Sean Connolly
President and Chief Executive Officer at Conagra Brands
Thanks, Bayle. Good morning, everyone, and Happy New Year. Thank you for joining our second quarter fiscal '24 earnings call.
Let's start with the Q2 headlines, shown here on Slide 5. At a macro level, the industry-wide shifts in U.S. consumer behavior, that we discussed on last quarter's call, persisted into the second quarter. These behavior shifts continued to pressure volume and mix. However, while the consumer is still deploying some value-seeking tactics when they shop, we are seeing clear progress when it comes to volume recovery. In Q2, that progress was most notable in our Refrigerated and Frozen segment, in particular, our Frozen business. This inflection was helped by investments on key brands as we were seeking to understand consumer readiness to revert back to more typical purchase behaviors. We saw outstanding responsiveness that will inform our back-half actions. More on that in a moment.
The net result was a clear improvement in volume trends, with domestic retail volume loss that was half of what we saw in Q1. We delivered solid margins and EPS, as well as excellent free cash flow conversion. Our productivity initiatives remain on track. Although, we also saw some absorption impact from our volume declines. As we look ahead to the second-half, we have a robust investment plan in-place, reflecting our increased confidence in consumer responsiveness to brand building levers. Our goal is to continue to build momentum with our consumers as we move through the back-half of the fiscal year, and then, enter fiscal '25 in a position of strength. I will share more on our multifaceted action plan in a few minutes.
Finally, we are updating our guidance for fiscal '24, reflecting both the consumer environment and the additional brand investments in the second-half of the year. After tremendous initial resilience in the face of a record inflation super cycle, U.S. consumer behavior shifts did merge last spring in our industry as the cumulative effect of inflation caused consumers to begin to stretch their budgets. This resulted in a reprioritization of food choices as shoppers adjusted purchase behavior towards more stretchable meals. This slide reprises some of those shifts we discussed last quarter. At that time, we told you that we expected these trends to be transitory. We still believe that to be the case. But the pace of the shift back to normal consumer behavior has been slower than we initially expected, and that pressured our volume, performance and mix in the second quarter. That said, the tide appears to be turning.
When we discussed these behavior shifts last quarter, Frozen was one of our most impacted businesses, specifically, our frozen single-serve meals. After five years of consistent strength, we saw some consumers looking to alternatives such as multi-serve meals and scratch cooking to stretch their budgets. We didn't expect that trend to be lasting as the unshakable consumer demand for convenience, combined with Conagra driven product innovation, has generated strong Frozen demand for a long-time now.
As I noted in my opening remarks, we believe it's important to understand consumer readiness to resume more typical shopping behaviors before more fully ramping-up investments to facilitate the process. We want to be confident that our investments will have the desired impact. With that in mind, during the second quarter, we did invest in certain key businesses to assess consumer response to increased brand building stimulus. Most noteworthy was our largest Frozen business, single-serve meals, where we deployed high-quality merchandising nationally. The results were very encouraging, with lifts up 60%. These lifts ultimately drove meaningful gains in our market share. As you can see on this slide, our Q2 share in this business approached 51%, eclipsing last year's gains and also setting a new record.
The net of this is while the consumer is still stretched, they are responding to high-quality brand building stimulus. And when you look at volume trends, while not yet positive, you can see that progress is clearly underway. Slide 9 shows volume results in our key U.S. retail segments, both separately and combined. I'll draw your attention to the chart on the left, where you can really see the impact of our investment actions. As a result of these investments, Refrigerated and Frozen segment volume went from minus 10.5% in the first quarter to minus 3.3% in the second quarter, coming in-line with volumes in Grocery and Snacks. Overall, our targeted investments in Q2 helped cut the total domestic retail volume decline in half compared to the first quarter, not all the way back, but good progress.
I'm also pleased to report that we continued to deliver momentum in our International and Foodservice businesses, which together account for approximately 18% of total Q2 revenue. International grew organic net sales by 5.6% in the quarter, while our two largest markets, Mexico and Canada, delivered organic net sales growth above 9%. This was a result of our International team's outstanding execution, including strong brand activation, improved point-of-sale performance, innovation that is resonating with our customers, and expanded distribution in Mexico. Our Mexican business has now delivered four consecutive quarters of volume growth.
In Foodservice, we delivered organic net sales growth of 4.3% in the quarter, driven largely by favorable price mix as well as expanded distribution in our Frozen portfolio, which accounted for roughly half of our total Foodservice business.
Slide 11 details our second quarter results, including organic net sales of approximately $3 billion, which is down 3.4% compared to last year. Adjusted gross margin of 26.9% was down 129 basis points from last year, reflecting our targeted investments and the absorption impact associated with the volume decline. Adjusted operating margin of 15.9% was down 108 basis points compared to last year and adjusted earnings per share of $0.71 was down approximately 12% versus last year.
Importantly, we delivered strong free cash flow during the second quarter. Dave will cover this in more detail shortly. But as you can see on Slide 12, free cash flow in the first-half of fiscal '24 was almost six times what it was in the first-half of fiscal '23. We used some of that free cash flow to paydown debt, bringing our net leverage ratio to 3.55 times in the second quarter. As I mentioned earlier, we have a robust and multifaceted investment plan in-place for the second-half of the year, reflecting our confidence in consumer responsiveness to our brand building efforts.
On Slide 13, you can see images from our new advertising investments, focused on our biggest brands, including Birds Eye, Healthy Choice and Slim Jim. You may have already seen some of the terrific work we've done this year with Slim Jim and the WWE, building on the heritage and built-in awareness of our long-term partnership with wrestling legend, Randy Macho Man Savage.
Fiscal '24 is one of our biggest innovation slates yet. We are backing those launches with meaningful increases in slotting in-store and other sales support versus the prior year. Slide 14 highlights some of the exciting innovation we've recently launched. If we have any chili lovers on the call, I highly recommend our Wendy's chili. You can get the true restaurant taste of this beloved chili at home.
Finally, Slide 15 highlights the investments we're making in high-quality merchandising. Our efforts are focused on reengaging consumers with our existing products to capture market share as well as introducing consumers to our new innovation. The targeted investments we made during the second quarter give us confidence that our multifaceted brand building investments in the second-half of the year will drive momentum going into 2025. Reflecting both the consumer environment and the additional brand investments in the second-half of the year, our new guidance includes organic net sales decrease between 1% and 2% compared to fiscal '23, adjusted operating margin of approximately 15.6%, and adjusted EPS between $2.60 and $2.65. Overall, we remain confident in our brands, plans, people and agility, as we continue to navigate this shifting consumer environment.
With that, I'll pass the call over to Dave to cover the financials in more detail.
