Conagra Brands Q2 2024 Earnings Results & Report

Conagra Brands EPS Results

• Actual EPS: $0.71
• Consensus EPS: $0.68
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $0.81
• EPS Beat Rate: 5 of last 8 quarters

Conagra Brands Revenue Results

• Actual Revenue: $3.21 billion
• Expected Revenue: $3.23 billion
• Beat/Miss: Missed by -$26.08 million
• YoY Revenue Growth: -3.20%

Conagra Brands (NYSE:CAG) is a packaged-food company that develops, manufactures and markets products for retail, foodservice and other customers. Its offerings include frozen meals and vegetables, snacks, baking products, condiments, cooking ingredients and meat snacks.

The company’s portfolio includes brands such as Birds Eye, Healthy Choice, Marie Callender’s, Duncan Hines, Slim Jim, Orville Redenbacher’s, Hunt’s, Banquet and Reddi-wip. Its products are sold primarily in the United States, as well as in international markets.

Conagra traces its roots to Nebraska Consolidated Mills, founded in 1919. The company adopted the ConAgra name in 1971 and became Conagra Brands in 2016.

Conagra Brands Q2 2024 Earnings Call Transcript

Key Takeaways

• Despite continued consumer value-seeking tactics amid record inflation, Q2 domestic retail volume loss improved to –3.3% from –10.5% in Q1, driven by strong recovery in Refrigerated & Frozen.
• Targeted Q2 investments in frozen single-serve meals, including high-quality merchandising, drove lifts of up to 60% and delivered a record market share near 51%.
• Q2 results showed a 3.4% decline in organic net sales, adjusted gross margin of 26.9% (down 129 bps), operating margin of 15.9% (down 108 bps), and EPS of $0.71 (down 12%), alongside nearly 6× first-half free cash flow versus prior year.
• International net sales grew 5.6% organically, with Canada and Mexico above 9%, and foodservice grew 4.3%, both segments expanding adjusted operating margins.
• Fiscal 2024 guidance updated to organic net sales down 1–2%, adjusted operating margin ~15.6%, and EPS of $2.60–2.65, while increasing second-half brand investments to drive momentum into FY 2025.

Presentation

[Operator]

Good morning, and welcome to the Conagra Brands second quarter fiscal 2024 earnings 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, this event is being recorded. I would now like to turn the conference over to Bayle Ellis, Manager of Investor Relations. Please go ahead.

[Bayle Ellis, Manager of Investor Relations at Conagra Brands]

Good morning, and thanks for joining us for the Conagra Brands second quarter and first half fiscal 2024 earnings call. Sean Connolly, our CEO, and Dave Marberger, our CFO, will first discuss our business performance and then we'll open up the call for Q&A. We will be making some forward-looking statements today, and while we are making those 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, including adjusted numbers that exclude items management believes impact the comparability for the period referenced. Please see the earnings release and the slides for GAAP to non-GAAP reconciliations and information on our comparability items, which can be found in the Investor Relations section of our website.

[Bayle Ellis, Manager of Investor Relations at Conagra Brands]

I'll now turn the call over to Sean.

[Sean Connolly, CEO at Conagra Brands]

Thanks, Bayle. Good morning, everyone, and happy New Year. Thank you for joining our second quarter fiscal 2024 earnings call. Let's start with the Q2 headlines shown here on slide five. 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.

[Sean Connolly, CEO at Conagra Brands]

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 2025 in a position of strength. I will share more on our multifaceted action plan in a few minutes.

[Sean Connolly, CEO at Conagra Brands]

Finally, we are updating our guidance for fiscal 2024, 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 emerge 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.

[Sean Connolly, CEO at Conagra Brands]

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.

[Sean Connolly, CEO at Conagra Brands]

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 nine shows volume results in our key U.S. retail segments, both separately and combined.

[Sean Connolly, CEO at Conagra Brands]

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 -10.5% in the first quarter to -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 food service 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%.

[Sean Connolly, CEO at Conagra Brands]

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 food service, 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 food service 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.

[Sean Connolly, CEO at Conagra Brands]

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 2024 was almost 6 times what it was in the first half of fiscal 2023. We used some of that free cash flow to pay down 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.

[Sean Connolly, CEO at Conagra Brands]

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 2024 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.

[Sean Connolly, CEO at Conagra Brands]

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. We're updating our guidance for fiscal 2024, 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 2023, 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.

[Sean Connolly, CEO at Conagra Brands]

With that, I'll pass the call over to Dave to cover the financials in more detail.

[Dave Marberger, CFO at Conagra Brands]

Thanks, Sean, and good morning, everyone. Slide 18 highlights our results from the quarter. Overall, our team executed well as we continued to navigate consumer behavior shifts that pressured our volume and mix. In Q2, net sales were $3.2 billion. As Sean discussed earlier, this reflects a 3.4% decrease in organic net sales, driven primarily from lower year-over-year volumes. However, this is the third quarter in a row where the rate of volume change versus the prior year quarter improved. Amid these broader macroeconomic challenges and increased brand investments, we delivered solid margins in EPS, along with strong free cash flow during the second quarter. Adjusted gross profit decreased by 7.6% in the quarter, as the positive impact from productivity initiatives was offset by cost of goods sold inflation, unfavorable operating leverage, lower organic net sales, and increased trade investment.

