Q3 2026 Conagra Brands Inc Earnings Call

Speaker #4: Every time I hear this groove, it makes me wanna move. Don’t feel fearless; it brings to you and makes you do what you do.

Speaker #4: Every time I hear this groove, it makes me wanna move. Don't feel fearless, it brings to you and makes you do what you do.

Operator: Good day, and welcome to the Conagra Brands Q3 Fiscal 2026 Earnings Q&A Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

Speaker #4: Good day, and welcome to the Conagra Brands third quarter fiscal 2026 earnings Q&A call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker #4: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone.

Operator: To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the call over to Matthew Neisius, Senior Director of Investor Relations for Conagra Brands. Please go ahead.

Speaker #4: To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the call over to Matthew Neisius, Senior Director of Investor Relations for Conagra Brands.

Speaker #4: Good morning, everyone, and thank you for joining us. Once again, I'm joined this morning by Sean Connolly, our CEO, and Dave Marburger, our CFO.

Matthew Neisius: Good morning, everyone, and thank you for joining us. Once again, I'm joined this morning by Sean Connolly, our CEO, and Dave Marberger, our CFO. We may be making some forward-looking statements in discussing non-GAAP financial measures during this Q&A session.

Speaker #4: We may be making some forward-looking statements and discussing non-GAAP financial measures during this Q&A session. Please see our earnings release, prepared remarks, presentation materials, and filings with the SEC in the Investor Relations section of our website for descriptions of our risk factors, GAAP to non-GAAP reconciliations, and information on our comparability items.

Matthew Neisius: Please see our earnings release, prepared remarks, presentation materials, and filings with the SEC in the investor relations section of our website for descriptions of our risk factors, GAAP to non-GAAP reconciliations, and information on our comparability items. I'll now ask the operator to introduce the first question.

Speaker #4: I'll now ask the operator to introduce the first question. Our first question comes from Andrew Lazar with Barclays. Please go ahead. Great, thanks so much.

Operator: Our first question comes from Andrew Lazar with Barclays. Please go ahead.

Andrew Lazar: Great. Thanks so much. Morning everybody.

Speaker #4: Good morning, everybody. Good morning, Andrew. Good morning. Hi there. Maybe Sean, to start off, I'd really like your thoughts on if the industry does end up facing another round of broad-based inflation, I guess, whether you think Conagra and the industry at large would be able to count on pricing as but one lever to help offset it as it has in the past, or if this time is different just given consumers are particularly value-conscious at this stage?

Sean Connolly: Morning Andrew.

Dave Marberger: Morning.

Dave Marberger: Hi there. Maybe Sean to start off I'd really like your thoughts on if the industry does end up facing another round of broad based inflation. I guess whether you think, you know, Conagra and the industry at large would be able to count on pricing as but one lever to help offset it as it has in the past or if this time is different just given consumers are particularly value conscious at this stage. I ask it because I think some industry players clearly are needing to remain highly focused on debt paydown and protect profitability even if it prolongs sort of the volume recovery dynamic.

Speaker #4: And I ask it because I think some industry players, clearly, need to remain highly focused on debt paydown and protect profitability, even if it prolongs the volume recovery dynamic.

Sean Connolly: Yep, great question. Here's how I would tell you to think about that. First, as a reminder, believe it or not, it was all the way back at the beginning of our fiscal 2024 when we pivoted to a focus on restoring volume growth in frozen and snacks, even if it meant eating some inflation and enduring some margin compression, while strategy has proven to be quite effective because you've seen our volume trajectory improve every quarter since, with the exception of that brief period last year where we had the temporary supply constraints. We're very pleased to see our total portfolio growing again this quarter. As for what comes next, our plan at this point is to stay agile. If inflation is benign, you'll see us likely continue to focus on continued volume momentum.

Speaker #4: Yep. Great question. Here's how I would tell you to think about that. First, as a reminder, believe it or not, it was all the way back at the beginning of our fiscal '24 when we pivoted to a focus on restoring volume growth in Frozen and Snacks, even if it meant eating some inflation and enduring some margin compression.

Speaker #4: While that strategy has proven to be quite effective, because you've seen our volume trajectory improve every quarter since, with the exception of that brief period last year where we had the temporary supply constraints.

Speaker #4: So, we're very pleased—and pleased to see our total portfolio growing again this quarter. As for what comes next, our plan at this point is to stay agile.

Speaker #4: If inflation is benign, you'll see us likely continue to focus on continued volume momentum. If, for some reason, inflation was to go the other way, we'll keep our options open. After all, we are a company that is intensely focused on maximizing cash flow.

Sean Connolly: If for some reason inflation was to go the other way, we'll keep our options open, after all we are company that is intensely focused on maximizing cash flow. We've already proven that we can move the volume needle to growth in frozen and snacks when we need to. Yet we will be agile, but right now I would say it's too early to speculate on a particular course of action. There's 3.5 months to go before we guide for fiscal 2027 and obviously a lot can unfold by the hour these days, certainly a lot can unfold in the next 3.5 months. One thing we can be sure of is that we will drive a lot of productivity while we optimize all our other levers to mitigate any inflation that might come our way.

Speaker #4: And we've already proven that we can move the volume needle to growth in frozen and snacks when we need to. So net, we'll be agile.

Speaker #4: But right now, I would say it's too early to speculate on a particular course of action. There are three and a half months to go before we guide for fiscal '27.

Speaker #4: And obviously, a lot can unfold by the hour these days, and certainly a lot can unfold in the next three and a half months.

Speaker #4: One thing we can be sure of is that we will drive a lot of productivity while we optimize all our other levers to mitigate any inflation that might come our way.

Sean Connolly: Remember we did take pricing this year on a bunch of products, our canned foods and our cocoa-oriented products, and the elasticities have been quite encouraging. Let's see how the dust settles, then we'll take the smartest course of action to deal with, you know, whatever we're seeing at the time. As I sit here today, I see a lot of positives. The business has strong momentum, especially in frozen snacks. Shares are excellent, cash flow is strong, productivity is robust, and people are highly engaged in delivering some of the most exciting innovations we've had. A lot to feel good about.

Speaker #4: And remember, we did take pricing this year on a bunch of products—our canned foods and our cocoa-oriented products—and the elasticities have been quite encouraging.

Speaker #4: So let's see how the dust settles, and then we'll take the smartest course of action to deal with whatever we're seeing at the time.

Speaker #4: But as I sit here today, I see a lot of positives. The business has strong momentum, especially in frozen and snacks. Shares are excellent, cash flow is strong, productivity is robust, and people are highly engaged in delivering some of the most exciting innovations we've had.

Speaker #4: So, a lot to feel good about. Great. No, thank you for that. And then, just, Dave, real quickly, maybe, I guess, what sort of visibility do we have at this stage on costs going into fiscal '27, just based on where you might already have some hedges in place?

Andrew Lazar: Great. No, thank you for that. Just Dave, real quickly, maybe, I guess, what sort of visibility do we have at this stage on costs going into fiscal 2027, just based on where you might already have some, you know, some hedges in place? I'm not asking, obviously, for your overall inflation estimate or whatever for next year, but just how much visibility do you think you have or based on where you already know what you've got in place. Thanks so much.

Speaker #4: I'm not asking, obviously, for your overall inflation estimate or whatever for next year, but just how much visibility do you think you have based on where you already know what you've got in place?

