Q2 2025 Conagra Brands Inc Earnings Call - Q&A
My question I was live in Alaska.
There was so many not so many that is full of dog temptation. There were so many nights that I regret.
The game itself.
[music] write them down on Miami.
I was there myself.
Speaker Change: Got you.
Speaker Change: In Japan.
Speaker Change: Yeah.
Speaker Change: [music] random.
Speaker Change: Oh, yes.
Speaker Change: Good morning, and welcome to the Conagra Brands' second quarter and first half fiscal 2025 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
Speaker Change: After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Melissa Napier head of Investor Relations for Conoco brands. Please go ahead.
Thanks, Mike Good morning, everyone. Thanks for joining us today for a live question and answer session on todays results. Once again I'm joined this morning by Shaun Connolly, our CEO, Dave Marburger, our CFO and Matthew <unk> Senior Director Investor Relations.
Speaker Change: We may be making some forward looking statements and discussing non-GAAP financial measures. During this session. Please see our earnings release prepared remarks presentation materials and filings with the SEC, which can be found in the Investor Relations section of our website for more information including descriptions of.
Speaker Change: Our risk factors GAAP to non-GAAP, reconciliations and information on our comparability items.
Why it please introduce our first question.
Speaker Change: Alright, it looks like our first question comes from Andrew Lazar with Barclays. Please go ahead.
Andrew Lazar: Good morning, everyone and happy holidays.
Good morning.
Andrew Lazar:
Andrew Lazar: We saw I guess during the course of the quarter sort of a little bit of a gap open up between sort of scanner and sort of conagra shipments and I'm I'm. Just curious if you saw any any benefit from the Thanksgiving timing change on volume in the quarter.
Andrew Lazar: That you would expect to reverse in the third quarter, just given others with sort of similar fiscal years have kind of discussed this dynamic.
Speaker Change: Yes, good idea, Andrew let's let's get grounded in some of the detailed facts around Thanksgiving because I suspect that this dynamic differs by company for us in our Q2 shipments were plus 1% and consumption was pluses, 0.6%. So they track very very closely and after the first half.
Speaker Change: Shipments and our consumption or actually equal.
Speaker Change: And this is an important fact as we exited Q2, our inventory levels with customers were essentially even with year ago. So there really was not a thanksgiving timing effect for our company now I can't speak to other companies shipping patterns and inventories entering our Q3.
Speaker Change: But I can tell you that's our situation.
Speaker Change: Thanks for that clarity and then.
Speaker Change: Can you talk about incremental inflation and FX are the key reasons for some of the back half EPS pressure versus previous expectations is incremental investment, whether it's consumer or trade part of this as well and I ask because it would seem that you are seeing a return on some of the spending with the volume and share trends that you spoke of in the prepared remarks, and we continue to hear about the consumer.
Speaker Change: You know more value seeking for longer than many expected. So I'm just trying to get a sense. If that is sort of part of the part of the dynamic around estimate changes for the back half of the year or not thanks, so much yeah. Good.
And I think it's very important we clarify this as I mentioned in my prepared remarks.
Speaker Change: The decision to invest to drive the top line back to growth is not a new concept for us.
Speaker Change: We implemented that strategy in Q2 last year and those investments have always been built into our plan for this fiscal year and as I said earlier those investments are obviously working if you look at our trend lines going back five quarters. Its been consistently going north so we werent surprised at all to see it break into positive territory.
Speaker Change: This quarter, nor am I, the slightest bit surprised to see real strength in our frozen and snack business. So thats satisfying, but it's good to be back north as for the trade component of our investments.
Mechanically we planned quarterly and then we true up actual spend at the end of each quarter in Q2, our actual spend came in a bit lower than planned and we've redeployed those funds to Q3 versus cutting them. So I guess, you would characterize that as a small shift, but I think it's important not to confuse that.
Speaker Change: With us being dissatisfied with topline momentum and scrambling to add adequate support we've had our support in place for five quarters, It's working and we're going to continue to see it work going forward.
Speaker Change: Okay. Thanks for the clarity.
Speaker Change: And our next question will come from Ken Goldman and we would like those to AST and limit themselves to one question Ken Goldman. Please go ahead.