[Dave Marberger, CFO at Conagra Brands]

Adjusted operating profit decreased 9.3% and Adjusted EBITDA decreased 7%, largely driven by the decrease in adjusted gross profit, partially offset by an increase in equity earnings, driven by continued strong operating performance in our Ardent Mills joint venture. We delivered Q2 adjusted net income of $341 million, or $0.71 per diluted share. Slide 19 provides a breakdown of our net sales for Q2. The 3.4% decrease in organic net sales was primarily driven by the consumer dynamics just discussed. Further contributing to the decline was a 0.5% decline in price mix, which reflects an increase in strategic trade investments made during the period and an unfavorable mix impact from selling a higher percentage of lower sales dollar per unit items.

[Dave Marberger, CFO at Conagra Brands]

This was partially offset by price increases taken on our tomato-based products, given the continued high inflation. We also saw a small benefit from foreign exchange, which is reflected in our net sales decline of 3.2%. Slide 20 outlines the top-line performance for each segment in Q2. While organic net sales were down in our domestic retail segments, we delivered sequential volume progress that benefited from the targeted strategic investment Sean discussed earlier. We also continued the strong momentum in our international and food service segments, which delivered Q2 organic growth of 5.6% and 4.3% respectively. Slide 21 shows our Q2 adjusted margin bridge. While our productivity initiatives remain on track, our margin was negatively affected by the continued impact of overhead absorption from our lower volumes.

[Dave Marberger, CFO at Conagra Brands]

Cost of goods sold inflation was a headwind of 1.7%, and price mix was a 0.6% headwind, which reflects the retailer investments made during the period. These factors combined drove the decline in adjusted gross margin for the quarter. Our adjusted operating margin benefited from small year-over-year favorability in A&P and SG&A. Slide 22 details our margin performance by segment for Q2. Adjusted operating margin in both our grocery and snacks and refrigerated and frozen segments decreased due to the margin drivers I just discussed, although inflation impacted the grocery and snack segment at a higher rate than refrigerated and frozen. We were pleased that our food service adjusted operating margin expanded 193 basis points, and our international segment's adjusted operating margin expanded 30 basis points, both driven by higher organic net sales and productivity, as both segments are showing consistent improvement.

[Dave Marberger, CFO at Conagra Brands]

Food service also benefited from comparison to prior year Q2, which included supply chain disruptions. Our Q2 adjusted EPS performance of $0.71 was $0.10 below the prior year quarter, primarily from the decline in adjusted gross profit and pension income and higher interest expense. This was partially offset by slightly lower A&P and adjusted SG&A expense, along with increased equity method investment earnings driven by Ardent Mills. The A&P change was timing related, as we expect to increase A&P spending in the second half, and the decline in SG&A was primarily the reduction in incentive compensation versus the prior year. Slide 24 displays the significant progress we made in the quarter and first half on free cash flow and our net leverage ratio.

[Dave Marberger, CFO at Conagra Brands]

Over the first half of fiscal 2024, we delivered a $532 million improvement in free cash flow, with a conversion rate of approximately 97%, the highest first half conversion rate over the past five years. Our focus on managing inventory levels and improvement in accounts payable directly contributed to these strong results. In addition, we had strong cash distributions from Ardent Mills in the second quarter, reflecting the strong profit and cash flow performance of Ardent Mills the last few years. Our strong free cash flow has helped us deliver debt reduction during the period. At the end of Q2, our net leverage ratio was 3.55 times, reflecting debt repayment of more than $500 million over the last 12 months.

[Dave Marberger, CFO at Conagra Brands]

Looking ahead to the remainder of fiscal 2024, we expect to continue our debt reduction efforts as we prioritize our long-term leverage target of 3x. We chose not to repurchase any shares in the quarter as we continue to prioritize paying down debt this fiscal year. We will continue to evaluate the best use of capital to optimize shareholder value as we progress through the fiscal year. As mentioned, we are updating our guidance for fiscal 2024 to reflect our year-to-date results, expectations for the slower pace of volume recovery, and the additional brand investments in the second half. Slide 25 outlines our expectations for our three key metrics, including organic net sales to decrease between 1% and 2% compared to fiscal 2023, with volumes continuing to improve through the back half of the year.

[Dave Marberger, CFO at Conagra Brands]

Adjusted Operating Margin of approximately 15.6% and adjusted EPS between $2.60 and 2.65. Turning to slide 26, I'd like to take a minute to walk through the considerations and assumptions behind our guidance. We expect net inflation to moderate through the remainder of the fiscal year, resulting in an inflation rate of approximately 3% for fiscal 2024. Regarding pricing, there are a few dynamics currently at play. With our estimated 3% inflation rate, we are seeing areas that are still highly inflationary, such as tomatoes and starches, which are up above the average, and areas that are deflationary, such as edible oils and dairy, which are below the average. These dynamics have resulted in both inflation-justified pricing actions and select pass-through price reductions included in our outlook.

