ConAgra Brands, Inc.

Q2 2022 Earnings Conference Call

1/6/2022

spk_0: good day and was home to the sonogram certain corners or two year two thousand twenty two in south of salt all this room for real of loneliness should you need assistance blizzard was also specialist but such as a star she followed by zero
spk_1: absence of a reservation a real opportunity to ask questions to ask questions you if saw the woman is have shown flow those are your questions please for started and to
spk_0: the results of these events is the recorded i was always of it's all others over the holding some of us are losers please go ahead sir the morning everyone thanks for joining us i remind you that we will be making some forward looking statements today
spk_2: well we are making statements in good faith we do not have any guarantees about the results we will achieve descriptions of the risk factors are included in the documents we filed with as easy also we'll be discussing some non get financial measures references to adjusted items including organic net sales refer to measures that exclude items management beliefs impact the compare ability for the period reference leads the the earnings release for additional information on are comparable of the items the gap to non gap reconciliations can be found in either the earnings press release or the earning flights both of which can be found in the investor relations section of our website can agger brand stuck with that of headed over dish on thanks brian good morning everyone it's thank you for joining our second quarter fiscal twenty twenty two earnings call today david i will discuss our results for the quarter are updated outlook for the remainder of the year and why we believe that con agra continues to be well positioned for the future i'd like to start by giving you some context for the quarter first you all know the external environment has continued to be highly dynamic but our team remain extremely padre island a quarter and executed the con agra a playbook navigated the ongoing complexity in delivered strong net sales growth anchored in elevated consumer demand that continue to exceed read our ability to supply inflation driven pricing options
spk_3: and lower than expected to last the city
spk_2: while or net sales exceeded our expectations margin pressure in the second quarter was also higher than expected driven by three key factors first while we anticipated elevated inflation during the second quarter it was higher than our forecast second we experienced some additional transitory supply chain costs related to the current environment and third in the face of elevated consumer demand that continue to outpace our ability to supply we elected to make investments to service orders and maximize products availability for our consumers we expect margins to improve in the second half the fiscal year as a result of the levers we pulled and continue to fall to manage the impact of inflation
spk_3: will always look to our cost savings programs to offset input cost inflation however given the magnitude of the cost increases our actions also include additional inflation driven pricing we communicated pricing to customers again in december
spk_4: for the year
spk_2: for once again reaffirming are adjusted mps outlook but or path to achieve that guidance has evolved were increasing our organic net sales guidance based on stronger than expected consumer demand and lower than anticipated elasticity we're also updating our margin guidance given the increase in our gross inflation expectations for the year and the timing of the related pricing actions taken together we continue to believe that elevated consumer demand coupled with additional pricing and cost savings actions will enable us to deliver adjusted st louis dps of about two dollars and fifty cents to with that is the backdrop let's jump into the agenda for today's call we'll start with an overview of the quarter before going into more detail on our outlook for the second half of the fiscal year i'll also share some of our thoughts on a structural changes we're seeing in consumer behavior particularly with younger consumers we believe these changes are further evidence in the long term potential of con agra france
spk_5: let's dig and of a quarter
spk_2: you can see on flights seven our team delivered solid qt results on a to your casual basis for ganic that sales to the second quarter increased by more than five percent and adjusted dps grew by nearly one percent as i noted earlier we deliver these results in the face of a highly dynamic and challenging operating environment he put cost inflation came in higher than expected in a quarter in addition we need some strategic decisions to service the heightened consumer demand we continue to experience as the entire industry incurred transitory costs associated with labour shortages supply issues on materials and transportation costs and congestion challenges during our few to we chose to invest in our supply chain and service orders this deliberate decision sure we could deliver food to our customers and consumers especially during the holiday season maintaining physical availability is an important part of building trust with customers and maintaining consumer loyalty
spk_3: the bottom line is that amid the supply disruptions seen across the industry we remain focused on building for the long term
spk_2: while the net result of these factors was a negative impact our margins during the quarter or confidence that are purposeful approach better positions are portfolio for the future i want to take this opportunity to thank our tremendous supply chain team they've been resilience in navigating this environment allowing us to remain agile and deliver for our customers and consumers continue to be impressed by our teams commitments and i'm grateful for their ongoing dedication looking at fly ten you can see that are strong performance in the second quarter was broad based total con agra retail sales were up fourteen point eight percent on a to your bases in the quarter with double digit growth in each of our domestic retail domains frozen snacks and staples household penetration was also up this quarter building upon a significant number of new consumers we've acquired over the past two years total con agra household penetration was fifteen i basis points on a to your basis and our category share increased forty one basis point in addition to increasing household penetration and acquiring new consumers we are retaining our existing consumers as demonstrated by our keep rates choppers continue to discover are incredible products and are tremendous value proposition as the charge on the right of flight eleven shows or consumers keep coming back for more as we execute er conagra a playbook innovation remains a key to our success across the portfolio and due to fly twelve highlights the impact of are disciplined approach to delivering new products and modernizing our portfolio during the second quarter or innovation outperform the strong results we delivered in the year ago period we continue to invest in new product quality and it's supporting or innovation launches with deeper more meaningful consumer connections once again or innovation rose to the top of the pack