Ken Goldman: Hi, and discussing the industry's higher investments in advertising promo trading and innovation, Sean you said the consumer response has varied significantly by category and company I'm, hoping to kind of unpack this a bit.
Ken Goldman: From your vantage point are there any best practices, perhaps that can.
Maybe thoughtfully be applied to the industry as a whole just given some of those consumer challenges are those value seeking behaviors.
Sure Ken Here's how I think about it.
Somewhere in maybe Q2 of last fiscal that I first called out a series of behavior shifts that we saw from cutting discretionary spending to more cooking from scratch to more cooking for many instead of meals for one.
Ken Goldman: Preserving leftovers as opposed to throwing it in the garbage we saw those things emerge last year end and what I've said all along is that the.
Ken Goldman: The benefit of convenience is the one trend that has been most shake unshakable over the last 50 years. So we saw some impact early on in frozen single serve meals.
Ken Goldman: I told you that that was not going to last consumers don't like to meal plan. They don't like to prep, they don't like to Cook and they don't like to clean up and that's exactly how it's unfolded. So my commented before is that really it's category specific if a category has the benefits that consumers really long for they can make a behavioral shift.
Ken Goldman: For a little while to make their household balance sheet work, but if those benefits like convenience are really important that shift isn't going to last forever. The other area that I'd say is kind of a signal of what's on trend is within snacking Theres, obviously been a movement toward protein snacks and healthy snacks and our categories are squarely within that so a year.
Ken Goldman: We saw people were kind of trading out may be cutting their buying rate a little bit, but the magnetic pull of convenience and helpfulness and healthy snacking is pretty strong. So what we've done all along as we've said many times as we've nudged the consumer back to those behaviors that we know theyre longing for using a whole battery of invest.
Ken Goldman: <unk> from an innovation to advertising to high quality trade like end caps and sampling in certain channels of trade things like that and it's been effective.
Ken Goldman: We don't have a lot of categories, where it hasnt been affected but keep in mind, we've focused a lot of our investments in frozen and snacks and we just happen to have.
Ken Goldman: Brands that are resonating well with consumers in those spaces.
Speaker Change: Thanks Happy holidays.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Next question will come from Chris Carey with Wells Fargo. Please go ahead.
Chris Carey: Hi, Good morning, everyone can you.
Speaker Change: Yeah.
Speaker Change: Can you just perhaps expand on.
Speaker Change: Your leverage targets for the full year inching up a bit free cash flow conversion it looks like it's coming in better or whats driving that the leverage kicking up a bit I assume is.
Speaker Change: More about profit as opposed to debt pay down can you just update us on I guess visibility on free cash flow. How quickly you think you can get to your leverage targets and in general how youre thinking about cash deployment, maybe over the next year and perhaps over the next several years between the dividend and share repurchases.
Speaker Change: And of course M&A. Thanks.
Speaker Change: Hey, Chris It's Dave let me take that from the top so yes, our forecasted leverage ratio for this year is now three four times versus three two times as I said in my prepared remarks, that's entirely due to the takedown in our profit so in terms of our forecasted free cash flow.
Speaker Change: On track with our plan in terms of how much debt, we expect to pay down.
Speaker Change: The free cash flow conversion is now above 100% because that's a metric of free cash flow is related to net income so with net income coming down obviously thats going to go up so but the broader point. There is we're really pleased with our performance and free cash flow. The company is very focused on it as an organization.
And now that we've come out of Covid, we're really making great progress in working capital, particularly with inventory or supply chain organization is doing a fantastic job setting goals to take days of inventory out.
Speaker Change: Things like tax just other areas of cash we're just really focused on it. So we're really pleased with the progress and its going to continue to be a priority for us. So as I also said in my prepared remarks, we still expect to hit our long term leverage target of three times by the end of fiscal 'twenty six and so that's.
Speaker Change: Where we are and then we've always talked about a balanced approach to capital allocation.
Speaker Change: Over the years, you've seen us do a lot of things in terms of <unk>.
M&A both acquisitions.
Speaker Change: <unk> divestiture share repurchase.
Speaker Change: Levering up and then paying down our debt.
Speaker Change: <unk> to everything and we liked the flexibility candidly that we would have but we are super focused on getting to that three times target for leverage by the end of fiscal 'twenty six.
Speaker Change: Okay. Thanks, so much.
