ConAgra Brands, Inc.

Q1 2024 Earnings Conference Call

10/5/2023

spk05: Good morning and welcome to the ConAgra brand's first quarter fiscal year 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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, today's event is being recorded. I would now like to turn the conference over to Melissa Napier, Senior Vice President, Investor Relations. Please go ahead.
spk03: Good morning, and thanks for joining us for the ConAgra Brands' first quarter fiscal 2024 earnings call. Sean Connolly, our CEO, and Dave Marburger, our CFO, will first discuss our business performance, and then we'll open up the call for Q&A. 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 will 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 to non-GAAP reconciliations can be found in the earnings press release and 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. I'll now turn the call over to Shawn.
spk08: Thanks Melissa. Good morning everyone and thank you for joining our first quarter fiscal 24 earnings call. Let's start with what we want you to take away from our presentation shown here on slide five. At an industry-wide level, macro dynamics have clearly impacted consumer behavior across the board. I will cover this in more detail shortly, but ultimately this behavior shift has elongated the volume recovery period across the industry which is reflected in our Q1 top line results. As we've navigated these macro dynamics, I'm proud of the team for delivering another quarter of strong margin improvement and EPS growth. We also continue to strengthen our balance sheet, improving our leverage ratio during the quarter while investing in our business and returning cash to shareholders. Our team's execution supported a strong supply chain recovery during the quarter, hitting pre-pandemic service levels as we exited Q1. Looking toward the remainder of the year, we will work to drive volumes and top-line growth through targeted and disciplined investments behind prudent merchandising and continued support for our strong innovation. Finally, we are reaffirming our guidance for fiscal 24, reflecting confidence in our plans, people, and agility as we navigate a shifting consumer environment. As I mentioned a moment ago, the timetable for volume recovery has been elongated across the industry due to near-term consumer behavior changes. After three years of unprecedented inflation, along with other macro dynamics, consumers have felt increased financial pressure and used a variety of strategies to stretch their balance sheets. This resulted in a near-term reprioritization of their typical purchase behaviors in order to make their budgets work. We've seen shifts like this before and expect these near-term changes in behavior to also be temporary. In fact, recent trends suggest this is already underway. Let me provide a bit more color on the kinds of behavioral shifts we've observed. As you've seen for some time now, with the notable exception of summer travel, discretionary purchases have been down almost across the board. Consumers have also been actively reducing remnant household inventory from the pandemic. Within food, convenience-oriented items, typically a top consumer priority, have lagged as shoppers have turned to more hands-on food prep to get additional bang for their buck. And as they've done this, not surprisingly, they have shifted from meals for one to meals for many, even if not everyone is home at the same time to eat together. And the last shift I will mention is a reduction in wasted food and an increase in the use of leftovers. Collectively, these short-term behavior shifts act as a sort of cheat code to help these consumers spend within their means. Slide 8 demonstrates the elongated volume recovery across the industry. As you can see, through the four-week period ending August 26th, the entire peer group was showing volume performance within a very tight band, with ConAgra in the middle of the pack. As I mentioned a minute ago, more recent trends are showing the first signs of improved performance. With that backdrop, let's dive into our results shown on slide 9. As you can see, in the quarter, we delivered organic net sales of approximately $2.9 billion, which is down slightly compared to last year as a result of the slower volume recovery we've discussed. Adjusted gross margin of 27.6% was up 272 basis points from last year. Adjusted operating margin of 16.7% was up 297 basis points compared to last year. And adjusted earnings per share of 66 cents increased almost 16% versus last year. Diving further into our top line performance by retail domain, you can see on slide 10 that sales in our staples domain were flat compared to the prior year. As consumers shift toward more stretchable meals, our staples categories, such as canned chili and canned tomatoes, are well positioned and have gained unit share compared to last year. Despite the macro headwinds, our snacks domain has continued to grow as shown on slide 11. We're building unit share as consumers continue to respond positively to our microwave popcorn, and ready-to-eat pudding and gel brands. Looking at slide 12, you can see that our frozen domain has been the most significantly impacted by recent shifts in consumer behavior, particularly in areas like single-serve meals, given the headwinds we discussed a moment ago. As we look at the frozen domain, it's worth noting a few key points. First, despite the recent impact on volume, we continue to gain unit share in important frozen categories like single-serve meals. This dynamic demonstrates the relative strength and strong position of our brands. Second, the year-over-year performance figures do not properly represent the broader trend within frozen food. In fact, if you look over a four-year period, ConAgra's frozen retail sales have increased 22%. Frozen meals has been one of the fastest growing categories in in-home consumption over the past 40 years. It's 4% TAGR, is in the top tier of foods growing in at-home consumption. This expansion has been fueled by the long-term, sustained consumer demand for convenience, as well as the addition of innovation and quality ingredients. This 40-year trend demonstrates the critical role that frozen plays in providing convenient, high-quality foods for every occasion, which consumers have come to increasingly rely on. This is central to why we believe the current softness is temporary. Turning to slide 14, I'm pleased to share that we continue to advance our supply chain initiatives during the quarter, allowing us to return our service performance back to pre-pandemic levels. Our productivity initiatives remain on track, and we plan to maintain and capitalize on this strong recovery during the rest of fiscal 24. That's a key piece of our action plan for the remainder of the year, as outlined on slide 15. In addition to our ongoing supply chain execution, we will continue to focus on executing our ConAgraWay playbook as we make targeted and disciplined investments behind our brands. To help protect share and drive the top line, we're focused on investing behind quality, high ROI merchandising, and A&P to support our brands. We'll also continue to prioritize reducing our debt and improving our net leverage ratio. We are reaffirming our fiscal 24 guidance that we shared last quarter, including organic net sales growth of approximately 1% compared to fiscal 23, adjusted operating margin of 16 to 16.5%, and adjusted EPS between $2.70 to $2.75. Overall, we remain confident in our plans, people, and agility as we continue to navigate is shifting consumer environment.