and several key categories including sacks sweet treats sauces and marinate and frozen vegetables like thirteen demonstrates how are ongoing investments ecommerce continued to yield strong results we again delivered strong quarterly growth in our one billion dollars he commerce business and ecommerce accounted for a larger percentage of our overall retail sales our peers we outpaced the entire total edible category in terms of ecommerce retail sales growth during the second quarter just as we did in the first quarter of twenty twenty two and throughout fiscal twenty twenty one the we mentioned earlier are strong net sales growth was driven by elevated consumer demand favorable elastic cities and inflation driven pricing actions fly fourteen you can see the extent of our pricing actions in the first half of the fiscal year during this period or on shelf prices rose across all three domestic retail domains and stable discuss shortly the pricing flowed through the piano you can see a fly fifteen price elasticity has been fairly low it's been favorable to our expectations consumers continue to see the tremendous value of our products relatives other food options concepts i will elaborate on in a few minutes
spk_3: now let's turn to the path ahead
spk_2: you can see a flight seventeen we currently expected gross inflation to be approximately fourteen percent for fiscal twenty twenty two compared to the approximately eleven percent we anticipated at the time of our first quarter call this is a large increase in were taking actions to offset the increase of dylan bad thing in the long term health of our business help manage are increasing inflation were taking incremental pricing actions including list price increases and modified merchandising plans many of these actions have already been announced to our customers
spk_3: as a reminder there is a lag in timing between the impact of inflation and our ability to execute pricing adjustments based on that inflation as a result he incremental price increases would go into effect in the second half of the year with the most significant impact during the fourth quarter
spk_2: oh it's easy to get caught up in a quarter to quarter impact of inflation uprising it's important to keep focused on a big picture the long term success of our business is driven by how consumers particularly younger consumers respond to our products and when you take a step back to evaluate the broader environment and how our portfolio delivers against the needs of the modern consumer we believe that con agra is uniquely positioned for the future as we detailed many times before an average on transport for folio filled with modern food attributes is winning with younger consumers and our confidence is underpinned by the many changes were seeing and consumer behavior that are proving to be structural especially given that these changes are driven by younger consumers that represent the most significant opportunity for long term value creation younger consumers represents a large and growing part of the us population and they want to optimize the valued as a guest for the money they spend on food a large part of optimizing their food spending includes shifting more dollars from eating away from home
spk_6: eating at home
spk_3: as they make that trade they're choosing national brands
spk_2: we believe con agra is ideally positioned to experienced an outsized benefit from these behaviors given the relationship or brands are forming with younger consumers overall con agra is delivering superior relative value to consumers compared to both away from home options and store brands let's take a closer look at these trends starting with the population changes like twenty i like the demographic shifts underway in the us millennial and he consumers are a large and growing coburn these consumers are starting to settle down by homes and start families we presented in the past when people enter the family formation phase increase the amount of food to eat at home with an outsized increase in the consumption of frozen foods what we find particularly important about reaching millennial and genji consumers is that we believe they will remain more value focused than their predecessors first let's talk about the near term as you can see in the chart on the left millennial and gnc consumers are earlier in their careers and earning less than the older generations of working age people this is natural by bodes well for food at home friends in a shorter term we believe that even as food service bounces back younger consumers will be value conscious in their food choices you were younger consumers are expected to achieve the financial success of the generations before them to date on the right suggests that millennials are more likely to earn less than their parents we believe this means that see savvy consumers will look to stretch their food dollars further even as they age the data also shows that young younger consumers are already eating more at home compare to the population as a whole can and millennials have increased restaurant visits more and sourced a larger percentage of their meals at home it's these younger consumers have made the shift at home heating the data shows that are finding comfort in a quality reliability and familiarity that national brands provide we believe this makes a lot of sense national brands provide value while replicating many of the on trend flavors and modern food attribute it's that consumers are used to experiencing in away from home dining with consumers make trades like away from home to in home eating trust is paramount
spk_3: george national brands particularly modernize brands like those in our portfolio deliver on his trust imperative and that's because they offer a superior relative value versus other food options
spk_2: if consumers the to stretch their house or balance sheets in the face a broad based inflation one of the single largest levers available to them is the reduction in spending on food away from home as food away from home prices are typically over three and a half times more expensive and food at home prices this trade will likely become even more important for consumers as food away from home prices have already increased faster than at home prices in calendar twenty twenty one and they are expected to increase it nearly twice the rate as at home prices in calendar year twenty twenty two or aggressive modernization of the con agra portfolio over the past several years has put us in a strong position to capitalize on the structural ships or portfolio has shown it's competitive advantage with excellent trial depth of repeat and share game performance overall we believe con agra is well positioned to leverage these shifts to create meaningful value for shareholders it's like twenty five shows you the data to support our claim and agra is attracting more younger consumers in our fears and getting them to repeat as more attractive race
spk_3: by appealing to younger consumers now we're building superior consumer lifetime value importantly it data shows that these you younger buyers are stickier across our portfolio we believe that comes back to the investments we've made and continue to make in our products and our branch the con agra way has positioned us to win
