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spk03: Good morning, and welcome to the CAGRA Brands' fourth quarter fiscal year 2023 earnings conference call. All participants will be in a listen-only mode, and should you need any assistance during the call, 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. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two. Please note that this event is being recorded today. I would now like to turn the conference over to Melissa Napier, Head of Investor Relations. Please go ahead.
spk00: Good morning. Thanks for joining us for our ConAgra Brands fourth quarter and fiscal 2023 earnings call. I'm here with Sean Connolly, our CEO, and Dave Marburger, our CFO, who will discuss our business performance. We'll take your questions when our prepared remarks conclude. On today's call, we will be making some forward-looking statements. And while we are making these statements in good faith, we do not have any guarantee about the results we will achieve. Descriptions of our risk factors are included in the documents we filed with the SEC. We'll also be discussing some non-GAAP financial measures. These non-GAAP and adjusted numbers refer to measures that exclude items management believes impact the comparability for the period referenced. Please see the earnings release for additional information on our comparability items. The GAAP and non-GAAP reconciliations can be found in the earnings press release and in the slides that we'll be reviewing on today's call, both of which can be found in the investor relations section of our website. And I'll now turn the call over to Sean to get us started.
spk14: Thanks, Melissa. Good morning, everyone, and thank you for joining our fourth quarter fiscal 23 earnings call. I'll start with a business update on the quarter and fiscal year, and then share how we're thinking about 2024 and beyond. Slide six outlines what we'd like you to take away from today's call. In Q4, we delivered solid profit and margin growth despite the disruption from one of our frozen logistics partners, AmeriCold, which impacted both our sales and costs during the quarter. For the full fiscal year, I'm proud of the way our team navigated a dynamic operating environment to deliver strong results. These efforts to execute against our fiscal 23 strategic priorities and the continued implementation of our playbook have our brands well positioned following the volatility of the past few years. As you'll see, our outlook for fiscal year 2024 reflects a transition toward a more normalized operating environment, as well as a continued commitment to our long-term financial algorithm. With that overview, let's dive into the results starting on slide seven. Organic net sales for the quarter grew over 2% compared to the fourth quarter of fiscal 22. An adjusted gross margin of 27% represents a 216 basis point increase over the fourth quarter last year. The full year results underscore the strength of our performance across all four metrics including 6.6% organic net sales growth and 17.4% adjusted EPS growth compared to the prior year period, as well as robust gross and operating margin improvement. Looking back at our priorities going into fiscal 23, we're pleased to say that we delivered on each of them. We continued our disciplined pricing execution in the face of ongoing inflation, which helped to drive margin recovery a top priority coming into fiscal 23. Our supply chain continued to improve as we made meaningful progress on our cost savings initiatives, which in turn led to a vast improvement in service levels. We remained committed to lowering our net leverage ratio, which was reduced from 4.0 to 3.6 times by the end of the fiscal year. And we did all of this while investing to maintain the brand strength that we've built up for many years running. Let's take a closer look at these priorities, starting with the impact of our inflation-justified pricing actions on slide nine. As you can see, pricing peaked in Q3 but remains almost 17 percent above the prior year due to our actions to offset ongoing COGS inflation. During the fourth quarter, elasticities did soften a bit but remain fairly consistent, well below historical norms, and in line or better than competitors. Our strong execution was instrumental in driving margin recovery, which is detailed on slide 10. As we've previously discussed, there is an inherent lag between the time when inflation hits and when we're able to recover that cost through inflation-justified pricing. This lag effect results in temporarily compressed margins, as we saw most notably throughout fiscal 22. We took great strides to recover our gross margin in fiscal 23, And Q4 was our third consecutive quarter of strong margin improvement, up 216 basis points in the fourth quarter compared to the prior year. Turning to slide 11, we continued to advance our supply chain initiatives, investing to rebuild our own inventory, which helped us to deliver service levels of 95% as we exited the fiscal year. While we're making strong progress in supply chain, it's not yet back to normal as we experienced transitory disruptions in the quarter, such as the cybersecurity event at AmeriCold. That said, we're pleased with our progress so far and see more room for improvement in fiscal 24, including investing in technology and modernization as the operating environment continues to normalize. Slide 12 highlights one of the key ways in which we are investing to maintain brand strength, our persistent focus on modernizing brands through innovations. The innovations we've launched since fiscal 2018 generated nearly $1.8 billion in retail sales during the last fiscal year. And unlike many in our space, we continued to innovate during the pandemic, with new product launches since fiscal 21 now representing more than half of that total. Importantly, our innovation has built some really strong and sustainable platforms, including Bowles, Slim Jim Savage, and Duncan Hines Epic. Our strategic frozen and snacks domains have been the focus of our innovation engine. As slide 13 highlights, they're growing domains, and we've helped architect that growth. Over the past four years, the frozen and snacks categories in which we compete have grown 9% and 8%, respectively, outpacing total food growth. Within our portfolio, frozen and snacks together now represent almost 70% of our domestic retail dollar sales. and we've consistently increased our share within these strong and growing domains. Looking more closely at frozen, slide 14 shows the growth of this category over the past nine years, which represents the timeframe in which we reinvented our approach to frozen food. Since fiscal 2014, the frozen categories in which ConAgra competes have grown from $29 billion to $54 