Sean Connolly: Yeah, Andrew, let me give you a little color there. For our fiscal 2027, our material spend coverage is generally consistent with the prior years at this point. We're roughly 60% covered, and this is total materials, 60% covered for Q1 and roughly 40% covered for the full fiscal year. Areas where we have a bit more coverage than historically would be steel, freight. Remember, we contract line haul, that's a big percentage of our freight, and so that's on contract. Then some of our crop-based ingredients, we have better coverage, and then a little bit less coverage on diesel fuel. We're covered through the end of this fiscal year there, but not as covered as we've been in the past.

Speaker #4: Thanks so much. Yeah, Andrew. Let me give you a little color there. So for our fiscal '27, our material spend coverage is generally consistent with the prior years at this point.

Speaker #4: So we're roughly 60% covered, and this is total materials. Sixty percent covered for Q1 and roughly 40% covered for the full fiscal year. Areas where we have a bit more coverage than historically would be steel and freight.

Speaker #4: Remember, we contract line haul. That's a big percentage of our freight, and so that's on contract. And then, some of our crop-based ingredients we have better coverage.

Speaker #4: And then a little bit less coverage on diesel fuel. We're covered through the end of this fiscal year there, but not as covered as we've been in the past.

Sean Connolly: Just as a reminder, proteins probably have the lowest coverage of anything. For next year, we're only about 15% covered. We're more spot market when it gets to the animal proteins. Hopefully that gives you a little bit of a feel.

Speaker #4: And just as a reminder, proteins probably have the lowest coverage of anything. So for next year, we're only about 15% covered. We're more spot market when it gets to the animal proteins.

Andrew Lazar: Yep, really helpful. Thanks so much.

Speaker #4: So, hopefully that gives you a little bit of a feel. Yep. Really helpful, thanks so much. Our next question comes from David Palmer with Evercore ISI.

Operator: Our next question comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer: Thanks. Those were precisely my questions, so let me just follow up on that a little bit. When you look at your portfolio, you've obviously been prioritizing volume over the last fiscal year, and that has helped. You know, there are some other notable companies in the space that have been aggressive in this prioritizing volume first, just like you. I wonder where we are now in terms of where you think your pricing power is. Do you feel like you're in a better spot now with regard to relative price points to private label in some of your categories versus main competitors and others in terms of your just volume momentum overall?

Speaker #4: Please go ahead. Thanks. Those were precisely my questions. So let me just follow up on that a little bit. When you look at your portfolio, you've obviously been prioritizing volume over the last fiscal year, and that has helped, and there are some other notable companies in the space that have been aggressive in this—prioritizing volume first, just like you.

Speaker #4: I wonder where we are now in terms of where you think your pricing power is. Do you feel like you're in a better spot now with regard to relative price points to private label in some of your categories versus main competitors and others?

Speaker #4: In terms of your just volume momentum overall—and I really am asking because in the past, you've said things like, 'We'll be okay if inflation is not over 3% in terms of getting to our algo,' and I just wonder if today, if we do go over 3%, if you'll be able to drive profitable growth going forward. And thank you.

David Palmer: And I really am asking because in the past, you've said things like, we'll be okay if inflation is not over 3% in terms of getting to where I'll go. I just wonder if today, if we do go over 3%, if you'll be able to drive profitable growth going forward. Thank you.

Sean Connolly: Hey, David, it's Sean. First of all, private label, just since you brought that up, we underindex in terms of private label development in our categories, particularly in our almost non-existent in our biggest business, which is frozen meals. You know, our strategy has been what I've called a horses for courses strategy, where our growth businesses have been focused on getting back to volume growth, that's frozen and snacks, and that is happening. Our staples business is focused on cash maximization. That's a lot of things like our canned food business, and we have taken inflation-justified price on those categories, and we've seen good elasticity. It's a surgical approach that we've taken historically, and you know.

Speaker #4: Hey, David. It's Sean. First of all, private label—just since you brought that up—we under-index in terms of private label development in our categories.

Speaker #4: Particularly, it’s almost nonexistent in our biggest business, which is frozen meals. But our strategy has been what I’ve called a ‘horses for courses’ strategy, where our growth businesses have been focused on getting back to volume growth.

Speaker #4: That's frozen and snacks, and that is happening. Our staples business is focused on cash maximization. That's a lot of things, like our canned food business.

Speaker #4: And we have taken inflation-justified price on those categories, and we've seen good elasticity. So it's a surgical approach that we've taken historically. But make no mistake about it, because we've dealt with the most protracted inflation supercycle that I've certainly seen in my 35 years of doing this.

Sean Connolly: Make no mistake about it, because we've dealt with the most protracted inflation super cycle that I've certainly seen in my 35 years of doing this. After a few years of every company taking justified pricing, you know, investors said, "Look, you can't shrink your way to prosperity. Show us that you can get the volumes moving again." We have done that. Our portfolio responsiveness, I think, has outpaced our peers, which shows you we are delivering good value and we are delivering exciting innovation. You know, as I mentioned to Andrew, as to what's to come, you know, we'll see what the field gives us, when we've got to snap the chalk line here.

Speaker #4: And after a few years of every company taking justified pricing, investors said, 'Look, you can't shrink your way to prosperity. Show us that you can get the volumes moving again.' And we have done that.

Speaker #4: And our portfolio responsiveness, I think, has outpaced our peers, which shows you we are delivering good value and we are delivering exciting innovation. But as I mentioned to Andrew, as to what's to come, we'll see what the field gives us when we've got a snap of the chalk line here.

Sean Connolly: If things settle down with the war and things like that and things look more benign, you know, I think it makes sense to stay focused on keeping the momentum that we've got in volume. If for some reason things broke the other way and we're looking at a whole slog of new costs, you know, we can pivot as well. Because to the degree you do take price and you sacrifice a little volume, it's more of a volume sabbatical than it is a permanent volume rebase, and you tend to see the volumes come back when inflation moves again and you see those prices get rolled back.

Speaker #4: And if things settle down with the war and things like that, and things look more benign, I think it makes sense to stay focused on keeping the momentum that we've got in volume.

Speaker #4: But if, for some reason, things broke the other way and we're looking at a whole slog of new costs, we can pivot as well. Because to the degree you do take price and you sacrifice a little volume, it's more of a volume sabbatical than it is a permanent volume rebase, and you tend to see the volumes come back when inflation moves again and you see those prices get rolled back.

Sean Connolly: As I said, we've got to stay agile, but feel really good to see that we have a portfolio that is responsive to, you know, proper pricing and wise investments and strong innovation when we need it to be. You know, look, investors always wanna see top line and bottom line growth. Sometimes the macro environment can make it challenging to do both at the same time. You know, we'll stay agile, and we'll keep you posted as we get to next quarter in terms of what we're seeing and what the exact plan is.

Speaker #4: So, as I said, we've got to stay agile, but it feels really good to see that we have a portfolio that is responsive to proper pricing, wise investments, and strong innovation when we need it to be.

Speaker #4: But look, investors always want to see top-line and bottom-line growth. Sometimes the macro environment can make it challenging to do both at the same time.

Speaker #4: We'll stay agile, and we'll update you as we get to next quarter in terms of what we're seeing and what the exact plan is.