spk_2: and i discussed earlier were reaffirming are just a dps guidance of approximately two dollars and fifty cents for the full year with a few updates on how we expect to get them we're increasing our organic net sales guidance to be approximately plus three percent up from approximately one percent we're slightly addressing are just operating margin guidance to approximately fifteen a half percent down from approximately sixteen percent and we're updating our gross inflation guidance to about fourteen percent up from approximately eleven percent now that i've highlighted or performance for the quarter and strong positioning for the future of turn it over to dave to provide more details on our financial performance baggage on a good morning everybody i'll start by going over some highlights from the quarter shown on t y twenty eight the sean mentioned earlier there were none nber of factors that influenced our results this quarter first we were encouraged to see that consumer demand for our products remain strong and second elasticity is were better than anticipated however we also continue to see inflation rise across a number of key and foot and a dynamic macro environment curry
spk_7: he added challenging conditions for the supply chain
spk_2: the team remained agile in response to these dynamics including the decision to make additional investments during the quarter to meet the elevated demand and maximize the food supply to our consumers overall our action favorably impacted our supply during the quarter with organic that fails up two point six percent compared to the
spk_8: year ago period
spk_2: an important part of the top line success we've realized throughout the pandemic is our ongoing commitment to the con agra way we've remained focused on building and maintaining strong brands across the portfolio we continue these efforts in the second quarter with continued product innovation and by further increasing our spending on advertising and promotion primarily focussing on e commerce investments we shall a breakdown of our net sales on flight twenty nine the four point two percent decline in volume was primarily due to the laughing at the prior years years surge in demand during an earlier stage and the coven eighteen seen pandemic as volume increase approximately one first that wanted to your tiger the second quarter volume decline was more than offset by the very favorable impact of brand max and inflation driven pricing actions we realize this quarter driving an overall organic net sales growth of two point six percent on last quarter's call we noted that the domestic retail pricing actions were just starting to be reflected on shelves at the end of the first quarter those increases were reflected in our pain eldest quarter driving the six point eight percent increase in price next the divestitures of our hk anderson business the peter pan peanut butter business and the egg beaters business resulted in a seventy basis point decline and foreign exchange drive a twenty basis point benefit together
spk_3: all these factors contributed to a two point one percent increase in total con agra net sales for the come for the quarter compared to a year ago
spk_2: y thirty shows are net sales summary by segment both on a year over year and on a two year compounded basis as you can say we continue to deliver strong to your compounded net sales growth and each of our three retail segments which resulted in a two year compounded organic net sales growth a five point three percent for the total company you can see the puts in takes of are operating margin on five thirty one
spk_7: we drove a six point two percentage point benefit from improved price max supply chain realize productivity cost synergies associated with the pinnacle foods acquisition
spk_3: and lower pandemic related expenses
spk_2: netted within the six point two percent or the additional investments we made to service orders and maximize product availability these investments reflects the dynamic environment and actions we've taken to respond to it this includes decisions to utilize more third party transportation and warehousing vendors for some of our frozen products and caring incremental cost to move product around our distribution network to better align with customer order patterns and delaying a plant consolidation productivity program to maximize current production the six point two percent also includes transitory supply chain costs such as fire inventory right off and increased over time to support operations
spk_3: the six point two percentage point benefit was more than off that fine inflation head when of eleven eleven percentage points
spk_2: the second quarter gross inflation rate or sixteen point four percent of cost of goods sold was approximately one hundred basis points for twenty million dollars higher than expected driven by higher than anticipated increases in proteins and transportation
spk_7: which are both difficult to hit
spk_2: the combination of the favorable margin levers our choice or supply chain investments and inflation headwinds resulted in adjusted gross margin declining by four hundred and eighty three days points our operating margin was further impacted by twenty basis points due to our increase a and fee investment during the quarter as i mentioned earlier you can see how these elevated cause in fact that each of our reporting segments on slide thirty two
spk_3: while each segment was impacted our refrigerated and frozen segment was impacted the most with adjusted operating margin down seven hundred and seven basis points primarily due to outsized materials inflation and the additional investment incurred to surface waters and get food delivered to consumers
spk_2: we are confident that we will improve overall operating margins in the second half as we execute are additional pricing actions to offset the higher inflation rates you can see on flight thirty three or second quarter just a dps of sixty four cents was heavily impacted by the input cost inflation across our portfolio even know the benefits of our first quarter price thing flowed through the piano this quarter the incremental inflation we incurred in the second quarter created an additional headwind in response we announced additional pricing to customers in early que three during december although we have yet another lag before this pricing benefits the piano we expect to realize benefits from these pricing actions in late two three with most of the impact and few for also or ardent mills joint venture had another good quarter and deliver dps benefit versus the prior year we realize lower net interest expense and a slightly lower average diluted share can do to our share repurchases and prior force burning to slide thirty four i want to unpack health cute to adjust the dps landed vs our expectations
spk_7: our second quarter just a dps came in lower than we originally had anticipated due to two main factors first as previously mentioned inflation came in higher by approximately one hundred basis points of cost of goods sold for approximately two to three cents a vps
spk_2: while we have announced additional pricing actions for the second half to offset the incremental inflation
