing that's the first question and then the second question is just Sean I'd Love your kind of observation of out of home versus in home.

It seems like.

It's a very mixed bag depending on what.

Category or Neil.

Occasion, we're talking about but I'd just love your view because the thought is the consumer's coming under more pressure, we should start seeing more in home consumption, which should benefit you as the year kind of goes through so I'd just love your thoughts on that.

Alright, so Nick the first one is easy the answer is no no no.

<unk> there.

And on the second one that is a very.

Keen observation because I mentioned, how our volume outlook for the back half of the year does not assume anything heroic part of not assuming anything around we're not assuming that some of the away from home dollars begin to shift into at home and you're 100% correct. If that happens that's a tailwind for us.

Probably for the group, what's very interesting is is how sticky some of this away from home spending has been even though we've seen a challenged consumer who.

Is making trade offs to stretch their household balance sheet. The one place that they've been fairly resilient is in their away from home spending should consumer stress.

The increase from here that is historically the first place that you would see an additional behavior shift as you would see a reduction in away from home spend and you would see an equal and opposite response in in home eating that has not happened yet.

But.

As we think about calendar year 'twenty four certainly that is a a.

Potential positive if the environment remains stressed in the consumer.

Decides they need to make further shifts.

And so I guess, just a follow up on that when you think about price gaps right. What's your strategic investments is it really just kind of thinking about what goes on within the center of the store within the frozen unit.

Or are you also thinking about kind of some of the price gaps between what you guys sell versus what maybe some low end <unk> be priced at.

The price gaps versus away from home tend to take care of themselves when the consumer reaches a point and they say look my my Burrito and my.

Coke to go now gotten too expensive.

First make the switch to stop doing that second thing they switched to buy in a grocery store third hopefully.

Buying our products, but we do look at our categories and look at this volume malleability as if it is an open set meaning it's not just what's on shelf and then what's to the left or right of it that's switching but it could be other categories. So an example would be.

Referenced in our prepared remarks today.

That we are going to be one of the things we're going to be investing behind is advertising on our birdseye business well that is in the marketplace right now it's running and it is directly comparative advertising to canned vegetables, and it is focused on delivering a superior relative value message because while it might be tempting to trade down to a canned vegetable in the current environment.

Speaker Change: and it is focused on delivering a superior relative value message because while it might be tempting to trade down to a canned vegetable in the current environment, the trade-off on quality is simply not worth that trade-down, and you end up actually in a worse value proposition. So that's an example of where we're thinking about the competitive set more broadly than what's immediately to the left or right of our products in any given section, and we're thinking about where consumers might go elsewhere and really getting after that in a very targeted, hard-hitting way with a focus on quality and superior relative value.

The tradeoff on quality is simply not worth that trade down and you end up actually in a worst value proposition. So so that's an example of where we're thinking about the competitive set more broadly than what's immediately to the left or right of our products in any given section and we're thinking about where consumers might go elsewhere and really getting after that in a very.

Targeted hard hitting way with a focus on quality and superior relative value.

Speaker Change: Excellent. Very helpful.

Excellent very helpful. Thank you.

Thanks.

Speaker Change: The next question comes from Max Gumport of BNP Paribas. Please go ahead.

The next question comes from Max Gum part of BNP Paribas. Please go ahead.

Max Gumpart: Hey, thanks for the question. Turning back to gross margin, so a year ago, you were really the first packaged food company to begin to sunset the inflation super cycle and start the post-sizeable gross margin expansion. But with price mix turning negative now, you know, partly due to the increased trade investment, it seems like productivity is now fighting against inflation, absorption, and a negative price mix to hold up gross margin.

Hey, Thanks for the question turning back to gross margin a year ago, you were really the first packaged food company to begin to sunset the inpatient Super cycle and started post sizable gross margin expansion.

With price mix, turning negative now partly due to the increased trade investment it seems like.

Productivity is now fighting against inflation absorption.

And the negative price mix to hold up gross margin.