David Palmer: Thanks. I'll pass it on.

Speaker #4: Thanks. I'll pass it on. Up next, we have Megan Clapp with Morgan Stanley. Please go ahead. Hi, good morning. Thanks so much. I just wanted to start with maybe a question on the fourth quarter.

Operator: Up next, we have Megan Clapp with Morgan Stanley. Please go ahead.

Operator: Hi, good morning. Thanks so much. I just wanted to start with maybe a question on Q4. You know, as you look at Q3, you obviously had some nice momentum, a return to organic sales. There were a lot of moving parts just with the retailer timing and some of your retail dynamics. As we think about Q4, maybe you can just help us with some of the building blocks as we think about top line, should shipments generally match consumption? And then on the op margin line, can you just help us kind of understand the building blocks to the sequential improvement that's embedded as well? Thanks.

Speaker #4: As we look at the third quarter, you obviously had some nice momentum—a return to org sales. There were a lot of moving parts just with the retailer timing and some of your year dynamics.

Speaker #4: So, as we think about the fourth quarter, maybe you can just help us with some of the building blocks. As we think about the top line, should shipments generally match consumption? And then, on the operating margin line, can you just help us understand the building blocks to the sequential improvement that's embedded as well?

Sean Connolly: Hey, Megan, it's Sean. Let me start by tackling the shipment versus consumption question because I saw a couple early reports this morning that I think might have that wrong. I would not spend a lot of time overthinking shipments versus consumption because with our company, because of the supply interruption last year and then some merchandising timing shifts in frozen this year out of Q2 into Q3, our shipment patterns have moved around a bit compared to what they normally do. But over fiscal 25 and fiscal 26 combined, we are basically shipping almost exactly to consumption, which is what we always do as a company. It's just been a bit lumpier quarter to quarter because of those dynamics. You know, with respect to this quarter, I wouldn't get overly exercised around there's an implication in Q4.

Speaker #4: Thanks. Hey, Megan. It's Sean. Let me start by tackling the shipment versus consumption question, because I saw a couple of early reports this morning that I think might have that wrong.

Speaker #4: I would not spend a lot of time overthinking shipments versus consumption because with our company, because of the supply interruption last year, and then some merchandising timing shifts in frozen this year—out of Q2 into Q3—our shipment patterns have moved around a bit compared to what they normally do.

Speaker #4: But over fiscal '25 and fiscal '26 combined, we are basically shipping almost exactly to consumption, which is what we always do as a company.

Speaker #4: It's just been a bit lumpier quarter to quarter because of those dynamics. And so, with respect to this quarter, I wouldn't get overly exercised around—there's an implication in Q4.

Sean Connolly: It's actually more the reversal of Q2, which was where we had a bunch of holiday shipments last year, those and merchandising shipments this year moved to Q3. Not a lot of drama there. That's the shipment versus consumption piece of the year to go. Dave, you wanna tackle anything else?

Speaker #4: It's actually more the reversal of Q2, which was where we had a bunch of holiday shipments last year. And merchandising shipments this year moved to Q3.

Speaker #4: So, not a lot of drama there. And that's the shipment versus consumption piece of the year to go. Dave, you want to tackle anything else?

Dave Marberger: Yeah. Just to add to that, Megan, we do expect positive organic net sales growth in Q4. That's obviously implied with our full year guide to the kind of the midpoint of the range for organic. Consumption and shipment should be more in line in Q4, you know, talking to what Sean just explained. We're excited about our innovation slate, and you start shipping some of that innovation, so you start to see some of that in Q4. So they're really the building blocks for the top line. As it relates to operating margin, yes, we expect an inflection from Q3 to Q4. Really the big drivers of that, A&P, as a percentage of sales, will not be as high in Q4 as it was in Q3.

Speaker #4: Yeah, and just to add to that, Megan, we do expect positive organic net sales growth in Q4. That's obviously implied with our full-year guide to kind of the midpoint of the range for organic.

Speaker #4: Consumption and shipments should be more in line in Q4. Talking to what Sean just explained, we're excited about our innovation slate, and you'll start seeing us ship some of that innovation.

Speaker #4: So you start to see some of that in Q4. So they're really the building blocks for the top line as it relates to operating margin.

Speaker #4: Yes, we expect an inflection from Q3 to Q4. Really, the big drivers of that—A and P as a percentage of sales—will not be as high in Q4 as it was in Q3.

Dave Marberger: It'll be more in line with that kind of 2.5% average. The 53rd week actually gives some leverage in terms of overall operating margin. Just some of the seasonality of trade, timing of productivity, timing of inflation, all those kind of things give us additional kind of benefit in op margin relative to Q3. I would say they're the kind of key building blocks.

Speaker #4: So, it'll be more in line with that kind of two-and-a-half percent average. The 53rd week actually gives some leverage in terms of overall operating margin.

Speaker #4: And then just some of the seasonality of trade, timing of productivity, timing of inflation, all those kind of things give us additional kind of benefit and op margin relative to Q3.

Speaker #4: So I would say they're kind of the key building blocks. Okay, that's helpful, thank you. And just as a follow-up—the op margin, you're now expecting at the high end of the guide.

Dave Marberger: Okay, that's helpful. Thank you. Just as a follow-up, the op margin you're now expecting at the high end of the guide, could you maybe just talk about what's driving that? As we look at the exit rate on Q4, I think it implies something above 12. It, you know, understanding there's a lot of moving parts right now, but if inflation kind of stays in this low single digit range, as you would hope it moderates to and normalizes over time, like, should we think about that exit rate as being informative of kind of a starting point going forward at this point?

Speaker #4: Could you maybe just talk about what's driving that? And as we look at the exit rate on the fourth quarter, I think it implies something above 12.

Speaker #4: Understanding there's a lot of moving parts right now, but if inflation kind of stays in this low single-digit range, as you would hope it moderates to and normalizes over time, should we think about that exit rate as being informative of kind of a starting point going forward at this point?

Dave Marberger: Yeah. Regarding the last part of your question, I'm not gonna comment on fiscal 2027. You know, what I can say is, it and if you just look at when we gave guidance at the beginning of the year, you know, 11% to 11.5% operating margin when there were so many things going on at that time, and since then, there have been so many dynamics, I feel really good that we're actually now gonna guide to the higher end of that range. And that all starts with our inflation call, which was core inflation and tariffs. We're pretty much on that call. Our productivity programs are really doing well. The investments we've made in our supply chain and technology and in process are really delivering. And so they're really the key.

Speaker #4: Yeah. Regarding the last part of your question, I'm not going to comment on fiscal '27. What I can say is, if you just look at when we gave guidance at the beginning of the year, 11 to 11.5 percent operating margin, when there were so many things going on at that time.

Speaker #4: And since then, there have been so many dynamics. I feel really good that we're actually now going to guide to the higher end of that range.

Speaker #4: And that all starts with our inflation call, which was core inflation and tariffs. We're pretty much on that call. Our productivity programs are really doing well.

Speaker #4: The investments we've made in our supply chain and technology, and in process, are really, really delivering. And so they're really the key. As Sean talked about, we have taken price increases.