Speaker Change: And the next question will come from Thomas Palmer with Citi. Please go ahead.
Hi, good morning, Thanks for the question.
Speaker Change: Wanted to ask.
Speaker Change: Presentation indicate that the third quarter operating margin is expected to be the lowest of the year. I think this would then imply that <unk> would be the highest of the year. So I just want to make sure I kind of understand the key drivers of this expected inflection come <unk> I know there is some incremental pricing.
Speaker Change: Are the investments you noted for the third quarter expected to taper off in the fourth quarter, just any help on that inflection. Thanks.
Speaker Change: Yes, So let me let me try to give you some perspective on that so kind of take it from the Todd Let me give you a little bit more color on Q3. So so we do expect volumes to sequentially improve as we talked about in the third quarter. We did talk about and Sean did a nice job of summarizing sort of the dynamic with.
Speaker Change: Trade and the shift from Q2 to Q3.
Speaker Change: So that's in there we also have a little bit more kind of innovation investment if you will and slotting that's going to come in for Q3, that's impacting us there.
Speaker Change: <unk>.
Speaker Change: We did comment that we do believe operating margin will be the lowest of all the quarters for the year.
<unk> SG&A.
Speaker Change: We are going to be in line with year ago.
Speaker Change: <unk>.
Speaker Change: Basically that and then from an inflation perspective, obviously, we've taken up our forecast of close to 4% for the full year and it will be higher in Q3 than Q4. So that's another kind of dynamic there so yes.
That's just the flow of how Q3 years ago.
Speaker Change: Okay. Thank you.
Speaker Change: Yes.
Speaker Change: And the next question will come from Peter Galbo with Bank of America. Please go ahead.
Peter Galbo: Hey, guys good morning.
Speaker Change: Shawn I just wanted to ask I know you said there was no. Thanks.
Speaker Change: Thanks, giving kind of timing benefit to the quarter, but.
Speaker Change: On slide 15, you have the staples portfolio.
Speaker Change: Several of the brands that we're kind of growing double digit. So just wondering if there was any hurricane impact in the quarter, maybe that helped benefit some of the shipments that might not repeat and if so if you could just quantify for that for us thanks very much.
Speaker Change: Pete There was a I would say characterize it as a very small benefit from the hurricane in the GFS segment, but not material to our overall results for the quarter.
And the next question will come from Robert Moskow with TD Cowen. Please go ahead.
Robert Moskow: I think the Lamb Weston call took all the energy out of the sell side, so I am going to China.
Yes.
Robert Moskow: Try to inject a little more into this one.
Robert Moskow: So Sean.
Sean: Raised your inflation guidance, just a little bit and it's had a pretty substantial impact to your earnings outlook.
Speaker Change: Is it more difficult than normal to put through pricing to offset higher costs because of where the consumer is right now and I know I know the guidance assumes that these costs come right back down again, but some of them look a little sticky, particularly cocoa. So what happens if that if those costs stay high.
Speaker Change: Hi into fiscal 'twenty six.
Speaker Change: Yes, let me, let me unpack that for you Rob first.
Speaker Change: Taking it from the top the EPS.
Speaker Change: Call down today equates basically identical lead to the inflation in the back half versus what we had previously expected.
A majority of it plus FX, so acute that queues up and that is the reason back to the earlier question around the leverage going from three two to three for it it's not it's not the need to invest more or any of that and I want to make sure. We don't get caught up in that so its so on a percentage basis, while it looks.
Speaker Change: Eight 3% to 4% on a dollar basis in terms of inflation and the impact on EPS. It just ticks and ties as to what's driving that it's really yes, yes, there is inflation and Coco in sweeteners and Thats very narrow in our portfolio and we will be pricing to offset that but the bigger driver.
Speaker Change: For us has been protein, it's meats eggs things like that and we did anticipate that there would be inflation in the second half, but we anticipated that level of inflation.
Speaker Change: Be lower and we still anticipate that those peak protein costs are going to come down.
Speaker Change: Pretty much across the board, but theres a bit of a deferral for that so then it kind of leaves it is a judgment call for companies like ours, which is.
Speaker Change: If you believe that the forward curves are going to be coming down do you want to price start the whole cycle all over again the lag the elasticity effect and right now we think what's in the best interest of the consumer and in the best interest of our shareholder with respect to kind of long term cash flows and value creation is to keep the top line momentum and Thats, what we are.
