Q1 2020 Earnings Call
Good day and welcome to the Conoco brands first quarter fiscal year 2020, <unk> earnings Conference call.
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I would now we could turn the conference over to Brian Carney and Investor Relations. Please go ahead.
Good morning, everyone. Thanks for joining us.
I remind you that we won't be making some forward looking statements during today's call well, we are making those statements in good faith, but do not have any guaranteed about the results. We will achieve descriptions of the risk factors are included in the documents we filed but that's you see.
Also we will be discussing some non-GAAP financial metrics.
References to adjusted items, including organic net sales growth.
Certain measures exclude items management believe impacted the comparability for the period referenced please see the earnings release for additional information on our comparability items.
Reconciliations of those adjusted measures to the most directly comparable GAAP measures can be found it never either <unk> earnings press release or in the earnings slides both of which can be found in the Investor Relations section of our website Conagra brands Dot com.
Finally, we will be making for references to total Conagra brands legacy Conagra brands and legacy Pinnacle references to legacy Conagra brands refer to measures exclude any income or expenses associated with the recently acquired pet food.
With that I'll turn it over to show.
Thanks, Brian Good morning, everyone and thank you for joining our first quarter fiscal 2020 earnings call.
2020 is on track following a very solid Q1, we continue to implement the conagra wait a profitable growth by executing against the principles and plan, we shared at Investor day.
We're applying our value over volume playbook to the legacy pinnacle portfolio.
We've made important progress strengthening the foundation of the business and repositioning Pinnacle's leadership brands for profitable growth.
We're also pleased to report that are ongoing integration and synergy capture related to the pinnacle business and our de leveraging progress remain squarely on track.
The legacy Conagra, we continued to deliver solid execution and maintained our momentum in the first quarter, particularly in our leading frozen and snacks businesses.
Looking ahead, we remain confident that our second half results will reflect stronger growth in the first half.
We'll lap the anniversary of the Pinnacle acquisition.
Easier comps due to the start up our value over volume execution across its portfolio.
Well also begin to benefit from the exciting new innovations that are being introduced to the market. Therefore, we are reaffirming our fiscal 2020 guidance for all previously communicated metrics.
Our agenda. This morning is to provide an update on our work on the legacy Pinnacle business.
Skus are continued progress on legacy Conagra and share some additional details on our expectations for the remainder of the year.
Turning to the legacy pinnacle portfolio.
Before diving into the details here I'd like to take a step back and review the central tenets of our value over volume playbook, which is essentially our approach to optimizing the base business and establishing a stronger foundation on which to build.
As you've heard me say before value over volume is a disciplined approach to growth that acknowledges not all volume is created equal and consumer demands are always evolving.
The approach dictates that we consistently apply rigor to portfolio management.
Value over volume involves eliminating weaker S.K. use in advance of the launch of higher performing in new products and the associated brand building investments.
It also involves renovating the core and getting the fundamentals right.
These fundamentals, including pricing promotion assortment distribution product quality and packaging.
We previously shared that our application value over volume to the legacy pinnacle portfolio would be a key priority.
You can see on slide seven we're making real progress in fact, we're seeing very similar patterns to what we saw legacy Conagra a few years ago.
We've trimmed low quality skews from the marketplace, we've seen tpds decline near term, but importantly, we've also seen based velocities improved sharply.
We demonstrated on brands like banquet and healthy choice in legacy Conagra. This creates a much stronger foundation on which to infuse brand building investments.
Wish bone is one of the key legacy Pinnacle brands were furthest along and strengthening the foundation.
As we've discussed previously wish bone was challenged by several issues service quality and the label change execution.
Yeah densify the issues and took action fixing the service challenges improving labels.
For better variety communication and also upgrading the product quality.
As you can see on slide eight we've stabilized the business in fact, we grew it in Q1.
We also remain highly focused on executing our play book on the birds eye in Duncan Hines brands.
Oh, performing SK years have come out of the market fundamentals are improving keep in mind that were in the very early stages of recognizing the benefits from our new innovations in these categories. The shelf reset windows at large customers are different than they are for wish bone. So the timing of their recoveries is different we do anticipate improvement in the SEC.
Can happen fiscal 2020 for both of these brands as they begin to benefit from the addition of our new innovation slate for.
We're confident that the birds eye and Duncan Hines brands will continue to stabilize and are on track for profitable growth.
We also remain on track across all our integration synergy and de leveraging initiatives as highlighted on slide 10 across the board were very pleased with the execution of our integration activities. Our employee related transitions are now substantially complete and since the close of the transaction through the end of Q1 we've.
Realized $71 million of cost synergies.
From a balance sheet perspective, we're on schedule with our deleveraging plan, having reduced total gross debt by 148 million in the first quarter and by more than 1 billion from the transaction close through the end of Q1.
As we consistently said, we remain firmly committed to maintaining a solid investment grade credit rating.
Overall, we had a solid first quarter on legacy Pinnacle, we've made good progress and strengthening the foundation across the portfolio and look forward to continued improvement in the back half of the year as we begin to benefit from the new innovations.
Turning to legacy Conagra.
Business started the year, well and we're pleased with the trends we're seeing.
The legacy Conagra business delivered solid performance during the quarter together the two large domestic retail business has outperformed their planned organic net sales growth.
Yet again, we saw terrific momentum in our legacy Conagra frozen and snacks businesses.
As expected our grocery sales performance in Q1 was impacted by some pulled over from the Hudson Chef Boyardee dynamics that we detailed last quarter as we'll share with you today, we have action plans in place and trends are already improving.
We also experienced some unplanned softness in our international and foodservice segments during the quarter. This negatively impacted our topline performance.
This softness relates to some onetime issues and both segments are expected to recover in the second half.