spk07: With that, I'll pass the call over to Dave to cover the financials in more detail. Thanks, Sean, and good morning, everyone. Slide 18 highlights our results from the quarter. Overall, we are pleased with our profit and cash flow delivery and remain confident in our ability to achieve our full-year guidance targets. In Q1, net sales were $2.9 billion. reflecting a 0.3% decrease in organic net sales driven primarily from the elongated recovery of volumes due to the industry-wide slowdown in consumption that Sean discussed earlier. Gross margin recovery was a key priority for us in fiscal 23, and we delivered another strong result in Q1. Adjusted gross profit increased by 10.9% in the quarter, primarily from the pricing implemented in the prior year and strong productivity, which more than offset the negative impacts of cost of goods sold inflation and unfavorable operating leverage. Adjusted gross margin increased 272 basis points, and adjusted EBITDA increased 12.1%, largely driven by the increase in adjusted gross profit. Slide 19 provides a breakdown of our net sales. The 0.3% decrease in organic net sales was driven by a 6.6% decrease in volume, which was partially offset by a 6.3% improvement in price mix, a result of fiscal 23's inflation-driven pricing actions. A small benefit from the impact of foreign exchange contributed to reported net sales coming in flat for the quarter. Slide 20 shows the top line performance for each segment in Q1. Our grocery and snack segment achieved net sales growth of 1.2% in the quarter. We gained dollar share in snacking categories, including seeds and microwave popcorn, as well as in staples categories, including chili and canned meat. As Sean discussed earlier, our refrigerated and frozen segment was the most impacted by recent consumer behavior shifts, with net sales down 4.6% in the quarter. Our international and food service segments combined are slightly below 20% of our net sales. Both are important to ConAgra and contributed meaningfully to growth this quarter. Our international segment delivered year-over-year volume growth in addition to improved price mix, which helped support strong organic net sales growth of 8.2% during the quarter. Our two largest international regions, Mexico and Canada, delivered double-digit organic net sales growth over prior year. We also saw low single-digit volume growth in Mexico, which contributed to the segment's overall positive volumes. For the remainder of the year, we expect volume growth to continue in international. Our food service segment delivered 5.2% net sales growth in Q1 from strong price mix, and we expect to see positive net sales growth in food service for the fiscal year. Food service also delivered a strong gross margin in Q1 versus a year ago due to the reduction of supply chain disruption costs incurred in the prior year. This benefit is not expected to extend beyond Q1. Our food service segment supplies a diverse set of clients beyond restaurants, including healthcare, travel and leisure, and educational institutions, and we are well positioned to compete in these markets. Slide 21 highlights our adjusted operating margin bridge. We are pleased to have delivered a fourth consecutive quarter of strong gross margin improvement, up 272 basis points in Q1. We drove a four percentage point improvement from price mix during the quarter. We also realized a 1.8 percentage point benefit from continued progress on our supply chain productivity initiatives, along with the wrap of some supply chain disruptions in the prior year. These price and productivity benefits were slightly offset by cost of goods sold inflation, a margin headwind of 3.1%. Those factors, combined with small year-over-year favorability in A&P and SG&A, drove the 297 basis point improvement in operating margin for the quarter. Slide 22 details our margin performance by segment for Q1. Overall, continued progress on our productivity initiatives and positive price mix contributed to an increase in adjusted operating profit and adjusted operating margin across all four operating segments. It is worth noting that our refrigerated and frozen segment continued its very strong operating profit and margin recovery in the quarter, with adjusted operating margin improving 294 basis points versus a year ago. Our Q1 adjusted EPS increased to 66 cents, representing a 15.8% increase over the prior year. Higher adjusted gross profit and slightly lower A&P and adjusted SG&A were the positive contributors to our adjusted EPS performance in the quarter. These positives were partially offset by lower pension and post-retirement non-service income, decreased equity method investment earnings, and higher interest expense. Slide 24 includes our key balance sheet and cash flow metrics. At the end of the quarter, our net leverage ratio was 3.55 times down from the end of fiscal 23. We will continue to prioritize reducing our debt and lowering our net leverage ratio in fiscal 24. Net cash flow from operations increased $180 million in the quarter. primarily driven by reduced investment in inventory versus the prior