Speaker Change: Doing it's been working very well for us it was great to get back to positive territory and so obviously there is a margin implication near term, but we do see that changing now you never know like we thought the back half was going to be less inflationary. If we find ourselves in next fiscal and there's more inflation, we'll deal with that then but.
Speaker Change: That's just a little color on kind of how we're looking at things now and I think the headline is we've got really strong brand performance, we've got industry leading share performance.
Speaker Change: I think the right thing to do is to keep that momentum.
Speaker Change: Thank you.
Speaker Change: And the next question will come from Alexia Howard with Bernstein. Please go ahead.
Alexia Howard: Good morning, everyone.
Alexia Howard: Good morning, Hi, Alexia.
Alexia Howard:
Speaker Change: Just taking a little bit of a different track you know youre healthy choice GLC one on track messaging recently can you talk about.
Speaker Change: What insights gathered from that segment.
Speaker Change: Our plans for maybe expanding that program over time.
Speaker Change: Sure.
Alexia Howard: This is an opportunity for me Alexia to kind of give a little promotional shout out to our forthcoming cagny presentation. This year.
Alexia Howard: Centerpiece of our presentation at Cagny is going to be titled the future of frozen in the future snacking and really the point. There is we think our categories are extremely well positioned in a dynamic macro environment.
Alexia Howard: <unk>, including a macro environment that has speculation around <unk> ones and regulatory and things like that and we think brands like healthy choice can really benefit in that kind of environment and we think snacks that are protein centric and fiber centric as well with respect to healthy choice. We did add what you.
Alexia Howard: Think of it as a way finder on the front of the package for people that are managing their diet proactively including using <unk> one so.
Alexia Howard: The title of the way finder is called on track and we use the language DLP one friendly on there and there was an article in the paper last week, they kind of talked about that if anybody wants to dig into it more but obviously, it's small right now in terms of the number of people on it people who do go on it are still dropping off a bit.
Alexia Howard: And what's interesting about that is a brand like healthy choice. We think can be a solution for both somebody who is actively taking <unk> one drug but also somebody who gives it up but then is seeking to maintain the progress that they've made while on <unk>. One so those consumers need a bit of an off ramp and healthy choice provides an excellent offer.
Alexia Howard: Ramp for them as well so we're we're on trend and we will focus our marketing and our packaging to make sure people people know that.
Speaker Change: Great. Thank you very much I'll pass it on.
Speaker Change: And the next question will come from Mexico import with BNP. Please go ahead.
Speaker Change: Hi, Thanks for the question this might be stealing the thunder from your upcoming Cagny presentation. It sounds like but Sean you touched on and move within snacking to protein and healthy snacks and really that's a microcosm for what we're seeing in the broader packaged food industry. This year, you've got higher protein category.
Speaker Change: Nutrition shakes cottage cheese, Greek yogurt are leaving on the growth side and then you've got unhealthy snacking categories are showing larger declines in your view, what's what's driving this trend and how long do you think it can persist.
Speaker Change: Well snacking is how big snacking, its 80 billion, it's a huge space and and it's a space that has always had a tremendous amount of variety and depending upon what the hot macro trends are you will see some shifting within that space from variety of variety. It just so happens that for a whole.
Speaker Change: Host of reasons things like protein and fiber are super on trend right now and.
Speaker Change: Who knows how that will change I don't see any change.
Speaker Change: On the horizon in terms of protein and fiber being and low carb really being on trend and so we are highly concentrated in our snack business in those benefit areas.
Speaker Change: And what happens when you get on trend like that is the categories grow and retailers add new brands to just to satisfy the demand. So when you think about big categories.
Speaker Change: In the food industry, you see cookies as an example, you see a lot of variety that's needed to satisfy demand. So that's why you see in areas like meat sticks, new brands, showing up because thats textbook and Thats why we acquired the baddie smoked meats.
Speaker Change: Business because.
Speaker Change: It's a new brand, it's playing that role and it's growing at a super fast rate. So we now have in meat sticks, what we call the trifecta smokehouse between slim, Jim Duke's and fatty and we think having a suite of brands Theyre just like we do in popcorn in seeds is the best way to continue capitalizing on that growth, but I don't see those trends changing.