Dave Marberger: As Sean talked about, we have taken price increases, particularly in our canned products, and the elasticities have been in line. When you kinda look at it's how we planned the year. There obviously have been some puts and takes, but generally speaking, we feel really good that we're coming in as we expected to on margin, and we expect that productivity to continue into next year. You know, obviously we have more work to do on inflation. There's a lot of dynamics. Things are changing all the time. I talked about the coverage we have. We are locked in on certain key areas, which is good for us.

Speaker #4: Particularly in our canned products, and the elasticities have been in line. And so, when you kind of look at it, it's how we planned the year.

Speaker #4: There's obviously been some puts and takes, but generally speaking, we feel really good that we're coming in as we expected to on margin. And we expect that productivity to continue into next year.

Speaker #4: Obviously, we have more work to do on inflation. There's a lot of dynamics—things are changing all the time. But I talked about the coverage we have.

Speaker #4: We are locked in on certain key areas, which is good for us. So, we feel good that the building blocks for next year's plan are there.

Dave Marberger: You know, we feel good that the building blocks for next year's plan are there, but we have to wait the next three months to give specific guidance, obviously. It's not operating margin, but on the free cash flow front, we continue to feel really good. You know, we took our conversion up to 105% from 100%, and we took it up at CAGNY. This is all from focus that we have in this company on free cash flow. It's part of the culture. It's part of the incentive plan for everybody in this company that's compensated; free cash flow is in their incentive.

Speaker #4: But we have to wait the next three months to give specific guidance, obviously. And then it's not operating margin, but on the free cash flow front, we continue to feel really good.

Speaker #4: We took our conversion up to 105% from 100, and we took it up at Cagney. And this is all from the focus that we have in this company on free cash flow.

Speaker #4: It's part of the culture. It's part of the incentive plan for everybody in this company that's compensated—free cash flow is in their incentive.

Dave Marberger: We're very focused on it in areas like cash tax efficiency, areas like Ardent Mills, where although our equity profit is off $0.10, our cash is on plan. They're gonna continue to dividend at plan despite the equity earnings being down. Then inventory. We built up inventory levels coming out of COVID. Our safety stocks were high, and we've continued to ramp that down. If you look at our balance sheet, we have $2 billion of inventory. With Project Catalyst and us being able to leverage AI and other technology, we think we have a long runway to keep, you know, taking inventory out and be more competitive. We're pretty bullish on that front. We'll talk more about that when we give guidance, but obviously that has a cost impact as well.

Speaker #4: And so we're very focused on it. And areas like cash tax efficiency, areas like Ardent Mills, where although our equity profit is off $0.10, our cash is on plan.

Speaker #4: So, they're going to continue to dividend at plan despite the equity earnings being down. And then, inventory—we built up inventory levels coming out of COVID.

Speaker #4: Our safety stocks were high, and we've continued to ramp that down. And if you look at our balance sheet, we have $2 billion of inventory.

Speaker #4: And with project catalysts and us being able to leverage AI and other technology, we think we have a long runway to keep taking inventory out and be more competitive.

Speaker #4: So we're pretty bullish on that front. We'll talk more about that when we give guidance, but obviously, that has a cost impact as well.

Dave Marberger: I would say they're the building blocks and foundations how to think about margin kind of ending this year, going into next year.

Speaker #4: So, I would say they're the building blocks and foundations for how to think about margin, kind of ending this year and going into next year. Thanks so much for all the color.

Dave Marberger: Thanks so much for all the color. I'll pass it on.

Speaker #4: I'll pass it on. Our next question comes from Peter Galbo with Bank of America. Please go ahead. Hey, guys. Good morning. Thanks for the questions.

Operator: Our next question comes from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo: Hey, guys. Good morning. Thanks for the questions. Dave, maybe if I could just start on Ardent Mills. You know, the change or the revision to that line item, I think it's the second one of the year. You know, historically, in that business, when there has been a lot of wheat volatility, you've been able to take advantage. I think, you know, in Q4, you're kind of calling that maybe it's the opposite. So just wanna understand kinda what's happening there, particularly in Q4, and then just any early read on kinda how we might start to think about the run rate of Ardent for 2027.

Speaker #4: Dave, maybe if I could just start on Ardent Mills. The change, or the revision to that line item—I think it's the second one of the year.

Speaker #4: And historically, in that business, when there has been a lot of wheat volatility, you've been able to take advantage, and I think in Q4, you're kind of calling that maybe it's the opposite.

Speaker #4: So, just want to understand kind of what's happening there, particularly in the fourth quarter, and then just any early read on how we might start to think about the run rate of Ardent for '27.

Dave Marberger: Sure, Peter. So just taking it from the top, as I've talked about, broadly speaking, Ardent has two sources of revenue and profit. They have their core business margin, where they, you know, they mill flour and sell that at a profit. That business is consistent, and that business is tracking. They have what we call commodity trading revenue. That's where there's a lot of activity, hedging and different arbitrage where Ardent can be in a position to make a lot of money. What really drives the upside there are overall wheat prices and the volatility of the markets.

Speaker #4: Sure, Peter. So just taking it from the top, as I've talked about, broadly speaking, Ardent has two sources of revenue and profit. They have their core business margin, where they mill flour and sell that at a profit.

Speaker #4: That business is consistent, and that business is tracking. And then they have what we call commodity trading revenue. And that's where there's a lot of activity, hedging, and different arbitrage, where Ardent can be in a position to make a lot of money.

Speaker #4: And what really drives the upside there are overall wheat prices and the volatility of the markets. And really, through the first three quarters of this year, wheat prices have been low, and there’s been less volatility in the wheat market.

Dave Marberger: Through the first three quarters of this year, their wheat prices have been low, and there's been less volatility in the wheat market, so not as much opportunity for Ardent to take advantage on the commodity trading side. Obviously, with the start of the war, wheat prices have gone up in the futures and volatility has increased. You don't see those benefits immediately. With our forecast for this year, you know, we've called the number where we are now. But clearly, there is more volatility that the Ardent team is working through now. We will work through it as well to determine what kind of impact that could have on next year. We don't have line of sight to that at this time, but there is more volatility at this point since the war.

Speaker #4: So not as much opportunity for Ardent to take advantage on the commodity trading side. Obviously, with the start of the war, wheat prices have gone up in the futures and volatility has increased.

Speaker #4: And so you don't see those benefits immediately. And so with our forecast for this year, we've called the number where we are now. But clearly, there is more volatility that the Ardent team is working through now.

Speaker #4: We will work through it as well to just determine what kind of impact that could have on next year. We don't have line of sight to that at this time.

Speaker #4: But there is more volatility at this point since the war. Okay, thanks for that, Dave. That's helpful. And Sean, I think on Dave's initial comment on inflation for next year, he mentioned a bit on contracting on certain crop-based ingredients.

Peter Galbo: Okay. Thanks for that, Dave. That's helpful. And Sean, I think on Dave's, you know, initial comments on inflation for next year, he mentioned a bit on contraction in certain crop-based ingredients. There's a lot of concern, I think, in the market just given where, you know, fertilizer costs have gone, and you all are a pretty big procurer of, you know, vegetables. So just how you all are thinking through that, what the conversations are like with your growing partners, and whether that's really an issue for this grow season or whether it's more of a 2027 grow cycle event. Thanks very much.

Speaker #4: There's a lot of, I think, concern in the market just given where fertilizer costs have gone, and you all are a pretty big procurer of vegetables.