year. While CapEx investment increased by approximately 20 million, Q1 free cash flow more than doubled from a year ago, coming in at 300 million. This strong free cash flow enabled us to pay down approximately 130 million of net short-term debt while also funding 157 million for the Q1 dividend. highlighting our focus on balanced capital allocation. We did not repurchase any shares in the quarter as we continued to prioritize paying down debt. As mentioned, we are reaffirming our guidance for fiscal 24 given the strong Q1 profit and margin performance and the confidence in our investment plans year to go as we continue to navigate a shifting consumer environment. Slide 25 outlines our current fiscal 24 expectations for our three key metrics, including organic net sales growth of approximately 1% over fiscal 23, adjusted operating margin between 16 to 16.5%, and adjusted EPS between $2.70 and $2.75. Let's take a closer look at how we expect to achieve that guidance during Q2 and the back half of fiscal 24 shown on slide 26. During Q2, we expect to continue seeing low single-digit organic net sales declines, but volume declines should improve versus Q1 as we wrap inflation-driven pricing actions from fiscal 23. As Sean mentioned, we will redeploy some of our strong gross profit into strategic investments behind quality, high ROI merchandising, and increased A&P to support our brands. We also expect operating margins to be down from Q1, with adjusted EPS approximately flat to Q1. In the back half of the year, we expect volume trends to return to year-over-year growth, which will help drive low single-digit organic net sales growth. We expect our trade and AMP investments to be higher than the first half, with margins flat to Q2, and second half fiscal 24 adjusted EPS approximately flat to the same period in fiscal 23. 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.
spk05: Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star then one on your telephone keypad. To withdraw your question, please press star then two. We'll pause momentarily to assemble our roster. And today's first question comes from Andrew Lazar with Barclays. Please go ahead.
spk13: Great. Thanks so much. Sean, I realize, as you talked about, a lot of near-term sort of macro dynamics impacting sort of the industry volume recovery right now and You know, it's logical that amping up the marketing investment in the second half, now that service levels have returned to normal, should logically start to improve volume trends sequentially. And, you know, I assume you forecast as best you can, but I guess my question is, do you think you've given yourself enough latitude to sort of do what's needed while also being able to reiterate the full year guidance on both the top line, which assumes a healthy positive inflection in the second half, and on EPS, given the year is now more back-end weighted there as well?
spk08: Good morning, Andrew. Yes, I believe the answer is yes, we have. Like others, we're essentially now putting our emphasis on the back half, where we expect to have the most impact. If you copter up and look at the back half, between more favorable comps, increased investment, a very strong innovation slate, and a move back toward a more typical consumer behavior, we do expect meaningful top-line progress in H2. And with productivity strong and excellent margin progress over the past several quarters and a good start to the year at EPS, we feel good about the profit call for the year even with that added investment. I probably also will give a nod to our food service and international teams for the excellent job they're doing working their plans.
spk13: And then I guess on the targeted and sort of disciplined spend, I assume much of this goes to the frozen arena. I guess, what form will this take more specifically? And I guess, how do you ensure it'll be disciplined? And I guess, what are you seeing competitively?
spk08: Great question. As you point out, with our supply chain now clicking on all cylinders, we're once again in a position where we can selectively add promotional activity to drive sales. As I've said before, selectively means highly incremental, high ROI events at critical calendar windows, like the holidays as an example. So frozen is certainly in the mix, but so are other categories. Just to give you some perspective, and I'll give you more on this in just a minute so you have the detail. In Q1, only 21% of our sales were on promotion, which was below the peer group and also below the pre-pandemic baseline. So if you look at Q1, the last couple of years, not this year, but the last couple of years, ConAgra was around 18% of our volume was on promo, and the pre-pandemic baseline, the number was 24%. So this year in Q1, we were at 21%. We're still below the baseline, and we've got some room to pick our spots and invest smartly to engage further with consumers. But let me be clear. We are not talking about deep discount, low ROI promotional activity like you might remember from ConAgra 10, 15 years ago. That is not part of our playbook. Great. Thanks so much.
