ConAgra Brands, Inc.

Good morning and welcome to the ConAgra brand's third quarter fiscal 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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 touchtone phone. And 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 Mr. Matthew Nysas. Senior Director of Investor Relations for ConAgra Brands. Please go ahead.

Good morning, everyone, and thank you for joining us today. 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 be found in the investor relations section of our website for more information, including descriptions of our risk factors, gap to non-gap reconciliations, and information on our comparability items. I'll now ask the operator to introduce the first question.

The first question will come from Andrew Lazar with Barclays. Please go ahead.

Great. Thanks so much. Appreciate it. I guess, Sean, I realize there's Still one quarter to go in the fiscal year. Macro dynamics, you know, make for obviously a super challenging environment in which to forecast. I think, but Cagney, you mentioned a few items as it related to fiscal 26, including, you know, the higher brand spending already being in the base for next year. 4% of cost of goods is productivity and a 53rd week with the wild card, I think being where inflation lands. So I was hoping, I guess you could at least bring us through your thoughts, even at high, if high level. on how we think about next year at this stage, knowing, you know, much is still subject to change. And I guess I asked this in the context of some other sort of fiscal year reporters having already indicated not to expect much growth next fiscal year due to the need for greater reinvestment. Yet in ConAgra's case, you know, as you pointed out in the prepared remarks, consumption trends have been steadily improving. So thanks a lot.

Okay. Good morning, Andrew. Let me try my best to answer that. As you know, we don't provide fiscal year guidance for any forthcoming year until a Q4 call that precedes it. So that won't officially happen to July. And given the macro environment you cited, this year is extraordinarily dynamic. So we will definitely take advantage of the time between now and then to see where the dust settles on a number of these external things we are monitoring. That said, you are already equipped with some of the puts and takes. Number one, consumer pull for our products remains strong and a lot of the spend, as you pointed out, is in the base. Number two, inventories are being rebuilt, but some of the higher costs associated with recent supply chain constraints will linger into Q1. Three, we don't expect a Hebrew national repeat in Q1. And four, we don't expect this year's second half supply constraints to repeat in H2 next year. But, and this is the big but, five, we are still monitoring inflation, tariffs, consumer sentiment, and the need for pricing. So overall, too early to give you an outlook at this juncture.

Okay. Yep, understood. And then really just second, if you could go into a little more detail on the differential or the gap between shipments and consumption. in the grocery space, just because that was the area where there was the biggest differential and frankly came in below what I think many had modeled versus obviously refrigerated and frozen. Thanks so much.

Yeah, let me hit on that. The prepared remarks were really focused on the gap between shipments and consumption that's tied to the supply constraints, which is really a frozen concept. What you're seeing in the grocery and snacks concept is a bit different, which is in grocery and snacks this year, More seasonal holiday, what I'll call seasonal slash holiday shipments fell into Q2 versus last year where more fell into Q3 because holidays were later this year. But overall, if you look at the six-month pattern in grocery and snacks, it's pretty normal. There's nothing out of the ordinary there. So, you know, overall, the quarter came out for us very consistent with what we laid out for folks when we spoke about it in Cagney, and that includes grocery shipments. and snacks where there's just some shipment timing where some of the holiday slash seasonal shipments were a little bit different quarter by quarter this year versus last year. But overall, consumption at the company level remains strong, and that's what we've been focused on. So that's really what you're seeing there. Got it. Thank you.

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

Just on the subject of grocery and snacks, you know, I appreciate that certain elements of that business, including meat snacks, are sold maybe a little more heavily in convenience stores than traditional packaged food. I'm just wondering, some of the data that we're getting on C-stores is not ideal right now. I'm just curious if that had any kind of impact versus your prior expectations on any of your products and maybe the overall grocery and snack segment this quarter.