billion, representing a 7% CAGR. and ConAgra has increased our share by nearly 500 basis points to become the leader in frozen. This growth is a testament to our continual effort to modernize and support our strong brands as part of the ConAgra Way playbook. One example of that brand strength is how our unit sales stack up to our peers. As you can see on slide 15, even during a year of significant pricing, seven of our top 10 frozen product segments held or grew unit share in fiscal 23. The same is true in our snacks portfolio. As you can see on slide 16, our two largest snacking platforms, MeatSnacks and Microwave Popcorn, also gained unit share during fiscal 23. Now let's turn to the year ahead. As we continue to emerge from unprecedented operating conditions, including both COVID and the inflation super cycle, we anticipate fiscal 24 to be a transition toward a more normalized operating environment. That transition will include a few tailwinds and headwinds that are outlined on slide 19. Starting with the tailwinds, in fiscal 24, we will be wrapping the various discrete supply chain disruptions that persisted throughout the year. As the operating environment continues to normalize, we will also benefit from the ongoing advancement of our productivity initiatives, and we expect our investments in innovation to continue to deliver strong results, building upon our track record of success. Now let's talk headwinds. First, shifting consumer behavior. As you can see in the weekly scanner data, food companies are starting to wrap pricing in the year-ago period, and dollar sales are coming down as expected. but the rate of improvement in volume recovery is lagging. That suggests new consumer behavior shifts beyond the initial elasticity effects that occurred when pricing actions were initially taken. We've seen this dynamic since just after Easter, and it has been broad-based across many categories and competitors. And importantly, where we see it, it is usually not a trade-down to lower priced alternatives within the category. Rather, it's an overall category slowdown. The question is, why now, given the steadiness we've seen from the consumer for two years? There are several possibilities at the root of this. One behavior shift we've heard about from consumers is just buying fewer items overall, more of a hunkering down than a trading down. There are several potential reasons as to why including this summer being more travel intensive than last year. Overall, we view this dynamic as likely temporary behavior shift for consumers to stretch their budgets, but we have captured it as a near-term headwind in our outlook. Moving to the second headwind, while very limited, we have seen a few single ingredient brands become deflationary, and we will make appropriate price adjustments to reflect that. Finally, The reduction of pension income and decline in contribution from Arden Mills compared to its strong fiscal 23 performance will impact our earnings performance compared to the prior year. To maximize our competitiveness this year, we will continue to execute our playbook and invest in our business. And slide 20 highlights one of our most important investments, our biggest innovation slate to date. Our fiscal 24 innovation lineup features a compelling mix of convenient, value-added meals, restaurant experiences, and exciting licenses. We expect our most significant new innovation to be in distribution by the end of Q1 and build throughout the rest of the year. These innovations, coupled with our consumer and customer support, will help us effectively navigate the dynamic marketplace conditions. Slide 21 outlines our financial guidance for fiscal 24. We expect organic net sales growth of approximately 1% over fiscal 23, adjusted operating margin of 16 to 16.5%, and adjusted EPS between $2.70 to $2.75. As Dave will unpack further, our EPS guidance reflects our expectation for growth from the underlying business operations, which is being muted by the previously mentioned impacts from lower contribution from Ardent Mills and pension income. Overall, ConAgra continues to benefit from strong brands, strong processes, and strong people, which are all working together to drive sustainable growth and margin expansion. With that, I'll pass the call over to Dave to cover the financials in more detail.
spk15: Thanks, Sean, and good morning, everyone. As Sean noted, We've made great progress from this time one year ago, as shown on this page. We navigated a challenging operating environment and successfully delivered on our priorities to implement inflation justified pricing, drive gross margin recovery, reduce net leverage and rebuild inventory levels, all while investing to maintain the strength of our brands. This enabled us to deliver strong full year results that exceeded our original fiscal 23 expectations on all metrics. Slide 24 highlights our results from the quarter and full fiscal year. During fiscal 23, we delivered strong top line growth with full year organic net sales up 6.6% compared to fiscal 22, driven by our inflation justified pricing and modest elasticities. Margin recovery was a top priority for fiscal 23 and our business delivered, increasing adjusted gross margin by 226 basis points and adjusted operating margin by 125 basis points for the full year. This margin enhancement contributed to strong full year adjusted EPS growth of 17.4%. Slide 25 shows our net sales bridge for the quarter and full year. The increases in fourth quarter and full year organic net sales were driven by improvements in price mix, primarily from inflation justified pricing actions, and were partially offset by a decrease in volumes. We estimate that our fourth quarter volume was impacted by the transitory supply chain disruptions from the cybersecurity incident at AmeriCold, impacting revenue by approximately 50 basis points in the quarter. This disruption negatively impacted sales in our refrigerated and frozen segment during the fourth quarter, an impact of approximately 110 basis points for the quarter. Despite this discrete situation in refrigerated and frozen, We were pleased to deliver solid sales growth in all other segments during the fourth quarter. And both our grocery and snacks and refrigerated and frozen segments delivered 6.1% organic net sales growth for full year fiscal 23. We detail our adjusted operating margin bridge on slide 27. As Sean discussed, we are pleased to have delivered a third consecutive quarter of strong gross margin improvement, up 216 basis points in Q4. We drove a 7.1% margin gain from improved price mix during the quarter and realized a 40 basis point net benefit from continued progress on our supply chain productivity initiatives. These pricing and productivity benefits were partially offset by