Max Gumpart: Are these trends still in line with the mechanical nature of how these inflationary cycles typically have played out in the past, or are there nuances starting to develop this time around?

Are these trends still in line with the.

Mechanical nature without these inflationary cycles typically have played out in the past are there nuances starting to develop this time around.

Speaker Change: Well, Max, I'll kick it off and then flip it to Dave, you know, all the mechanical wrap stuff should work the way it always does, unless there is something new going on with the consumer.

Well <unk> I'll kick it off and then flip it to Dave.

All the mechanical wrap stuff.

Should work the way it always does unless there is something new going on with the consumer.

Speaker Change: And what we saw right after Easter was that something new did start emerging with the consumers. They started making some of these behavior shifts. So that dynamic is not assumed in the typical mechanics of a wrap.

And what we saw right or right. After Easter was that something new did start emerging with the consumers. They started making some of these behavior shifts so that that dynamic is not assumed in the typical mechanics of a ramp right. So that's why and by the way as soon as that dynamic begins to either be embedded in the base or just improving the outright.

Speaker Change: Right? So that's why. And by the way, as soon as that dynamic begins to either be embedded in the base, or just improve in the outright, then the mechanics of a typical wrap go right back to what what they would always be. So that's why we've been focused on.

Then the mechanics of a typical ramp go right back to what they would always be so that's why we've been focused on on these volume trends because up right through last quarter. When you looked at the group you didn't see the band when you looked across 15 weeks 13 weeks five weeks now, particularly for us you've seen that band and that band is.

Speaker Change: on these volume trends because right through last quarter when you looked at the group you didn't see the bend

Speaker Change: When you looked across 15 weeks, 13 weeks, five weeks, now.

Speaker Change: particularly for us, you've seen that bend, and that bend is getting pretty close to being kind of embedded in the base. And once it does, then you're set up to be back on algorithm, so to speak. Dave, you wanna add anything to that? Yeah, so if you just look at the guidance and you kind of say, okay, where are we gonna land? We got it to operating margin of 15.6%.

Getting pretty close to being kind of embedded in the base and once it does then.

You are set up to be back on algorithms. So to speak Dave you want to add anything to that yes. So if you just look at the guidance and you kind of say, okay, where are we going to land, we guided to an operating margin of 15, 6% and that is gross margin and gross margin is going to come in pretty close to where it landed in fiscal 'twenty three.

Speaker Change: In that is gross margin and gross margin is going to come in pretty close to where it landed in fiscal 23

Speaker Change: So, you look at that and you say, okay, we kept gross margin flat the prior year when we've wrapped on pricing, our sales are going to be down for the year based on our guidance, and we've had a pretty significant impact from negative absorption, right, because volumes were down all of last year and they're down first half of this year. So,

So you look at that and say, okay. We kept gross margin flat to prior year. When we wrapped on pricing our sales are going to be down for the year based on our guidance and we've had a pretty significant impact from negative absorption right because volumes were down all of last year and Theyre down first half of this year. So.

Speaker Change: You know, being in manufacturing, when you start to get your volumes more stable and actually start, you know, inflecting them to be positive that negative absorption headwind goes away.

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Being in manufacturing when you start to get your volumes more stable and actually start inflicting them to be positive that negative absorption headwind goes away. So the focus now as we keep gross margins flat. This year, we're increasing our investment which gets our total investment when we finish this year.

Speaker Change: So, the focus now is we keep gross margins flat this year. We're increasing our investment, which gets our total investment when we finish this year back to more normalized trade levels. So, we're going to have a business where the margins are consistent with last year, our investment's back to where it was, and we have a lot of negative absorption that's in our base.

We're back to more normalized trade levels. So we're going to have a business where the margins are consistent with last year, our investments back to where it was and we have a lot of negatives absorption thats in our base. So with fiscal 'twenty five we can get back to growth we have some opportunities to leverage our cost base, we have an investment base, that's where it should.

Speaker Change: So with fiscal 25, we can get back to growth. We have some opportunities to leverage our cost base. We have an investment base that's where it should be. And it sets us up well for fiscal 25. So there's a lot of things bouncing around, but when you copter up and you just look at where we're gonna finish the year, that's how I think about it.