Yeah, good question, Ken. Let me try to demystify that for you a little bit. First of all, overall, Q3 unfolded in a manner that was very consistent with what we updated everybody on when we were at Cagney, and that includes grocery and snacks. The thing you're noticing in grocery and snacks, as Andrew just pointed out, is that gap between shipments and consumption. Consumption overall at the company level and at G&S in general remained pretty strong, but there was a gap And it was really the way shipments fell last year versus this year. And last year, more was in Q3. This year, more was in Q2. So that's it. In terms of consumption overall for our company, as you saw in the prepared remarks, consumption remains incredibly strong, which is really terrific to see. Now, if you asked me to dig within the strong overall consumption, where are there spots that are weaker? Certainly, on a channel perspective, C-Store is as a channel can have its challenges when the consumer gets stretched. And we have not been immune to that this year, nor have our competitors. And so there is some channel shifting going on. C-Store, relative to its normal performance, is a bit weaker. That's certainly impacting our portfolio. But as you can see in the total scanner data, we tend to make that up in other channels. So our total consumption remains incredibly strong. The only other thing I'll point you to is that within parts of the dollar channel, and not every competitor or every retailer within the dollar channel is performing equally, there are some spots that are, I'll just say, that are weaker than others. So we've had some of that. Actually, it's some non-measured that shows up in shipments, but not material at all on an overall consumption basis for the company, which you saw was strong. Great. I'll pass it on. Thanks, Sean.

The next question will come from Lee Jordan with Goldman Sachs. Please go ahead.

Good morning. Thank you for taking my question. I know it's a little early still for 2026 guidance, as you pointed out, but I just wanted to see if you could comment on your confidence in hitting your leverage target of three times by the end of next year. I guess, what are the key risks you see at this point, and how do you think about the contributions from debt pay down versus just an acceleration in the business?

Yeah, Lee, this is Dave. Yeah, so as you saw in Q3, we're really pleased with our cash flow performance. Our free cash flow conversion is 125%. We've paid down a half a billion dollars of debt in the last 12 months. So we expect the cash flow to continue to be strong and continue to pay down debt. We will update kind of where we are with the three times leverage target by the end of next year when we give guidance for July. Obviously, that's impacted by earnings in the denominator. So we'll see where we are there. But the cash flow is strong. We expect it to continue to be strong. And our priority with that cash flow is to pay down debt. So that will continue. And then we'll see where we are with that leverage target when we give guidance in July for fiscal 26th.

Great, thank you. That's helpful. And then just as we're kind of talking about cash flow, you know, it looks like you lowered your CapEx guidance for this year by about $40 million. Just seeing if you could provide more detail on what was removed or delayed from the budget, and really does this mean that we should anticipate a higher than normal CapEx next year? And then just maybe while we're on the topic, and given we've had these recent plan issues, just maybe have you changed how you think about maintenance CapEx at all? Thank you.

Yeah, so yes, the update in capital for this year is all timing. So just in terms of the cash impact of capital, more of that is shifting into next fiscal year. So we'll give a specific guidance number on CapEx next year, but you could expect that that will bounce back up to, you know, kind of levels where we started this year. And that's not unusual with projects that you have timing can slip. And so that's just simply timing. It's not a result of us kind of cutting anything or doing anything. In terms of maintenance capital, we have a very robust process for allocating maintenance capital and making sure that all of our operations have capital that they need to keep the operations running and be efficient. In situations that we've had with our chicken operation, when we find things, we prioritize fixing the root issues. And in this case, we're going through a full modernization of that plant. And we are estimating that we will be done that by August. So we always prioritize maintenance capital, and that's no different than the way we've always handled it.

Yeah, just to add a little more color on the maintenance capital piece, we are in the midst of a multi-year effort to kind of modernize our supply chain. L.A., Eboli, our chief supply chain officer, laid that program out at Cagney a little over a year ago. And we've made tremendous investments in maintenance capital to modernize our facility, including planned major capital investments in the frozen facility that makes our work and process chicken. As I pointed out at Cagney, we didn't quite get all the way to get implementing that project because we ran into some quality and consistency issues before we got started. So we've had to deal with that a little bit earlier than we expected. It's coming at a cost. It obviously disrupted our service. But I just want to emphasize that the investment plans have been in flight on the modernization of our network for multiple years now and remain robust.

Great. Thank you.