spk05: Thank you. And our next question today comes from Ken Goldman at JPMorgan. Please go ahead.
spk12: Hi. Thank you. Sean, to Andrew's question right there, one of the drivers you mentioned for the second half was I think maybe a little bit of a directional return to more typical consumer behavior. I just wanted to know if we could hear a little bit more about which elements of this behavior Maybe you expect to improve, what will drive it? Or is the comment more just, look, we have less pricing, we have more trade, we have more A&P, more new products. So that altogether will help our business. I just wanted to get a little bit more color there if I could.
spk08: Yeah, Ken, it's a mix of all the above. The comps are clearly much more favorable. We're clearly going to have some stronger merge investment in the back half. And we've got A&P focused on our largest brands with good margins. So those are all well positioned to have an impact. But I think the key here is this consumer behavior shift. And I do think, you know, when you see all the competitors in such a tight bandwidth, which is frankly a tighter bandwidth that I'm even accustomed to seeing, you know it's a macro dynamic. And the way to think about what we saw in the first quarter with respect to the behavior over the summer was it was this paradoxical combination of selective splurging and broad-based belt tightening. So as an example, consumers may have simply said, I'm taking that summer trip and it's not up for debate, and then at the same time said, I'm going to change some things up to create an offset. And so in our line of work, it's what we call compensating behavior. But one of the other things we know about consumer habits and practices is that they are very hard to change long term. So these shifts tend to be temporary tactics that people use to get through a period of time when they've committed more of their cash to something else. And I think the summer travel example is illustrative of what I'm talking about there. And so this is a bit of a different animal than what we would call normal elasticity effects, because normal elasticity effects are really brand-level elasticity effects that are consumer judgments about the value of a particular brand versus another. close-in alternative following a price increase. These macro behavior shifts are a bit of a different animal. Here, the consumer's not passing judgment on the value of a specific brand following a price increase. Rather, they're temporarily re-ranking how they prioritize entire categories in order to live within their means for a period of time. So why does it matter to understand the difference between this versus normal elasticity? Well, in our experience, it's because Behavioral shifts at a category level tend to be shorter in duration. And a simple way to think about it is consumers are creatures of habit, so it's very difficult for them to deprioritize things like convenience benefits. So this is one of the key reasons we expect these shifts to be temporary. They have been in the past, and that's what we expect again. And it's also why We're really loading up our resources in the back half where we think the market conditions will be much more favorable to driving the kind of impact we're seeking.
spk12: Thanks, Sean. I'll pass it on.
spk05: Thank you. And our next question today comes from Pamela Kaufman with Morgan Stanley. Please go ahead.
spk04: Hi. Good morning. You talked about your plans to step up A&P and trade spend over the rest of the year. Just wanted to get a sense for if this was kind of consistent, the amount was consistent with your initial expectations heading into the year, or if you're now planning for greater reinvestment compared to your initial plans given volume trends.
spk08: It's higher, Pam. It's obviously the consumer dynamic in the first quarter was tougher than we planned for. We do think the macro conditions will be more favorable in the back half. And we're in a fortunate position where we got off to a strong start in the year on profitability. So we've got some room to invest back. So we're talking about a higher investment posture on on merch in particular in the back half of the year as now that we've got the supply chain working.
spk04: Okay, thanks. That's helpful. And then, I guess, do you feel like there are areas in the portfolio where you've taken too much pricing, and do you envision a scenario where pricing growth turns negative?
spk08: Yeah, I don't really see that, Pam. The volume impact we are seeing, and frankly, the peers in the space, are really not a function individual brand level prices and a consumer judgment that it's got it's much more this macro thing where they're reprioritizing entire categories and consumer domains in order to stretch their budget short term you know there are there was very little interaction in our portfolio with private label there are some categories in our portfolio albeit very few that are more passed through in nature and are more prone to a rollback in price if the if the key ingredient cost deflates. So products like Ready Whip, where you've got basically dairy in there, products like our sausage business or our hot dog business, where it's pretty much a particular meat block that's in there, those kinds of products tend to move with the commodity. But for most of our portfolio, A, we haven't seen that kind of singular judgment around the value of the product being too expensive, and we just haven't seen any cost basis for rolling back price in terms of deflation. We're still net-net in an inflationary position.
spk04: Thank you. That's helpful.
spk05: And our next question today comes from David Palmer at Evercore. Please go ahead.