spk_3: the timing of these benefits is naturally lagging behind the higher inflation second the costs we elected to encourage service orders coupled with the additional transitory supply chain cost i described earlier led to another two to three sent impact on our adjust the dps
spk_2: we are forecasting the service and transitory costs dynamics to improve as the second half progresses looking at five thirty five we ended the quarter with a net debt to eat at that ratio of four point three times which is in line with the seasonal increase in leverage expected for the second quarter we expect to generate strong free cash flow in the second half of the fiscal year and expected and any year with a net leverage ratio of approximately three point seven to three point eight times we remain committed to a longer term that leverage target of approximately three point five times and to maintaining an investment grade credit rating
spk_3: i want to close today by reviewing the factors driving the updated guidance we issued this morning which is shown here on flight thirties decks i'll start by saying that we remain confident in our ability to achieve approximately two dollars and fifty cents and adjusted dps for the full fiscal year as the macro environment continues to be very dynamic our expectations for the path to achieve that target have shifted
spk_2: we are increasing our organic net sales growth guidance to approximately three percent to reflect are stronger than expected performance year to date as well as our incremental pricing accidents in the second half we are lowering our adjusted operating margin guidance to approximately fifteen and a half percent we expect the incremental sales and pricing actions in the second half to offset the dollar impact of the incremental net inflation and other supply chain costs we have increased our gross inflation expectations to approximately fourteen percent largely driven by fire estimated cost versus the previous estimate for proteins transportation dairy and resin
spk_3: we will continue to monitor these input costs closely and will be quick to respond using all available margin levers the sean detailed price elasticity has been favorable to our expectations so far
spk_2: as we have explained previously there is a lag and timing between when we experience inflation
spk_7: take actions including pricing to offset the dollar impact of the inflation
spk_2: and when we see those actions flow through our financial results with respect to the additional pricing actions we have announced for the second half of fiscal twenty two weeks back to realize a small amount late in the third quarter and the full benefits from these price increases in the fourth quarter
spk_3: we therefore expect our third quarter margins to be roughly in line with second quarter margins with an increase in operating margins in queue for as the pricing catches up with inflation and the impact of the lag is reduced
spk_2: our guidance also assumes that the end to and supply chain will continue to operate effectively as the covert nineteen pandemic continues to evolve before turning it over to the operator for q when i i would like to reiterate that our results this quarter and throughout the pandemic have reflected our ability to consistently deliver superior relative value to our consumers our confidence in our ability to reach our earnings goal is based on the strength of our business at it's core to manufacture and deliver foods that people enjoy that concludes my prepared remarks today thank you for listening on allehanda back to the operator for questions
spk_0: the issue we would all be in the question and answer session to ask a question of started one on the touchstone phone is a speakerphone we as easily forgotten your handset professionally keys
spk_1: what are your questions please first or them to
spk_0: for the influence wasn't on some enter was our with berkeley's for or not
spk_9: annoying and happy new year everybody forty nine hundred and two questions for me if i could first maybe shawn he mentioned several times and less the city's remain on meals are below expectations and many what you've seen historically and i realize or a lot of dynamics and he i play that that lead to that
spk_10: ronnie offensive of what you're building in to sort of back half guidance along these lines in terms of elasticity just giving you know more pricing is obviously set to keep rolling in his you've talked about
spk_9: and destiny your tummy your expectation take into account the out the potential feeding have some governments stimulation and how does that play a role you know getting how you think about electricity and and upscale a follow up for days
spk_2: right sure injured when he said that last these and stimulus on i say our year to go outlook takes into consideration everything that we've seen in the marketplace to date as well as our plan pricing and merchandising actions in the year ago period i will tell you that i see with respect to last cities a major difference in the marketplace today in terms of how consumers are assessing value vs when i'm historically seen in the past previously yeah that consumers comparison of choices was between close proximity items inside the grocery store today due to the demographic dynamics i talk about around young consumers home nesting as well as a huge moved to working from home the biggest comparison taking place from a value standpoint is between away from home choices and at home choices and as i said my prepared remarks the consumer consumers showing us the modernize national brands like ours are offering period relative value and that's having a positive impact on the last two cities that we expect to continue but we we have factored in our year to go actions
spk_11: in terms of
spk_2: would do stimulus payments particularly snap the short answer is we don't believe that the eventual end to the emergency allotments in the snap program is going to create a material had when to our business and fundamentally comes back to that superior relative value of our portfolio vs alternatives but i mean on this one a bit because i know it's been kind of a hot topic since the start of the pandemic consumers were actually able to reduce their overall food spending significantly and that reduction was driven by the mix shift from higher priced food away from home to lower priced food at home and at the same time that consumers that consumers been able to save money on food because
spk_3: that shift to food at home many have also been receiving these toby related stimulus or payments on multiple fronts including for some higher snap benefits
spk_2: the as this one component of consumer cash flow changes that is as the emergency allotments in the snap program sunset we're not seeing and we don't expect to see a meaningful shift away from his newly created behaviors we talked about around he national brands at home there are few things that i think you need to keep in mind your first the reduction in snaps dollars in the total ecosystem is already happening as a slow peeling back it's not a cliff know into that points the number of individuals receiving any snap benefits today has been declining vs pandemic highs are ready and individual states are ending waivers emergency allotments