continued inflationary pressure with market inflation and market-based sourcing negatively impacting our margins by 2.1 and 3.3% respectively. Adjusted operating margin was 14.6% for the fourth quarter, which was a 39 basis point decline versus a year ago. The strong gross margin improvement was more than offset by increased AMP investment and an increase in SG&A from both higher incentive compensation expense and transitory asset write-offs in the quarter. One additional call-out on this slide. Our cost of goods sold inflation headwind of 5.4% is calculated by netting our Q4 market inflation and our market-based sourcing. Previously, market-based sourcing was captured in our net productivity column. We believe this format is more meaningful to investors, and this change will be applied in our materials going forward. Slide 28 details our margin performance by segment for Q4. Refrigerated and frozen continued its strong operating profit and margin improvement in the quarter. with adjusted operating margin improving 286 basis points versus a year ago. Grocery and snack operating margins were down 248 basis points due primarily to increased inventory reserves for excess seasonal inventory along with unfavorable manufacturing overhead absorption. The international segment increased adjusted operating margin 497 basis points in the quarter driven primarily by pricing while the food service segment adjusted operating margins were down 75 basis points due to some transitory asset write-offs. Also, as highlighted in our earnings release, results from our annual Goodwill intangible impairment testing also negatively impacted reported profits, primarily in our grocery and snacks and refrigerated and frozen segments. The primary driver of the impairment charges was the increase in our discount rate due to the current interest rate environment. Slide 29 shows adjusted EPS bridges for the fourth quarter and full year compared to fiscal 22. In the fourth quarter, adjusted EPS from operations was flat as the increase in adjusted gross profit was offset by the increases in A&P and SG&A mentioned previously. Total EPS for Q4 was down 4.6% as the flat operating profit and benefit from our equity method investment earnings was more than offset by lower pension and post-retirement income, higher interest expense, and higher adjusted taxes. On the bottom half of this slide, you can see that our year-over-year EPS growth of 17.4% was entirely attributed to the operating profit increase of 41 cents, which underscores the strength of the underlying business. The benefit of 11 cents from our Ardent Mills joint venture was offset by increased pension and interest expense. Slide 30 includes our key balance sheet and cash flow metrics. At the end of fiscal 23, our net leverage ratio was 3.63 times, down from 3.99 times at the end of the prior year. Our net cash flow from operating activities reflects continued investments to rebuild our inventory levels. Going forward, we are well positioned to support sustained demand across categories. Year-to-date CapEx was $362 million at the end of fiscal 23, down from $464 million in the prior year due to the timing of projects. We continue to prioritize returning capital to shareholders as we paid $624 million in dividends in fiscal 23, up 7.2% versus fiscal 22, and we paid $150 million to repurchase shares in fiscal 23, up from $50 million a year ago. I'd like to spend a minute reviewing our guidance for fiscal 24. Slide 31 outlines our expectations for our three key metrics, including organic net sales growth of approximately 1% over fiscal 23, adjusted operating margin growth between 16% to 16.5%, and adjusted EPS between $2.70 to $2.75. Let's take a closer look at the drivers of our adjusted EPS guidance on slide 32. Compared to the prior year period, we anticipate continued improvement to our adjusted gross profit to be offset by the impact of elevated investments in A&P and SG&A to support our innovation and our people, higher interest expense from interest rate increases, approximating $450 million and an adjusted tax rate of approximately 24%. That net to adjusted EPS growth of 2% to 4% in our underlying business operations or an adjusted EPS of $2.83 to $2.88. We also expect the growth in our underlying business operations to be offset by lower income from our Ardent Mills joint venture as well as the reduction of pension income due to higher interest rates. As we've previously discussed, Ardent Mills had a particularly strong fiscal 23 driven by favorable market conditions and the venture's effective management through recent volatility in the wheat markets. As we transition toward a more normalized operating environment, we expect lower Ardent Mills income of approximately $150 million in fiscal 24, which is still a very strong operating performance relative to historical results as Ardent continues to mature as a business. I will now unpack a few additional assumptions behind our guidance shown here on slide 33. Again, we expect to see easing inflationary pressures and improved supply chain operations in fiscal 24, which is reflected in our outlook. We anticipate net cost of goods sold inflation of approximately 3% in fiscal 24 as we continue to emerge from the inflation super cycle with targeted inflation justified pricing actions that will become effective in the early second quarter of fiscal 24 to help offset elevated costs. From a supply chain perspective, we expect CapEx spend of approximately $500 million as we continue to make investments to support our growth and productivity priorities with a focus on capacity expansion and automation. We also expect the investments we are making to drive gross productivity savings of approximately $300 million during fiscal 24. Finally, we expect to reach a net leverage ratio of approximately 3.4 times by year-end fiscal 24 and remain on track to reach our target net leverage ratio of approximately three times by the end of fiscal 26. We see fiscal 24 as a transition toward a more normal operating environment. and we are reiterating our commitment to the long-term financial algorithm we unveiled at our investor day in July 2022 as shown here on slide 34. This morning, we announced that our board of directors approved a 6% increase in our annualized dividend from $1.32 a share to $1.40 per share. This increase reflects confidence in our outlook and is in line with the targeted payout ratio. To sum things up, we made outstanding progress in fiscal 23 as we continue to execute on our strategic priorities to drive value for shareholders. We believe ConAgra is well positioned for long-term value creation. That concludes our prepared remarks for today's call. Thank you for listening. I'll now pass it back to the operator to open the line for questions.