spk09: Thank you. It looks like you're assuming 2% to 3% organic sales growth in the second half, as implied by the guidance. I guess, what gives you the most confidence that you can get there? What are the key improvement areas that we would see? I would imagine frozen entrees would be one, but perhaps you can give a sense of where we should be expecting the most energy and improvement going into the second half.
spk08: Sure, Dave. Let me hit that. You know, we're going to focus, as we always do, on our frozen and snacks businesses because those are the centerpiece of our strategy. But we also do have businesses within our portfolio now that are typically reliable contributors that are working really well in terms of meal creation, simple meals, and things like that in our Staples business, which tends to be a good mix. But I think between, you know, an improving consumer environment, more aggressive but smart and selective businesses, merchandising environment, a really good innovation slate, and then A&P on some of our biggest businesses, not to mention we've got very favorable comps on some of our big businesses in the back half of the year. I think all of that gives us a line of sight to delivering the kind of numbers that you just quoted. Dave, you want to add anything to that?
spk07: Yeah, just a little more color on the disruptions in the prior year, which were mostly second half last year, Dave. We had a fire at our Jackson plant, which significantly impacted our frozen fish business. Obviously, Lent is the big time for that. So we'll be in a much better position this year on that. You know, we had canning issues in our beans and chili business second half last year. And then, as you remember, we had the canned meat recall, which impacted Q3 and Q4. So, you know, more specifically, we should see – strong improvement on those categories.
spk08: Hey, one other point I'll make too, David, because you brought up our frozen business. It's not an inconsequential point that one slide in our prepared remarks today that showed the 40-year trend on frozen. It is literally not counting commodity category like frozen fruit. It is in the top two, I think, of of packaged goods in terms of long-term growth in the category. And it's been particularly strong in the last six or seven years as we've driven innovation. So we remain incredibly bullish on our frozen business. And by the way, our unit share in frozen has grown consistently over the last seven or so years. And that included Q1. I saw, David, you printed this morning and thought we were losing share. in our frozen meals business. That is actually not the case. Even with the consumer environment the way it is right now, consumers making some of these trade-offs, we grew our unit share in our frozen meals business once again. And that is with some additional promotional activity from a larger competitor in the space during Q1. But frankly, that had no impact on us on a national basis. It impacted a different competitor in the space that happens to be a value-oriented play but had no impact on ConAgra where we again gained unit share in our frozen meals business.
spk09: Thanks for that. We're certainly seeing that promotional activity. I'll pass it on. Thanks.
spk06: Thanks, David.
spk05: Thank you. And our next question today comes from Max Gumport with B&P Paribas. Please go ahead.
spk06: Hey, thanks for the question. I wanted to come back to the commentary around the improved outlook for the second half of the low single-digit organic sales growth. I hear what you're saying, but a lot of the factors that you've called out feels like they would have been knowable a couple months ago in terms of the easier comps and the innovation and the advertising and lacking the supply chain disruption. So I'm just curious, what's changed over the last couple of months that's given you this increased confidence in the second half because before it sounded like we were going to see organic sales with the strongest in the first quarter and then work its way down. Thanks.
spk08: Sometimes when you run in businesses like this and you're servicing consumers, you take what the field gives you. And I think what we're saying is in Q1, the consumer environment was more challenged. People were trying to create these offsets to cover expenditures that they were determined to make over the course of the summer. And we do believe that the consumer environment is going to be more favorable. There'll be a bit of pent-up demand here for some of the things that people have traded out of as they've created these kind of short-term hacks to make their household balance sheet work. And having the supply chain in the position it's in and getting off to a strong start on profit and having the ability to invest more, we think these are high ROI investments that are going to enable us to grow have the kind of consumer engagement impact that we want to have, but also be profitable the way we want to be at the same time. And that's kind of our outlook.
spk07: Yep. And our international and food service businesses are off to a really strong start, and they're really tracking ahead.
spk06: Got it. And then one on gross margin, if I can. So you – Talked about how you expect a step down in gross margin from the first quarter to the second quarter, and then to remain at a similar level in the second half. And so I'm getting that might imply a gross margin of around 27% for the year, or roughly in line with last year. A few months ago, it sounded like you were expecting some improvement in fiscal 24, given price mix and productivity, the lapping of supply chain disruptions, all outweighing negative overhead absorption and business investment. I didn't see an updated inflation number today, but assuming it stayed at around 3% for the year, I'm just curious what's changed. I'm assuming it's maybe a bit more business investment that has moved up. I'm just curious for any color there. Thanks.
