ConAgra Brands, Inc.

Good day and welcome to the ConAgra Brands Third Quarter Fiscal Year 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Melissa Napier, SDP Investor Relations. Please go ahead.

Good morning. Thank you for joining us today for our live question and answer session on today's results. Once again, I'm joined this morning by Sean Connolly, our CEO, and Dave Marburger, our CFO. We may be making some forward-looking statements and discussing non-GAAP financial measures during this session. Please see our earnings release, prepared remarks, presentation materials, and filings with the SEC, which can all be found in the investor relations section of our website, for more information, including descriptions of our risk factors, GAAP to non-GAAP reconciliations, and information on our comparability items. Operator, please introduce the first question.

The first question today comes from Andrew Lazar with Barclays. Please go ahead.

Great. Thanks so much. Good morning, everybody. Good morning. Good morning. I guess, Sean, based on scanner data, most expected, I think, some upside in grocery and snacks and maybe a bit more weakness in refrigerated and frozen. This dynamic was certainly more extreme, I think, in the quarter than I think many had modeled. So I guess in grocery and snacks, ConAgra had about a 4% benefit from price mix. And that was, you know, well ahead of what we'd thought. So curious kind of what drove that. And then in refrigerated and frozen, you talk about success in single-serve meals, but trying to, you know, corroborate how we sort of marry that with the 8% organic sales decline in that segment. And maybe that's more of a function of refrigerated, you know, versus frozen in some way. So those two aspects would be really helpful.

Yeah, let me unpack all of that for you, Andrew. As I said in the prepared remarks, things unfolded very much in line with what we expected. And as you heard us say, our investments in Frozen have driven a nearly seven-point swing in our scanner volume from Q1 to the most recent four weeks, where volume came in down a fairly modest 1.2%. So very strong progress in Frozen overall, which is important because that's been the focus of our investments. What you're seeing, and the reason for the optics being a bit confusing, is the reason the RNF segment and total numbers don't show the same magnitude of inflection is noise in the refrigerated part of the business, which was, by the way, also consistent with what we anticipated. Recall, our refrigerated businesses are predominantly pass-through categories, and one of the rare areas in our portfolio is where we've actually experienced deflation and rolled back prices accordingly, as pass-through categories do. And while, you know, that creates some short-term volatility in dollars until it's in the base as deflation passes through, importantly, margins are preserved due to the lower COGS. The other dynamic that I'll point out there in R&F is, in addition to that piece, Our table spreads business benefited in Q3 a year ago due to a large competitor having a particularly weak quarter due to supply chain challenges. So that's kind of some color on R&F and why the divergence between frozen and refrigerated. With respect to grocery and snack segment, we also expected a solid quarter in the GNS segment, and we got it. And there were several factors there from pricing in tomatoes, to bounce back in canned meat, like chili, Vienna sausage, where you'll remember we had a recall in the year-ago period, but also strong innovation, like our new Wendy's chili, where we've grown significant market share. So, overall, our grocery brands are great consumer options for people who are seeking to make convenient meals at a great value. It's also a good mix for us, but I think the big picture is one of the benefits of a scale diversified portfolio is that, as they say, there are horses for courses. So you're inherently hedged when the macro environment is less stable than normal. Big picture for us, I like the volume momentum we saw in Q3. I like what I've seen so far in Q4, and I expect further progress from here.

Got it, got it. And then I guess just lastly, obviously volume's in the quarter. We're still down, but a sequential improvement. And that's obviously what the expected step up in investment spend. So I guess, you know, you kind of talked to this a little bit, but how would you characterize, like, the current volume momentum? And would you expect volume trends to inflect positively, you know, by the time we get to the start of FY25? Or are dynamics still such in the broader industry that that's a little bit hard to peg right now? Thank you.

Well, it's one of the reasons why, you know, we're looking at this so closely. It's one of the reasons why I referenced the most recent four-week scanner data and frozen being down a mere 1.2. We obviously are seeing and expect to continue to see further progress. You know, we're not going to draw the line in the sand and say, you know, this is the month, this is the day where it's going to cross over. You know, next quarter, obviously, when we give 25 guidance and have our annual operating plans fully rolled up, we'll give you that color. But you know, it's moving in the right direction. That's the bottom line. I mean, this is a food thing. Everybody wants to see volumes go in the right direction. I think companies and investors are, you know, willing to see investment in order to do that. But what I think people want to see overall is, can you hold your gross margins while you're making those investments and getting the volume results that you want to see? And that's what was particularly encouraging to me in the quarter is we pretty much got, we made the investments we intended to make We got the volume improvements that we wanted to see. We've got continued volume progress into Q4. And we've done all this while maintaining, even expanding, gross margins that we worked very hard to kind of claw back after the initial compression from all the huge inflation we experienced a couple of years ago. So, you know, that I think is a positive, and I think it foreshadows just continued momentum from here. Thank you.