Importantly, despite these topline headwinds our international in foodservice segment over delivered their profit plans for the quarter.
Let's get into each of these items in more detail.
Turning to slide 13, you can see the total retail sales for the legacy kind of ever business were up 0.9% from the same period, a year ago, demonstrating 2.7% growth over the two year period.
Well I'll walk you through the year on year drivers of the fiscal year in a moment you can see in this chart that to your growth rate has been fairly stable for the past four quarters and we're entering a period of easier comparisons on a one year basis.
On Slide 14, you can see that we continued our momentum in the legacy Conagra frozen portfolio throughout the first quarter with retail sales growing 2.5%.
In addition, our legacy Conagra frozen meals business continued to outperform our peers in Q1 in fact, it has become the industry leader in the frozen category, our legacy Conagra meals business frozen meals business now has the number one position in share of total retail sales and gain share of category dollars.
Q1.
Slide 16 demonstrates there were also gaining share of shelf.
As we've discussed in some instances our actions to remove low performing products drives lower tbds as we create more holding power for our higher velocity items.
Other cases, we've seen teams tpds expand it either event our goal is to grow share up shelf and that's exactly what we're doing.
As we know our retail customers run the ultimate meritocracy, they will give more space to the products that move off the shelf the fastest.
This data demonstrates that were earning more shelf space by having products that consumers demand.
Importantly, shelf space is a leading indicator that bodes well for our opportunity to grow sales.
Frozen wasn't the only leader in our legacy Conagra portfolio in Q1 snacks also maintained momentum through the first quarter and delivered strong results across a variety of brands and categories.
Retail sales in snacks were up an impressive 7.2% versus a year ago.
Meat snacks in seeds emerged as particularly strong leaders with an increase in retail sales of 9.4% and 8.5% respectively.
For all retail dollar sales in snacks demonstrated sustained performance improvement throughout the first quarter, having grown 9.8% on a two year basis.
Similar to frozen our legacy Conagra snacks business is also outperforming its peers and gaining share as demonstrated on slide 18.
Turning to the legacy Conagra grocery portfolio for a moment, if you recall last quarter, we faced headwinds in our grocery portfolio related to pricing and promotional challenges.
As the cost of steel cans increased we implemented inflation justified pricing on Hans can't Tomatoes, and chef boyardee to partially offset the increased cost. However, our private label competition and can tomatoes kept prices flat and in some instances actually decreased prices and on chef boyardee.
We lost some high quality merchandising.
The effective these dynamics was a higher than expected volume decline in Q4.
We plan for this decline to continue through the first quarter as a carry over from Q4 and it did we've already begun implementing action plans for each of these brands to reverse this trend.
Before I get to the year to go I'll cover foodservice and international.
Mentioned earlier, we faced some unplanned softness in the topline performance in our international in foodservice segments during the quarter.
International segment was impacted by external events in Puerto Rico in India that shifted the timing of sales previously expected in Q1 to the second half.
While this shift in timing impacts our quarter to quarter results. We expect that it will have no net impact on the topline for the fiscal year.
Partially offsetting this timing shift our international segment benefited from growth in snacks, and frozen improved mix as well as cost savings resulted in higher than planned operating profit and margins in the quarter.
And our foodservice segment, we made the strategic decision this quarter to opt out of a particularly low margin margin contract consistent with our value over volume strategy.
Well this decision negatively impacted our topline in the near term. It was the right thing to do for the health of the business and benefited our Q1 margins in the segment. Furthermore, we expect stronger top line performance in food service for the balance of the year with new items coming to market. We also expect better than anticipated performance from.
Guardian within the Foodservice segment, which will start to be included in our organic number during the second quarter.
Looking ahead, we're excited about what's to come in the back half of the year.
First we are providing more promotional support on Hudson chef boyardee to better compete in market.
Second we got a strong investment plan for Q2 for the new innovation, that's about to hit the market in fact, the second quarter will Mark the peak of our investment cycle as we incur launch expenses to tee up our slate of new products.
Third we expect terrific second half growth.
The innovation build across many of our segments in the second half of the year.
We expect our in store presence to be much stronger and drive growth.
Some categories. This will be on the back of increased Tpds and others. It will come on the back of increased facings on high velocity items.
We will also benefit from easier comparisons in the back half of the year as we lap prior year value over volume activity and increased competition.
In addition, we'll lap the anniversary of our Pinnacle acquisition discrete supply chain disruptions and the higher interest expense and share count that started in Q2 of last year.
Let's go into each of these items in a bit more detail.
Starting in the second quarter, we began launching new smart promotional support for Hudson chef Boyardee to improve volume trends remember Hudson chef Boyardee continue to maintain the number one position in their categories. Among branded competitors. Both brands are critical importance to consumers.
We're already seeing early traction on both brand has demonstrated on slide 23. The first two weeks of our second quarter have shown the benefit of these strategic promotions. It certainly early days and we have some tougher comps in the weeks ahead, given the year ago Hurricane activity, but we're confident that we have the right marketplace strategies now place to do.
Liver sequential improvement throughout the second half of the year.
We're also excited to introduce exciting new products to our 2 billion dollar snacks portfolio throughout the remainder of the fiscal year.
Latest innovation slate a portion of which is shown here will premiere at next in October .
We're delivering products with bold flavors, new forms and optimized price pack architecture.
Many of you are athenax, please stop by our booth to see this great work for yourself.
We're proud of our snacks portfolio. It's one of the fastest growing we're confident that our continued innovation in the space will further differentiate and elevate our already iconic brands.
We're also excited about our new Conagra brands Center for food design, which we expect to open in the first calendar quarter of 2020 next door to our headquarters in Chicago.
This is an expansion of our state of the art R&D and culinary capabilities and will be exclusively focused on snacking related innovation.