spk07: I'll leave it there. Yes, we're holding our inflation assumption at 3% at this point. We've had some categories, some items where there is more inflation than we expected, but we have some that have gone the other way. We're still holding to the 3%. That's That's important that that remain that way for us to hit the margin guidance that we gave. You know, we were impacted in Q1. We're really pleased with our productivity in the first quarter. Embedded in the productivity numbers are actual headwinds from absorption. So the second half with volumes, us, you know, being confident that our volumes will be up, we'll have a benefit in absorption. So the incremental investment can drive incremental volume and help with absorption offsets, which benefits margin. But I would just remind you, we gave a range for margin for a reason. Because of that, you know, we're not going to get precise with an absolute gross margin number. You know, you're directionally correct, but that's why we gave a range on operating margin for our guide. Got it. Thanks very much.
spk05: Thank you. And our next question today comes from Robert Moscow with TD Cowan.
spk11: Please go ahead. Hi, thanks for the question. Sean, I think you said in your script that in the Nielsen tracking data, you had started to see signs of some sequential improvement. I didn't quite see it in the slide, and I haven't seen it in our data yet, so I was wondering if you could give a little more color on that.
spk08: Sure, happy to do that, Rob. If you look at the slide we shared today, Notably, it's units, it's not dollars. And that's the metric that we are looking at is units, not dollars, because to us, that is going to be the marker of when we start to see this change. Frankly, if you look at the slide that I shared today, it's got 52 weeks, 13 weeks, four weeks. What the competitive set would expect to have seen is that as you move from 52 to 13 to four, you see improvement in trend. And as you could see on that slide, it was fairly flat. So what we're looking for is bend in the trend in unit movement as a proxy for this consumer behavior shift beginning to move. So if you look at the more recent period, which is, it just came out, I think, this week, which is, you know, the four-week period following what we shared today, you see the first noteworthy change in unit movement for ConAgra, and there may have been one or two other competitors that saw some movement there as well. That's important because, you know, that's the kind of movement that we thought we would see across the industry back around Memorial Day or so, and it didn't materialize. And we've got our first data point now that's showing it's going in the right direction. That's the metric we need to move. If units move the way that we expect them to move, everything else will take care of itself at dollars. And so that's why we're focused on that.
spk11: Okay. And a quick follow-up for Dave. You mentioned a lot of little supply chain issues that affected last year, Dave, like the frozen fish issue and then the beans and the chili. Is there any way to add it all up and help us understand what kind of easy comp this provides, either on sales, profits, in the back half?
spk07: Rob, I would just kind of go back to what we said last year. We didn't quantify everything exactly, so I wouldn't want to give you a number here. But if you go back and look at what we communicated, you know, last year, second half, I think you'll get, you know, a pretty good feel for the magnitude, you know, generally speaking. But we didn't give a precise number on that. Okay. All right. Thanks.
spk05: Thank you. And our next question comes from Nick Moody with RBC. Please go ahead.
spk02: Yeah, thank you. Good morning. Sean, it's clear your brands within Frozen are doing well, and you see that in the share gains. But I'm just curious if you have made any observations regarding the perimeter. Some of the things that we're seeing through our channel work is deflation happening in the perimeter is putting pressure on Frozen, the category. So when you think about the competitive landscape, are you kind of factoring that in? And do you think that could put more pressure on potential pricing and promotional spend over the next several quarters?
spk08: Nick, can you say more about the specific things in the perimeter that you're seeing that are growing that you think might be impacting frozen?
spk02: Yeah, just fresh vegetables, fruits, primarily the gaps between frozen and some of the fresh areas of the store.
spk08: Well, I'm not sure we're having a lot of interaction there. Even our bird's eye business is kind of behaving similarly with the balance of our frozen business. What you're seeing in frozen, most of the frozen items we sell are frozen convenience items. And what you've seen over the last quarter are more of this consumer pivot to what we'll call meals for many instead of meals for one. It's more of a speed scratch type of thing where you can stretch your buck and feed more mouths But that's a laborious effort, and it's also not exactly the food that people are habitually accustomed to eating. So when I look back over the last 50, 60 years and you look at consumer trends, by far the most unshakable trend in the consumer packaged goods space is the trend toward convenience. And so we know, and you saw it in the long-term frozen data that I put up, that consumers don't have the time to make stuff from scratch. They don't have the culinary skills, and they don't want the waste associated with it. Does that mean they won't do it from time to time? and buy a bag of rice and a can of beans and some ground beef. No, they will do that. Those are kind of the short-term cheat codes that I referenced, but they tend not to be very lasting behaviors because, as I pointed out, consumer habits and practices are highly entrenched. So, really, we're focused on that. We know that this is a short-term dynamic, and we expect it to change, and we certainly, within frozen have the brands that drive the growth and drive the share with the innovation we've delivered. I think our categories over the last five years have accounted for about 70% of the growth in all of Frozen. And we expect that kind of highly competitive performance to continue.