spk_3: on their own schedule it's not a one time event
spk_2: second i say recent permanent changes to the snap program has actually raised core continuing snap benefits to a level that is fires and pre pandemic south the course nap consumer who has also benefited from other stimulus is going to have higher snap budget coming out of the pandemic than they did three pandemic
spk_3: third the u s the a forecast that food away from home prices are going to rise faster than food at home prices and at maintains the value proposition of food at home for consumers and finally i just say and perhaps most importantly the early data does not show that as snap benefits and country
spk_2: were behavior changes relatives to food at home we are as you can imagine closely watching the states where emergency allotments have already ended and we have not yet seen a significant change in consumers purchases of packaged foods and that we believe kids because as i said our brands are offering superior relative value vs both away from home alternative and store brands especially given the huge move to working from home
spk_10: great no thank you for that that was three or for our perspective and then just a quick one for david at my senses you'll you'll get a lot of questions long lines day but as a giving you are i'm expectations he just talked about in terms of margins for for three to either some senior hundred and fifty two hundred basis points sort of below speedy were a consensus was looking for the identity it's timing lag around pricing coming through and impacting for two more significantly and then yeah some of these incremental costs starting to sort of in know a little is as the year goes on a second question is you know it puts out a lot more pressure on for to to counter deliver the year
spk_9: yes we are you would be your center here we are building in some level of flexibility
spk_8: to that based on what it requires and for to and and i guess what your your level of his ability to that at this stage given it does seem like it's more forty loaded self either a broader question but he is of get where i'm coming from banks some it out and and you summarize well and really let me try to walk through it so i can and a hit that that's the kind of the big puts and take so
spk_7: as i mentioned in my remarks weeks back to three operating margins a roughly in line with you to margins and then and then you for margins up if you look at the puts it takes from few to to que three we've increased our total inflation estimate for the year from eleven percent to fourteen percent so now we expect second half inflation to approx eight lebanon a half percent that's also the prior year inflation that was about six and a half percent we also expect some somebody additional costs we incurred in the second quarter to support shipments and getting product that consumers will continue into the third quarter given to continue challenges and supply chain were forecasting that this complexity will gradually improve as we approach you for or in the march time frame the additional pricing actions which which are critical we announced in december and they were accepted
spk_3: and we have a small impacting que three given a timing but we'll have a much bigger impact on you for from the pricing so surprising been announced it's been accepted and we have very good visibility to that for forecasting purposes so to foot for will benefit meaning meaningfully from these pricing actions we expect price
spk_7: next approximate ten percent in the fourth quarter as will start to catch up
spk_3: yeah with the inflation and and the reduced pricing like that impacted us through the first half and well impacts que three to human to mention also benefit from the decline and incremental costs to support shipments that i just referenced as well as a decline in some of the transport costs that had us and and future as well
spk_7: so
spk_12: you know it's it's it's important note that although we expect meaningful and permanent you for were still forecasting higher inflation as i mentioned so you look at our cost per unit of volume we expect that to continue to increase in an age to before being offset by that the pricing and and few for
spk_0: thanks so much
spk_13: economics lesson for the don't some ten gold medalist o jp morgan please go ahead
spk_14: hi thanks so much
spk_7: dave i just wanted to clarify when you said to expect she was margin to be roughly in line with to choose margin is his comments solely about the operating margin or should that roughly apply to the gross margins well
spk_14: i was commenting on the operating margin but that's driven by the gross margin okay perfect thank you i'm and then i wanted to clarify you he mentions inventory write offs i think i heard and hi overtime expenses as a maybe some of the examples of to choose nonrecurring telling challenges i guess the the one can you elaborate a bit if i did your that right on what to write offs worse and it he also taught a little bit us about labour availability of the last couple of weeks videos on the
spk_3: trying to start to affect more people and was how much of that risk is expected to your guys as well
spk_2: i can't sean money let me start with of that peace peace because i know that's also a hot topic when he wrote about it the other day which is absenteeism and when it when i say there is i told my team sack in july the word of the year this year's perseverance and at is certainly are proven to be true we faced a number of factors that have converged to create a persistently challenging operating environment things like sustained elevated demand alongside a protracted pandemic and street supply chain and acute inflation but against that backdrop i'd say our team is done a remarkable job persevering and doing everything possible to keep our food and consumers hands pretty killer lead in queue to which is our largest volume quarter what are your point clearly it's not perfect yet and i think it's entirely reasonable for all of us to project that the next month or so could remain sprained within supply chain his army grant runs its course but i'd say will persevere through that too but as you saw due to any reference some
spk_3: of the things not at normal deficiency which is a factor as to why margins and que three are expected to be similar to what we put put up and que to but we will persevere because keep in mind that used three is a smaller quarter volumetric leading you to call it five to ten percent less volume on average we also had a geographically diversified manufacturing footprint across or plants in those were called packers we don't have like one big mega plant on and as we saw earlier posts it there are steps we can take to maximize our line efficiencies and through good things like skewed simplification etc and as i mentioned earlier were of we very tight number merchandising activity in the years ago period so collectively these things should help ease the impact on crime driven absenteeism you know an important way as you highlighted your notes on tuesday there's good reason to believe that said challenge will be short lived so you know it's a to sum up the team is staying agile and as we move beyond you three and in a queue for clearly with the opportunity will begin to wrap the onset of input cost inflation or most recent pricing actions we rolling into market and army crimes driven absenteeism should be diminished and all that positions us to deliver meaningful improvement in multiple my