Speaker #4: So just how you all are thinking through that, what the conversations are like with your growing partners, and whether that's really an issue for this grow season, or whether it's more of a '27 grow cycle event.

Sean Connolly: Well, fertilizer it would be more of an F'28 event than F'27. You know, I would say conversations are very productive. I think everybody's in the same boat, Pete. I mean, it's kinda like the news of the hour around here that we're responding to, and so it's just super dynamic. We gotta stay on top of it. It changes day to day, and you gotta be agile. That's why I started my comments today to Andrew saying, you know, We will be responsive to the hand we are dealt, and we will choose the smartest course of action. That's just kinda the nature of operating in incredibly dynamic times.

Speaker #4: Thanks very much. Well, fertilizer would be more of an F28 event than F27. But I would say conversations are very productive. I think everybody's in the same boat, Pete.

Speaker #4: I mean, it's kind of like the news of the hour around here that we're responding to. And so it's just super dynamic. We've got to stay on top of it.

Speaker #4: It changes day to day, and you’ve got to be agile. That’s why I started my comments today to Andrew by saying we will be responsive to the hand we are dealt, and we will choose the smartest course of action.

Speaker #4: And that's just kind of the nature of operating in incredibly dynamic times. Okay. Thanks very much, guys. Thanks, Peter. Our next question comes from Tom Palmer with JPMorgan.

Peter Galbo: Okay. Thanks very much, guys.

Sean Connolly: Thanks, Peter.

Operator: Our next question comes from Thomas Palmer with J.P. Morgan. Please go ahead.

Thomas Palmer: Good morning. Thanks for the question. Maybe I could just start off with a clarification on some of the inflation and freight commentary. You noted that you're covered in terms of contracts. I think in the past when we've seen rates run up, not totally dissimilar to now, we have seen spot running well above contracted rates and maybe contracted rates not holding in the way that you might think of a contract holding. I guess to what extent you're seeing that now, especially when I look at some of that margin pressure in the refrigerated business this quarter? Thanks.

Speaker #4: Please go ahead. Good morning. Thanks for the question. Maybe I could just start off with a clarification on some of the inflation and freight commentary—you noted that you're covered in terms of contracts.

Speaker #4: I think in the past, when we've seen rates run up—not totally dissimilar to now—we have seen spot running well above contracted rates, and maybe contracted rates not holding in the way that you might think of a contract holding.

Speaker #4: I guess, to what extent are you seeing that now, especially when I look at some of that margin pressure in the refrigerated business this quarter?

Dave Marberger: Yeah, spot was actually running low for a lot of our fiscal year. Spot has now spiked up, and is above sort of contracted rates. A high percentage of our freight, as we kind of look into next year, is contracted line haul, so a high percentage. A smaller percentage is spot. You know, that market has spiked up like you just alluded to. We've incorporated all that for our fiscal 2026 guide. As I mentioned, next year, we're covered through a good part of next fiscal year with our freight contracts, and that's a high percentage. We do have some spot, but a high percentage is contracted.

Speaker #4: Thanks. Yeah. So spot was actually running low for a lot of our fiscal year. Spot has now spiked up, and it's above sort of contracted rates.

Speaker #4: A high percentage of our freight, as we kind of look into next year, is contracted line haul—so, a high percentage. So, a smaller percentage is spot.

Speaker #4: That market has spiked up, like you just alluded to. But we've incorporated all that for our fiscal '26 guide. And then, as I mentioned, next year we're covered through a good part of next fiscal year with our freight contracts.

Speaker #4: And that's a high percentage. We do have some spot, but a high percentage is contracted. Okay, thank you. And then following up on Ardent, you mentioned earlier the strong free cash flow conversion.

Thomas Palmer: Okay. Thank you. Then following up on Ardent, you mentioned earlier on the strong free cash flow conversion, how some of that was aided by not lowering the distributions from Ardent, even as earnings have maybe not come in quite the way you expected. If we think about a potential rebound next year in Ardent's earnings, to what extent should we think about that flowing through to free cash flow generation, so essentially increasing the distributions versus more just fully covering the distributions in terms of the earnings? Thanks.

Speaker #4: Some of that was aided by not lowering the distributions from Ardent even as earnings have maybe not come in quite the way you expected.

Speaker #4: If we think about a potential rebound next year in Ardent's earnings, to what extent should we think about that flowing through to free cash flow generation?

Speaker #4: So essentially increasing the distributions versus more just fully covering the distributions in terms of the earnings? Thanks. Yeah. So we look at this on a kind of a year-by-year basis.

Dave Marberger: Yeah. Tom, we look at this on a kind of a year-by-year basis. We have a lot of discussion with our joint venture partners on capital allocation priorities. As a kind of a general rule, Ardent Mills does an outstanding job managing their balance sheet. They keep their leverage low, and they're really efficient with their cash flow. You know, this year they were in a position to be able to hold to plan despite you know, some of the volatility I described earlier on the commodity trading revenue. As a general rule, you know, we have a sort of a payout ratio level that we set going into the year.

Speaker #4: We have a lot of discussion with our joint venture partners on capital allocation priorities. As a kind of a general rule, Ardent Mills does an outstanding job managing their balance sheet.

Speaker #4: They keep their leverage low, and they're really efficient with their cash flow. So this year, they were in a position to be able to hold to plan despite some of the volatility I described earlier on the commodity trading revenue.

Speaker #4: So, as a general rule, we set a sort of payout ratio level that we establish going into the year, and then we look at how the year plays out.

Dave Marberger: You know, we look at how the year plays out, and then we modify from there. Generally speaking, we feel very good about, you know, the cash generation of Ardent Mills and, you know, getting timely distributions.

Speaker #4: And then we modify from there. But generally speaking, we feel very good about the cash generation of Ardent Mills and getting timely distributions. Okay.

Thomas Palmer: Okay, thank you.

Sean Connolly: Mm-hmm.

Speaker #4: Thank you. Our next question comes from Robert Moscow with TD Cowen. Please go ahead. Thanks. A couple of questions. One, Dave, can you remind us what the tariff component of your cost inflation is this year?

Operator: Our next question comes from Robert Moskow with TD Cowen. Please go ahead.

Robert Moskow: Thanks. A couple questions. One, Dave, can you remind us what the tariff component of your cost inflation is this year? I think it's like 2% or so. How should we think about it for fiscal 2027? Does it lap? Will it turn to a 0? Does that automatically get you some relief in your inflation for next year?

Speaker #4: I think it's like 2% or so. And how should we think about it for fiscal '27? Does it lap? Will it turn to a zero?

Speaker #4: And does that automatically get you some relief in your inflation for next year? Yeah, Rob. So generally, kind of going into the year, our overall inflation was 7%—4% was core, and 3% were gross tariffs before mitigation.

Sean Connolly: Yeah, Rob. Generally, kind of, going into the year, our overall inflation was 7%, 4% was core, and 3% were gross tariffs before mitigation.

Dave Marberger: Yeah.

Dave Marberger: We track mitigation as part of productivity, and we estimated 1% in mitigation. As we look, that's pretty much played out. You know, there's been some volatility, obviously, with the IEEPA tariffs, but then we have the new tariffs that have come in. Not a material change, I would say, to the original estimate, a little bit favorable, but then our core inflation's been a little unfavorable. We're still at that kind of total 7%, call it. As we look to next year, because we had mitigation that we're gonna wrap, there is gonna be some headwind from a kind of wrap perspective in tariffs. You know, we originally said 1% mitigation, which would imply $80 million of headwind.

