Sean Connolly
President and Chief Executive Officer at Conagra Brands
Thanks Bayle. Good morning, everyone and thank you for joining our third quarter fiscal 2022 earnings call. Today, Dave and I will detail our results for the quarter and our updated outlook for the remainder of the year. We'll then open the line to your questions. I'd like to start with the key messages we want to share with you this morning.
As we navigate a dynamic external environment, our team delivered a solid Q3 that was largely in line with our expectations on the top line and adjusted EPS. We remained laser focused on successfully executing the Conagra Way playbook by creating superior products and ensuring physical and mental availability to create lasting connections between consumers and our brands. This enabled us to deliver a robust plus 6% organic net sales growth for the third quarter, in line with what we expected.
The strength of our top line could be measured both in the absolute and relative to peers as we gain share in key categories on a one and two-year basis. And it's important to note that in response to inflation driven pricing that has been executed in the market to date, elasticities have been favorable through historical patterns even more so than what we expected. Unit demand remained strong as consumers continue to recognize the superior relative value that our portfolio provides.
As worldwide events contributed to an already challenging environment, our teams remained agile and nimble to respond effectively and continue to serve our customers. Our third quarter results reflect strong contributions from our latest innovations and we have another exciting innovation slate planned for fiscal 2023. But we also experienced higher than anticipated inflation as the third quarter unfolded. In the face of these heightened costs, we again made the deliberate decision to continue to invest the service orders and meet the strong consumer demand for our products, ensuring physical availability as an important part of maintaining and building trust and loyalty with consumers.
While these strategic investments contributed to margin compression in Q3, we believe making them was the right decision as we position Conagra for the long term. Ultimately, we landed Q3 EPS a bit differently than we previously anticipated, but we did get there. Our adjusted Q3 EPS actualized in line with our expectations, above forecasted performance in our Ardent Mills joint venture offset incremental Q3 inflation headwinds.
As we look to the remainder of the fiscal year, the environment isn't getting much easier in the near term. We now expect an additional $100 million of market inflation in Q4. The updated Q4 inflation forecast equates to a 26% increase versus two years ago. As we'll detail further today, this higher than expected inflation is disproportionately impacting some of our strongest businesses including meat snacks and frozen.
Keep in mind that these businesses rely on inputs like protein and dairy, which are harder to offset in the short term and that frozen requires more specialized temperature controlled transportation, but as we started to see this latest wave of inflation coming, we took action on pricing just as we have throughout the year. These new pricing moves go into effect in Q1 of fiscal '23 and are highly targeted toward frozen and protein snacks. These businesses have been distinguished by innovation-driven sales growth, favorable elasticities, continued share gains and limited private label competition.
So although we are experiencing pressure on our total company margins near term, we will see the benefits of the new pricing actions we've taken to offset this latest wave of inflation beginning in Q1 of fiscal '23. With this context, we're updating our outlook for the remainder of fiscal 2022. Our updated outlook reflects expectations for continued strong consumer demand for our products and lower than historical elasticities, as well as the further increase in our gross inflation expectations for the year and the timing of the related pricing actions.
Specifically, we now expect organic net sales for the year to be plus 4% and we project adjusted diluted EPS to land at about $2.35, which translates to approximately $2.65 of earnings power when taking into account the impact of the lag between inflation and our in-market pricing this fiscal year. And with that overview, let's dig into the quarter. As you can see on Slide 6, our team delivered solid Q3 results in the face of a highly dynamic and challenging operating environment. On a two-year CAGR basis, organic net sales for the third quarter increased at just under 8% and adjusted EPS grew by over 11%.
Looking at Slide 7, you can see that we continued to grow sales on both a one and two-year basis. Total Conagra domestic retail sales were up 18.5% on a two-year basis in the quarter. We also continue to gain share in the quarter with our category-weighted share growth up on both a one and two-year basis. And on a relative basis, our share performance continued to compare favorably to the industry overall and to our largest peers.
Slide 8 demonstrates that we gained category share at levels that outpaced our top 15 peers during the quarter. And if you take a look at the chart on the right, the share gains in our frozen and snacks domains were particularly notable. As you can see on Slide 9, our performance in frozen and snacks has driven our total Conagra share gains fiscal year-to-date and during the third quarter. Importantly, our categories are healthy, attractive and growing.
As you can see from the chart on the left, our frozen and snacks domains have grown nearly 8% and 9% during the fiscal year-to-date and third quarter respectively. So we're not just gaining share, we're gaining share in some of the most attractive parts of the store. These results are holding, notwithstanding our need to put significant inflation-driven pricing into the market.
On Slide 10, you can see the extent of our recent actions which increased in Q3 and have accelerated over the last five weeks. On shelf prices for our brands rose across all three domestic retail domains compared to the same period a year ago with inflation-driven price increases most concentrated in frozen and protein snacks. We implement these pricing actions, we're watching the impact on volumes closely and we are pleased that the price elasticity has remained below historical levels.
Slide 11 demonstrates that unit sales have remained consistently positive on a two-year basis even as the on shelf prices for our brands have increased. This dynamic is a testament to the fact that despite the broad-based inflationary environment we're operating in, the targeted nature of our inflation-driven pricing actions and the superior relative value of our products continue to resonate with our customers and consumers.
A great example of this is our Banquet brand in our frozen business. As we've discussed before, the Banquet brand is a mainstay in American households and has undergone considerable modernization to ensure that the brand delivers on its promise of relevant flavors, party [Phonetic] portions and a great value. Consumers see the relative quality and availability of our Banquet products and continue to choose Banquet despite inflation-driven price increases. Banquets volume has remained consistent as prices went up in stark contrast to a key competitor.