Facility will combine culinary food and packaging design expertise and one space, enabling the rapid development of even more contemporary snacking products.
We're also introducing reinvigorated innovation to our sweet treats portfolio in the back half of the year across both legacy Pinnacle and legacy Conagra brands.
Duncan Hines is being re framed as a suite treat to unlock significant growing demand spaces with refresh packaging on a novel flavors and new snacking platforms.
Legacy kind of aggregate snacking brands will also receive an injection of innovation to capture consumer excitement with trending kid friendly themes.
We plan to build upon our category leading position in frozen by introducing our strongest innovation slate to date throughout the balance of fiscal 2020.
We've been strategically tailoring our products to fit the needs of today's busy consumers by providing them with premium nutritious ingredients and increasing sustainability all at affordable price points.
Words, I is expected to benefit meaningfully from these efforts.
We expect birds eye performance to accelerate in the second half as we see the impact of our recently launched innovation slate as well as upcoming new product introductions, including Spiralizer King.
As one of the largest brand in frozen vegetables, we're confident that birds eye is well positioned to capitalize on contemporary forms and trending flavors.
Another brand in our portfolio with significant growth opportunity is gardien, which we spoke about Atlanta last quarter, we're working hard to continue to build out the guardian brand to capitalize on the explosive growth in the plant based meet alternative space.
Regarding foodservice business grew an impressive 25% in the first quarter and continues to accelerate penetration across multiple foodservice channels.
As we shared with you last quarter. The brand is the second largest in the plant based meet alternative space and has already quadrupled in size over the past four years in.
In retail, we expect gardien to gain prominence in both frozen and refrigerated as we introduce more high quality innovation.
On trend brand with modern attributes gardien is uniquely positioned to generate superior velocities by leveraging conagra's culinary capabilities differentiated packaging techniques and our diverse portfolio of power brands and we are well positioned to support Guardians continued growth with new capacity coming online.
During Q2.
Overall, we're pleased with the progress Conagra has made in the first quarter fiscal 2020.
We're on track with our plan and confident in our ability to accelerate growth in the second half of the year and deliver our fiscal 2020 guidance with that I'll turn it over to Dave.
Thank you Sean and good morning, everyone. This morning, I'll walk through our first quarter fiscal 2000 performance before we open it up for questions. As a reminder, starting this quarter Conagra no longer reports pinnacle as a standalone reporting segment.
Clinicals business components have been allocated to the for legacy Conagra reporting segments to reflect how we are now managing the business.
You can find historical segment financial information that reflects this recast and an 8-K furnished with the FCC on September 20 Threerd.
Slide 31 outlines our performance for the quarter.
Ill walk through more detail in a moment, but I'll start here by noting a few highlights.
Compared to the same period, a year ago net sales for the first quarter were up 30.3%, primarily reflecting the acquisition of Pinnacle foods.
Organic net sales were down 1.7%.
The decrease in organic net sales was primarily driven by the unplanned softness and international and foodservice and the plan declines in our grocery and snacks segment that Sean discussed.
Adjusted operating profit for the first quarter was up 40%.
And adjusted operating margin increased 108 basis points to 15.7%, which was ahead of our internal expectations.
I'll walk you through the adjusted EPS Bridge in a moment, however, I want to highlight that while our adjusted EPS decreased 8.5% to 43 cents for the quarter adjusted net income increased 12.5%.
Our increase in operating profit more than offset the impact of the increased interest expense associated with the pinnacle transaction.
Slide 32 outlines the drivers of our first quarter net sales versus the same period a year ago.
We continue to drive an increase in price mix, even after taking into account our increases and retailer investments to support brand building.
It should also be noted that the 32.1% increase from acquisitions and divestitures includes 3.7 percentage points of decrease from the sales of the west and oil Gelett and Canadian del Monte businesses, and the Trenton production facility.
Slide 33 provides a summary of net sales by segment for the first quarter again, the legacy Pinnacle business has been allocated to the for other reporting segments. So we're not showing at pinnacle segment anymore.
I will discuss pinnacle Q1, net sales in more detail shortly.
Grocery and snacks net sales increased 26.9% in Q1 as the acquisition of Pinnacle added, 34.7% and the divestiture of west and oil subtracted, 4.1% from the net sales growth rate.
Organic net sales for grocery and snacks decreased 3.7%.
As the plan to declines in hundreds Tomatoes, and chef Boyardee were partially offset by continued strong end market performance and innovation success in our snacks business.
The refrigerated and frozen segment benefited once again from our robust slate of innovation across multiple legacy kind of anchor brands, including banquet healthy choice Pf chains, Reddi Wip and sandwich froze.
During the quarter refrigerated and frozen net sales and organic net sales increased 51% and 1.5% respectively.
Organic growth in both volume and price mix.
Our international segment increased net sales, 5.5% in Q1, due primarily to the acquisition of clinical.
International organic net sales continued to benefit from growth in the snacks in frozen businesses in certain regions. However, the segments organic net sales were down versus plan in prior year due to discrete items in our businesses and Puerto Rico and India.
As Sean mentioned these items shifted the timing of sales previously expected in Q1 to the second half.
Timing shift contributed to a decrease of 3% in organic net sales during the quarter.
And our foodservice segment, we made the strategic decision in Q1 to opt out of a lower margin contract consistent with our value over volume strategy.
As a result of this decision foodservice organic net sales declined 3.2% for the quarter.
Reported net sales increased 6.3% during the quarter with the acquisition of Pinnacle, adding 15.3% and the sales of west and Trenton subtracting, 5.8% from the net sales growth rate.
We expect a strong stronger balance of your performance from this foodservice segment with new items coming to market and improved performance from body.
Slide 34 outlines pinnacle's fiscal 2000 net sales for Q1 versus fiscal year 19 pro forma net sales for the same period.