The next question will come from Tom Palmer with Citi. Please go ahead.

Good morning, and thanks for the question. I guess just to start off, I wanted to ask on the fourth quarter, you noted the persistence of higher inflation, which seems to maybe be a little bit incremental to 4Q. It sounds like tariffs, at least the ways you were able to comment on aren't a big swing item, but they probably don't help. And then at least relative to consensus estimates, sales came in a bit light. But you also reiterated your annual outlook. So are there incremental maybe tailwinds to be thinking about when we look towards 4Q that drive that inflection? Thank you.

I'll make one comment and flip it to Dave. You know, as I mentioned earlier to Andrew and Ken, Q3 unfolded in a manner largely consistent with what we expected when we spoke to investors at Cagney. And given that, there's obviously not a lot of contemplation to changing kind of what we anticipate in Q4. But I think the big thing that we have to do, and I understand everybody on this call today is really eager to get some perspective on how is next year going to unfold. We've got to see where the dust settles on these external factors because that is the biggest variable we are dealing with right now. We've already been dealing with inflation that really has not abated. So we've had record inflation over the last few years. We've still been in higher inflation this year than we expected when we went into the year. And now we're looking at potential factors that could exacerbate that. and what are the follow-on actions that we're going to have to take. It's too early to tell, obviously, how the dust is going to settle there, but that's going to be a factor for us. And things are moving around quite a bit. There are things like vegetables that we import from Mexico that at one point we thought maybe that would be an issue. Well, maybe there's an exemption there, but then maybe there are other things that become an issue. So things are moving around not only on a weekly or daily basis, but on an hourly basis right now. We've got to see where all the dust settles on that so we can really pin down next year to the best of our abilities and give you the guidance that is going to be as helpful as we can give. Dave, anything?

Yeah, so just, Tom, real quick, just the building blocks for our Q4. We expect consumption to continue to be strong through Q4. We expect our shipment volumes to improve versus Q3. As we improve our service levels, we are improving our service levels on Versailles and our frozen meals with chicken. expect improvement in gross margins in Q4 versus Q3. Because remember, in Q3, we were negatively impacted by the supply disruptions and the disruption to our operations. Absorption in this quarter, negative absorption was very high. And then just some of the one-time costs we had, because when you shut down an operation, it does hit your cost. So we do expect improvement in Q4 versus Q3. And then you saw that we had a trade estimate true-up in Q3. So we don't expect trade to have as much of an impact on margin in Q4 versus Q3. And our SG&A will be favorable in Q4 versus the prior year. So they're really the key building blocks. Okay. Thank you for that.

Just on the, I guess, import question with tariffs, you noted the veggies from Mexico. Are there other major items we should be thinking about that you traditionally import? And then beyond just, I guess, raw materials, are there finished goods sold in the U.S. that are sourced overseas? Thank you.

Yeah, I'll just give you a little commentary on that. We buy, obviously, a lot of stuff that goes into our product. Much of it is sourced in the U.S., but when we cannot find a supply in the U.S., you know, think Chipotle and avocados, things like that, we will source it elsewhere. So, you know, I mentioned vegetables out of Mexico. We buy a lot of tin plate steel for our cans outside the U.S. because something like 75% of the tin plate steel lines in the U.S. have been eliminated since 2018, leaving manufacturers in a position where they have no choice But to source these things overseas, we kind of fall into that camp. But things are moving. So, you know, yesterday I might have thought there could be an issue with vegetables coming in from Mexico, and maybe that's not going to be an issue. We'll see. But today, maybe there is an issue on things like palm oil that wasn't on the radar as squarely yesterday. So things are moving around. I'm not going to give you a definitive list right now because of the volatility of the situation. But as you know, running a business, you have to be able to have some stability in your assumptions and Right now, the assumptions that we're making are moving around a bit. We're tracking them by the minute. And as soon as we kind of see the dust settle, we'll rack it all up, give you our outlook, and that'll be when we're in a position to give you the best guide for the coming year. Anything you'd add to that, Dave? Yeah, no.