spk_7: tricks as we going to them while for safe yet so many get the first part your question can so yeah we were impacted two to three cents in the quarter from incremental transitory costs and that included higher over time across all of our supply chain operations giver given the labour challenges and hire him into a write offs regarding the him and tory and it's environment it's no secret the and and supply chain as and strange yeah we're moving fast meet demand as our suppliers south or food safety and quality standards are the highest priority for this company and include product from suppliers that we use as well we have thought processes for ensuring that are the raw materials and finish good meet our standards the for the utilize and if not we write them off and that's what happened in kyoto we do believe that this impacts as transitory nature as we move into the third quarter south we always have some level of him into a write off fights or this was higher than we expected for those reasons
spk_2: and the messaging just a rapid up is not a demand driven right off it's a supply chains have any issue
spk_13: downing automatic adept at the the supply chain is it is a complex thing and of their fault like possible facets and we each of them i've run into challenges it's it's tend to have a bit of a compound fact in this is a kind of friction you see during those kind of trance tory windows
spk_15: very clear fact so much atlanta explosives they don't some brian's blame a bill to your that hey ah thanks operator good morning everyone i'm just just too too quick ones for me maybe the first days on can you give us a little bit of help with with some color on the bottom of the below the operating on
spk_16: more are operating profit line items for the balance of the year or for the full year
spk_15: you know i think interest expense consensus is around three eighty
spk_3: you know equity income i guess with with ardent bills you know it's it's a glitch there's some felons they're so maybe that will be artists and and also the tax rates because it's going to help us a little bit in terms of how we we should be thinking about the below the operating profit line
spk_7: for the for your your i think go on the i'm on the interest expense i think that numbers in line that once the number that you quoted as a three eighty
spk_2: and we we had benefit in the quarter which is install and we expect to continue to have benefits so we see upside and artist and that contributes to our dps call it to fifty so we have upside and art a year to go and the tax rate should be in line with said
spk_16: when three percent guy that we have we are a little favorable or this quarter slightly but
spk_15: that that's that's right right to use okay thanks for that and then staunchest is is where i'm a jerk you know in this inflationary period and i think you mention maybe in response to one of the question assists you know adjusting merchandising you don't pre kobe the result more of an emphasis to spend like
spk_3: yes above the sales line because that was kind of where the bank for the buck was and now it seems like he has you know that that there's not a real instead of the do that here are are you shifting more of that spend into a and p on and it is that sir is gonna be an ongoing thing especially as as we're we're kind of innocence lesnar environments guy i would not think of it that way brian the
spk_2: money that is spent in brand building above the line there there's all kinds of investments in their traditional merchandising is one of them my comments in a her remarks today we're basically about not being as aggressive as we typically would on normal in store merchandising and said that piece of it we've been very consistent on since the parts started the pandemic is it just doesn't make sense to stimulate excess demand when you're already having trouble services surfing to manage you've got the other investments that we make above the line have been really robust for several years now and that won't change because that's where we get some of the best are a why we get in brand building is everything from investing in cogs are all into product innovation impacting innovation we do to investing with our customers to get the right on merchandise to get the right physical placement on the shelf in terms of getting or new items in the store or getting the right kind of support in store investing were our customers eyes on things like sampling and in store theater so those investments are really grand building investments in those has continued strong the piece of the above the line and i was referring to was exclusively that that merchandising peace and then with respected a p being up in a quarter that as i've said before can can change any given quarter depending upon what or innovation agendas we have a new items getting the marketplace and
spk_0: we want spotlight cause and he is the right way to go particularly in ecommerce which we continue to drive odds will put that money they're so that that will move around a quarter quarter but no philosophical changes in in the way we spent a day for that child happy new year guys
spk_17: i give settlements was into their homes from david palmer and every for i aside please hill and thanks op question on slider thirty one yeah that's six or twenty basis points benefit from productivity hedging price makes and other it just would love to dig into that a little you have pricing a six hundred eighty basis points and i would imagine you might have a few hundred basis points it or of productivity and and some hedging benefit so that number could be seen as is low but i obviously there's some headwinds in there could you dig into that
spk_3: maybe give a sense of the the headwinds offsetting one but what might be significant benefits of pricing and our productivity
spk_7: your david let me let me give you a i kind of as a high level bread so yeah we clearly have the benefit of frightening we always combine price makes right so we did have unfavorable mixed in the quarter of primary driver that is because our away from home segment with up fifteen percent and that's a lower margin segments are you get set on paper both segment next there and there is some are unfavorable brand makes embedded in the business but that away from home is a big driver there
spk_17: for yeah you're right we are productivity and sourcing combined we had over five hundred basis points of of favorability there are improvements but then the additional supply chain cost that we encourage that i that i went through plus absorption of hit us because volumes were down we had forecasted that for that's in those numbers so that's a headwind are the additional supply chain was outside of inflation which we show separately so that's a high level bridge to get you to the to the six point
spk_18: and then if as you're looking through the rest the year