The next question comes from Ken Goldman with JP Morgan. Please go ahead.

Hi, thanks, and good morning. Just wanted to ask a quick question about 4Q. Your implied guidance might suggest around minus 2% in organic sales growth. It's pretty similar to what you posted in 3Q. Some might say it's a little prudent, though, just given You do have an easier comparison, both on one, two, three, and four-year basis, just looking that through. You have the lapping of the AmeriCold issue. So I'm just curious if it's right to think that's a little bit prudent, or there may be, you know, some offsets to that, maybe a little bit of less of a help from mix, perhaps, just throwing that out there, just trying to get a bit of color on those building blocks as you think about that.

Ken, I'll make just a quick overall comment and flip it to Dave, but, you know, after the last nine months of kind of elongated volume recovery, our posture has been one of let's lean toward prudent because, you know, the macro environment's been more volatile than I think anybody expected. And so that's been our posture. That's why we didn't bake in anything heroic in our back half plans. And I think that'll continue to be our posture until we see in a macro that is just inherently bouncier than it's been. But it's going in the right direction, and that's good. And I think, you know, I think we're in the – I like the way we're set up for Q4. Dave, you want to make any additional comments on Ken's point?

No, I think you pretty much hit it. I mean, Ken, we're, you know, we're expecting sequential volume improvement, and we've been talking about that, and we've seen it through Q3. But we also expect to continue investing. So, obviously, both of those things – impact the top line, and you referenced mix, you know, we do have mixed impacts in this portfolio, and they can be, you know, slightly positive or slightly negative any quarter. So, you know, as Sean mentioned, we want to be prudent, but, you know, they're the three key drivers that get us to the, you know, towards the low end of the sales guidance range for the year.

Yeah, and just to also think about this way, too, Ken, is, you know, our fiscal ends in May, which is kind of an odd month, but What's happening for us in May is our new innovation is rolling into the marketplace. We are focused at that point of the year always on the next fiscal year and how do we build momentum in the next fiscal and big events like 4th of July, back to school. And so we're really getting so late in the year now that a lot of our attention is focused on getting these annual operating plans finalized and trying to set up next year to be as strong as possible, including around key dates and holidays and things like that.

And then while we're talking about next year, and thank you for that, I realize it's too soon to provide any kind of quantitative numbers. I wouldn't ask for them, or quantitative information, rather. But at Cagney, you said you're doing what you can to be as close as possible to be on algo. And I was just curious, you know, where your level of confidence on that topic stood today, how you're thinking about maybe balancing what might continue to be a challenging consumer environment, I guess, with You know, maybe what also could be some friendly top-line comparisons, progress on cost savings, cash flow, and so forth. Just trying to think directionally how you guys are thinking about that now.

Well, you know, you're 100% right. We will give you our complete and total view of fiscal 25 on our next call. I think for this call, I think the key messages to our investors are we are getting momentum on the volume line. We are moving forward. kind of toward that Mendoza line here that everybody wants to see us cross over at some point. Exactly when that happens, as you've heard from other companies, I think you'll get more perspective on that in the coming months as people finalize their plans. That'll be true of us. But, you know, make no mistake about it. We've been watching the consumer for their readiness to kind of reestablish, well, you know, their typical behaviors. And we've said we're willing to kind of nudge them along if we see that readiness. And so we've been methodical in not only monitoring their readiness, but putting the investment out there to nudge them and measuring the response very carefully. And we're getting a good response. We're getting close. You know, it's not as if the momentum is slowing. If anything, it accelerated in the last quarter. So I think all I can say at this point is I like the setup. We just have to continue to do more of what we've been doing, continue to drive it, which is that mindset of volume is important, but so is protecting margin. And that's, you know, one of the things in our materials today that you saw is why our supply chain team is so important. You know, that work we've got going on at supply chain to really maximize cost savings provides critical fuel for growth. And, you know, we expect that to continue. And that's how, you know, ultimately over the long haul, that's how we're going to drive volumes back positive again. We've got really tremendous stuff going on in supply chain with cost savings right now. And as you saw in our Chief Supply Chain Officer L.A. Ebley's presentation at Cagney, we are on track to implement our connected shop floor program in half our facilities in the next couple of years. And that is outstanding performance overall. If you look across the industry, that's a leading position in the industry, and that will be key to margin expansion going forward. And so we're very excited about that work and the legs that it still has in front of us.