[Dave Marberger, CFO at Conagra Brands]

We expect that these dynamics, combined with our increased second half investments, will result in price mix being down versus prior year in the second half. We now anticipate CapEx spend of approximately $450 million in fiscal 2024 as we continue to make investments to support our growth and productivity priorities, with a focus on capacity expansion and automation. As a result, we continue to expect to achieve gross productivity savings of approximately $300 million by the end of fiscal 2024. We expect interest expense to approximate $440 million, primarily due to a higher weighted average interest rate on outstanding debt. While we do not expect to receive any benefit from pension income, we expect Ardent Mills to contribute approximately $170 million to our bottom line due to its continued strong performance.

[Dave Marberger, CFO at Conagra Brands]

Our full-year tax rate estimate remains approximately 24%. As I discussed, we are prioritizing our debt reduction efforts and expect to further reduce our outstanding net debt in the second half. Longer term, we remain on track to reach our 3x net leverage ratio target by the end of fiscal 2026. 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.

[Operator]

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble the roster. Our first question will come from Andrew Lazar of Barclays. Please go ahead.

[Andrew Lazar, Managing Director and Senior Equity Research Analyst at Barclays]

Great. Good morning, everybody.

[Sean Connolly, CEO at Conagra Brands]

Morning.

[Dave Marberger, CFO at Conagra Brands]

Morning.

[Andrew Lazar, Managing Director and Senior Equity Research Analyst at Barclays]

Sean, I know that I think investor concern for the group as a whole, right, has been sort of building, that there would ultimately be a need for sort of greater price investment to deliver volume improvement, and that it could get to the point where it could start to more negatively impact sort of margin profiles. So I guess my question is, how can we be comfortable that the investments being made are sort of ROI or value enhancing, rather than, let's say, money being spent to simply flatter volume at the expense of margins and sort of disrupt the broader competitive environment?

[Sean Connolly, CEO at Conagra Brands]

Well, I think, Andrew, in terms of how we think about return on investment, let me be very clear around what we are and what we are not doing in support of our brands. Number one, as you heard in our prepared remarks, we've got a multifaceted investment plan that spans advertising, innovation support, merchandising support, and more. Number two, we've got an ROI mindset in everything we do. This company has worked very hard to expand our operating margins over the last nine years, and we did not get there by being frivolous. Number three, with respect to merchandising, you know, I've consistently pointed out that there was room to do more in a high-quality way, operative words, high quality, now that the supply chain is humming again, especially on key brands and around key merchandising windows.

[Sean Connolly, CEO at Conagra Brands]

And as you know, Conagra's merchandising today is very different from a decade ago. Our overall merchandising levels are below peers, and our depth of discount is extremely reasonable. It's been over the last several years more of a frequency strategy. The last point I'll make is that part of our ROI mindset is understanding where the consumer is in terms of their readiness to reengage with more typical purchase behaviors, and it was important that we test that a bit in Q2. And as you heard in our remarks, we liked what we saw.

[Sean Connolly, CEO at Conagra Brands]

So I think all of this adds up to a deliberate plan in the second half to smartly invest, to build momentum with consumers, set ourselves up for a nice fiscal 2025, and be very responsible in terms of the types of activities we engage in. And again, it's everything from merchandising to advertising. But that, I think that's kind of the response I'd give you to that question.

[Andrew Lazar, Managing Director and Senior Equity Research Analyst at Barclays]

Thank you for that. Then, you know, the assumption, I think, was that consumer behavior by now, or the initial assumption anyway, was that consumer behavior by now would have started to improve, and as you talked about, it seems the timing of that's been pushed out a bit. I guess, what are you embedding in terms of consumer behavior into your sort of new guidance at this stage?

[Sean Connolly, CEO at Conagra Brands]

Yeah, great question. Here's how to think about where we are, big picture. Yes, the macro environment has challenged volumes for the group a bit longer than expected, and yes, we would all like to get back on growth algorithms ASAP. But in the simplest sense, before you can return to volume growth, you have to sunset the volume declines and get them into your base. And that's why we've been very focused on tracking volume trends. And as you saw in our deck, those trends have improved significantly, particularly where we have invested to reengage lapsed consumers. In fact, Conagra's trend bend in Q2 has been one of the better ones in the group.

[Sean Connolly, CEO at Conagra Brands]

So given the consumer response we saw in Q2, the associated increase in H2 investments and the easier comps we've got in H2, we fully expect that the volume declines will further sunset in the second half. But to be clear, and to answer your question, we are not banking on a major improvement in the macro, or are we signing up for huge volumes. The goal at this juncture is to build momentum, move the volumes back toward growth as we approach fiscal 2025, and make sure that we deliver along the way without signing up for anything heroic. And I think that kind of best describes where we are.

[Andrew Lazar, Managing Director and Senior Equity Research Analyst at Barclays]

Got it. Thanks so much.

[Operator]

The next question comes from Peter Galbo of Bank of America. Please go ahead.

[Peter Galbo, Managing Director and Senior Equity Research Analyst at Bank of America]

Hey, guys. Good morning. Thanks for taking the question.

[Sean Connolly, CEO at Conagra Brands]

Morning, Pete.

[Dave Marberger, CFO at Conagra Brands]

Morning.

[Peter Galbo, Managing Director and Senior Equity Research Analyst at Bank of America]

Dave, just in your commentary around kind of price mix, both on the quarter and into the back half of the year, you know, I think you spoke a bit about not only the incremental investment, but also just some of the pass-through nature. Just, is there any way to elaborate more or dimensionalize just how much of the price mix decline is really that pass-through component relative to maybe some of the incremental investments you're making at retailers?