B and it sets us up well for fiscal 'twenty five so there is a lot of things bouncing around but when you copter up and you just look at where we're going to finish the year, that's how I think about it.

Speaker Change: Great. And then turning to the investments, it's good to hear about the

Great and then turning to the investment.

To hear about.

Speaker Change: But they were both responses on the second quarter and what that means for your increase investment in the second half. I'm just curious. Are you expecting that investment to help?

The favorable response, you saw in the second quarter.

What that means for your increased investment in the second half I'm. Just curious are you expecting that investment to help.

Speaker Change: category volumes, or if other companies are seeing the same response that you're seeing, are we really just talking about a share fight and it doesn't really improve category volumes? Thanks. I'll leave it there. Yeah, I really

Category volumes, sorry, if other companies are seeing that.

Same response that you're seeing are we really just talking about a share fight and.

It doesn't really improve category volumes, thanks, I'll leave it there.

Yes.

Really interesting question.

Speaker Change: Basically, what we're saying is that, yes, the consumer is still deploying some value-seeking tactics to stretch their balance sheet, and that has had some impact on how they've prioritized categories.

Basically what we're saying is that yes, the consumer is still deploying some value seeking tactics to stretch their balance sheet and that has had some impact on how they prioritized categories.

Speaker Change: And not every category is equal their max in terms of what we've seen in the category. So we've seen tactics like this from consumers before and they tend to serve their purpose over a short horizon and then they tend to disappear. But interestingly, even in some of the categories that remain softer than usual, we are seeing volume malleability via investments that drive share.

And not every category.

Is equal their Max in terms of what we've seen in the category. So we've seen tactics like this from consumers before and they tend to serve their purpose over short horizon and then they tend to disappear, but interestingly even in some of the categories that remains softer than usual, we are seeing volume malleability via investments that drive share.

Speaker Change: But over time, frankly, we will take what the field gives us in the moment, whether that's improved volumes through share gains or improved volumes through improving category momentum. I think we're going to see both going forward.

But over time, frankly, we will take what the field gives us in the moment, whether that's improved volumes through share gains or improved volumes through improving category momentum I think we're going to see both going forward.

Great. Thanks very much.

Speaker Change: The next question comes from Chris Carey of Wells Fargo. Please go ahead. Hi, good morning. Good morning.

The next question comes from Chris Carey of Wells Fargo. Please go ahead.

Okay.

Hi, good morning.

Hey, good morning.

So clearly investment in promotion.

Our topics that have been.

Chris: Well discussed on this call rightly so I think for me that the question on that is just and you're given a lot of great detail.

Well discuss on this call right. So I think for me.

<unk> on that is just <unk>.

Give it a lot of great detail.

Speaker Change: The question is really the step up in investment that you expect in the back half of the year, which sounds quite strong.

The question is really.

The step up in investment.

Do you expect in the back half of the year, which sounds quite strong are you seeing the lift in your volumes.

Speaker Change: Are you seeing the lift in your volumes?

Speaker Change: so far this quarter to give you the confidence on sequentially improving volumes into fiscal Q3 and to get into fiscal Q4? Or is it more kind of conceptual? You've seen the uplift that these investments have had on certain of your businesses, which is giving you confidence in the back half. So more, are you seeing it versus the confidence piece?

So far this quarter to give you the confidence on sequentially improving volumes into fiscal Q3, and again into fiscal Q4 or is it more kind of conceptual you've seen the uplift that these investments have had on certain of your businesses, which is giving you confidence in the back half or more are you seeing it versus the competence piece if that makes sense.

Speaker Change: Yeah, let me try to kind of re-hit.

Yes, let me try to kind of re <unk>.

Speaker Change: I'm not going to comment on Q3, we're in Q3, so we'll stick with Q2. We saw clear evidence in Q2 that where we deployed investment to kind of help the consumer with this process of kind of re-engaging in the more typical purchase behaviors, we got the response we were looking for.

