ConAgra Brands, Inc.

Good morning and welcome to the ConAgra brand's third quarter fiscal year 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Brian Carney from Investor Relations. Please go ahead.

Good morning, everyone. Thanks for joining us. I'll remind you that we will be making some forward-looking statements during today's call. While we are making those statements in good faith, we do not have any guarantee about the results that we will achieve. Descriptions of the risk factors are included in the documents we filed with the SEC. we will be discussing some non-GAAP financial measures. References to adjusted items, including organic net sales, 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 reconciliations to those adjusted measures to the most directly comparable GAAP measures can be found in either the earnings release or in the earnings slides, both of which can be found in the investor relations section of our website, ConAgraBrands.com. Finally, we will be making references to total ConAgra brands, as well as the legacy ConAgra brands. References to legacy ConAgra brands refer to measures that exclude any income or expenses associated with the acquired Pinnacle Foods business. With that, I'll turn it over to Sean.

Thanks, Brian. Good morning, everyone, and thank you for joining our third quarter fiscal 2020 earnings call. On behalf of ConAgra Brands, I want to start by expressing my heartfelt hope that you and your families are staying safe during this unprecedented time. Today, I'm going to address two main topics, our response to COVID-19 and its impact on our business, as well as the underlying trends that we saw in the third quarter, which ended just before the impact of COVID-19 started. Rest assured that we're taking all necessary precautions to protect the health and safety of our employees and our ability to safely and reliably meet consumers' needs. For the most recent status of our efforts to respond to COVID-19, please visit ConAgraBrands.com. We'll continue to provide updated information on our site as the situation evolves. As I'll describe in more detail in a moment, we've taken a number of steps to ensure our supply chain continues to operate well. We're incredibly proud of our teams who have been producing and delivering without disruption. While we all remain focused on executing through this rapidly evolving situation, I don't want to lose sight of the fact that we've made significant progress against the operational objectives we established for fiscal 2020. In many ways, our progress against these objectives is enhancing our ability to navigate this crisis. Recall, at the outset of fiscal 2020, we set out to execute on integration, synergy capture and deleveraging, drive strong consumption growth in frozen and snacks, improve trends in Hunt's Tomatoes and Chef Boyardee, bend the trend in the Legacy Pinnacle business, and drive innovation and growth in Gardein. I'm proud to say that through the third quarter, we remained squarely on track with all of these objectives. And from a financial standpoint, the third quarter results are in line with the expectations we provided at Cagney. As we previously described, Industry softness, which started in December in food service and pivoted to retail in January, put pressure on consumption trends in several of our key categories, which more than offset share gains. As expected, consumption trends recovered in February prior to COVID-19 impact. It's important to keep in mind that our third quarter ended on February 23rd. At that time, there were very few reported cases in the US and notably no widespread change in behavior. As we all know, that has changed significantly in recent weeks. From the second week of our fiscal fourth quarter to date, we've experienced the unprecedented impact of COVID-19 as consumers have stocked up on food and shifted rapidly to eating more at home. Given the quality of our brands and the categories we participate in, ConAgra is well positioned to serve consumers during this time of disruption and extraordinary demand. Our team is hard at work in close coordination with our customers to ensure that consumers have access to the food they need to stay safe at home. At this point, the magnitude and duration of the COVID-19 impact is still uncertain. However, I can tell you that we expect to exceed our prior full year guidance for total company sales and profit metrics assuming the end-to-end supply chain continues to operate effectively. We will provide more detail on the impact of COVID-19 in a moment, but first, we would like to walk you through the highlights of the third quarter. During the third quarter, our performance was in line with the updated expectations that we provided at Cagney. Organic net sales growth decreased 1.7%, while our adjusted operating margin was 15.7%, and our adjusted diluted EPS from continuing operations was 47 cents for the quarter. As we noted at Cagney, we saw category softness in January that was greater than anticipated. At the time, we told you that our more recent data was improving, and we expected to bounce back. And that's exactly what happened. As you can see on slide seven, total ConAgra retail sales returned to growth in the final four weeks of February, and sustained a normal rate into the first week of Q4. Clearly, even before the current disruption due to COVID-19, we were well on track and had already seen the expected rebound in consumption trends. Not only did we see growth of 0.9% in the four weeks ended February 23rd, but what we saw in the week ended March 1, which is in our fiscal fourth quarter, reaffirmed this return to consumption growth. And during the quarter, we continued to deliver on integration, synergies, and deleveraging. On integration, we have been converting Legacy Pinnacle Plans over to SAP. And through Q3, this multi-year process has been progressing on plan. We captured $33 million in incremental synergies, increasing our total through the end of Q3 to $145 million. And we made further progress on reducing our net debt position by paying down $450 million of debt during the quarter. Slide nine demonstrates our continued success in the important frozen category. As both graphics demonstrate, we maintained strong growth during the quarter across our frozen portfolio, both for Total ConAgra brands and Legacy ConAgra brands. As we will discuss later in the presentation, Total ConAgra's frozen growth has been driven by both Legacy ConAgra and Legacy Pinnacle. Slide 10 shows the outsized performance of ConAgra's frozen meals within the category. Not only did we have yet another quarter of gaining share of shelf and share of sales, but we also did so at an accelerated rate. Our snack segment reported solid growth in the third quarter. Total snacks were up 2.9% during the quarter and 8.7% on a two-year basis. Our results were led by our meat, snacks, and seeds businesses which delivered growth of 8.4% and 5.9% respectively. And as slide 12 shows, we continued to gain share in many of our snack categories in Q3. Another key objective for fiscal 2020 was to improve trends in Hunt's Tomatoes and Chef Boyardee. As you can see on slide 13, that's just what we've done. Over the five-week period ended February 23rd, Hunts Tomatoes and Chef Boyardee gained 2.2% and 4.5% in dollar sales growth, respectively. And both brands also grew share of retail sales over that same period