Speaker #4: And we track mitigation as part of productivity. And we estimated 1% in mitigation, and so as we look, that's pretty much played out.

Speaker #4: There's been some volatility, obviously, with the AIPA tariffs, but then we have the new tariffs that have come in. And so, not a material change, I would say, to the original estimate.

Speaker #4: A little bit favorable. But then our core inflation has been a little unfavorable. So we're still at that kind of total 7%, call it.

Speaker #4: As we look to next year, because we had mitigation that we're going to wrap, there is going to be some headwind from a kind of wrap perspective in tariffs.

Speaker #4: And so we originally said 1% mitigation, which would imply $80 million of headwind. We don't think it's going to be that much. Might be more like half of that.

Dave Marberger: We don't think it's gonna be that much, might be more like half of that, but we are gonna have some headwind with tariff just because we're wrapping up the mitigation that we had this year that now won't flow into next year.

Speaker #4: But we are going to have some headwind with tariffs just because we're wrapping on the mitigation that we had this year. That now flows—won't flow into next year.

Robert Moskow: Okay. I'll follow up on that. More broadly, I mean, you know, the retail consumption data, Sean, looks really strong on a two-year volume CAGR basis for frozen. But then when I just look at your shipments and I try to do that same two-year CAGR just for Refrigerated and Frozen division, it's down on a two-year basis, and that's trying to normalize for the supply chain disruption. Is that just because this division has like refrigerated brands that have been down over that two-year period that you're not including in that Nielsen data?

Speaker #4: Okay, I'll follow up on that. And then, more broadly—I mean, the retail consumption data, Sean, looks really strong on a two-year volume CAGR basis.

Speaker #4: For frozen. But then, when I just look at your shipments and I try to do that same two-year CAGR just for the Refrigerated and Frozen division, it's down on a two-year basis.

Speaker #4: And that's trying to normalize for the supply chain disruption. Is that just because this division has refrigerated brands that have been down over that two-year period, that you're not including in that Nielsen data?

Sean Connolly: You know, I'm not sure exactly what you're looking at, Rob, but that could be a piece of it. I mean, there are some of the refrigerated businesses that are nowhere near the strategic priority as our frozen business as an example.

Speaker #4: I'm not sure exactly what you're looking at, Rob. But that could be a piece of it. I mean, there are some of the refrigerated businesses that are nowhere near the strategic priority as our frozen business, as an example.

Robert Moskow: Mm-hmm.

Sean Connolly: Those could be categories where as we follow our horses for courses approach, that it's more of a value over volume. You know, I would say in general, on the core frozen business, you've seen strength on a one-year and you see strength on a two-year. You know, staggering market share data around 88% of that business holding or gaining share, which I know was a central focus for investors last year when we had the supply interruption. It's like, will this bounce back? Will it bounce back strong? It has bounced back. Our refrigerated businesses, some of those businesses are more about cash contribution. There are some particularly high margin businesses in there.

Speaker #4: So those could be categories where, as we follow our horses for courses approach, that it's more of a value over volume. But I would say, in general, on the core frozen business, you've seen strength on a one-year.

Speaker #4: And you see strength on a two-year, and staggering market share data—around 88% of that business holding or gaining share, which I know was a central focus for investors last year when we had the supply interruption.

Speaker #4: It's like, will this bounce back? Will it bounce back strong? And it has bounced back. So our refrigerated businesses—some of those businesses are more about cash contribution.

Speaker #4: There are some particularly high-margin businesses in there. And so, some of those refrigerated businesses we treat more like some of our center store businesses, like cans, where we manage them for cash and not as much for volume growth.

Sean Connolly: Some of those refrigerated businesses we treat more like some of our center store businesses, like cans, where we manage them for cash and not as much for volume growth. That's probably what you're seeing there. Dave, do you wanna add to that?

Speaker #4: That's probably what you're seeing there. Dave, you want to add to that? Yeah. Just Rob, and I'll let you kind of follow up, checking numbers.

Dave Marberger: Yeah, just Rob, and I'll let you kind of follow up checking numbers. If I just look at the Q3, obviously this quarter for shipments for RNF volume was +3.9, Q3 a year ago was -3. On a two-year basis-

Speaker #4: But if I just look at my Q3, obviously this quarter for shipments for Arnett volume, it was plus 3.9. Q3 a year ago was minus 3.

Robert Moskow: Yes.

Dave Marberger: Volume's actually up in shipments.

Speaker #4: So, on a two-year basis, volume's actually up in shipments. Yes, I was referring to overall dollars being down. So, but yeah, I agree with you, Dave.

Robert Moskow: Yes. I was referring to overall dollars are down. But yeah, I agree with you, Dave. All right. Thank you.

Dave Marberger: Thanks.

Speaker #4: All right. Thank you. Thanks. Our next question comes from Chris Carey with Wells Fargo. Please go ahead. Hey, good morning, guys. I wanted to see if you maybe could just take sort of a two- to three-year view on the margin trajectory for your key U.S. businesses.

Operator: Our next question comes from Chris Carey with Wells Fargo. Please go ahead.

Chris Carey: Hey, good morning, guys. I wanted to see if you maybe could just take a sort of a 2-3-year view on the margin trajectory for your key US businesses. You know, the grocery and snacks business has seen pressure, but there's clearly been more pressure on the refrigerated and frozen side. When you kinda digest that past few years, what are the key challenges that have impacted the business? Obviously, there's been inflation, but I wonder if there are other things under the hood. Maybe you can comment on your medium-term productivity initiatives as well.

Speaker #4: The grocery and snacks business has seen pressure, but there's clearly been more pressure on the refrigerated and frozen side. When you kind of digest the past few years, what are the key challenges that have impacted the business?

Speaker #4: Obviously, there's been inflation. But I wonder if there are other things under the hood. And as you look out over the next several years, how tangible is your ability to kind of claw back some of those margins? And maybe you can comment on your medium-term productivity initiatives as well?

Chris Carey: I'd love any thoughts there.

Speaker #4: So I'd love any thoughts there. Yeah. Chris, let me give you my thoughts on that. We are the biggest frozen food manufacturer in North America, if not the world.

Sean Connolly: Yeah. Chris, let me give you my thoughts on that. We are the biggest frozen food manufacturer in North America, if not the world. We have, as a company, seen, you know, in this, you know, now 5, 6-year deep inflation super cycle, we've seen a, you know, a massive increase in the cost of goods that we've had to deal with. After about 4 years of taking inflation-justified pricing in order to kinda protect margins, that's where we said on our growth business is you can't shrink your way to prosperity, and that's led by frozen. We did pivot the strategy to, you know, stop taking, at some point, all this inflation justified pricing in frozen to get volumes moving again. That means we had to eat some of that higher cost.

Speaker #4: And we have, as a company, seen in this now five-, six-year deep inflation supercycle, we've seen a massive increase in the cost of goods that we've had to deal with.

Speaker #4: And after about four years of taking inflation-justified pricing in order to kind of protect margins, that's where we said, on our growth businesses, you can't shrink your way to prosperity.