spk03: We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. We ask that you please limit yourself to one question on today's call. If you have additional questions, you may rejoin the queue. And to withdraw a question from the queue, you may press star, then two. At this time, we will take our first question. Our first question will come from Andrew Lazar with Barclays. Please go ahead with your question.
spk08: Great. Thanks so much. Good morning. So, Sean, it sounds like, as you've talked about fiscal 24, sort of a transition year of sorts between the anomalous environment of the past few years and a more normal operating environment moving ahead, hopefully. I'm curious, how do we think about the pattern of how fiscal 24 unfolds in terms of volume pivoting back to growth as the benefit from pricing wanes? Because there's clearly some concern, as you're aware, among investors that there could be a period of sort of negative organic sales if the timing of volume and pricing don't perfectly align. And I realize it's hard to put too fine a point on this, of course, but in light of some of your comments on some recent consumer behavior shifts, I'm curious how you see the year playing out from an organic sales growth perspective. Thanks so much.
spk14: Yeah, sure. Good morning, Andrew. Let me start with the big picture here, and then I'll flip it to Dave to give you some more color. First, you're 100% right. It is a transition year back to a more normal macro, and that's probably going to be true of everybody. Second, yes, there will be a settling effect that occurs as the year unfolds. Dollars will come down, obviously, as pricing gets wrapped and volume trends will improve. Third, as you can imagine, that settling effect is not likely to be exactly linear from month to month. And the simple reason for that is there are time-specific factors at play. So you've got supply chain disruptions in the year-ago period of particular months We've got the shifting consumer behavior dynamic. So I'd say given all of this, you know, 1% growth in organic net sales dollars for us for the full year is what we expect. That feels prudent given everything we see. And while we don't guide on volumes from a shape of the trend standpoint, we do expect trends to improve as the year unfolds. And, you know, Dave, you can unpack that a little bit more.
spk15: Yep. So, Andrew, we gave our guide of approximately 1% organic net sales. So, there are a lot of different dynamics that went into landing on this guide. So, I just wanted to try to go through kind of the key puts and takes and try to give you some color to help with cadence. We're not going to give exact numbers by quarter, obviously. So, the first thing is we will be wrapping on fiscal 23 pricing the beginning of Q2. So, Q1 will deliver stronger price mix. But after that, it will slow significantly starting in Q2. As you know, we had several supply chain disruptions in fiscal 23 with our Jackson plant and canning and then our canned meat recall. The kind of wrap impact on that is mostly in the second half, if you look at this year. We obviously have our strong innovation slate that we showed today, and that starts shipping. It's already started shipping in Q1. As Sean talked about, and we're estimating as far as kind of how we look at the year, a slower rebounding of volumes as pricing starts to wrap. So we do expect volumes to improve as we move through the fiscal year, but we're not going to give a specific guide on full year volumes. There is some deflation and a few pass-through categories. So our edible oils, pork, dairy, that will result in some lower prices on a few of our brands. We will have incremental merchandising and trade with strong ROI. And it's mostly around brands that we were supply constrained in 23 and couldn't promote as much as we want to, which we will do this year. And then just for our international and food service business, we expect fairly consistent growth in those businesses during the year. So hopefully that gives you some color on how we got to the 1%. Thanks so much. Appreciate it.
spk03: Our next question will come from Ken Goldman with JP Morgan. Please go ahead with your question.
spk05: Hi, thank you. I wanted to ask just quickly about where your customer inventory levels are today and if you see any abnormalities there. And part of the reason I'm asking is it seemed, even if you add back the 110 basis point impact in America, that maybe your shipments in refrigerated and frozen were a little bit less than what we saw in terms of measured channel takeaway. So just trying to get a sense of how you see that looking ahead.
spk15: Yeah, Ken, this is Dave. We don't see any significant difference in our customer inventory levels versus where we've been historically. If you look at refrigerated and frozen, which is really, you know, what you're talking about, for the quarter, our price mix was 10.4 and volumes were down 11.5. our consumption was 2.9% for the quarter. So there was about a, we shipped below consumption by about 400 basis points. We planned to do that, Ken. So we expected shipments to be below consumption in Q4 because we shipped ahead of consumption year-to-date Q3 in refrigerated and frozen. So if you look at the full year, we basically shipped to consumption, which we normally do. So there were no unusual customer dynamics that drove that. And yes, the AmeriCold product situation was a 110 basis point negative impact of volumes for refrigerated and frozen for the quarter.
spk05: Great. I'll pass it on. Thank you.