The 9.2% sales decline was largely in line with our expectations as we increased brand building investments with retailers eliminated some low quality promotions and saw some inventory reductions with retailers in advance of implementing new shelf sets.
While these dynamics led to a wider than typical difference between shipments and consumption in the quarter.
We don't expect this dynamic to continue for the year to go period.
Slide 35 outlines the puts and takes of our Q1 adjusted operating margin versus the prior year.
It's worth noting that the impact of the legacy Pinnacle gross profit was a decrease to operating margin of 46 basis points during the quarter versus the prior year.
Our legacy Conagra realized productivity initiatives are progressing as planned and helping to offset inflation, which approximated 2.8% in Q1.
We're also seeing the margin benefit of pinnacle synergies in Q1, particularly in ESG today.
Slide 36 outlines the significant progress on clinical synergy capture which remains on track in all areas SJ cost of goods sold and trade spending.
We realized approximately $40 million of cost savings in the quarter, which brings total cost synergy capture to approximately 71 million since the closing of the acquisition through the first quarter.
We continue to expect synergies to increase throughout fiscal 2000.
And as previously announced we expect to achieve the majority of our 285 million and cost synergies related to the transaction by the end of fiscal 2000.
Moving to slide 37, Conagra's total adjusted operating profit increased 40% in Q1.
Our adjusted operating margin came in at 15.7%.
Each segment's adjusted operating profit benefited from the addition of Pinnacle's profit.
The International segment was the only segment to see a decline in adjusted operating profit in the quarter and that was driven by the impacts of divestitures unfavorable FX and the volume impact from the discrete items in the quarter.
The grocery and snack segment margin decreased year over year.
Definitely half of the margin decline was the result of the legacy pinnacle grocery in snacks business being dilutive to overall segment gross margin.
The rest of the decline coming from inflation and brand investment with retailers exceeding pricing and realize productivity.
The refrigerated and frozen segment showed very good margin expansion in the quarter.
While the legacy Pinnacle business was slightly accretive to the segment's margins. The segment benefited from strong cost of goods sold realized productivity and synergies in the quarter.
The international segments declined an operating margin was primarily attributed to the impact of FX and the lower margin Pinnacle business being included in the segment.
Operating margins improved for the quarter on an organic basis after excluding FX in M&A.
Finally, the foodservice business, all nice margin expansion in the quarter as it continued to execute its value over volume strategy.
Slide 38 outlines the drivers of our Q1 adjusted diluted EPS from continuing operations versus the same period a year ago. As you can see conagra's adjusted EPS decreased four cents approximately two cents of this decline were from divested businesses and two cents we're from a decline.
The ardent mills joint venture.
The increase in adjusted operating profit in taxes, offset the impact of increased interest expense and shares outstanding.
Slide 39 summarizes net debt and cash flow information and shows the solid progress we've made over the last four quarters to improve our balance sheet.
Compared to the end of Q4 fiscal 19 net debt was approximately flat as we used cash on hand to fund a reduction in gross debt of approximately $150 million during the quarter.
This was in line with our expectations given the quarterly seasonality of the business.
In total I'm happy with our progress to date.
Since the close of the Pinnacle acquisition in the second quarter fiscal 19 through the end of the first quarter fiscal 2008.
We have reduced gross debt by over $1 billion.
And with the recently announced pending divestiture of our DSD snacks business will have some additional cash on hand for debt repayments. After we close.
As we've stated we don't need divestitures to achieve our deleveraging targets, but they can accelerate our progress.
Overall, we remain on schedule with our fiscal 21 target of a net debt to trailing 12 months adjusted EBITDA ratio of 3.6 to 3.5 times.
As we've consistently said we are committed to a solid investment grade credit rating.
As noted in our release, we are reaffirming our fiscal 2000 guidance.
Slide 40 outlines our fiscal 20 outlook across all metrics.
Please note that the organic sales growth rate excludes the impact of fiscal Twentys 50 Threerd week.
All other metrics on this slide include the impact of the 50 Threerd week.
It is also important to note that the financial information included in our presentation. Today includes the expected full fiscal year results of the DSD snacks business.
As disclosed earlier this month, we expect this transaction to close by the end of the calendar year as it remains subject to customary closing conditions.
The expected annualized impact from this divestiture is approximately $110 million of net sales.
And two cents of adjusted EPS.
I'd also like to highlight that we continue to believe in the planning assumptions that we noted during our Q4 fiscal 19 call.
Overall, we see fiscal 2000 results being more heavily weighed weighted towards the second half.
With respect to our organic net sales growth our plan calls for higher innovation related investment with retailers during the first half of fiscal 20.
With investment, peaking in the upcoming second quarter, resulting in expected second quarter gross margin coming in below our Q1 levels.
The related sales growth is weighted towards the second half of fiscal 20, as our distribution trial and repeat builds throughout the year.
We expect margins to improve during the second half of fiscal 2000.
Innovation related investment will be higher in the first half is I just mentioned.
The impact of synergies will also increase as we move through the year, helping margins.
We expect pinnacle to continue to be dilutive to our year over year total gross margin until we anniversary the acquisition in late October .
Finally in the second half, we will be lapping the higher levels of interest expense and share count, allowing for easier comparisons.
That concludes my remarks, thank you for listening I'll now pass it to the operator is Sean Tom Mcgough, Darren surround I are ready to take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then Ron on your Touchtone phone. If you are using speakerphone. Please pick up your handset before pressing the keys.
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This time, we'll pause momentarily to assemble our roster.
And the first question today comes from Andrew will Die of Barclays. Please go ahead.
Good morning, everybody and thanks for the question.
Morning, Andrew Good morning. Thanks.
So first off you talk about the what you see is still strong momentum in the legacy frozen business specifically.