And our manufacturing, what we sell in the U.S., is really manufactured in the U.S. So as Sean said, what we're looking at is our materials and materials that we would have to bring in from outside of the U.S. just because they're not available in the U.S. Great. Thanks, guys.

I know it's a very evolving situation, so appreciate the call.

The next question will come from Chris Coray with Wells Fargo. Please go ahead.

Hey, guys. Quick follow-up on Q4 and then a little bit of a follow-up on the broader macro backdrop. Just in Q4, you said that the shipments would come at a higher cost. but you also expect gross margins to improve in the quarter in Q4 relative to Q3. What's kind of the gap there? Is it better productivity, the incremental pricing on protein? Can you maybe just, you know, help a little bit more context there?

Yeah, Chris, as I mentioned, we have pretty negative absorption, which has impacted our cost in Q3, which will get better in Q4, but also the... incremental costs we're incurring with third-party commands to get our inventories back, we've actually started incurring in Q3. So that will continue in Q4, but it's consistent. So it's not incremental to Q3. And that will continue through Q1 of fiscal 26, using the third-party commands.

And then this is a slightly unfair question, but just following up on the prior line of thinking. When you think about the uncertainty in the current environment going into fiscal 26, how much of that is associated with the top line, the consumer response to this environment relative to your cost structure? I don't know if there's a way to kind of parse that out, but clearly there's a consumption angle to this, and there's also the kind of tariff and cost angle. And, you know, I wonder if there's any way to frame the relative impact of either at this point.

Well, you know, I won't comment on next year, Chris, but let me just let me give some perspective on this year and kind of what our stance has been for the last year. Obviously, management teams are always trying to simultaneously drive acceleration of growth and gross margin expansions. So in normal times, we want them both, and we want them both right now. About a little over a year ago, we said, look, they may not come in at the same time. So if you've got to prioritize getting volume back to growth versus continued gross margin expansion, how do you prioritize? And we said, we're going to plant the flag and say returning volume to growth is the most important thing for the the long-term value creation of the company. We have to keep the relationship between the consumer and our brands. And we made the investment to do that. And we've seen very strong connectivity between the consumer and our brands. Obviously, you know, that has pressured gross margins for us and for the industry. And so now as we start to think about what's coming next year, I think we're in for another year where we've got, you know, we're going to have our hands full in terms of continuing to drive growth and continuing to drive margin expansion. And that's That's what we're going to do between now and July when we guide is say what's the strongest plan we can put together on both metrics.

Okay. All right. Thanks a lot.

The next question will come from Yasmine Diswanding with Bank of America. Please go ahead.

Good morning, everyone. Thanks for the question. Dave, I just have a question for you and just specifically on cost inflation. You know, in your prepared remarks, you mentioned taking pricing in Hebrew National to offset protein inflation. And I believe there was a comment made previously on the expectation of deflation on crop-based inputs. So I guess at this point, is the expectation for fiscal 26 to be higher than fiscal 25 year-to-date? Do you just have any updated thoughts there? Thanks.

Yeah, we're not, as we mentioned, we're not going to give any insight on fiscal 26 until our July call. You know, there's a lot of things moving around right now, candidly. You saw for the quarter, our inflation came in around 4%, which is, you know, where we expected it to be. And we had guided for that for the full year. So, you know, right now we're just looking, as Sean said, looking at all the dynamics and kind of the impact that it may have. And then we'll update further in July. But I'm not going to comment anymore on inflation for next year.

I think the big thing to take away is that it's still 4%. We've had record inflation over the last few years, and there were some folks that thought things would go backwards. That has not happened. In this quarter, we're still looking at 4%. And some of the external things that we're talking about are incremental above and beyond that if the baseline doesn't move. So that's what we've got to see shake out. And obviously, if we have to deal with some of these external factors, we're going to have a number of levers available to us that we typically push on. You know, we'll look at our productivity programs and can we squeeze more out of that? We'll look at alternative suppliers. Can we get a better price elsewhere? And we'll look at pricing. Everything is on the table.