Hit.

What we touched on our prepared remarks, Chris I'm not going to comment on Q3, where in Q3, So we'll stick with Q2.

We saw clear evidence in Q2 that where we deployed investment to kind of help the consumer with this process of kind of re engaging in a more typical purchase behaviors.

We got the response, we were looking for and because that was real empirical evidence that of course inspired confidence that if we do more of that in the second half of the year, we will get a similar type of response, but from a planning posture standpoint.

Speaker Change: and because that was real empirical evidence that of course inspired confidence that if we do more of that in the second half of the year, we will get a similar type of response. But from a planning posture standpoint, I don't think we're going to get a similar type of response.

Speaker Change: We are not banking on major improvement in the macro consumer environment or signing up for a huge consumer response. So, you know, one might interpret that as, you know, we've got the investment in there, but what we're banking on in return is conservative. Look, in this current environment, that's probably not a bad posture to be in because this.

We're not banking on major improvement in the macro consumer environment or signing up for a huge consumer response, so one might interpret that as.

We've got the investment in there, but what we're banking on in return is conservative.

Look in this current environment, that's probably not a bad posture to be in because this is.

Speaker Change: This, this volume recovery has been more elongated than people expect, but I think that's an, that is a fair characterization of kind of what we're, we're looking at.

This volume recovery has been more longer than people expect but I think that's and that is a fair characterization of kind of what we're looking at.

Speaker Change: Okay. All right. Perfect. And one just quick follow-up. You mentioned, I believe, earlier in the call that incentive comp was a favorable SG&A item for fiscal Q2. Is there any way to dimensionalize that for the full year with the lower guidance for the year? That's it for me. Thanks.

Okay, Alright, perfect and then one just quick follow up you mentioned.

Believe earlier in the call that incentive comp was a favorable SG&A items for fiscal Q2.

Is there any way to dimensionalize.

That for the full year with the lower guidance for.

For the year, that's it for me thanks.

Speaker Change: Yeah, we really almost all of the, the.

Yes.

Really almost all of the.

Speaker Change: Delta and SGNA in the quarter was driven from incentive comp, so that really drove the Delta in the quarter. We do expect SGNA as percentage sales to be higher in the second half.

Yes.

Delta in SG&A in the quarter was driven from incentive comp so that really drove the delta in the quarter we.

We do expect SG&A as a percentage of net sales to be higher in the second half. So it will get our SG&A as a percentage of net sales close to where it was a year ago. So there's some timing elements to this especially with incentive comp because it can it really can be a timing item relative to where you were in the prior year in your forecast, but as it relates to Q2.

Speaker Change: So, it'll get our SG&A as a percentage in that sales close to where it was a year ago. So, there's some timing elements to this, especially with incentive comp, because it can, it really can be a timing item relative to where you were in the prior year in your forecast. But as it relates to Q2, it drove all of the, all the variants in SG&A.

Two it drove all of that all of the variants in SG&A.

Speaker Change: And just to clarify, that SG&A is higher in the back half, excluding advertising spending or with? Yeah, that's excluding. That's adjusted SG&A, which excludes anything. Great. Okay.

And just to clarify that SG&A is higher in the back half excluding advertising spending are with.

Yes that is exploding.

Rested SG&A, which excludes.

It excludes A&P.

Great. Okay. Thanks, so much.

Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to the company for any closing remarks.

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

Mellistsa: So it's Melissa Navier, we thank you again for joining us this morning for the call and we're looking forward to seeing everyone at Cagney next month.

So it's Melissa Napier we thank you again for joining US this morning for the call and we're looking forward to seeing everyone at Cagny next month.

Speaker Change: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.

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

Speaker Change: I'm found, in your arms, there's solid ground When I feel like, a castle in the sand And I fall down, you pick me up again When I can't find, the answers in the wind And I fall, so you pick me up again And you pick me up again When I fall down, you pick me up again You're all I need When I can't stand on my own two feet And I'm on my knees I know whenever I fall down, you pick me up again

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