spk03: Our next question will come from Pamela Kaufman with Morgan Stanley. Please go ahead with your question.
spk01: Good morning.
spk03: Good morning.
spk01: Can you talk about the pricing outlook from here? You pointed to some additional inflation in fiscal 24, although it's much more modest compared to the last few years. Do you anticipate taking more pricing in fiscal 24 to offset those increases? And then you mentioned lowering prices in a few key categories. Do you expect having to lower list prices across other product categories as well?
spk14: Hey Pam, it's Sean. Let me tackle this and Dave fill in whatever I missed. So, you know, big picture in terms of the deflation piece, we're really talking about, we've got a large portfolio, as you know, significant scope. And not surprisingly, we've got a small number of what you might call pass-through categories that are more single ingredient. And some of those are made of ingredients that are actually on the deflationary side. So those are the exceptions that tend to go up or down. And so we're seeing things like oil, dairy, some of the meat products that are coming down during our fiscal year outlook. So that's a piece of it. In terms of the new pricing, yes, overall inflation is still with us. As Dave covered, it's in the 3% range. But we've got some surgical pricing. on select categories that we are taking to offset that. But at a company level, it's productivity getting back in the game that really helps us to tackle the continued inflation. We're thrilled to see it come down, but it's still with us and it is going to cause us to take some surgical pricing in a few businesses early in the year. Dave, anything you want to add to that?
spk15: Just to re-emphasize, Q1, we will see the pricing wrap from obviously pricing we took in fiscal 23, and then we have communicated to customers, and there will be pricing on our tomato-based products effective early Q2. We're seeing significant tomato inflation in fiscal 24.
spk14: Yeah, and to your last question, Pam, no, we don't see price rollbacks or price downward adjustments in a broad-based way across the category. That's highly contained to those very limited single ingredient more pass-through categories in our portfolio.
spk01: Great. Thank you. And just on your guidance for 40 to 90 basis points of operating margin expansion, can you unpack that a bit? What's embedded into that for gross margin expansion versus SG&A reinvestment?
spk15: Sure. The operating margin improvement we guided to is coming primarily from gross margin improvement. So the A&P and SG&A taken together should approximate the same percentage of net sales as they did in fiscal 23. So the key drivers of the gross margin improvement are the price mix, the Q1, and then the targeted Q2 pricing I just talked about. Productivity of $300 million, which we talked about. We're very pleased with where our productivity programs are right now. and then netting against that some negative overhead absorption and business investments. And then I talked about wrapping on some supply chain disruption costs that we had in fiscal 23. That should be a tailwind to margin for fiscal 24. So they're the key drivers, I would say, to get to the guidance.
spk01: Thank you.
spk03: Our next question will come from David Palmer with Evercore ISI. Please go ahead.
spk06: Thanks. I wanted to ask you a question on frozen and snacks. I mean, obviously, those are key long-term growth categories for ConAgra. And you've shown some good innovation energy there. It looks like the pipeline is strong. But those categories are not doing that great lately. Those categories have slowed significantly. and you're losing share in some of them. I'm wondering if you could speak to perhaps a few of these and just tell us what your outlook is and what's going on to your best diagnosis, frozen entrees, frozen vegetables, maybe popcorn, because obviously these are going to be key growth categories for you. Thanks so much.
spk14: Hey, David. Sure. Sean, our frozen business has been a juggernaut for us for quite some time now, and fiscal 23 overall, as you saw in our presentation today, was another very strong year. Obviously, Q4 had a lot of noise in it with AmeriCold and the broader consumer behavior shifts that I discussed, but we remain super bullish on the future of the space, and we have lofty long-term objectives that we plan to deliver through a number of tools in our playbook. With respect to shares, overall, we've been very pleased with our share performance over the long term, which you saw earlier. Obviously, supply chain disruptions in certain categories we experienced made share gains more challenging in short-term windows, but we feel good overall. In categories like vegetables, keep in mind, as we discussed at Cagney, we are focused there on the premiumization of the category, not on low-tier, more commodity vegetables. There is an element of value over volume strategy that remains central to our bird's eye playbook there as we continue to drive premiumization and really more of a finished prepared vegetable product than a bag of commodity vegetables. And then with respect to pick a snack or just about any other category across mainstream kind of food industry right now, there has been some slowing down where we would have expected volume trends to be up a bit and, you know, and really see volume improvement more in sync with the dollar decline. So that softness, as I mentioned, does point to a bit of a consumer behavior shift. And, you know, the data we can see is very interesting in what it doesn't point to, and that is it's not materially related to private label trade down or something like SNAP. Rather, it is more of a multi-category slowdown that appears to be tied to shifting consumer behavior aimed at stretching their budgets, likely to cover other expenditures like travel, things like that. And again, that's likely a short-term phenomenon, but we do have that factored into our outlook as we go forward. We're going to invest to keep our brands, including popcorn and other snacks and frozen, top of mind with consumers. Thank you.
spk03: Our next question will come from Cody Ross with UBS. Please go ahead.
spk13: Good morning. Thank you for taking our questions. I just want to follow up real quick on the AmeriCold disruption. Thank you for the color there. Do you expect to recover those sales in fiscal 24? If so, can you detail when? And I'll stop and pause for a second before my next one.