[Dave Marberger, CFO at Conagra Brands]

Yeah, let me try to give you some color, and kind of unwind the price mix. Let me start with Q2. So our price mix for the quarter was -0.5%. There were several dynamics to that. So if you start with our tailwinds, as I mentioned, we did take pricing. We thought we have high inflation in tomatoes. We took tomato pricing in our domestic retail and food service business. We did have some other pricing in international. That was partially offset by some pass-through pricing we have basically in our oil-based businesses, which is our spreads business. So when you net those together, pricing was actually a tailwind, so it was positive in that price mix. The other component was investment in slotting. Slotting was pretty significant this quarter.

[Dave Marberger, CFO at Conagra Brands]

It was about 30 basis points year-on-year of investment to support our large slate of innovation, which we talked about in the prepared remarks. Another piece that was negative this quarter was mix. And, you know, this is simply selling a higher percentage of our lower sales dollar per unit item. So for example, lower sales on a multi-serve meal like Bertolli, relative to higher sales on a Banquet pot pie. That is just a negative sales mix. That's a timing thing, Peter. So, over the course of the year, that tends to work out, but quarter to quarter, it can flip a little positive or a little negative. So that was negative in this quarter. And then the remaining piece is the trade and merchandising investment.

[Dave Marberger, CFO at Conagra Brands]

And that was, you know, less than the slotting investment for the second quarter. So there's a lot in there that gets to that 0.5. I did comment that in the second half, we do expect price mix to be down. Those dynamics are pretty much the same. We would expect less negative impact from mix in the second half and more increase in kind of the trade and merchandising investment. So the second half price mix will be a little bit down, a little bit more than we saw in Q2, but directionally in that area. So that hopefully that gives you some color on price mix.

[Peter Galbo, Managing Director and Senior Equity Research Analyst at Bank of America]

Yeah, no, that's very helpful. Thank you for that. And then maybe just, you know, secondly, like on the leverage piece, guys, you know, you have the bond that comes due in May. You know, the leverage at least has kind of stabilized, but with the earnings coming down, just how are you thinking about, you know, debt paydown on that $1 billion relative to refinance at this point, you know, as we kind of go forward here?

[Dave Marberger, CFO at Conagra Brands]

Sure. So we're always looking at all of our options. Obviously, we have our commercial paper. We have, you know, a lot of liquidity. As you saw in the first half, our Free Cash Flow was very strong. Usually, this company, we don't deliver really strong Free Cash Flow in the first half. Our conversion is usually very low, with all the Free Cash Flow coming in the second half. Well, given our focus on working capital and Ardent Mills cash distributions, we had a very strong first half, and we expect the second half Free Cash Flow to be very strong as well.

[Dave Marberger, CFO at Conagra Brands]

So it puts us in a nice position where come May, when the bonds due, we're gonna have strong Free Cash Flow, we have access to our commercial paper, and then obviously, we're always looking at the capital markets to see if there's an opportunity to refinance. You know, rates seem to be coming down. We watch them very closely. So, we look at all the options and we figure out what's the best combination. You know, maybe we use our Free Cash Flow to repay down some of it and refinance the other part. But we'll look at all our options as we go forward, but I like where we are given our strong free cash flow.

[Peter Galbo, Managing Director and Senior Equity Research Analyst at Bank of America]

Great. Thanks, guys.

[Operator]

The next question comes from Robert Moskow of TD Cowen. Please go ahead.

[Robert Moskow, Managing Director at TD Cowen]

Hi, thanks for the question. I guess it's a two-parter. One is, I think the guidance at the start of the year for advertising was to grow it, as a percentage of sales to be consistent, with what it was last year. And so I guess the first part of the question is: Now that you've cut your sales guide, does that mean that the advertising, it sounds like you're keeping advertising the same, so does that mean that it will be higher, as a percentage of sales for the year? Or do you have to cut the A&P commensurate with the sales growth?

[Dave Marberger, CFO at Conagra Brands]

Yeah, Rob, so let me, let me answer that a couple different ways. So if you, if you just look at the total year, our guide, our operating margin guide is approximately 15.6%. That's where we came in in fiscal 2023. And when you look at gross margin, you look at A&P and SG&A, we generally expect to be in line with where we were prior year. So to your question, if, if we were at 2.4% last year, if we come in again at 2.4%, dollar-wise, that's a little bit lower than where we were, and we're still looking at that. There's, there's opportunity to spend up if we want to.

[Dave Marberger, CFO at Conagra Brands]

The way we look at it, though, is if you look at A&P, first half versus second half, our A&P spending is gonna be up around 20% in the second half relative to the first half. So we're just looking at what's the run rate on spend now and what is it going to be in the second half to support the advertising that, that Sean talked about and our other kinda digital, advertising that we've been doing. So we feel good about the second half, and the trajectory of the A&P relative to the first half.

[Sean Connolly, CEO at Conagra Brands]

Rob, it's Sean. I'll just add a point on there. As we talked to our team about delivering this year, we said at the beginning of the year, two things we're gonna have to demonstrate as a team, and those things are agility and resilience. Part of the agility piece from the beginning of the year has been really trying to understand the consumer readiness to resume more typical purchase behaviors after we saw some of the shifts emerge in the spring. So you may recall on last quarter's call, I mentioned that our assessment was the consumer wasn't quite ready to engage in that.