I guess in some of the more recent data we've seen a little bit that both some of the on a sequential and sort of two year basis. Some of the trends slow a bit on on again those legacy frozen brands I guess, what do you attribute this to and do you expect this to pick up as fiscal two TG progress is and if so what drives that.
Sure Andrew let me address that.
Let me give you my perspective on our topline trends overall as you heard me say my prepared remarks topline is tracking pretty much how we plan to with the obvious exception being international in foodservice, which is again timing frozen is thriving snacks is thriving grocery is on track navigating some competitive dynamics on it.
Couple of brands and value over volume is doing its thing on pinnacle. So one quarter down we're on track now in Q2, we're investing meaningfully to tee up a terrific innovation slate that will support our strong second half growth Thats always been the plan and we're excited to see it unfold, what you're seeing much more recently.
As a function of the fact that we are in a transitionary period.
It's a major customers with respect to new shelf sets in frozen and we have in fact seen some out of stocks.
As the new tags are being set so to be clear no drop off in consumer pull this is a temporary dynamic it's fairly typical in right in advance of the new shelf sets.
And in terms of share of shelf and share of market that we're seeing in the very early days of these new shelf sets. We continue to see positive momentum so that bodes bodes well.
Great Thats really helpful on that on that one to thank you for that and then I guess lastly, just wanted to zero in a little bit on the on the sales bridge for a moment.
Specifically price mix, excluding the retailer investments accelerated significantly from from Fourq, you to one Q retailer investment declined at a greater rate sequentially I assume some of this is spending against the Hudson chef sort of competitiveness and reflected in those retailers sort of spend the investment bucket, but maybe you could talk about.
That a bit in other words, I guess, what part of retailer investments is sort of promotions on these brands maybe versus actual brand building at the point of sale.
Thank you let me give I'll give you some big picture on that Andrew Dave fill in any details.
When we partner with our customers to drive mental and physical availability on our brands, it's kind of a holistic discussion again it may involve merchandising off the shelf in may involve pricing incentives. It's the total package I may involve online programs things like that so so thats really on a holistic program.
But with respect to Q1 keep in mind, we had particularly strong growth in frozen and its snacks and part of what drives that growth is the investments that we're making with our retailers on Hans and on chef, you're really talking more about Q2 and beyond investment because those programs or just.
Now hitting the marketplace as we speak so thats more of a Q2 and on function than than what we saw in Q1 anything I Miss there Dave Yes, just to add as you see on the bridge, Andrew we invested 1.7% of organic net sales and investment in Q1.
We do expect that Q2 that level will be higher and I made that in my comments to that will impact Q2 gross margins relative to Q1, and then into second half, we expect those levels to be lower than the first half.
Thank you.
The next question today comes from Ken Goldman with JP Morgan. Please go ahead.
Hi, good morning, and thank you.
Okay.
Sean I wanted to ask about the comment that you said, we expect terrific second half growth.
I appreciate the reasons why you and you laid them out well I just wanted to follow up a little bit on the distribution part of that to what extent do you have locked in a lot of these tpd gains.
For especially the birds eye business that you've talked about in the second half or is some of its still hey, you're negotiating with your retailers for the shelf space.
Can we keep in new item tracker on every single new item, we have that has our targeted by ACB. Our targeted Tpds and then has our progress in terms of what has been accepted and what has not so we've got a roadmap and bye bye.
Now we have a pretty good handle on what has been accepted we feel very good about it that's in a large part why we feel so good about the inflection in the back half of the year, it's really the combination of much much easier comps on a lot of these brands plus basically the polar opposite of what was happening last year at this time unfolding where.
Adams, we're coming out that were particularly.
Week velocity items now we've got.
Our largest slate of innovation, yet frankly across the board notches legacy Pinnacle and birds eye that is hitting the marketplace now through the back half of the year. So feel very good about customer acceptances and.
And the innovation slate in the back half.
Okay. Thank you for that and then.
I guess the.
Philosophical question I would have as a follow up is.
Your your many many months into the Pinnacle deal now you talked when Pinnacle first started coming in a little bit below your expectations about some of the things that maybe prior management had done that you wouldn't have.
In hindsight is there anything substantial anything meaningful that you and your team could have done differently or would have done differently any learnings from that that you might apply to any future deals that you do just again in hindsight with with the benefit of 2020 vision.
Well as Weve.
Cash through multiple times after we closed on the deal we did learn some things about the business that had to be addressed and our approach is to address them head on and we're doing that and in fact.
You can look at the absolute numbers on pinnacle in the quarter as an example, and say well how can it be on track in the short answer to that is because it is when we.
Realized that we had to deal with some of these things on the pinnacle portfolio head on we knew right then that we had to execute our value over volume playbook and keep in mind value over volume is about cleaning up and strengthening the base. It may not be pretty optically when you're in that throws of it particularly when you're in close proximity to the shelf sets and inventories adjust which is.
What we saw in Q1, but it is an absolutely critical step to improving velocities and establishing that stronger foundation on which we can build and if you look at what we've done a banquet on healthy choice and Marie and now we've been wish bone wish bone.
You've got to have the courage of your convictions to build brands the right way for long haul and we do so.
We definitely had some things unfold on this business that we did not.
Planned for but once you're at that point in time, it's really a question of how do you respond to it and this is how we're responding to not to mention.
The synergies that we are managing to extract from the combination are proving to be quite attractive.
Thanks, so much.
The next question today comes from Bryan Spillane with Bank of America. Please go ahead.
Hey, good morning, everyone.
More around so I guess.
Question for me is just around with a lot of this innovation hitting in the second half of the year.
Is it is the innovation on its own margin accretive.
Or are you supporting them the margins because you're you're going to be pulling in more synergies. So just I know I understand that the dynamic with the slotting fees in the second quarter net might sort of.