as outlined on slide 14. It's worth noting that these trends for Hunts Tomatoes and Chef Boyardee continued into the first week of our fiscal fourth quarter prior to the impact of COVID-19. Slide 15 shows a milestone for ConAgra as we bent the trend on Legacy Pinnacle on both a one-year and a two-year basis. Recall that in December 2018, we outlined a number of actions that were needed to get Pinnacle back on track. We also indicated that we did not expect to see the impact of those actions until the second half of fiscal 2020, which as you can see here is exactly what has occurred. slide 16 shows how we've been able to bend the trend in the big three legacy pinnacle brands by implementing the ConAgra way playbook we started with wishbone where the missteps came from several executional issues including a label change which we quickly addressed to stabilize the brand as a result we saw an immediate spike in retail sales before returning to more normal levels bird's eye which is our biggest brand took a little longer as the playbook required us to remove lower performing skews, which negatively impacted sales and distribution. Notably, Bird's Eye is now contributing to our growth as the innovation we launched in the first half of fiscal 2020 builds momentum with more innovation to come. With respect to Duncan Hines, we've made great progress on reframing the brand as a sweet treat, but recognize that there's more work to be done. We're focused on introducing more on-trend innovation as we trim lower performing skews. While it will take time to return this brand to growth, we're confident in the ongoing implementation of the ConAgra Way playbook. Another legacy Pinnacle brand that has benefited from the ConAgra Way is Gardein, which is accelerating at very strong rates. As a reminder, we've made significant investments to expand Gardein's manufacturing capacity, which came online earlier this fiscal year. As the slide shows, The brand's growth is attributed to more than just meatless burgers and includes meatless options for chicken, seafood, and sausages, to name a few. As you can see, it's clear that we remained on track with all our fiscal 2020 operational objectives through the third quarter. Now let's turn to the current quarter and the balance of the year. Typically, we would be spending our time on this call reaffirming our guidance and discussing short list of initiatives underway to close out the year. But this year is unprecedented, and the impact of COVID-19 will be significant. Let me start by saying that our top priorities right now are the health and safety of our employees, as well as our ability to safely and responsibly meet customer and consumer needs. With respect to our results, the magnitude of the impact is difficult to predict. What we know to date The Q4 retail demand surge is significant and spans multiple retail channels, including e-commerce. While our food service segment is facing headwinds, that impact is more than offset by increased demand in our retail segments. Given the depth and breadth of our portfolio, we are well positioned to meet this increased demand for at-home consumption. Having all these brands and capabilities under one roof is enabling us to meet a wide array of customer and consumer demands. Importantly, we've been able to address this retail demand surge because of a strong business continuity plan that we were able to activate as soon as the market disruption began. I'm very proud of the extraordinary efforts across our company and the way our teams have supported each other and our business, all in the pursuit of ensuring that consumers are able to access food during this time. We have decided to temporarily delay some legacy Pinnacle Plants SAP implementation to prioritize supplying customers with the food they require now, but our integration plans are otherwise on track. We will continue to consider and prioritize our business needs as the COVID-19 situation unfolds. And I'd like to take a minute to talk a bit more about the ConAgra team, and in particular, to highlight the exceptional work of our supply chain team. While demand has sharply increased, our order fulfillment rate so far in Q4 has remained above 90%. This is a testament to the systems we have in place and the commitment of our people. This has been remarkable to see, and I'd like to thank our Chief Supply Chain Officer, Dave Beeger, and the entire supply chain team for their incredible efforts. Our supplies of ingredients and packaging remain sufficient, and we've experienced minimal disruption so far in the quarter. All of our North America manufacturing facilities are open and running at high levels of utilization, and our distribution network remains fully operational. Our plants and locations have the resources and critical equipment they need to operate in full compliance with current regulations and CDC guidance. And I'm proud of the remarkable level of collaboration among our sales, customer order management, and supply chain teams. That collaboration, along with the work we're doing with customers, is enabling us to ensure we are able to supply consumers with the food they need. Great job all around. Although providing specific Q4 guidance is not possible due to the uncertainty of this situation, We do want to give you a sense of our experience so far. The chart on slide 20 shows what we've seen in the market to date. You can see that there's been a material increase in demand the past few weeks. While some categories are benefiting more than others, all categories and all temperature states are seeing increases. In addition to a significant uptick in sales, our execution has enabled ConAgra to outperform and gain share in the categories in which we compete. The data we're showing in the chart is only measured channel data. It's important to note that demand has surged broadly across retail channels, including e-commerce, as well as for pickup and delivery, most of which are not reflected in this data. Similar to our measured channel retail business, our e-commerce business is also up in sales, outpacing the competition and gaining share. Overall, We made good progress during the third quarter of the year. Our quarterly results were in line with our updated expectations, and we remained on track with all of our fiscal 2020 operational objectives. Going forward, our teams are prioritizing health and safety, adapting well and operating effectively to ensure consumers are able to access the food they need. And while this is clearly an unprecedented time, we will not lose focus on executing the ConAgra way playbook. Our brand building and innovation processes remain critical pieces to our long-term success. We're updating our full year guidance today to note that we now expect to exceed our prior full year guidance for total company sales and profit metrics. Beyond fiscal 2020, it's important to note that we are also working with customers as they reevaluate the timing of promotions, and shelf resets as they look to minimize in-store disruption during this time of surging demand. Finally, while the situation is still evolving, we believe the sharp increase in at-home eating occasions is generating trial among new consumers that we did not anticipate accessing. We view this dynamic as a long-term opportunity for our portfolio overall, and in particular, our leading frozen business. With that, I'll turn it over to Dave.