The next question comes from David Palmer with Evercore. Please go ahead.

Good morning, guys. A question on frozen. I'm curious, particularly on frozen entrees, what's your thought there about a return to growth in sales in that business? And if there's any sort of juxtaposition that you would make between frozen entrees and frozen vegetables and how you view the challenges and opportunities for each in returning to growth. Thanks.

Sure. David, you saw in the presentation today that in Q3 of 24, our frozen single-serve meal business achieved over a 51% market share, which is up 1.7 points versus a year ago. And if you remember Tom McGough's comments from Cagney, we have just – We've become the leading frozen food producer in the United States largely because of the success we've had in frozen single-serve meals over the last five years. So our performance there continues to be stellar, and we continue to gain share. And by the way, you know, I've made the comment many times that we under-index as a company in terms of competing with private label. Nowhere is that truer than in frozen single-serve meals. So, for example, The entire size of private label in frozen single-serve meals is 1.8 points. Our business is 51.2 points in market share. And, in fact, our growth in markets, unit market share, in the last quarter was 1.7 points, which is almost the total equivalent of private label. So, we like our position, our market and the market structure there. We like our brands, and we feel great about it. And it's been a growth juggernaut for us for the last five years, and I see no reason why that won't continue. In terms of bird's eye and vegetables, vegetables is one of the categories where earlier in the year we saw consumers exhibit value-seeking behaviors. So, for example, we saw some trade down from fresh and frozen vegetables to canned vegetables despite the obvious quality tradeoffs. But bird's eye is also one of the businesses that we are investing against with a clear focus on the superior relative value of frozen vegetables versus other choices. In fact, the advertising we're running now is directly comparative, as I mentioned to you previously, and features the clear benefit of our stay fresh flash freezing process, which basically freezes time for the consumer and keeps our vegetables at the peak of freshness until the consumer is ready. So, it's a clear advantage, and in the most recent four weeks of scanner data, Bird's Eye grew overall share even though our focus is really on the value-added tier. So we've got investments there, we've got momentum there, and it's an important brand, and you're not going to see us slow down on the marketing support and the innovation front.

You know, I just wanted to follow up on Ken's question. Maybe one way to ask is what ways are you going to be really reviewing your business in the coming months as you contemplate how you're going to be guiding fiscal 25? Is it simply just volumes getting closer to flat overall in the business, or are there any areas of the business you would be particularly focused on that will really help you think about how you guide for 25? Thanks.

Well, I think the way I think about it principally, David, is we are an ROI-minded management team. We are not bashful about putting investments out there to support our brands if they drive growth. the impact that we want to see in the marketplace, which in turn drives the return on investment. So where we are in our typical annual operating planning process is, you know, brand by brand, looking at the market fundamentals on what's happening within the brand dynamics, the competitive dynamics, the category, what do we know about the need for those consumers in those categories to have some kind of stimulus to kind of nudge them back to their normal behaviors, and what kind of lifts can we expect? So we do that on a brand-by-brand basis, and that ultimately leads to our investment profile. So we're in the midst of that right now. We've obviously run a lot of what you might consider to be test markets starting in Q2 in terms of those investments and understanding what those ROIs are, and we're racking it up right now. But I think what's encouraging is we are seeing responsiveness, and we are seeing good ROI, and I think that bodes well going forward. Thank you.

The next question comes from Chris Carey with Wells Fargo. Please go ahead.

Hi, good morning. One thing that did stand out was that the inflation impact to margins did get a little bit worse quarter to quarter. Can you just expand on that if that's driven by commodities, non-commodities? I think you mentioned tomatoes. with respect to some incremental pricing. Just any context on what is driving that and if there are any nuances.