[Sean Connolly, CEO at Conagra Brands]

So we were fairly conservative in Q1 and Q2 in terms of deploying some of these dollars, because we wanted to kinda keep those funds for the back half of the year, where we had more confidence that the consumer was really gonna be ready. And we, as we mentioned in our prepared remarks, we deliberately tried to assess that readiness in Q2, and we really were quite encouraged by what we saw.

[Sean Connolly, CEO at Conagra Brands]

So now that we've got a lot of our powder still dry for the back half of the year, we've got some easier comps, and we've got consumers that are demonstrating a real willingness to kinda reengage their more typical purchase behaviors with a little bit of a nudge from us across this multifaceted investment plan, we like where we sit in terms of the fullness of the support for the back half of the year.

[Robert Moskow, Managing Director at TD Cowen]

Got it. Second part is, it sounds like you're very happy with the lifts you've seen in the promotional activity behind Frozen. Sean, can you speak more broadly about whether the food industry and retailers overall are happy with the lifts that they're seeing on a more broad basis? I think I hear kind of some dissatisfaction from certain big retailers about the lifts and that the rollbacks haven't gotten the response that they fully expected. Is it possible to speak more broadly about what you're seeing?

[Sean Connolly, CEO at Conagra Brands]

Yeah, I'll give you a sense of it, Rob, because we've got a pretty large scope here at Conagra, and so if you look at where we invest and where we wanna get good lifts, we're super selective, right? We pick our spots. You know, we're not out there spending money trying to drive lifts on Manwich or business like that. We're driving lifts. We're focusing our dollars on those categories where we know the consumer really wants to buy the category, but for other reasons, particularly the objective of trying to stretch their budget, they've made a short-term sacrifice, and that's the way they describe it to us when we talk to them. They're depriving themselves, they're sacrificing, particularly on convenience items.

[Sean Connolly, CEO at Conagra Brands]

So, if you look at a product like frozen single-serve meals, where we saw such tremendous lifts in Q2, what you've got going on here is some consumers who are really financially stretched, were basically forced to give up on some of that buying rate. You know, they didn't stop buying the category, they reduced their buying rate, and they started doing things like scratch cooking rice and beans and ground beef. They do not wanna do that. I can assure you, I've been in food for 30 years, that's the last thing they wanna do. They don't like to cook, they don't like to clean, they don't like any of that. They'd rather be buying our stuff. But when they've got to make some short-term trade-offs, especially over the course of the summer, when they were spending their money on things like travel, they'll do it short term.

[Sean Connolly, CEO at Conagra Brands]

But when you give consumers with that kind of a headset, a bit of a stimulus to reengage, they're super responsive to it. But again, not every category is created equal. So if it's more of a staple category, where there's another alternative, where they were trading down to a store brand, maybe you're not gonna get a lift. But that's not the kind of investments we're talking about. Those are not the kind of events or categories where we're focusing our energy.

[Robert Moskow, Managing Director at TD Cowen]

Makes sense. Thank you.

[Operator]

The next question comes from Pamela Kaufman of Morgan Stanley. Please go ahead.

[Pamela Kaufman, Executive Director and Equity Analyst at Morgan Stanley]

Hi, good morning. Happy New Year.

[Dave Marberger, CFO at Conagra Brands]

Good morning.

[Sean Connolly, CEO at Conagra Brands]

Hi, Pam.

[Bayle Ellis, Manager of Investor Relations at Conagra Brands]

Happy New Year, Pam.

[Pamela Kaufman, Executive Director and Equity Analyst at Morgan Stanley]

Can you give some more color on the drivers behind your reduced top-line guidance for the year? How much of it is a change in your expectation for volumes versus greater price investment. And then just, you mentioned that in the second half, you'll see price declines. Can you frame the magnitude of the declines relative to the second quarter?

[Sean Connolly, CEO at Conagra Brands]

Yeah, Pamela, it's Sean. Let me make just a quick comment up front, I'll flip it over to Dave. You know, the macro environment that we talked about in Q1, I mentioned again today, it persisted into Q2. So we've just seen fewer purchases in our first half than we would have assumed at the beginning of the year. So that's part of the call down the top line.

[Sean Connolly, CEO at Conagra Brands]

The second part of it is, I don't wanna sign us up at this point for any kind of heroic volume recovery in the back half of the year, because, you know, I think the mood of our investors is, let's, let's be prudent, let's be up the middle of the fairway. Let's put some targets out there that are, are not making any grand assumptions that we can meet or beat. And that's kind of, you know, what's, what's behind it. Because we like the momentum we saw in the second quarter. We have every intention of further driving that momentum in the second half, and we, we have a high degree of confidence that we're going to get what we expect.

[Sean Connolly, CEO at Conagra Brands]

At this point, that's really what we are focused on: fiscal 2025, setting up a really nice fiscal 2025 and exiting this year with momentum. The sales outlook that we've given for the balance of the last year kind of is right in that vein. Dave, over to you.