spk15: Yeah, Cody, it's Dave. So in that situation, obviously, we were disrupted on shipment. we were backed up and had to catch up during the month of May. So anything that didn't get out, which we quantified for Q4, would just flip into Q1. So it's just a shipment that we didn't ultimately get out the door. So that's that.
spk14: And the only caveat to that, Cody, is that we probably were out of stock in some stores when we couldn't ship for a while. So I'm sure if the consumer was looking to buy one of our products, they couldn't, and they needed to make a purchase in that shopping trip, they grabbed something else. We're probably not going to get that back, but at this point, that consumption loss is water under the bridge.
spk13: Understood. And then just tangential to that before I ask my next question, is it fair to assume that 1Q would be the high watermark for organic sales for the year just because of the shipments going from 4Q into 1Q? and also the wraparound price that you detailed for 1Q.
spk15: We don't guide by quarter, Cody, but as I mentioned, Q1, we still will have the big impact from price mix.
spk13: Understood. Thank you for that. And then just real quickly, I want to pivot to Ardent Mills. It continues to perform better than we expected. You guided JV income of $150 million for the year. And on prior calls, I think you guys noted the contribution was north of $80 million prior to the spike in wheat prices. How much visibility do you have at this point to the $150 million, and what does that assume for wheat prices?
spk15: Yeah, we have a lot of visibility, and you can assume that we have been through the details with Ardent. We review the business with them very closely. The level of profit we're guiding to is pretty consistent with where the business came in in fiscal 22, so it's at that similar level. The thing that I've really come to appreciate personally is it's such a great business. It's a young business. It's only 10 years old. They've made investments in the business, and they continue to grow. So their core business continues to do really well, and then they have a trading aspect of the business too. So it's a business that's growing. It has a lot of competitive advantage in it. And so we're really bullish on the business. It's a really great business.
spk13: Thank you. I will pass it along.
spk03: Our next question will come from Max Gunport with BNP Paribas. Please go ahead with your question.
spk04: Hey, thanks for the question. With regard to the shifting consumer behaviors that you called out, I'm curious if there's any commonalities that the impacted categories share, and then what data points you're seeing that suggest to you it's short-term in nature. Thanks very much.
spk14: Well, when we look at this, Max, we pull the data across the entire food space by category just to see if as dollars roll off and individual categories wrap price, you see that in-sync improvement in volume trends. And you're really not seeing it. Even if you look at the scanner data that just came out for the period ending 7-1, you see ConAgra and our five near-end peers are basically in the exact same place in terms of unit performance change versus a year ago. And we're probably all better served by looking at the unit volume change versus two years ago to get the noise out of the base period last summer. And when you do that, it's really kind of uncanny. Everybody's volume is in an extremely tight band of down just over 6% in the last several periods. As I pointed out, what we don't see is much of a difference in terms of that volume change versus a year ago between the 13-week data and the past four-week data. And that's where I think people would have modeled in, us included, a bit of an improvement in that trend from 13-week to four-week because when you roll off a price and you wrap the initial volume elasticity effect, you should see an improvement there. And that is exactly what I was pointing to when I talked about the shifting consumer behavior. And in terms of what's behind it exactly, I think everybody's trying to figure it out. A lot of the data to answer that question is on a lagging basis, whether it's diary data or panel data or things like that. And so we're studying it carefully. Importantly, it's not a trade down within individual categories to lower price alternatives. It looks optically more like a cutting back and what I call the hunkering down. And one thing I know for sure, people aren't eating less. So they're making choices to manage their budget, as I suggested, likely to cover other expenses. And it's just hard to imagine how that continues for an extended period of time unless people start eating less, which I haven't seen happen.
spk04: Understood. Thanks very much.
spk03: Our next question will come from Jason English with Goldman Sachs. Please go ahead.
spk11: Hey, morning, folks. Thanks for slotting me in. We've covered a lot of ground already. Oh, and congrats, by the way, on a great year. You mentioned a few brands with supply constraints and your intention to lean in with some more targeted promotions now that the constraints are being lifted. What are those brands? would you expect that promotional intensity to be enough to drive their net pricing deflationary?
spk14: Yeah, let me give you just without, you know, kind of tipping our hand on what we want to do competitively. You know, this is always a hot topic is what's the promotional environment? How is it going to change? In the simplest sense, Jason, we are okay with category building promotions that have a positive ROI. And I expect you will see more of those now that supply chains are servicing above 95% again. As I've mentioned in the past for ConAgra, you know, we like certain holiday promotions because there's an incremental opportunity to drive volume there. And we haven't really been at full speed on some of those. The most recent example was in the Lenten season where we usually do some very high ROI fish promotion because you sell a lot of fish on promotion during the Lenten season. We didn't do that last year because we had a fire on our fish line. So that's an example of the kind of thing we can do more of and even some holiday type things with bird's eye where demand had been very constrained because of supply chain issues previously. So you're going to see competitors do more of that. And frankly, that's a good thing. And I think investors should think it's a good thing because it's going to help drive healthy quality category volume. Now, conversely, what we're not big fans of is deep discount, low ROI promotions that train the shopper to buy on deal. ConAgra had a period of its history where it did plenty of that stuff. We drained the swamp on all of that over the last eight years, and we kind of got off that. We're one of the least promoted categories or companies in the space. And the reason for that is simple. It's not how you grow categories. You grow categories with great innovation and quality display. You know, to David Palmer's point on Frozen, just look at Frozen and what it did for years when that was the playbook. It didn't do anything. And then when we changed the playbook around innovation and marketing support, we drove real high-quality category growth and dollar realization. So we don't like those kinds of promotions. But in the current environment with the consumer that is cutting back and making other choices, we probably are more likely to see some players resort to hotter deals to stimulate units. We have not seen a lot of that to date, so that's a good sign. But, you know, this isn't our first rodeo, and we wouldn't be surprised to see that again. So we monitor that carefully, and really the only competitive detail, I'll say, is we'll do what's best for our business.