spk_2: can you give a sense even directional a about some of those line items how you're thinking about mean it sounds like worry get some more pricing benefits for apps how you're thinking about says the cadence and directions of of those
spk_7: items on gross margins yes or for about a from a price makes perspective we're estimating price makes now will be approximately six percent for the year
spk_3: so are you three should be in line with future and as i mentioned to for price respected respect beer as about ten percent
spk_7: so clearly there's a benefit their we continue to expect our productivity six like a long as it's done both are poor productivity and are sourcing benefits so that will continue to to track we laid out the inflation and kind of what that looks like
spk_9: so there really the key drivers and then as i mentioned david the the class we got hit with in queue to the transitory cause we really expect those that to start to go down and three and into queue for and then some the incremental costs to support selling and and and getting products on shelves that will continue through que three and then
spk_17: we expect that's a decline in queue for so that the high levels of wage
spk_7: and and i'll stop here but is a they support the supply chain friction costs were those you know you're really common interest or another but you can see that string covered there's a lot of these costs how much of that has that would you estimates in the fiscal twenty two gross margins that you're anticipating the overall how much of their supply chain
spk_2: call it covert era african cost to think of weighing on that fifteen a half percent overall margin your david levy levy get back to your neck as are so many different components of cost i'd want to go through that make sure that i classify right
spk_3: different things are on the moon clearly david we can see if something's had begun to improve ties more recently and and economic crime comes in some things are still moving in terms of multiple things going in different directions but you know we do see some of these friction points improving based on best available information right now as we can move out
spk_2: you three and and queue for and that's import that's part of what size of the gross margin peace improving to for but there's more to it's a man terms of gross margin recovery in the fourth quarter and frankly beyond the fourth quarter and i'd come back to the big picture which is the key to navigating these a acute inflationary cycles is two things as france and resonate with consumers and be perseverance because he the former enables implementation of inflation driven pricing and eight and nine consumer response to that pricing of we have both of those things in place and that's critically important for this company the latter perseverance is as important reminder that once you wrap of acute inflation with pricing in place and strong demand material for improvements they can come pretty quickly and so sharp inflections are fairly common when these two things are in place pricing and benign concern response and all the data we have suggests that consumers particularly or younger ones are seeing or products is being you know in that value sweet spot between away from home in store brands on and it's driven by yeah
spk_0: demographic dynamics and huge i moved to working from home so you know all of that says we're coming to canada is the end of this issue
spk_19: it's really challenging period as we can get into queue for that that's a good set up on the other side thank you
spk_8: the an annex once for the some some dollars in sydney and consumer as go on
spk_20: as
spk_19: thanks very much of a couple questions out first
spk_21: but what if i look at the bridge between measured pricing what appears to be a good way things across the mother differently but looks like about nine and your realize price makes us about sick a like when i realized scare doesn't cover everything but a few key comments or day particularly on any of the appeal pick pockets of things that affect that lag i'm i'm
spk_19: practically concerned about skills whether it is case that retailers maybe are marching up on some about on their pricing environment and maybe a related question would be
spk_22: your broadly
spk_2: i'm telling you mentioned several times on electricity their love much clearly the case
spk_3: utilization is i can't even make enough things for that consumers demand you know is there
spk_2: what a big picture like what is preventing and maybe as an industry or and every detail year comfortable getting into what is preventing pricing from getting through cause it's been a while now
spk_3: comic lot of on that sex
spk_19: well i i would you say that i think the pricing is getting through we've certainly been very upfront with our customers about the true cost inflation we're experiencing and what we believe is justified action arm this case actions consecutive actions to to take price and how different we don't control cars
spk_0: summers do with price they put on shelf but say an average they say tend to pass it through i've pretty close the way we we pass through them the maybe some that that take a small margin grab equally there may be some that compressed because they want to gain market share so it tends to command the wash and attention to be pretty much in lockstep what i would say is he
spk_14: five following the scanner data because you know we anticipate that the pricing actions that we take are gonna show up in that scanner data it's size it it's unfolded thus far john the pretty pretty consistently with with what we expected
spk_17: john i would i take to my previous point next does impact that that six eight number so we had some negative mix in a quarter
spk_23: i gotcha thank you and at that yet clear clear your ex record what much darker pricing it's gonna take it
spk_24: you
spk_14: the families was of the shown some rather moscow with some please go ahead hi there guys are happy new year and couple questions i i adhere he forecast says that you expect a transitory costs to dissipate in the second half of your fiscal year
spk_24: what did you experience then in december and january and your fiscal third quarter because i would imagine you know absenteeism minute and these issues would have continued yellow are you experiencing it now and third quarter and then the second question i had as your i look at what's changed in your the in my
spk_3: model anyway it is it looks like you raised your pricing guidance for the year but you didn't really change your volume guidance for the year and i know you've you've talked through your confidence in the last se and all that but when pricing gets up to ten percent in the make water and lets us as a significant change for what consumers are going to see and you also have an aunt a crime wave it's to be fast and and dissipate quickly so might have consumers relieved that that was my old and and quick and may go back to to restaurant eating faster than you think so i am i correct that he didn't change any volume estimates for the year
spk_2: in relation to price when he coming on the first piece eyes