Margins initially, but I'm just trying to get an understanding of run rate wise, how much of the how much what the impact of this innovation will have on margins overtime.
Well, principally we always aim for margin accretive innovations now that is not always the case, we talked about spy realized as an example over the last several quarters where.
The the Pinnacle organization previously opted out inspire lies because it would be margin dilutive that is it kind of an exception when you have the consumer absolutely demanding and innovation in the short term. It requires a dilutive gross margin profile my position as you've got to getting the game you can't see that beachhead to your competition. So there will be examples.
Were in the short term the margins could be dilutive and certainly in the short term you've got some startup investments we were putting a lot of the start of investments as an example for them, which will help us in the back half into Q2.
But in general we're looking for margin accretive innovation and quite frankly, we've been quite successful at that over the last several years, Dave you ought to get to add and Brian . If you look at Q1 I know it gets a little bumpy with us at now having pinnacle and you look at refrigerated and frozen and you can see the margin improvement and you can.
See that birds eye really helps with the overall margins at the segment and so with a lot of innovation and birds eye, obviously that's margin accretive.
And in our snacks business.
Great margin there on on innovation, it's hard because its combined in a segment that has other businesses with it. So it's a big part of our focus is looking at the margins whenever we launch new products just one other point on that Thats worth.
Folks on the line keeping in mind is if you think about the legacy conagra portfolio and even to some degree the legacy pinnacle portfolio. It was heavily skewed toward the value value tier a value orientation. So we have been working non stop for five years to Premiumize, our legacy CAG portfolio, We're certainly working now to premium.
Wise, the pinnacle portfolio and while the old school thinking is that when you add more Cogs your margin comes down.
Actually we have experienced the opposite when you build better quality products and better quality packages you can price for it and when you can price for it you can build back not only your margins, but your retailers margins, which we've done and Thats one of the things that has helped our our relationships with our retailers to grow progressively stronger over the years.
Okay, great. Thank you.
Next question today comes from Robert Moskow with Credit Suisse. Please go ahead.
Hi, Thanks, I, just wanted to dig a little bit deeper into the sequential.
Progress of Pinnacle, if I'm looking at that operating margin dilution sharp correctly. It said that pinnacle was dilutive by 10 basis points.
And just just using that I get to about $90 million of operating profit for the quarter, which I think is a little bit down from the prior quarter.
And then you said sales down 9% from prior year. So is this really in line or was the retailer inventory reductions I guess, a little more than you expected and am I doing the math right.
Well, let me take the inventory piece, Rob and Dave can weigh in on the balance of it because it is it is very consistent with what we expected and it's very consistent with what we've experienced before and frankly, it's something that.
It's something that we have experienced from time to time on our broader business. So just a broader comment on this notion or shipments vis-a-vis consumption again, Dave at any more detail I want to remind you are business historically shows shipments in consumption track pretty closely together, but from time to time they will die.
Urge and in our case, if you see that divergence, it's likely tied to one of four factors one is value over volume driven reductions in retailer inventories and this is because when skews get eliminated so do the safety stocks on those items at usually occurs in close proximity to the shelf resets.
And that's what we saw in Q1 on panicle.
As you saw consumption was tracking on pinnacle very consistently with where we've had it in that 4.5 down 45% range. The second factor is increased brand building investments with retailers that are accounted for above the line and in Q1, we saw that on both pinnacle and on legacy CAG third occurrence, where you might see a divergence is when.
We take deliberate actions that you can't see in the scanner data. We did this in Q1 on legacy CAG, because we exited some private label products that were not the margin profile, we liked and then the fourth.
Factor when you'd see it is declines in and measured channels and we saw a bit of that in Q1 on our dukes brand tied to.
The supply chain disruption, we experienced in Q4 and recovering from that but that root causes behind us, we expect normal distribution and be back in place on that business in the second half. So we saw some divergence both in our grocery snacks business and in the Pinnacle business, it's not typical for us, but when it happens is tied to those four things and we can bridge those out.
And every element of it makes sense with with how we anticipated it to pull that importantly, we don't expect shipments to lag consumptions in the year to go period the way they did in Q1 either on.
Legacy pinnacle or our our grocery and snacks business.
Yes, just to add Robert on that on the when you look on the operating margin bridge, which is what I think you're referring to we do show that pinnacle's 46 basis points dilutive and that's just to demonstrate that and this was what we reported pinnacle's separate last year you can see the pinnacle gross margins are below the overall legacy Conagra gross margin so by bringing that busy.
Yes in its to show that it's dilutive, but what gets a little complicated ALS that with the synergies coming in and SGN egg going out it.
A kind of Standalone pinnacle at this point is really not relevant were not reporting it that way, but that's just to show that the gross margins for pinnacle coming in are lower than overall company average, which is what you saw at the end of last year.
So just a follow up Dave. The this 46 basis points does that include the benefit of the synergies or is that separate from the synergies.
Yes, good question.
It includes some benefit the way that we actually capture synergy and then allocated some of it can go to a pinnacle items. Some of it can go to legacy CAG right. So if it's in procurement and you're able to get a benefit of reducing your overall by on a certain ingredient. It may benefit the ingredients that you use on conagra products.
Medical products right, so that synergy gets allocated so.
Some of it's in there, but not all of it.
Okay. Thank you.
Okay.
The next question today comes from David Palmer with Evercore ISI. Please go ahead.
Thanks. Good morning, you mentioned that brand building will be outsized in fiscal Twoq, you and the impact would be greater gross margin then in the first quarter I guess, most curious about the magnitude of that increase and.
Just to be clear.
Partially going to be contra revenue and gross margin hit rather than a traditional advertising and consumer marketing expense.
Well first of all welcome back David Good heavy on the line.