[Dave Marberger, CFO at Conagra Brands]

Yeah. So, Pam, if you just take the midpoint of our guide for the year on organic net sales, that implies a second half organic net sales of -1%. And that's going to be a combination based on the way we forecasted it and incorporating the comments, the important comments Sean just made, is a combination of price mix, slightly negative price mix, and slightly negative volume. The combination of those two to get to the -1% organic. That's H2, and that's improvement on total sales and volumes as we've seen Q1 to Q2 and then H2. We expect that improvement to continue, so that as we, you know, we continue to track towards growth by the time we get to the end of fiscal 2024.

[Pamela Kaufman, Executive Director and Equity Analyst at Morgan Stanley]

Okay, thanks. That's helpful. And then just to clarify on the reduction in your operating margin guidance for the year, how much of that is a reflection of your expectations for lower gross margins versus increased operating expenses and more brand investment?

[Dave Marberger, CFO at Conagra Brands]

Yeah, so if you look at the second half, gross margins, if you look at where we landed the first half in gross margins, we were at 27.2, I think, is our first half gross margin. Our second half should be generally in line with that, maybe a little bit below that. So the second half, where you're gonna see the reduction in operating margin, is coming from the higher investment in A&P, as a percentage of sales, and the timing of SG&A being higher in H2 than it was in H1.

[Dave Marberger, CFO at Conagra Brands]

So that's really the second half reduction in operating margin. So when the dust settles and you look at the full year, we've guided to 15.6 operating margin, that will be in line with fiscal 2023. And if you look at kind of where we land with margin, A&P and SG&A, we'll be pretty close to where we were prior year.

[Sean Connolly, CEO at Conagra Brands]

Got it. Thank you. That's helpful. I'll pass it on.

[Dave Marberger, CFO at Conagra Brands]

Thanks.

[Operator]

The next question comes from Alexia Howard of AllianceBernstein. Please go ahead.

[Alexia Howard, Senior Analyst at Bernstein]

Can I ask about innovation, in terms of... I guess during the pandemic and also during the period of supply chain disruption, I imagine that the pace of innovation was dramatically reduced. How quickly is it recovering? Can you give us any numbers on how quickly the pace of innovation is likely to pick up over the course of the next few quarters?

[Sean Connolly, CEO at Conagra Brands]

Sure, Alexia. So let me take us back to kind of the pandemic for a minute. When we got hit with the pandemic, we fully expected that we would hit the pause button on innovation, even though we had the pipeline ready to launch. To our surprise, our customers asked us, in a very convincing way, not to do that.

[Sean Connolly, CEO at Conagra Brands]

And so we slowed innovation launches modestly during the pandemic, but only modestly. And if, in fact, if you look at the amount of innovation we continued to put into the marketplace through the pandemic, it was probably the highest or among the highest in our peer group. So we really didn't pause the way we expected, when we kept the momentum there since then. Last year was a much bigger launch. It was one of our biggest launches yet, and we had tremendous performance in terms of productivity per TPD and overall TPDs. And this year is perhaps our biggest innovation slate yet. So the... We'll share some metrics when we're at CAGNY.

[Sean Connolly, CEO at Conagra Brands]

Just to give you a kind of what we track historically, we track this thing called renewal rate, which is a percentage of our annual sales. It comes from items we've launched in the last three years. You know, 10 years ago, we were probably at 8%, and then over the last five years, we've probably hit a high water mark of 15%. So that's kind of the ballpark we like to be in, is that 13%-15%, depending upon what we've got coming into the marketplace. And again, this year is our biggest launch year yet. And we've also, as Dave pointed out, back that with customer investments and slotting investments, both in the front half and very, very materially in the second half this year.

[Sean Connolly, CEO at Conagra Brands]

We'll do the full parade of innovation for you in a month or so at CAGNY, so you can see it. We hit some of the highlights today in our prepared remarks. I think the fun one is this Wendy's Chili business, 'cause we're always focused on frozen and snacks around here, and this thing has just emerged from zero to be a major player in that category. More to come on that in CAGNY, but net-net, it's a very significant year for us on an innovation front.

[Alexia Howard, Senior Analyst at Bernstein]

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

[Sean Connolly, CEO at Conagra Brands]

Thank you.

[Operator]

The next question comes from Nik Modi of RBC Capital Markets. Please go ahead.

[Nik Modi, Managing Director at RBC Capital Markets]

Thank you. Good morning, everyone. So just two quick questions. Just I don't think it's an impact, but all the drama going on in the Red Sea, just wanna make sure there's no issue with freight rates or, you know, some of the temporary spikes that we're seeing. That's the first question. And then the second question is just, Sean, I'd love your kind of observation of out-of-home versus in-home. You know, it seems like it's a very mixed bag, depending on what, you know, category or meal occasion we're talking about. But I just would love your view, 'cause the thought is if the consumer is coming under more pressure, we should start seeing more in-home consumption, which should benefit you as the year kinda goes through. So just love your thoughts on that?

[Sean Connolly, CEO at Conagra Brands]

All right. So Nik, the first one's easy. The answer is no. No, no impact there. And on the second one, that is a very keen observation, because I mentioned how our volume outlook for the back half of the year does not assume anything heroic. Part of not assuming anything heroic, we're not assuming that some of the away from home dollars begin to shift into at home, and you're 100% correct. If that happens, that's a tailwind for us and probably for the group. What's very interesting is how sticky some of this away from home spending has been, even though we've seen a challenged consumer who is making trade-offs to stretch their household balance sheet. The one place that they've been fairly resilient is in their away from home spending.