spk02: Great. And then maybe one for Dave real quick. Just wage inflation obviously has been a big issue as it relates to conversion costs in terms of finished goods that you may buy. And you have all these union negotiations going on in other industries. And I'm just curious, like, you know, what are you seeing right now in terms of conversion costs kind of coming upstream in terms of how your cost of goods is shaping up?
spk07: Yeah. And our inflation assumption for 3%, you know, we had assumptions on conversion costs, which, you know, kind of in that mid to upper single digit area. So that hasn't changed. You know, we're very, we spend a lot of time on our compensation benefits, working hard to be competitive. as part of our overall strategy for all of our employees. So we feel like we've captured it in our estimates for inflation.
spk02: Excellent. I'll pass it on. Thank you.
spk05: And our next question today comes from Jason English with Goldman Sachs. Please go ahead.
spk10: Hey, good morning, folks. Thanks for slotting me in. And congrats on the momentum in international food service. Great to see you. Sean, a lot of questions, obviously, today on your back half guidance, and I'm sure it's not lost on you, but there's clearly some skepticism on your ability to get to the volume growth you're promising in the back half. If that doesn't come to fruition, what, if any, offsets are in your P&L to allow you to get to the bottom line guidance?
spk08: Well, look, you know, it is a quarter of the year is behind us, and as I've said many other years, a quarter doesn't make a year, so You know, we are on or ahead of pace on most of our goals after one quarter, and the challenge has been this consumer behavior shift, which, as I mentioned, we view as a temporary dynamic. And between that, our favorable comps, the increased investment, we do expect, you know, meaningful top-line progress in the second half. And, you know, that's our playbook. We feel good about it. We are investing more to drive the business. We are trying to do a couple things here, which is deliver a strong 24, but also set our business up to have excellent momentum as we go out of 24 into 25, which we're confident will be a very different environment. Dave, you want to add anything to that?
spk07: Yeah, sure. So, you know, Jason, obviously, we're looking at our costs very closely. If you look at the quarter, you know, our productivity performance was really strong. You know, our supply chain organization does a phenomenal job especially now that we're back to a kind of more accommodative operating environment to drive our productivity, and we're seeing that. So that's a big driver, obviously, for us. You look at SG&A, 9.1% is where we came in last year. We'll be around that again this year. We're very efficient. We're as efficient as any food company out there, but we're always looking for opportunities. And then we obviously have our Ardent Mills joint venture, which continues to do really well. You know, we're holding to our guide for the year there, but there's still really strong momentum in Arden Mills. And that, you know, that generates cash for our business. And so, you know, there are places we're always looking, but we're always looking to just make sure we're finding opportunities to drive savings so that we can continue to invest in the business.
spk10: So, Dave, I'm going to put words in your mouth to see if I'm understanding this right. I appreciate what your guidance is predicated on. That's top-line acceleration. But I think I heard if that doesn't come to fruition, there could be some more opportunities on cost, and there could be some upside opportunity on Ardent Mills. Did I hear that correct?
spk07: That's what we're always looking for. So we're productivity coming, and Ardent is off to a good start.
spk08: Part of it, Jason, is culturally the way we operate. We are wired to be a very lean organization. Very adaptable, very agile team. We don't have a lot of orthodoxies around here or things that we're not willing to do to get to where we've got to go. So, you know, we've got a great team. They're going to get us to do what we need to do throughout the balance of the year, and we'll be super agile, as we always are in an environment that's highly dynamic.
spk10: Yeah, I definitely recognize and respect that. Thank you very much.
spk05: And our next question today comes from Steve Powers with Deutsche Bank. Please go ahead.
spk01: Hey, thanks. Good morning. So I kind of wanted to build on what Jason just asked about because it sounds, I guess the question I'm left with is if the consumer behavior shift that you're expecting doesn't play out as we go through the balance of the fiscal year, are you committed because of looking forward to 25 and beyond, are you committed to the the investment spend that you've articulated in 2Q and 2H? Or does that itself become a lever to pull to preserve bottom line dynamics? And it sounds like in the first quarter, given what the environment gave you, you delayed some of the spending. Maybe that's the wrong read, but it feels like you delayed some of the investment spending because the demand was weaker. Now you're planning it later in the year as you expect demand to pick up. I guess the question is if that consumer behavior shift doesn't happen, do you keep spending?