spk_3: as the in terms of que three of as i mentioned my response to can a little bit ago i you know we don't expect use reach operated often i'll call normal agency and you know dave talk about some of the train store expenses and cue to that we were willing to encourage because we were determined to get as many boxes a product as we do it in a consumers and and so that in efficiency and that says that zero a variety of things are created that in queue to we think some of that dynamic will persist in que three although it might look differently you know might be more
spk_2: army tried driven absenteeism for the first whatever it's gonna be six seven weeks of que three and less of something else where we've seen improvements are you taking place so that's where i was referring to earlier when i said things are proving many other things a bit a walkable that you know started create a bit of a headwind like ib army cron absenteeism but when you put it all together on that piece of that
spk_7: i'd say you know will persevere that's why we expect volumes were so focused on getting as much volume as we can out in que three even if it comes as he said less efficiency them we normally expect and then as we used to read going to que four weeks that some of those friction points will will diminish i think it's reasonable to expect them to diminish and then as we wrap pricing that's when you start see this mean meaningful margin expansion in terms of size sales know dave and are you get some comments here for robert ice rob one thing i want to keep coming back to here is the calculus on how the consumer determines value you know historically it might be widget a vs which is
spk_3: the side by side on the shelf and if you see twenties and increase it translates to meaningful for leicester city that's nothing compared to today
spk_14: parents are today is you know we're selling a product that might have been to sixty nine am i go up to you know to eighty nine something like that versus the alternative is to go away from home or prices have increased even faster is fourteen hours and fifty cents we are clearly a superior value proposition vs that and that is what
spk_0: the consumer seeing as part of that is being aided by the fact that they're working at home there's a lot of these consumers are are working at home now they're not working in the office so there's there's more structural stuff at play here than you would typically see and that's why we believe we've seen very little alaska cbc son such as much lower the
spk_25: historical to date and we don't see a whole lot of reasons as going to change materially going forward stated you wanna get just one on the transitory caused the peace that's inventory related around that i discussed earlier i would you see that as transitory as we get into that or for said it's so that all that come down and then volume aren't er four hits or volume declines are volume has declined a little bit and our internal forecast it's it's not significant but it is down and is sean said the way we do this as we go brand by brand category by category and we look at our demand science models and and determined elasticity so it's a bottoms up forecast of impact on by volume based on the brand and category where where frightening so that that's how we get to have a volume is a little bit down vs where it wasn't a previous forecast
spk_14: okay so little bit start thank you for that clarity
spk_25: then i saw some for those also militia howard was bernstein is elizabeth good morning everyone to thank you for the question having yes
spk_14: so
spk_2: i i just want to dig into the ecommerce slide on page thirteen and you basically said that yeah eighty percent have a two years in fiscal twenty one fifty percent over two years and see i see him that means that year on things slide materially and is it is the nine point four percent that your ass at the moment is that mostly clicking collect what did he called us investment said that you're making at the moment and does that mean that the profitability of the ecommerce channel is now different from the regular bricks and mortar approach the you're taking take your i have like follow up yeah like see the arms we have made of it's even if you look within our a p line a lot of the investments that we've if you look at are totally anti pot we've it's changed dramatically in the last seven years in terms of what we spend it on much less in line t v and things like that that you for me talk about before that are inefficient so it's winstead today we put those investments into social a digital platforms but also importantly and
spk_25: ecommerce so i would say he a we made the decision a few years back to treat ecommerce as a bit of a start a business and week we said we're invest in it so we've been a united states over investing relative to other areas in ecommerce because it's far more elastic we've we've seen the business we get the purchases started
spk_2: consumers basket and it's both pure blood he taylor's and brick and mortar retailers who are have built out there ecommerce platinum's both of them have been very high growth areas for us and and very strong investment areas for us and what we found is that there is a good are ally on these investments and ecommerce because once we to kind of getting into the consumer repertoire and a part of their shopping algorithm online it translates to repurchase so we get them when they come back whatever the first cycle for that product so that's been young one of our key marketing shifts areas is to go hard after ecommerce last few years and we're very happy with it returns and that's why we continue to invest their will move around from quarter to quarter and are you know when you look at the present cops it also can be bit misleading because it's it's a function whatever we didn't the base period we might have we met be wrapping a huge
spk_26: eight years and given for when you see if approved a relative dip what you see large absolute growth
spk_25: so overall with a big priority for us it's working really well and you'd be amazed at the kinds of products that are working well and ecommerce are frozen for example is one that you may not think of intuitively as being very successful and ecommerce but it is and you know these are these are profitable sales growth
spk_2: very helpful and just a quick flopped i'm pace of innovation you highlighted to add that innovation is an important driver for you at the moment i remember the last few years meaningfully increase the percentage of sales so new products are you at a level what level that you act now and our are you comfortable with where you're at or you expecting increases soldering faces at the time it which we call this renewal raise the percentage of our annual sales it comes from stuff we've launched in the past three years and we've we've gotten to about fifteen percent from back in the day we started we're about nine percent and as i like that level he and because it would it reflects is that and it's it's a persist
spk_0: in amount of innovation because consumers have new benefit areas that they become interested in every single year for example last year you don't healthy choice we were already wrapping huge numbers on goals but we went with the grain free trend which was a big thing and it's been as it's been six success person innovation why so we try to be out ahead of our
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