[Sean Connolly, CEO at Conagra Brands]

Should consumer stress increase from here, that is historically the first place that you would see an additional behavior shift: you would see a reduction in away from home spend, and you would see an equal and opposite response in in-home eating. That has not happened yet, but, you know, as we think about calendar year 2024, certainly that is a potential positive if the environment remains stressed and the consumer, you know, decides they need to make further shifts.

[Nik Modi, Managing Director at RBC Capital Markets]

So I just to follow up on that, when you think about price gaps, right, with your strategic investments, is it really just kind of thinking about what goes on within the center of the store, within the frozen unit? Or are you also thinking about kind of some of the price gaps between what you guys sell versus what maybe some quick low-end QSR would be priced at?

[Sean Connolly, CEO at Conagra Brands]

You know, the price gaps versus away from home tend to take care of themselves. When the consumer reaches a point, and they say, "Look, my burrito and my Coke to go have now gotten too expensive," they first make the switch to stop doing that. Second, they switch to buy in a grocery store, and third, hopefully, they're buying our products. But we do look at our categories and look at this volume malleability as if it is an open set, meaning it's not just what's on shelf and then what's to the left or right of it that's switching, but it could be other categories. So an example would be, I referenced in our prepared remarks today, that we are gonna be one of the things we're gonna be investing behind is advertising on our Birds Eye business.

[Sean Connolly, CEO at Conagra Brands]

Well, that is in the marketplace right now. It's running, and it is directly comparative advertising to canned vegetables. And it is focused on delivering a superior relative value message, because while it might be tempting to trade down to a canned vegetable in the current environment, the trade-off on quality is simply not worth that, that trade-down, and you end up actually, you know, in a worse value proposition. So, so that's an example of where we're thinking about the competitive set more broadly than what's immediately to the left or right of our products in any given section, and we're thinking about where consumers might go elsewhere and really getting after that in a very targeted, hard-hitting way with a focus on quality and, and superior relative value.

[Nik Modi, Managing Director at RBC Capital Markets]

Excellent. Very helpful. Thank you.

[Sean Connolly, CEO at Conagra Brands]

Thanks.

[Operator]

The next question comes from Max Gumport of BNP Paribas. Please go ahead.

[Max Gumport, VP and Senior Equity Analyst at BNP Paribas Exane]

Hey, thanks for the question. Turning back to gross margin, so a year ago, you were really the first packaged food company to begin to sunset the inflation super cycle and start to post sizable gross margin expansion. But with price mix turning negative now, partly due to the increased trade investment, it seems like productivity is now fighting against inflation, absorption, and the negative price mix to hold up gross margin. Are these trends still in line with the mechanical nature of how these inflationary cycles typically have played out in the past, or are there nuances starting to develop this time around? Thanks.

[Sean Connolly, CEO at Conagra Brands]

Well, Max, I'll kick it off and then flip it to Dave. You know, all the mechanical wrap stuff should work the way it always does, unless there is something new going on with the consumer. And what we saw right after Easter was that something new did start emerging with the consumer as they started making some of these behavior shifts. So that dynamic is not assumed in the typical mechanics of a wrap, right? So that's why, and by the way, as soon as that dynamic begins to either be embedded in the base or just improve in the outright, then the mechanics of a typical wrap go right back to what they would always be.

[Sean Connolly, CEO at Conagra Brands]

So that's why we've been focused on these volume trends, because right through last quarter, when you looked at the group, you didn't see the bend when you looked across 15 weeks, 13 weeks, 5 weeks. Now, particularly for us, you've seen that bend, and that bend is getting pretty close to being kind of embedded in the base. And once it does, then you know, you're set up to be back on algorithm, so to speak. Dave, you want to add anything to that?

[Dave Marberger, CFO at Conagra Brands]

Yeah. So if you, if you just look at the guidance and you, and you kind of say, "Okay, where are we gonna land?" We guided to operating margin of 15.6%. In that is gross margin, and gross margin is gonna come in pretty close to where it landed in fiscal 2023. So you, you look at that and you say, "Okay, we kept gross margin flat to prior year when we've wrapped on pricing. Our sales are going to be down for the year based on our guidance, and we've had a pretty significant impact from negative absorption," right? Because volumes were down all of last year, and they're down first half of this year. So, you know, being in manufacturing, when you start to get your volumes more stable and actually start, you know, inflecting them to be positive, that negative absorption headwind goes away.

[Dave Marberger, CFO at Conagra Brands]

So the focus now is we keep gross margins flat this year. We're increasing our investment, which gets our total investment when we finish this year, back to more normalized trade levels. So we're gonna have a business where the margins are consistent with last year, our investment's back to where it was, and we have a lot of negative absorption that's in our base. So if fiscal 2025, we can get back to growth, we have some opportunities to leverage our cost base. We have an investment base, that's where it should be, and it sets us up well for fiscal 2025. So there's a lot of things bouncing around, but when you helicopter up and you just look at where we're gonna finish the year, that's how I think about it.

[Max Gumport, VP and Senior Equity Analyst at BNP Paribas Exane]

Great. And then turning to the investments, it's good to hear about the favorable response you saw in the second quarter, and you know, what that means for your increased investment in the second half. I'm just curious, you know, are you expecting that investment to help category volumes? Or if other companies are seeing the same response that you're seeing, are we really just talking about a share fight and it, you know, doesn't really improve category volumes? Thanks. I'll leave it there.