Hi, Yes. The answer is yes to your question. Yeah. This is the way to think about this is we've got.
Both in Q2, it you see some birds eye stuff that is recently at the marketplace in the back half the year, we have it on up to stop hitting the marketplace. We've got a pea that up to get the.
It's kinda shelving, we want the high level placement we want.
Basically all the awareness drivers have to get in place.
And then the trial drivers going in place so and we're doing a lot of that as we've done consistently over the last couple of years in store because we find it far more effective in spotlighting, our new items than running TV commercials at three o'clock in the morning as an example, so.
That does hit at a peak in Q2 and it is a central piece of making sure. We've got that bugs out there in advance of when we expect to see the takeaway kick in which is in the back half of the year.
Okay. Thanks, and then just on frozen frozen business.
In the quarter.
I think you touched on it that the shipments were less than consumption and perhaps that was somewhat of the the re shelving that's happening rather than some trade inventory dislocation because nestle shift out of DSD into warehouse that was a little bit of a concern. So maybe you can clarify that and then also I know that.
When you did some of your more rapid innovation periods past, particularly when you did bowls, which were a premium offering that was perhaps not as incremental to shelf as you would have liked to reside.
Some of the retailers instead replace some of your lower priced older varieties. So I'm wondering if you're making adjustments. This time around to make sure you get that incremental shelf as you put out these new varieties. Thanks.
Alright, so theres a lot in there let me try to.
Hit the piece at first of all in terms of some inventory reductions at retailers it's really.
Not a lot noteworthy in frozen I was really a concept around.
The legacy pinnacle business and value over volume in a bit of the grocery <unk> snacks business that I already talked.
With respect to the shelf in the dynamics.
With customers right now I would say.
These are certainly very dynamic times, but our relationship with customers is very strong and I feel very good about the progress we're making in terms of getting new items on the shelf certainly creating space for new items always starts with us proactively spotlighting our own items that need to come out that's kind of value over volume.
And the simplest sense, our customers want to grow and they understand that their shoppers demand modern products and our innovation capabilities are clearly well respected with our customers as we drive growth in their priority categories be innovation. So they continue to embrace our our innovation. We are also working very collaboratively with many.
Of our traditional customers, though to help them navigate their exploding e-commerce business, particularly the in store pickup piece or with some people call click and collect and what we're doing with them. There is trying to create more holding capacity within the store for top movers think that is high velocity items and the reason we're doing that.
It is to avoid out of stocks because they not only have their old foot traffic on the ground now they've got all the people that are doing click and collect and doing pickup. So you got to create more holding power on those high velocity items and that is particularly important in space constrained spaces like frozen where you've seen and we'll continue to see the actual number of tpds.
Come down, but I think it's critically important you don't confuse that tpd read with.
With the linear feet shelf space being reduced because that is not happening in frozen singles or meals. As an example, we actually see real estate expanding tpds are coming down intentionally collaboratively with us in our customers. We have to have more holding power on our high velocity stuff because that leads to better sales and those are the things that really turn.
But it's a more limited assortment with more pacings for big brands that have high velocities and those are brands like ours.
Thank you.
The next question today comes from Chris growing with Stifel. Please go ahead.
Hi, good morning.
Morning, Chris Good morning, just had a question for you if I could first on this the drag on volume from food service International looks like it was about half of the volume decline if I'm calculating the copper we don't have you quantified that exactly that's where I got came out because the remainder of that drag going on volume.
Looks like it mostly came from the grocery division because that is that would you expect to improve in the second quarter, you think about some of those investments you're making.
Yes, that's into the grocery piece.
As I said in our prepared remarks, the decline in grocery wasn't planned it was highly focused on the two brands we discussed.
And that is the where we we planned it that way because we didnt put the action plan in place until the very ended the quarter, which really impacts Q2, and that's pretty much. How it's played out so while it's early early days on those action plans you can see some of the numbers that we showed you today, we do like the traction we see and those typically are.
Very responsive brands there number one market share brands when we're fully competitive we tend to move a lot of volumes. So that's that's what we expect to improve as we move through Q2.
And then just to be clear on that foodservice International's right does that get better in Q2 or is that we're just better than this does that continue in Q2 embedded in the second half.
Yeah, Chris So the biggest driver in the first quarter was the timing of sales both in India in Puerto Rico. So.
Assistance programs in Puerto Rico were delayed in the quarter and that a significant impact on our export shipments in our sales and shipment patterns change certain sales in India, which caused timing shifts between quarters as well. So we expect these businesses to remain on track to plan for the full year, that's just a timing push for port.
National.
So a push into twoq or pushed in the second half.
Year to go.
Okay got it just one quick one on the innovation costs are those is that reflected in your retailer investment categories. So to in sales breakdown is that we should see some of these incremental cost coming through in Q2 for the new products.
Yes, so when you talk about innovation, if you're talking about the cost to get to market and distribution, yes, you'll see that above the line Theres, obviously, all the developmental costs of innovation R&D and manufacturing resort resources and test runs and all that and all that hits in ESG.
Our cost of goods sold but the actual distribution commercialization.
Push with the customer is above the line.
Slotting fees for example, as well would be in there right.
Correct.
Okay. Thank you.
Your next question today comes from Steve Nicola with PBS. Please go ahead.
Hi, good morning.
Hey, good morning.
So.
A question Sean I wanted to feedbacks I've gotten proceed. This morning is that there is a little bit a disconnect between I guess, where you guys had planned internally for sales were seem to be online as you say.
And externally just having a down 1.7.
How do we think about the trajectory of the business for Q2 through the balance of the year for some of your Investor Sue.
When it kind of be more aligned to familiar with what you're planning internally for how that business rebalanced clearly your emphasizing the back half but.