spk11: For sure. Understood. I'm going to come back to Mr. Ross's question. I know you don't give quarterly guidance, but To his point, you're carrying in an inventory rebuild in the first quarter. You've got wraparound pricing. Ardent Mills still has momentum. You've got a really easy gross margin comp. It looks like you're set up for another really solid first quarter. And in context of that and the four-year guide, it would seem to suggest that you're expecting top and bottom line declines throughout the remainder of the year. Is there anything flawed with that thought process?
spk14: I think that, Jason, that – The simplest way I think you could think about the year and the cadence and flow that I hinted at before is you got dollars and you got volumes. And this year, they ought to move in different directions, right? Because we're wrapping the pricing. And so you're just going to see, yeah, you're going to have stronger dollars early as pricing carryover is in there. And then that will soften. And then as you wrap that, volume trends should improve. And we're not We're not going to guide by quarter for a variety of reasons. One is we don't ever do that. The other is, as I mentioned to Andrew, it's not going to be linear in terms of month-to-month, quarter-to-quarter in terms of how this thing flows. I know everybody would like it to be that way, but it wasn't linear in the base period when a lot of these factors that we're going to wrap occurred, and we've got to get through the settling effect and continue to drive this business for the long term, and that's what we'll do. Understood. Thank you. I'll pass it on.
spk03: Our next question will come from Peter Gallo with Bank of America. Please go ahead with your question.
spk10: Hey, guys. Good morning. Thanks for taking the question.
spk15: Good morning. Good morning, Peter.
spk10: Dave, I was just trying to do a little bit of back of the envelope math just on the dividend increase and the leverage target. Just can you help us out with free cash flow for this year? I know you have a capex guide, but just it would seem like you'd land a little bit below that $1.2 billion, but just wanted to confirm that. Thanks.
spk15: Sure. So if you look at fiscal 23, really 22 and 23, we made significant investments in working capital. So our free cash flow did not convert to being able to pay down debt like we wanted to. But the good news is as we end fiscal 23, we're in great shape with our inventories. We are at high service levels. We have the inventory that we need. So as we look at fiscal 24, we guided to expected net leverage of 3.4 times. We expect to pay down debt with discretionary cash flow in fiscal 24. And in 24, where working capital has been a headwind, we expect it to actually be a slight tailwind for fiscal 24. So if you look at ConAgra with modest working capital improvement, $500 million in CapEx, which we guided to, we should approximate a 90% free cash flow conversion in 24 on this business. So That's how we look at it, and that drives all the assumptions on debt pay down and dividend payout and everything else on the capital allocation.
spk10: Got it.
spk15: Thanks very much.
spk03: Our next question will come from Steve Powers with Deutsche Bank. Please go ahead.
spk02: Hey, thanks. Good morning. Just a couple of, you know, you talked about some of these items already, but just a couple of elaborations on how to think about 24. from a couple of perspectives on the top line. Number one, as we think about the wraparound pricing, none of those pockets of deflationary correction, is there a way to quantify what that kind of net wraparound pricing is on a full year basis? Number one. Number two, as you catch up on sort of supply chain disruptions in the aggregate over the years, is that, is there a way to quantify kind of what you're assuming in terms of that benefit for 24? And then, Lastly, on the shifting consumer behavior, the hunkering down, you talked about that as transitory and temporary, and I think that's clear. The question I have is, are you assuming that it's temporary and transitory within the year, i.e., there's improvement as we go forward, or are you assuming that the hunkering down that we're seeing of late is with you for the duration of 24 and the improvement really comes in 25 and beyond? Thanks. Thanks.
spk14: Hey, Steve, it's Sean. I'll start with the end and flip it back to Dave for the beginning part. So, yeah, what I was getting at is because our diagnostic without perfect information looks at some of this multi-category, multi-company kind of softness, our conclusion is it likely is transitory. Our outlook and our guide assumes some of those headwinds really in the first half of the year, call it, you know, earlier in the year, and and assumes that that will revert to more normal type of behaviors as consumers adjust. In fact, who knows? There are some people that are speculating that there's a summertime phenomenon as you get back to school and people are getting back in the groove, it changes. We're not that precise in terms of trying to peg it to a day or a month, but just to give you some color directionally on how we're thinking about it, yes, we suspect it's going to quickly go back to kind of what it normally is exactly when we don't know, but we've baked in some conservatism there in the front part of the year. Dave, over to you.