We see a similar story in our snacks domain with Slim Jim, another brand that has made lasting connections with its consumers through perpetual modernization, relevancy and availability. Despite the increased cost of protein and associated pricing actions, Slim Jim volumes have increased considerably, far outpacing a key competitor.
In addition to strong relative performance compared with other branded products, we also continue to maintain share relative to private label products. Slide 14 shows private label dollar share across the edible industry at large, across the categories in which Conagra competes and across Canagra's frozen and snacking category specifically.
Two things stand out about this chart. First, we compete in parts of the store with less private label penetration than the edible space at large. And second, the share of private label sales has remained stable amid the highly inflationary environment over the past several years. We believe the data shows that consumers are finding comfort in the quality, reliability and familiarity that national brands provide, particularly modernized brands like those in our portfolio. And we have not backed off from our modernization focus in the current environment. Innovation has remained a key to our success.
Slide 15 shows the impact of our disciplined approach to delivering new products and a modernized portfolio. During the third quarter, our innovation outperformed with strong results -- with the strong results we delivered in the year ago period. And once again, our innovation rose to the top of the pack in several key categories including with toppings, frozen vegetables and frozen plant-based meat alternatives. And we have another exciting lineup of new innovations set to hit the shelves during fiscal 2023.
The new product you see on Slide 16 are already being accepted by customers who have come to respect the innovation and marketing engine at Conagra and our ability to drive demand in key categories. Our ongoing investments in e-commerce also continue to yield strong results in the third quarter. We delivered compelling quarterly growth in our $1 billion e-commerce business as we outpaced the entire total edible category in terms of e-commerce retail sales growth in Q3, building on our momentum from fiscal 2021. Looking at the chart on the right, you can see that our e-commerce business has continued to grow as a percentage of our total retail sales as we continue to invest behind supporting our brands.
I'd like to briefly detail our performance across our three retail domains starting with our frozen business on Slide 18. Frozen continues to be one of the strongest businesses in our portfolio and offers convenience and quality that make it the perfect fit for today's consumer. In Q3, we continued to deliver strong growth on both a one and two-year basis and within this domain meat substitutes, single serve meals, desserts and multi-serve meals were the main drivers of our results. Driven by the appeal of our products to the consumer and the investments we've made in brand building and innovation, our leading frozen portfolio again grew share in Q3, both in the domain overall and within key categories.
Now, let's talk about snacks. Slide 20 highlights the meaningful acceleration in retail sales growth that we've experienced in our snacks business. In the third quarter our snacks business grew 11% year-over-year that equates to more than 30% growth over the same period in 2020. Within Snacks, we have seen growth across key categories, highlighted by more than 20% year-over-year growth in meat snacks. Similar to our frozen business, our snacks portfolio is gaining share in large and growing -- in this large and growing domain. We delivered share gains in multiple snack categories including several popcorn categories, meat snacks and hot cocoa.
Our staples retail sales have also been growing over two-year period and that trend continued in Q3. Specifically, we saw very large increases in retail sales for refrigerated with toppings and cooking spray, both of which were up over 25% in Q3 on a two-year basis. Since the onset of COVID-19 many consumers have rediscovered their kitchens reinvigorating the relevance of our staples portfolio. As demonstrated on Slide 23, our staples portfolio has increased its share during this critical time frame with two-year share gains across many key categories including Asian sauces refrigerated with toppings, syrup, sloppy Joe and canned meat.
When you take a step back and look across our portfolio and the retail domains in which we operate, you see broad-based strength and healthy categories. We are driving growth, gaining share in attractive categories and remain disciplined in executing the Conagra Way to create lasting connections with consumers. The health of our business is what will enable us to deliver profitable growth for the long term. In the immediate, however, we face a volatile cost environment that continues to be very challenging.
As the third quarter unfolded, our expectations for full year fiscal 2022 gross inflation increased from approximately 14% to approximately 16%. The biggest driver of this change is the market inflation that we now expect for Q4. At the time of our Q2 call, we expected Q4 gross inflation of about 11%. Today, we expect Q4 gross inflation of approximately 16%. On a two-year basis, Q4 gross inflation is expected to be an unprecedented 26%. And as I noted earlier, these incremental costs are disproportionately impacting our strong frozen and snacks businesses, both rely on inputs like protein and dairy, which are harder to offset in the short-term and in the case of frozen require specialized temperature-controlled transportation.
As noted on Slide 25, we're updating our guidance for the full year to reflect the trends I just covered. We now expect organic net sales growth of approximately 4%, adjusted operating margin to be approximately 14.5%, adjusted EPS to be approximately $2.35 and as I just mentioned, we're updating our gross inflation guidance to approximately 16%. We're also providing guidance for the fourth quarter to reflect the higher estimated inflation and the lag in the offsetting pricing actions. In Q4, we expect organic net sales growth of approximately 7%, adjusted operating margin of approximately 15.5%, adjusted EPS of approximately $0.64 and gross inflation of approximately 16%.
While the environment remains challenging, our team continues to stay focused on executing our Conagra Way playbook and positioning our business for long-term growth and value creation. We delivered strong sales growth and continue to gain share, particularly in our healthy and growing frozen and snacks categories, both of which continue to resonate with consumers despite necessary price adjustments to help offset the impact of inflation. While accelerated inflation has put pressure on our near-term earnings, we're confident in our ability to offset the impact with additional inflation-driven pricing actions.
And overall, due to the strength of our brands and consistent approach to creating lasting connections with consumers, we are confident in the underlying health of the business and the many value creation opportunities ahead. We hope to see you at our upcoming Investor Day on July 28th at the New York Stock Exchange, where the team and I will be sharing more on our plans for the future. We look forward to seeing many of you there in person.
Now that I've highlighted our performance for the quarter, I'll turn it over to Dave, to provide more detail on our financials.