Okay, great. Thank you. And I just have a quick follow-up, and it's more of a clarifying question off of Andrew's question earlier. So the gap in grocery and snacks, you know, some of that is unfavorable mix. Some of that is trade spend. So is the remaining of that mix, is it just Swiss Miss? What other products was that that kind of drove that delta?

I think you just hit on pretty much all of it. I mean, the gap between shipments and consumption in grocery and snacks, I already hit that pretty hard. That was really just the way shipments fell last year, more of them in Q3 than this year, more of them in Q2. That's really it. You understand the trade gap. adjustment. Anything else, Dave? Yeah, no.

And we talked about like Swiss Miss, you know, the consumption was really strong in Q3. So when you look at consumption versus shipments, that's just, you know, the seasonality of that business, right? You ship it and then the consumption and it really It depends on, you know, the weather and when people want to buy it.

Yeah, those shipments went in Q2. You know, we and retailers thought more consumption would have occurred in Q2. The weather didn't cooperate, but it did come in Q3. So I always say winter always comes. It came in Q3. It just pushed more of the gap. It's one of the contributing factors between the gap between shipments and consumption as it fell in the third quarter.

Okay. Thanks, guys. Thanks.

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

Good morning, everyone.

Hi, Alexia. Good morning.

So a couple of quick questions. First of all, can you comment on any recent changes in the state of the consumer and behaviors that are shifting? We've been hearing from others that things might have deteriorated in the last eight weeks or so. I know you mentioned C stores. Yes, any comments about shifts?

You know, Alexia, we've been talking about these behavior shifts for about two years now where you've got stretched household balance sheets, you've had value-seeking behavior, people seeking trade-offs. So that's been in place, and it's been everything from the beginning around things like more use of leftovers, things like that. So that has been with us. We invested to kind of overcome some of those challenges, and obviously you've seen tremendous responsiveness there. And especially in our frozen business since we started making those investments. But I think it's really more of just a continuation of a challenged consumer balance sheet where they are stretched. And so, you know, we've been incentivizing them with good innovation and some low discount, high quality promotions to drive consumption. And you can see it in our numbers. But they're being very discerning. I anticipate that's going to continue. If we see prices in food or elsewhere go up further, I think you're going to see more trade-down behaviors. And I think it'll be the typical stuff. I think that, you know, the first thing you'll see is discretionary purchases will weaken, food service trends will weaken. And then within at-home eating, I think you'll see a lot of that value-seeking behavior. So we're very well-positioned. compete in that environment. As we pointed out at Cagney, frozen foods are doing quite well right now. And obviously, we're the world's biggest frozen company. And then within snacking, importantly, we're very protein-centric and healthy, permissible snacking. And so we've got one of the stronger snack portfolios right now. And that's helping us navigate some of these challenging consumer times as well.

Thank you. And as a follow-up, I know you've got a lot on your plate right now with everything going on. But there seems to be a lot of activity at the state level to introduce bans or labeling requirements on certain additives. That seems to be bubbling up in a lot of different states now. Is that going to be a major burden, headache for you, or is it going to be fairly straightforward to accommodate all of that?

Well, Alexia, you are now hitting on why when I talk about the things we're monitoring externally, it's plural. It's not one thing. It's not tariffs. It's a variety of things. So added to the list of external factors we're monitoring, the good news for the ConAgra portfolio in regard of that one in particular is, as I pointed out at Cagney, some number materially over 90% of our portfolio doesn't have any synthetic dyes or food coloring in our products. So It's really not a big deal for us, but we do have to monitor it because state-by-state legislation is very difficult for manufacturers to deal with. We'd rather have a federal singular voice on this so we can adapt and be as agile as we can, but when you're dealing with With state-level legislation, it makes it more challenging for manufacturers to have to try to tailor stuff to individual states. But with respect to food dyes and colors in general, we don't have a lot of it in our portfolio. It's not a material concern.

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

The next question will come from Megan Clapp with Morgan Stanley. Please go ahead.