spk15: Yeah, Steve, I would just say I know there's just such a burning desire for everybody to get quarterly information, but we're just not going to do that. I think in my answer to Andrew's question, I really tried to go through pretty methodically kind of color around the guidance and some of the cadence items with the disruptions and kind of wrapping on pricing and everything else. So I feel like there's enough there to put together a pretty good estimate.
spk02: Yeah, first of all, thank you both. On the second part, Dave, I'm actually less focused on the cadence and more just thinking about it in the aggregate. You know, on an annualized basis, just kind of what benefit, if any, you've baked in for supply chain disruption catch-up, number one, and then what that kind of net wraparound pricing is when you do the, we know what pricing you took last year, and then I'm going to, you know, just trying to quantify what that is net of the deflationary givebacks.
spk15: Yeah. And I don't want to get it because then you get into, you know, then you figure out volumes and we just don't, given the dynamics that Sean talked through, we just don't want to get into getting very precise with exact volume and kind of the net impact on pricing. So I think, you know, the drivers, you know, the outcome that guiding to, so we'll keep it. Okay.
spk02: Yep. Fair enough. Thank you. Thank you very much. Thanks.
spk03: Our next question is from Brian Callen with Bank of America. Please go ahead with your question.
spk12: Good morning, guys. Peter actually asked part of my working capital questions. That was helpful. I guess a follow-on to that is just thinking longer term about the leveraging and the three times by the end of fiscal 26. That's probably a year behind what we thought. Is there anything that you see now impacting free cash flow conversion or or maybe how you'll need to manage the maturity pay down that sort of takes you a little bit longer to get to three times?
spk15: Yeah, no. First of all, we put that out there. This is the first time we've actually put a date on the 3.0. No, we don't see anything material that should impact free cash flow. I tried to give some good color on kind of how we're seeing 24. Paying down debt is our priority, so I will be crystal clear on that. Given where interest rates are, we're about 88% of our debt is fixed. So we still have that 12% that's variable. And obviously with interest rates going up, it's pushing 6% on the cost of that debt. So paying that down is going to have a real cash financial benefit to us. So we're very motivated to generate the discretionary cash flow and pay down debt. That's our priority for 24 and really beyond.
spk12: And is there anything on the working capital side from an inventory management perspective? I guess that's the key source of the slight tailwind you mentioned. Is there anything we should be thinking about with pacing of working capital through the year, just as an extension on the working capital comment before? Thank you.
spk15: So generally, we finish 23 at the days on hand that we're very comfortable with, but we do have a seasonality to the business too, right? When you look at the flow, we usually build inventory as we go through our first quarter into our second quarter. So during the course of the year, you'll see sort of an inventory build, working capital build, and then it comes back as the year progresses. But that's our normal seasonality for ConAgra. Got it. Thanks, David. Yep. Thank you.
spk03: And our last question today will come from Matt Smith with Stiefel. Please go ahead with your question.
spk09: Hi, good morning. I wanted to ask a follow-up question on elasticities. I know that in the fourth quarter, your elasticities overall were in line with peers and below the historical level, but part of the consumer softening that we've seen has led to softer elasticities overall for ConAgra and the total store. And more specifically, ConAgra's elasticity relative to peers has weakened and moved more towards the historical one-to-one level. So when we think about the first half of the year and some of the comments you've answered to other questions, is that more in line with how you're thinking about guidance elasticities holding near what we've seen more recently? Or was some of the Ameri-cold and other disruptions in the fourth quarter impacting the current trends?
spk14: Now, I think you're looking at what you're calling elasticities in far too simplistic a manner. You can't calculate an elasticity by looking at total volume change, looking at total price change, and saying that's your elasticity, because there are many factors that go into what happens with volume. So not to get too technical here, but elasticity analytics measure a consumer demand response to a change in pricing at a brand level and in a time period following that pricing action. And those analyses have consistently, including recently, shown consumer response to brand-level pricing actions has been benign compared to historical norms. That remains true for ConAgra. It remains true for our peer set, as I mentioned in my prepared remarks. Our elasticities, they softened a little in Q4, but they remain benign versus historical norms. And they are directionally ahead of the peer groups. The behavior shifts I referenced, are a bit of a different animal. It's not a consumer response to a particular brand's pricing action. Rather, it is a set of coping tactics more broadly to the overall higher cost environment. These tactics include things like just buying less for a period of time, the stuff I talked about there. So you may look at that and say, well, the net of them both is that volumes are lower. That's true. But if you really want to get into analytically what consumers are judging the value of a specific brand and product, you've got to get into the more granular analytical science. And if you want to understand just the more macro consumer attitude and how they're coping with the cumulative effect of higher prices, that is – you're going to get to different conclusions.
spk09: Okay. Thanks for that detail. Appreciate it. Pass it on.
spk03: This concludes our question and answer session. I'd like to turn the conference back over to Melissa Napier for any closing remarks.
spk00: Thank you for joining us this morning. Investor Relations is happy to address any follow-up questions that you may have, and we hope everyone has a wonderful day.
spk03: The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.
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