Speaker Change: I like being protein centric fiber centric and I like not being DSD. That's a good combination for snack business.
Speaker Change: Great. Thanks very much.
Speaker Change: And the next question will come from Rob Dickerson with Jefferies. Please go ahead.
Rob Dickerson: Alright, great. Thanks.
Rob Dickerson: I had a quick easy question.
Rob Dickerson: Unlike me wrong.
Rob Dickerson: I thought so.
Here too.
Rob Dickerson: Was supposed to be.
Rob Dickerson: The highest kind of spend for the year just in terms of advertising and promotion.
Rob Dickerson: But then I also hear maybe theres, a little bit more trade going into Q3, and I heard a little time shift and then also I think you said kind of total SG&A in.
Rob Dickerson: AD and promo will be the same in Q3 relative to last year's Q3, which implies.
Rob Dickerson: Q3 is higher so was there anything just kind of occurred in the quarter, where you say okay.
Rob Dickerson: We might have a few new innovations that might have slipped into Q3, so maybe more will.
Rob Dickerson: We will also shift some of that AD and promo or maybe we want to promote a little bit more in December to the holidays, just trying to gauge kind of the yes.
I guess it seasonality to certain extent, all the AD and promo.
Speaker Change: But just kind of how you're thinking about that as we kind of moved through Q3.
Speaker Change: Let me take that Rob So just kind of take it from the top from a dollar perspective, we spend the most in Q2 in terms of trade merchandising just in terms of absolute dollars, although Sean talked about it we were a bit favorable to our forecast and some of that shifted to Q3.
Speaker Change: From an A&P perspective, we are ramping up A&P. So that will continue to ramp up so that by the end of the year I think our A&P percentage is pretty much in line with the prior year as what we said and so that would ramp up and that obviously will start in Q3.
Speaker Change: I mentioned two that we did have a little bit of.
Speaker Change: Innovation investment that was higher that we expect to be higher in Q3.
Speaker Change: Versus what we had forecasted before again not not really material, but it is an increase versus what we had forecasted before so.
Speaker Change: And then SG&A as you had commented on we're still kind of our commentary is the same in terms of where we expect SG&A to be so they are really the dynamics I would say that hopefully answered. Your question, yes, Rob most of those most of those events are easy to plant Thanksgiving and Christmas and blend.
Speaker Change: Where they fall in the calendar you plan around the ones, where you have to stay more agile as support for business like Swiss Miss where the weather moves around and you want to try to heavier investment track with when the weather hits, but I wouldn't say that that type of variability as material at all in the scheme of our spending.
Speaker Change: Okay perfect that was great. Thank you.
Speaker Change: Thanks.
And the next question will come from Leo Jordan <unk> with Goldman Sachs. Please go ahead.
Speaker Change: Good morning. Thank you for taking my question <unk> seen if you could comment on the competitive environment and frozen a large peer has talked about adding capacity in the category and stepping up some investments to support its growth. So just seeing if you have seen any shift in behavior, yet and how you think these changes could impact your ability to.
Speaker Change: Continue to drive volume improvement going forward.
Speaker Change: While frozen is an absolutely awesome space, we've been saying that pretty much exclusively for about 10 years. So I'm glad people are starting to recognize the opportunity in this space because it's a vast.
Speaker Change: Domain within the retailer store and we've been really the only ones who have been active in driving that end and as a result, our products are in our innovation machine is well out ahead of our competition you can see that an extremely strong market share. So we love our model, we're just going to continue to drive it and leave it in.
Speaker Change: To the degree the retailers continue to appreciate how much upside in innovation space remains in frozen.
Speaker Change: Faster the overall category is going to grow and we are the leaders globally in frozen and certainly clearly in the U S. You can see by the share numbers.
Speaker Change: And we intend to stay that way.
Thanks.
Speaker Change: Thank you.
Speaker Change: As there are no further questions at this time I would like to call turn the call over to Matthew <unk> for closing remarks.
Matthew: Thank you and thank you all for joining US today, please reach out to Investor relations with any additional questions.
Speaker Change: The conference has now concluded.
Speaker Change: Happy holidays.
Speaker Change: Conference has now concluded. Thank you for attending today's presentation you may now disconnect.