spk08: Yeah, Steve, I think the easy answer to your question is we manage this business for long-term value creation and long-term success with the consumer. When you get caught up in these short-term windows of consumer behavior shifts, people always ask the question, well, in this window, what's more important, sales or profit? And obviously, you always want both. But when you see short-term behavior shifts, Sometimes you have to be smart and you've got to ride the wave in a patient and pragmatic way. And that means not trying to force things before they're poised to pivot. Otherwise, you can end up with neither metric working for you. And as I said, we will invest smartly. We'll pick our spots. We'll focus on quality merch, A&P and our biggest brands, and awesome innovation. And we'll keep a strong determination to drive brand health and value creation for the long term.
spk01: Okay. That makes sense. Is there any validity to the thought that because there was less spending in the first quarter, it exacerbated some of the weaker demand trends?
spk08: No, I actually would say the opposite. We did see in one of our categories a competitor try to do some promotional things to kind of force the issue and force, and it didn't work. And it didn't have any impact on our business. And I can't imagine what their bottom line looks like with such an inefficient spend. But it's just, that's what I mean by you have to be, sometimes be smart, ride the wave in a patient and pragmatic way. If you get impatient and you try to do something irrational and force the consumer to do something they're not ready to do, you know what you're going to do? You're going to spend a lot of money without having a lot of impact. And so we want to put our dollars and our investment out there in the marketplace on the right levers at the right time when the consumer is going to be responsive to it. And that's why we've got the cadence of our spend laid out the way we've got across the full year.
spk01: Okay. That's very helpful. Thank you.
spk05: And our next question comes from Alexia Howard with Bernstein. Please go ahead.
spk00: Good morning, everyone.
spk05: Good morning.
spk00: So it seems as though the industry this year has been caught fairly flat-footed with the surprising lack of recovery in volumes as price growth has slowed. Now, it's obviously still way too early to tell where the impact of the GLP-1 drugs is going to go, what the uptake is going to be over the next 5, 10, 15 years. But in a similar vein, how can you start thinking about different scenarios for how that could play out which parts of your portfolio might be most affected, either positively or negatively, and how do you start getting data to decide which of those paths you might want to pursue? I mean, how do you plan for another potentially big consumer behavior shift that might be coming down the pike over the next few years?
spk08: You know, Alexia, I view that one a little bit differently. If you think about it, we've got an entire department of demand scientists here who are every day studying changes in consumer behavior. A particularly important one for our company has been the ever-evolving consumer definition of what constitutes healthy and how they want to eat in order to be responsive to healthy. Back in the 90s with Snackwells, it was all about fat and calories. And if you just look in the last few years, we've gone from grain-free to cauliflower to keto. I mean, it's constantly evolving. So what our demand science folks do is they're constantly studying the trends that consumers are chasing, figuring out which of those need to be designed into our products, and then adapting our products through our innovation program relentlessly so that we're staying up with consumer trends. So if we end up seeing changes in consumer eating patterns, let's say they go to smaller portions, then we evolve the innovations and we design smaller portions. If they switch to different types of nutrients, we evolve the innovation, we switch to different types of nutrients. If they change the kind of pack sizes they snack on, we'll change that. So this is the kind of stuff that will happen over five, 10, 15 years, not over the next six months. But I think the key to navigating these kinds of just constantly evolving consumer environment is You have to be externally focused. You've got to study these consumer trends, and you've got to rapidly design in what the consumer is looking for into your products, and that's what we do every year.
spk00: Great. Thank you very much. That's very helpful. And just as a quick follow-up, your leverage is obviously coming down. It's expected to come down further. Appetite for additional M&A and what parts of the portfolio you might be focused on for that, and I'll pass it on.
spk08: Yeah, let me say this first because I never want our investors to misunderstand this. We always follow kind of a balanced approach to capital allocation, but we've said now for some time, and I'll continue to say it, our top priority is de-levering. You know, the importance of having a clean balance sheet in the current strained external macro environment is very important to our investors, our ratings agencies, and that is our top priority. You know, when the time comes that we've got our balance sheet where we want it to be, M&A has always been part of it. We've always said there are two kinds of big picture M&A. There's big, you know, synergistic acquisitions that rarely come along once in a blue moon, and then there are bolt-on, more growthy, smaller acquisitions. They tend to happen more frequently. You know, so we'll always, you know, over the long term, keep an eye on both of those things, but right now our focus is on continuing to pay down debt. And then when we get to the time where we can add something to the portfolio, odds are it would be in our key strategic domains of frozen and snacks.
spk00: Perfect. Thank you very much. I'll pass it on. Thank you.
spk05: Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Melissa Napier for closing remarks.
spk03: Thank you, everyone, for joining us this morning. Investor Relations is available if anyone has any follow-up questions. Have a great day.
spk05: Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines and have a wonderful day.
Disclaimer

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