[Dave Marberger, CFO at Conagra Brands]

Yeah, really interesting question. Basically, what we're saying is that, yes, the consumer is still deploying some value-seeking tactics to stretch their balance sheet, and that has had some impact on how they've prioritized categories. And not every category, you know, is equal there, Max, in terms of what we've seen in the category. So we've seen tactics like this from consumers before, and they tend to serve their purpose over a short horizon, and then they tend to disappear. But interestingly, even in some of the categories that remain softer than usual, we are seeing volume malleability via investments that drive share. But over time, frankly, we will take what the field gives us in the moment, whether that's improved volumes through share gains or improved volumes through improving category momentum. I think we're gonna see both going forward.

[Max Gumport, VP and Senior Equity Analyst at BNP Paribas Exane]

Great. Thanks very much.

[Operator]

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

[Chris Carey, Senior Equity Analyst at Wells Fargo]

Hi, good morning.

[Sean Connolly, CEO at Conagra Brands]

Good morning.

[Chris Carey, Senior Equity Analyst at Wells Fargo]

So, clearly, investment and promotions are topics that have been, well discussed on this call, rightly so. I think for me, you know, the question on that is just, and you've given a lot of great detail. You know, the question is really, you know, the step up in investment that you expect in the back half of the year, which sounds quite strong. Are you seeing the lift in your volumes so far this quarter to give you the confidence on sequentially improving volumes into fiscal Q3 and again into fiscal Q4? Or is it more kind of conceptual? You've seen the uplift that these investments have had on certain of your businesses, which is giving you confidence in the back half? So, more so are you seeing it versus the confidence piece, if that makes sense?

[Sean Connolly, CEO at Conagra Brands]

Yeah. Let me try to kind of hit what we touched on our prepared remarks, Chris. I'm not gonna comment on Q3. We're in Q3, so we'll stick with Q2. We saw clear evidence in Q2 that where we deployed investment to kind of help the consumer with this process of kind of reengaging in the more typical purchase behaviors, we got the response we were looking for. And because that was real empirical evidence, that, of course, inspired confidence that if we do more of that in the second half of the year, we will get a similar type of response. But from a planning posture standpoint, we are not banking on major improvement in the macro consumer environment or signing up for a huge consumer response.

[Sean Connolly, CEO at Conagra Brands]

You know, one might interpret that as, you know, we've got the investment in there, but what we're banking on in return is conservative. Look, in this current environment, that's probably not a bad posture to be in because this volume recovery has been more elongated than people expect. But I think that is a fair characterization of kind of what we're looking at.

[Chris Carey, Senior Equity Analyst at Wells Fargo]

Okay. All right, perfect. And one just quick follow-up. You mentioned, I believe, earlier in the call that incentive comp was a favorable SG&A item for fiscal Q2. Is there any way to dimensionalize that for the full year with the lower guidance, you know, for the year? That's it for me. Thanks.

[Dave Marberger, CFO at Conagra Brands]

Yeah, we really almost all of the delta in SG&A in the quarter was driven from incentive comp, so that really drove the delta in the quarter. We do expect SG&A as a percentage of net sales to be higher in the second half, so it'll get our SG&A as a percentage of net sales close to where it was a year ago. So there's some timing elements to this, especially with incentive comp, because it really can be a timing item relative to where you were in the prior year and your forecast. But as it relates to Q2, it drove all of the variance in SG&A.

[Chris Carey, Senior Equity Analyst at Wells Fargo]

Just to clarify, that SG&A is higher in the back half, excluding advertising, spending, or width?

[Dave Marberger, CFO at Conagra Brands]

Yeah, that's excluding. Yes. Adjusted SG&A, which we excludes A&P.

[Chris Carey, Senior Equity Analyst at Wells Fargo]

Yeah.

[Dave Marberger, CFO at Conagra Brands]

Yep.

[Chris Carey, Senior Equity Analyst at Wells Fargo]

Great. Okay, thanks so much.

[Dave Marberger, CFO at Conagra Brands]

Yep.

[Operator]

This concludes our question and answer session. I would like to turn the conference back over to the company for any closing remarks.

[Melissa Napier, SVP of Investor Relations at Conagra Brands]

It's Melissa Napier. We thank you again for joining us this morning for the call, and we're looking forward to seeing everyone at CAGNY next month.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.

Participants

Executives

• Bayle Ellis, Manager of Investor Relations
• Dave Marberger, CFO
• Sean Connolly, CEO

Analysts

• Alexia Howard, Senior Analyst at Bernstein
• Andrew Lazar, Managing Director and Senior Equity Research Analyst at Barclays
• Chris Carey, Senior Equity Analyst at Wells Fargo
• Max Gumport, VP and Senior Equity Analyst at BNP Paribas Exane
• Melissa Napier, SVP of Investor Relations at Conagra Brands
• Nik Modi, Managing Director at RBC Capital Markets
• Pamela Kaufman, Executive Director and Equity Analyst at Morgan Stanley
• Peter Galbo, Managing Director and Senior Equity Research Analyst at Bank of America
• Robert Moskow, Managing Director at TD Cowen