Speaker #4: And that's led by frozen. So we did pivot the strategy to stop taking, at some point, all this inflation-justified pricing in frozen to get volumes moving again.

Sean Connolly: As a result, that business in particular, because it's so strategic to us, we got volumes moving. They're moving extremely well again this quarter, but we've had to eat some cost. A lot of that cost has been in animal protein, because as you know, animal proteins have been up. That's exactly what has driven the margin compression in the frozen business. It was a choice we made to protect our leading market shares and protect our sales. If you looked at even the velocities across our portfolio that came out yesterday, I think we've got the best velocities by a good chunk in the group. So now the question comes, you know, what's next? Obviously, we've got the war curve ball that we're dealing with.

Speaker #4: But that means we had to eat some of that higher cost. And as a result, that business in particular, because it's so strategic to us, we got volumes moving.

Speaker #4: They're moving extremely well again this quarter, but we've had to eat some cost. And a lot of that cost has been in animal protein.

Speaker #4: Because, as you know, animal proteins have been up. So that is exactly what is driving the margin compression in the frozen business. And it was a choice we made to protect our leading market shares and protect our sales.

Speaker #4: And if you looked at even the velocities across our portfolio that came out yesterday, I think we've got the best velocities by a good chunk in the group.

Speaker #4: So now the question comes, what's next? Obviously, we've got the war curveball that we're dealing with. But as I said last quarter, absolutely assuming we can get some element of normalcy, we absolutely expect margin expansion going forward, particularly in Frozen.

Sean Connolly: As I said last quarter, we absolutely, you know, assuming we can get some element of normalcy, we absolutely expect margin expansion going forward, particularly in Frozen. The building blocks haven't changed. It starts with productivity. In Fiscal 2026, between core productivity and tariff mitigation, that number is just over 5%, which is very strong. Second, at some point, we're gonna get inflation relief, hopefully back to our, closer to our typical 2%. Certainly, getting the war behind us would help with that. Third, we've got the advancement of our supply chain resiliency investments, including the chicken plants, and that's gonna enable us at some point to repatriate outsourced volume, which will be a, you know, a good gain for margin.

Speaker #4: And the building blocks haven't changed. It starts with productivity. In fiscal '26, between core productivity and tariff mitigation, that number is just over 5%, which is very strong.

Speaker #4: Second, at some point, we're going to get inflation relief, hopefully back to our typical 2%. Certainly, getting the war behind us would help with that.

Speaker #4: Third, we've got the advancement of our supply chain resiliency investments, including the chicken plants. And that's going to enable us, at some point, to repatriate outsourced volume, which will be a good guy for margin.

Sean Connolly: Fourth, you know, we are taking price and we're, you know, we have taken price surgically and we've seen encouraging elasticities. The fifth thing is, as you've heard me talk, you know, in the last couple of quarters, we've kicked off this Project Catalyst, which is an ambitious initiative to reengineer our core work processes, leveraging technology, and that's gonna be a benefit to both the P&L and the balance sheet. In the P&L, it'll be a benefit to sales, it'll be a benefit to profit. In the balance sheet, we see opportunity there in terms of, you know, reducing working capital, increasing cash, and that's a real tangible and exciting opportunity. Yeah, it's margin, and it's more than margin in that particular project.

Speaker #4: And then, fourth, we are taking price. And we have taken price surgically, and we've seen encouraging elasticities. And then the fifth thing is, as you've heard me talk in the last couple of quarters, we've kicked off this Project Catalyst, which is an ambitious initiative to re-engineer our core work processes, leveraging technology.

Speaker #4: And that's going to be a benefit to both the P&L and the balance sheet. And the P&L, it'll be a benefit to sales. It'll be a benefit to profit in the balance sheet.

Speaker #4: We see opportunity there in terms of reducing working capital and increasing cash. And that's a real, tangible, and exciting opportunity. So yeah, it's margin.

Sean Connolly: You know, put those things together and, you know, we feel very good about the margin outlook from here. Obviously, it wouldn't hurt if the world settled down a bit, but, you know, we'll deal with that because that's, you know, not something we control. We gotta respond to that.

Speaker #4: And it's more than margin in that particular project. So, put those things together, and we feel very good about the margin outlook from here.

Speaker #4: Obviously, it wouldn't hurt if the world settled down a bit. But we'll deal with that, because that's not something we control. We've got to respond to that.

Chris Carey: Okay. All right. Great. Thanks, Sean. Just, you know, Dave, the free cash flow conversion has been a really good story. You know, you upped that at CAGNY and, you know, small increase again today. Are we run rating, you know, at a new level for free cash flow conversion? You know, do you see level of sustainability up here over 100%? Then just, you know, it's kind of a confirmation of a prior question. You know, the dividends are staying, you know, on Ardent, or I think that the cash component of Ardent has maintained despite, you know, the income statement component coming down.

Speaker #4: Okay. All right. Great. Thanks, Sean. And just, Dave, the free cash flow conversion has been a really good story. You upped that CAGR and small increase again today.

Speaker #4: Are we run-rating at a new level for free cash flow conversion? Do you see a level of sustainability up here over 100%? And then, just as kind of a confirmation of a prior question.

Speaker #4: The dividends are staying on Arden or I think that the cash component of Arden has maintained despite the income statement component coming down. Does that get reset next year?

Chris Carey: Does that get reset next year or can you maintain a level of dividends? By the way, I know you're not guiding to Ardent and nor am I suggesting, but is there some sort of like mark to market that needs to happen there? That's kind of you know just a quick follow-up. Thanks on cash.

Speaker #4: Or can you maintain a level of dividends? And by the way, I know you're not guiding to Arden, nor am I suggesting. But is there some sort of mark-to-market that needs to happen there? So that's kind of just a quick follow-up.

Dave Marberger: Well, let me start with the free cash flow conversion. We're not gonna guide to that now. What I would say is we always target a 90% or better free cash flow conversion as the base. You know, given our earnings and our ability to convert that to cash just in the normal course, we feel 90% is the appropriate target. To get above that, we need to find additional cash-generating ideas. We've done that with cash tax efficiency this year, with different planning that we've done that's really helped us there. The big thing has been working capital specific to inventory. I talked about it earlier.

Speaker #4: So, thanks on cash. Yeah. Okay. Well, let me start with the free cash flow conversion. So, we're not going to guide to that now.

Speaker #4: What I would say is we always target a 90% or better free cash flow conversion as the base. Given our earnings and our ability to convert that to cash just in the normal course, we feel 90% is the appropriate target.

Speaker #4: So, to get above that, we need to find additional cash-generating ideas. We've done that with cash tax efficiency this year, with different planning that we've done that's really helped us there.

Speaker #4: And the big thing has been working capital, specific to inventory. And I talked about it earlier. We have a significant amount of inventory, and we believe we have great opportunity to really reduce that inventory in future years.

Dave Marberger: We have a significant amount of inventory, and we believe we have great opportunity to really reduce that inventory in future years. Our inventory increased coming out of COVID 'cause we had a lot of demand and we increased our safety stocks. Now we're methodically reducing it with our supply planning systems and our process. When we leverage some of these new tools with AI now, we think that we can continue that acceleration of inventory reduction, and that's the kind of thing that's gonna take you above 90%. Again, I'm not gonna specifically guide on that today, but we're laser-focused on inventory. A big part of that too. I've done this a long time to be able to take inventory down. You have to have alignment between supply chain, sales, and finance.