Yeah, I'll make a quick comment, Chris, and flip it to Dave. You know, obviously, inflation has slowed, but we're still in an overall inflationary environment. And some things more recently have inflated, and that has led to taking some price. So you get the benefit of that. But it also, you know, there's a lag effect. So we've kind of taken you all through the mechanics of how that works, and that's part of it, right? When you get new inflation, you take new pricing, you've got a bit of a lag effect, so you get a little bit of margin pressure in the early days while you're waiting for that to get reflected, and then you see a pretty rapid inflection from that point on. So that may be a piece of it. Dave, you want to add more color to it?

Yeah, just a little color. So, Chris, yeah, our inflation rate as a percentage of cost of goods sold for the quarter was 2.9%. which are the 1.9% margin impact that you see in the materials. So we're still on track for, we said full year, approximately 3%. We're still on track for that, maybe a tick above that. But, you know, the inflationary areas, you mentioned tomatoes. We've talked about that. We've taken pricing. That was a big driver of the price mix in grocery and snacks for the quarter. We've also seen inflation more broadly in vegetables, in different ingredients and sweeteners. starches, you know, we have some inflationary areas. These things ebb and flow. We still, and we've talked about this in the past, we still have inflation in our manufacturing operations, both with our labor and overhead and transportation, you know, is relatively flat, a little bit inflationary. So we're pretty much in line. It is slightly higher, but generally we're managing it to the full year expectations.

Okay, perfect. And then a follow-up regarding the comment on pricing. You mentioned tomatoes, among other things, in the grocery and snacks business. How would you characterize the positive pricing there in the quarter? Was that due to anomalies in the base period, anomalies in the quarter itself, or are we looking at what appears to be a more durable, positive price mix for that division from here on? new pricing or lingering pricing, which is now being fully reflected in the P&L. Thank you very much.

Yeah, I mean, we obviously got the biggest benefit was from the tomato pricing. And we saw, you know, we saw the expected benefits there. The elasticities were good and in line with what we expected. We also did have a benefit of mix in the quarter. So our price mix which was a little over 4% for the quarter, we did get a benefit of mix, which contributed as well. And so, you know, a lot of our businesses and grocery and snacks are, you know, progressing as we expected. And so that's driving a good mix for us. So that was part of the equation as well in the quarter.

Okay. All right. Thank you.

The next question comes from Alexia Howard with Bernstein. Please go ahead.

Good morning, everyone.

Good morning, Alexia.

Okay, so can we ask to begin with just about the productivity improvements in the food service channels? It seemed as though they were particularly strong this quarter. Is that likely to continue going forward?

It was definitely a strong margin performance for food service. You know, there's been a little bit of weakness in traffic in food service, but I'd say overall it was a very good quarter, and And I think, you know, that is just an example of the productivity and total cost savings performance we expect across the portfolio, Alexia. So food service has opportunities, but we've also got opportunities across the international business and the retail business in the U.S. as well. So we expect strong, continued cost savings performance across the total portfolio. Okay.

Great, thank you. And then can I just hone in on private label in the frozen vegetable area? There seems to be some confusion out here about whether private label is becoming more of a problem just broadly or whether it's actually still fairly contained. Is there anything that you're seeing in terms of private label either in frozen vegetables or more broadly that would suggest it's becoming more of an issue Or is it really that, you know, the supply chain challenges have been overcome on the private label side, but there doesn't seem to be any major red flags or anything on the horizon?

Yeah, let me kind of frame that up for you. So you've got the big picture of how that works. Overall, as a company, we under-index, as I mentioned a few minutes ago, versus private labels. That is obviously category specific. So there are some categories that have more private label. A good example is canned tomatoes where you basically got hunts, you've got private label, and then you've got some kind of regional brands that are smaller in the area. One of the other categories where there is a larger piece of private label is frozen vegetables. But as you think about vegetables more broadly, vegetables are sold frozen, they're sold in the produce section, and they're sold in the canned food section in the center of the store. And there's been a lot of movement between that as value-seeking behaviors have been out there. And one of that has been actually about six months ago, some trade out of frozen into canned, and we're seeing that come back. Within frozen vegetables, Alexia, there's kind of the commodity vegetable tier, and then there's the more premium steamer, and then value-added tier, which is sauce, seasoning, things like that. For the last two years, we have been focused on building our business and our innovation pipeline on the premium value added space and actually pulling back on the commodity veg space, doing more value over volume, as you've heard us talk before. And the reason for that is because that's a lower margin business. Not surprisingly, it's more commodity oriented. So there's a role for us to play, or that business plays a role for us as a company in terms of overhead absorption in our vegetable plants, But our aspiration is not to be, you know, the world leaders and fastest growers in commodity veg tier within frozen because, you know, that's just arguably a bit of a misuse of our resources that we could people and otherwise put elsewhere because there's not much of a profit pool there. So, you know, it's important for us to maintain a certain scale of business there for overhead absorption purposes, but that is not strategically where we play When we look at frozen vegetables, we are looking, and you can see in our innovation pipeline, at more premium products and more value-added tier.