Hi. Good morning. Thanks so much. Maybe just a quick follow-up on that. 4Q. I think the guide maybe implies org sales somewhere around Flattish. It looks like consumption, which makes sense just given the supply chain challenges, has trended a bit lower in the most recent period. So as you talked about volumes improving, you're going to get a shipment benefit from the restock of retail inventory. But maybe can you just help us unpack the underlying expectation as it relates to consumptions in the context of, you know, flattest shipments in the fourth quarter, that would be helpful. Thank you.

Well, I just, I think the way to think about the shape of consumption is when you have supply constraints is as long as the underlying consumer pull remains strong, consumption will remain strong until your inventory position weakens. And so obviously because we've had limited inventory, the inventory position has begun to weaken. That'll lead to out of stocks on the shelf and that will start to show up as weakness in consumption. But unlike what you're seeing from some companies on the consumption line right now, I think investors don't need to have a lot of anxiety if you see that weakness in our consumption because it will not be connected to weakened consumer pull. It'll really be about weakened supply and inventory levels. That too will pass because we have invested now to rebuild those inventories, but that'll be the shape of the curve is Consumption will be strong until our inventory position weakens, then it'll weaken for a little bit, and then it'll rebound. You already hit the shipment flow and how that works.

Yeah, and there is a Q4 impact because of the timing of the Easter holiday. So, you know, you're seeing some negative consumption now because Easter was earlier last year than this year. So, yeah, so we expect continued strength in consumption for Q4 like we've seen.

Got it. That's helpful. Thanks. And maybe just a couple of housekeeping questions. I don't think I saw an updated guide for leverage for this year. Is it still, you know, I think 3.55 is what you told us at Cagney, or is it maybe a bit better given the lower CapEx guide? And then the second would just be on equity method earnings. I think they were a bit better in the quarter, at least versus what consensus was modeling. Is that just timing? Is 150 kind of still the right number for the year?

Yeah, we've held both of those for the year. We haven't changed.

Okay. Thank you. Yep.

The next question will come from Max Gumport with B&P Paribas. Please go ahead.

Hey, thanks for the question. Your snack volumes are up 4% in 3Q, which stands in contrast to what we're seeing for the industry. Really, we're seeing snacking categories under pressure, and I realize your total snack performance was helped by weather as it relates to the Swissmas business, but it still looks like you're Your volume growth came from several of your key brands. So I was hoping you could provide a bit more color on what you're seeing in snacking with regard to the broader industry weakness and then what you think is helping your business outperform.

Thanks very much. Sure. And for those who are tuning into this call who did not tune into Cagney, I would direct you to Bob Nolan's presentation on the future of frozen and the future of snacking because it was chock full of interesting insights. On both of those businesses, with respect to snacking, it's a fascinating time because snacking is an enormous, I don't know, $80 billion plus industry in the U.S. And historically, a lot of that volume in snacking is in traditional chips. But there is a movement afoot in snacking right now toward healthier snacking, away from carbs, and more toward protein and protein density. And that's effectively our business. Our business is highly concentrated in protein and fiber. So between meat snacks and popcorn, you've got two very on-trend businesses, not to mention our seeds business, which is sometimes overlooked, but is a phenomenal, very profitable business. We happen to have a lot of horses that are in the right subcategories right now. And they're doing right pretty well. Part of the strong number that you just referenced, Max, was Swiss Miss being particularly high. I wouldn't get overly excited about that. That's timing because obviously Swiss Miss was down last quarter because of the weather. But the underlying performance in our snacks business relative to the broader space that you're pointing out remains very strong. And I would attribute it to the right subcategories and the right brands. And just a quick public service announcement on our new acquisition of Fatty Smoked Meat Sticks. You know, our fatty business is now fully integrated. It's doing extremely well. It's getting incredible resonance with our retail customers. And if you have not eaten a fatty meat stick yet, I encourage you not just to eat one, but eat it side by side versus some of the other new players on the market. And I think you'll see that we win the taste test hands down.

Great. Thanks very much. I'll leave it there.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Nises for any closing remarks. Please go ahead, sir.

Thank you, Chuck, and thank you all for joining us today. Please reach out to Investor Relations with any additional questions. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.