Speaker #4: Our inventory increased coming out of COVID because we had a lot of demand, and we increased our safety stocks. And now we're methodically reducing it with our supply planning systems and our process.

Speaker #4: But when we leverage some of these new tools with AI now, we think that we can continue that acceleration of inventory reduction. And that's the kind of thing that's going to take you above 90%.

Speaker #4: So again, I'm not going to specifically guide on that today. But we're laser-focused on inventory. And a big part of that, too—I've done this a long time.

Speaker #4: To be able to take inventory down, you have to have alignment between supply chain, sales, and finance. And it may sound simple, but sometimes that doesn't always happen.

Dave Marberger: It may sound simple, but sometimes that doesn't always happen. We have great alignment here, and it starts at the top in terms of a commitment to taking inventory out. We're investing and we feel pretty bullish on our ability to take that out. As it relates to Ardent Mills, I would just when we set equity earnings for Ardent, we always have a payout ratio on those earnings, and that's how we start the year. That payout ratio is pretty high. It's not 100%, but it's pretty close. Then we go from there. This year, the earnings fell, but we kept the dividend to plan, so our payout ratio is above 100%.

Speaker #4: And we have great alignment here. And it starts at the top in terms of a commitment to taking inventory out. So we're investing, and we feel pretty bullish on our ability to take that out.

Speaker #4: As it relates to Arden Mills, I would just say when we set equity earnings for Arden, we always have a payout ratio on those earnings.

Speaker #4: And that's how we start the year. And that payout ratio is pretty high. It's not 100%, but it's pretty close. And then we go from there.

Speaker #4: And so this year, the earnings fell, but we kept the dividend to plants. Our payout ratio is above 100%. But you always reset it every year.

Dave Marberger: You always reset it every year so that the dividend payment and the equity earnings to start the year are pretty much in sync, and then we evaluate their balance sheet as we go each quarter.

Speaker #4: So that the dividend payment and the equity earnings to start the year are pretty much in sync. And then we evaluate their balance sheet as we go each quarter.

Chris Carey: Okay, that's really helpful. Thanks so much, guys. Appreciate it.

Sean Connolly: Thanks.

Speaker #4: Okay. That's really helpful. Thanks so much, guys. Appreciate it. Thanks. Our next question comes from Scott Marks with Jefferies. Please go ahead. Hey. Good morning.

Operator: Our next question comes from Rob Dickerson with Jefferies. Please go ahead.

Rob Dickerson: Hey, good morning. Thanks so much for taking your questions. First thing I just wanted to get clarity on, in terms of the volume growth in the business, wondering if you can help us understand if that was driven by some of the retailer inventory adjustments and how much of it would you attribute to just recovery from the supply chain disruptions a year ago?

Speaker #4: Thanks so much for taking my questions. First thing, I just want to get clarity on, in terms of the volume growth in the business—I’m wondering if you can help us understand.

Speaker #4: Of that was driven by some of the retailer inventory adjustments and how much of it would you attribute to just recovery from the supply chain disruptions a year ago?

Sean Connolly: Well, we certainly undershipped last quarter, Scott, and we caught that back up because the merchandising events moved into Q3, and so the shipments associated with those moved into Q3. We're, you know, on a two-year basis, as I mentioned before, we basically ship consumption, and there's not a material gap there at all. In terms of the takeaway portion of it's strong on a one and a two-year basis. If you look at the mix of TPD versus velocities, the hero there has really been the velocity piece, and that's driven in large part by just the strength of the innovation we've seen.

Speaker #4: Well, we certainly undershipped last quarter, Scott. And we've caught that back up because the merchandising events moved into Q3, and so the shipments associated with those moved into Q3.

Speaker #4: So we're on a two-year basis. As I mentioned before, we've basically shipped consumption, and there's not a material gap there at all. In terms of the takeaway portion of it, it's strong on a one- and a two-year basis.

Speaker #4: And if you look at the mix of TPDs versus velocities, the hero there has really been the velocity piece. And that's driven in large part by just the strength of the innovation we've seen.

Sean Connolly: you know, very pleased with the consumer takeaway that we've seen, particularly in frozen and snacks, which is obviously you could see in some of the data's been quite strong.

Speaker #4: So very pleased with the consumer takeaway that we've seen, particularly in frozen and snacks, which is obviously you could see in some of the data has been quite strong.

Rob Dickerson: Understood. Appreciate that. A follow-up just quickly. I know, last quarter you've been talking about the new big chicken facility, talking about bringing in-house some production and that had been on track. Just wondering if you can share an update on that, how that's progressing versus expectations. Thanks.

Speaker #4: Understood. Appreciate that. And then a follow-up just quickly. I know last quarter you've been talking about the new big chicken facility talking about bringing in-house some production.

Speaker #4: And that had been on track. Just wondering if you can share an update on that, how that's progressing versus expectations. Thanks. Yeah. We sell a lot of chicken.

Sean Connolly: Yeah, we sell a lot of chicken, and we use a lot of chicken in our products, and it's a combination of baked or roasted, whatever you wanna call it, and fried. Both have been strong. Both projects are tracking right where we need them to be. We still do have production on the outside. That'll continue for a little bit, but then at some point when all our work is complete, we'll have an opportunity to bring that back in as a good guy to our margins.

Speaker #4: And we use a lot of chicken in our products. And it's a combination of baked or roasted—whatever you want to call it—and fried.

Speaker #4: Both have been strong. Both projects are tracking right where we need them to be. We still do have production on the outside that'll continue for a little bit.

Speaker #4: But then at some point, when all our work is complete, we'll have an opportunity to bring that back in as a good guy to our margins.

Dave Marberger: Yeah. Just as on the bake side, we did complete that project, and we're starting to bring that volume back this year. As we go into next year, that should be a tailwind in terms of having full year on that. Then the fried, we've made investments and that's, you know, that's gonna go out longer.

Speaker #4: Yeah, and just on the bake side, we did complete that project, and we're starting to bring that volume back this year. So as we go into next year, that should be a tailwind in terms of having a full year on that.

Speaker #4: And then the fried—we've made investments, and that's going to go out longer. Appreciate it. Thanks very much. Thanks. Our next question comes from Karla Kaseya with JPMorgan.

Rob Dickerson: Appreciate it. Thanks very much.

Sean Connolly: Thanks.

Operator: Our next question comes from Carla Casella with JP Morgan. Please go ahead. Carla, is it possible your line is muted? It's open on our end, but I'm still unable to hear you.

Speaker #4: Please go ahead. Karla, is it possible your line is muted? It's open on our end. But I'm still unable to hear you. I think that might be the last question.

Matthew Neisius: I think that might be the last question, so why don't we go ahead and wrap today.

Operator: All right. This concludes our question and answer session. I would like to turn the call back over to Matthew Neisius for closing remarks.

Speaker #4: So, why don't we go ahead and wrap up today? All right. This concludes our question and answer session. I would like to turn the call back over to Matthew Neisius for closing remarks.

Matthew Neisius: Thank you, Bailey. Thank you all so much for joining us today. Please reach out to investor relations if you have any follow-up questions.

Speaker #4: Thank you, Bailey. And thank you all so much for joining us today. Please reach out to Investor Relations if you have any follow-up questions.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.