Great. Thank you very much. I'll pass it on.

The next question comes from Rob Dickerson with Jefferies. Please go ahead.

Great. Thanks so much. John, just a I guess a question specific to Frozen. It sounds like the ROI on the investments have been attractive. You seem very upbeat and encouraged to the momentum on the business. But at the same time, when we think about what's happened in the quarter, it doesn't really seem like a lot of that was driven necessarily by upside, so to speak, um you know within that volume component within refrigerated and frozen so i'm just curious like you know as you speak to those investments um you know are we talking you know kind of more promotional activity you're doing better and better pack and bigger pack sizes just trying to gauge you know kind of what's like your perspective as to you know why the rois are good and kind of what you're doing right because optically, as we looked at the number in the segment, you know, which does include refrigerated, you know, it's not really better, and there was, I think, a little bit of an easier compare. So just trying to gauge, get a little bit more color on that one piece.

Yeah, I think to not get too twisted up in the optics of the combined R&F segment, if you look at, I think it was page 10 of our presentation today, which was consumption in our consumer domains, That's really the key kind of evidence point of what we're seeing from our investments. So our investments have been heavily skewed toward frozen, as I mentioned, because that's very strategic business for us. And that line, that consumption line there in terms of volume change has moved from minus 7.8 in Q1 of fiscal 24 to minus 2.8 in Q3 24. And in the most recent, in the first month of the fourth quarter, that number is about a minus 1.2. So that's when I referenced the nearly seven-point swing in consumption that we've seen over the last couple of quarters, that's precisely what I'm talking about. And that is a very, very meaningful move in terms of the category. I think you'll be hard-pressed to find a bigger move more broadly in food. What is creating the noise in the R&F segment data is the refrigerated, which I don't have here for you broken out, volumes, dollars in the absolute, which is a function of two things that I referenced. One is the rollback in prices because of the deflationary categories there, and also the wrap that we had in one of our table spreads business. So that's really what's behind that. But the movement in the volume is the basis for the ROI comment that I made, and you can see – how that movement has come out. It's been very material.

And continue to do that. And then just a quick question on gross margin, very simplistically. You know, clearly I hear all your comments and prepared remarks around productivity, efficiency, sellable pricing, and grocery and snacks, all positive. But I'm just curious, like, what changed relative to coming out of Q2, right, in early January? Because I think the commentary there previously for the year was gross margin, would probably be similar back half, maybe relative to Q2, but now it seems like it'll clearly be better than the back half relative to Q2, and that kind of took place over the course of two months. So, seems like something changed to the upside. I'd just like to know what. That's all. Thanks.

Yeah, Rob. So, I think you'd agree that if you'd look over the last six quarters, there's been a lot of volatility in our supply chain. And so, when forecasting gross margin, we want to make sure that we're considering all scenarios around operations. The fact of the matter is that if you look a year ago, we still had a lot of things going on in supply chain with some recalls and some other challenges that we had that did impact the profitability. So as Sean talked about, You know, our core productivity programs are on track. We're focused on the projects we're executing. So we're really seeing that benefit. You know, the inflation is still coming in. We're still investing, and you see those as part of margin. And we still have a headwind from absorption. So because the volumes are down, and importantly, we're driving inventory down. So our production in our plants has been down, and we're managing that. that's been a headwind. But we haven't had any other disruptions like we've had the last couple of years in supply chain, given the environment, that, you know, now we're able to – we're really encouraged that we're able to make – fund the investments we want to fund and execute our productivity programs and drive, you know, the gross margins that we're looking for. So, you know, one quarter doesn't make a year, but, you know, we're really encouraged by what we saw this quarter, and we're going to build on it.

All right, super. Thanks, Dave. Appreciate it.

This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.