We see directional progress in Q2 to get halfway there, meaning like closer to flat territory for your organic sales just help us understand kind of that shipment aligning versus consumption as we move to the back half.
Yes, Steve one of the reasons why I think.
Consensus with a little further offer internal plans, because we don't guide to the quarter and we're not going to guide to the quarter, but we want to be helpful and getting the shape of the curve right and I think the message today is.
Quarter, one is on track the back half, we're counting on being big in terms of growth and Q2 is really a quarter that sets up the back half in terms of investment which is why Dave made the comments on gross margin.
That we've got because we've got some contract gross margin by and growth and Contra net sales investments hitting in Q2, so that that suggests that the real inflection that we're going to see is really coming in the back half of the year, Dave you want to get just add and here again, we don't guide quarterly but give.
A little bit more context, you should see sequential improvement in organic net sales from Q1 into Q2.
And then improvement from Q2 to the second half to get through our full year outlook of 1% to 1.5%.
Okay. Thanks, that's helpful and then Sean for clarification think going back to Angela's ours question and I think maybe polymers question, but do you have frozen piece of that business for legacy Conagra. It seems like you have confidence that that is intact and would you say that because we see we're paying attention to the distribution losses and as is tracking Nielsen you're saying.
That is kind of that's a little bit misleading can you kind of like run through that one more time, then Dave can you confirm on the 40 million synergies, whether that's a net or gross number. Thanks.
Yes, So let me.
Try to simplify frozen.
Theres a lot going on right now frozen dynamic times, we've got shelf sets.
I mean kind of re shuffled at major customers big part of that is to accommodate this whole higher holding capacity on high velocity items to support the click and collect business, which by the way is not just a customer priority. It's our priority our sales look better when we've got we're holding power high velocity items. So so lot of dynamics going on within.
In that.
In space constrained spaces, you may and likely we'll see tpds coming down and I think this is important because sometimes tpds are assumed as a proxy of real estate and it is not an accurate proxy of real estate were actually as I pointed out single serve meals is growing in real estate, but.
We're getting more facings, a high velocity items. So lot of this is happening right now as we speak and I am not only and very pleased with leading up to those shelf planogram change with how we perform because if you look at our data are our sales are the best in the industry our share of shelf is the best in the industry.
And no one else is even remotely close so that's good and then as we see the new plan of grams unfold I continue even though we've had some near term out of stocks in the shelf is getting reset I continue to see positive things in terms of our overall market shares and our overall share of shelf within new shelf set so nothing but.
It's dynamic times, but but nothing's changed in terms of the consumer pull and the appeal of our brands to consumers and customers alike.
Steve to your second question. It is a net number.
Okay last question today comes from Jason English with Goldman Sachs. Please go ahead.
Hey, good morning folks. Thank you for squeezing me.
I guess I'll jump off of the the net synergy number.
Congratulations by the way on the synergy realization impressive uptick from the run rate you guys finished last year.
This is the full year number of 130 still the right way to think about it given.
Given the pace, you're running at rather gates here and if you could remind me is that 130 is that a cumulative number for the full year or is that incremental over and above the 31 million you realized in fiscal 19.
Yes, Jason So let me just let me take it from the top we're obviously very pleased with the progress we're making with synergies we're focused on it we track at closely in the first quarter, we delivered $40 million in synergies about two thirds of that was SGN, a which is what we expected we're still estimating the total synergies of to 85.
True through fiscal 2002, one quarter under our belt still early in the year. So we'll provide an update at the end of the second quarter on exactly where we see synergies coming in for the full year. We had said previously that we would be at 55% a total synergies by the end of fiscal 20, we're going to update that at the end of the second quarter.
As we continue to see our progress in terms of cost to achieve just to hit that.
Thats 87 million program to date, we're still on track with the 320 million through fiscal quite too.
Awesome I appreciate the incremental detailed out.
And then one more I guess sort of multilayer question.
First the to step up in trade spend I totally understand how that's going to our retailer Mark I totally understand how that contra revenues is going away on price realization and margins next quarter.
But it sounds like we should be expecting a nice little volume response on grocery and then we've got these these international issues, which sound like they were kind of isolated those those go away and I imagine a lot of your activation on frozen well, you're not going to see the consumption route for some time it it sounds like it's been a company by the distribution Bill.
So we should lease is still expect some degree of pipeline fill so as I stock those up and I contemplate the shape of higher your progress is well organic may not really accelerate interest to the back half is it fair to say, we may actually see some real evidence of the uptick coming through in earnest on the volume line in the next quarter.
Well you know.
On the volume line, you're going to see volume diverged obviously from from sales right because the contract net sales items are really about setting it up so there will be some new items that are going to build momentum in second quarter Volumetrically.
The net sales piece of it you're going to see inflect more in the back half of the year.
Got it yes, so sounds like we will see some evidence at least building in volume.
A little earlier in the back half, which would obviously encouraging yes with organic as I said.
Q2, we expect to be better than Q1, and then the second half to be better than Q2, so that that sales, but obviously with the higher investment in there.
You can do the math on volume and part of that.
Jason is.
The gap between shipments in consumption on in a goal in Q1 is again that is a typical thing in close proximity to the shelf resets those are basically unfolding now so.
On a year to go bases, we don't expect to see that kind of lag.
Now that will begin here as we as we go into Q2 in that volume.
Got it so there could be some bleed over that issue into Q2, which we should contemplate.
If it's ongoing now fair to say I wouldn't say, it's a straight line for the balance of the year.
But over the course of the year to go period, we don't expect there to be lag between shipments in consumption.
Got it cool. Thank you guys. So much for your time I appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Brian Carney for any closing remarks.
Great. Thank you so as a reminder, this call and recorded it will be archived on the web as detailed in our press release.
The IR team is available for any follow up discussions that anyone may have thank you for intra timeframe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.