Sean Connolly
President and Chief Executive Officer at Conagra Brands
Thanks, Melissa. Good morning, everyone. I hope you all are off to a happy and healthy start to the new year. Thank you for joining our second quarter fiscal '23 earnings call. I'd like to start by covering some key points for the quarter on Slide 5. Despite our most recent wave of inflation-justified pricing, consumer demand for our products in the second quarter was strong as elasticities remained muted and well below historical norms.
The ongoing durability of demand is a testament to the strength of our portfolio and demonstrates how the Conagra Way playbook has positioned our brands to continue to resonate with consumers even in an inflationary environment. The successful execution of our playbook is clear in our second quarter results. We drove a significant increase in our top line. We continue to have solid share performance across the portfolio, especially in our key frozen and snacks domains and we made excellent progress recovering both gross and operating margins.
Operationally, we made good headway on our supply chain and productivity initiatives. While we're pleased with what we've accomplished to date, our supply chain is not yet fully normalized. That will improve. And overall, we see a long runway of opportunity ahead. We also continue to prioritize strengthening our balance sheet while making strategic investments in our business and returning capital to shareholders. In short, Conagra had a strong quarter across the board. Given our positive results during the first half of fiscal '23, we have increased our expectations for the year, raising our full-year guidance across all metrics, including organic net sales growth, adjusted operating margin and adjusted earnings per share.
With that overview, let's dive into the results on Slide 6. As you can see, we delivered organic net sales of more than $3.3 billion, representing an 8.6% increase over the prior year period. Our adjusted gross margin of 28.2% represents a 310 basis point increase over the second quarter of last year and our adjusted operating margin of 17% represents a 237 basis point increase over that same period. Adjusted EPS rose 26.6% from last year to $0.81 per share.
Slide 7 goes into more detail on our sales results on a one and three-year basis. Given the timing of when the pandemic and inflation began to impact our industry, we believe that the three-year comparison provides important context to highlight the underlying strength of our performance. At the total Conagra level, we grew retail sales more than 10% on a one-year basis and more than 26% on a three-year basis. We're pleased with our solid share performance, including how our strong brands allowed us to largely maintain total company market share while taking several inflation-justified pricing actions, particularly during the past year. Notably, we've continued to drive robust share gains in key frozen and snacks strategic domains, on both a one and three-year basis.
I want to spend a minute putting our sales growth in context. Slide 8 shows our performance over the past three years compared to our near-in peer group, including Campbell's, General Mills, Kellogg's, Kraft Heinz and Smucker's. We have a great deal of respect for our peers, all of which have been navigating the same macro demand and inflation dynamics over the past three years. Among this group, Conagra ranked second in dollar sales growth and first in unit sales performance.
It's important to keep in mind that all of these peers have taken pricing actions to help offset inflation and Conagra is in the middle of the peer set in terms of the price per unit increases in this time period. It's clear that consumers continue to appreciate the quality, convenience and superior relative value that our strong brands have to offer, which has enabled Conagra to perform extremely well on both an absolute and relative basis.
Let's take a closer look at our top line performance during the second quarter by retail domain, starting with Frozen on Slide 9. We maintained our momentum, delivering strong retail sales growth on both a one and three-year basis, improving 9% and 26%, respectively. This growth was driven by a number of our key categories, including breakfast sausages and single-serve meals, which both experienced double-digit retail sales growth compared to last year.
Turning to Snacks on Slide 10, you can see a similar story. We drove a 14% increase in retail sales compared to the second quarter of fiscal '22 and a 41% increase over the second quarter of fiscal '20. The continued momentum of our Snacks business is broad-based across a number of categories. Compared to last year, microwave popcorn was up 21%, seeds was up 18% and meat snacks and hot cocoa both rose more than 14%.
We also accelerated growth in our highly relevant staples portfolio, increasing retail sales 10% this quarter compared to the second quarter of last year and 22% compared to the same period three years ago. This growth was led by Pickles and Whipped Toppings, which grew more than 11% and 10% respectively on a year-over-year basis. As I've mentioned, our strong top line performance was primarily driven by inflation-justified price increases coupled with ongoing muted elasticities.
Slide 12 details the relationship between pricing and volume over time. As you would expect, increased pricing does have an impact on volume, both for Conagra and the total industry. However, you can see how elasticities have remained steady even as we have continued to increase the price per unit of our products to help offset ongoing COGS inflation. And as we detailed a few minutes ago, Conagra's three-year CAGR on unit sales performance leads its near-in peer group. The relatively modest elasticities, both compared to historic norms and our peers are a testament to the strength of our brands.
Now that we've unpacked the relationship between price and volume and the resulting net sales, I'd like to spend a few minutes on the relationship between net sales and COGS and the resulting impact on our margin performance on Slide 13. Generally speaking, when a business has strong brands, strong processes and strong people, as Conagra does, it is able to navigate inflationary cycles in discrete, predictable phases.
As we have detailed for some time, when unprecedented inflation increased our cost of goods, we took strategic pricing actions to help offset the rising costs. However, there was an inherent lag between when we implemented pricing actions and when we realized the benefits of those actions in our top line results, this pricing lag resulted in temporary margin compression. Furthermore, continued inflation extended this period of margin compression as new inflation-justified pricing actions led to additional lag effects. That is the dynamic we have experienced over the last several quarters as we continue to play catch-up by increasing price incrementally to account for the extraordinary extended rise in inflation.
At the end of the first quarter, we reached a significant inflection point in the relationship between net sales and COGS, marking the end of the temporary margin compression phase in the beginning of the margin recovery phase. As you can see in the chart, inflation has begun to moderate in certain areas, enabling our inflation-justified pricing actions to catch up to the rising costs.
Slide 14 shows the impact this inflection has had on our gross margin results, as continuously rising inflation weighed on our COGS throughout fiscal '22 and into the first quarter of fiscal '23, our margins were compressed. Now predictably, as pricing has finally caught up to COGS inflation, you can see the recovery of our gross margin to be more in line with pre-pandemic levels. While our gross margin can vary quarter to quarter due to a range of internal and external factors, the strategic pricing actions we have successfully executed, combined with moderating inflation and our strong brands, position us well to recover and maintain a healthy gross margin going forward. Of course, inflation remains elevated in many areas and we continue to closely monitor our costs, just as we have in the past. We will continue to take appropriate inflation-justified pricing actions as needed.
Another key driver of our margin recovery is our supply chain performance shown on Slide 15. This is due to a combination of macro factors as well as the strategic initiatives we are executing to improve our operations. We made good progress on our supply chain during the second quarter, which benefited from improvements in the service we provided to our customers, continued headway on our ongoing productivity initiatives, which remain on track to achieve the targets we outlined at our most recent Investor Day, more moderate increases in commodity prices and improved inventory levels due to an increase in the availability of materials. The takeaway here is that we're pleased with the progress we're making, but industry-wide challenges do persist. There's more room for improvement as we advance our productivity initiatives and the macro environment continues to normalize.
As a result of our strong performance this quarter and the first half of fiscal year 2023, we are raising our full-year guidance for all metrics detailed here on Slide 16. We now expect organic net sales to grow between 7% and 8% compared to fiscal '22, adjusted operating margin to be between 15.3% and 15.6%, and full-year adjusted EPS growth of 10% to 14% or $2.60 to $2.70 per share. Dave will provide more detail on the underlying assumptions behind these expectations.
Before I turn the mic over, I want to summarize what I've covered today. Our strong performance during the first half of fiscal '23 was primarily driven by a combination of inflation-justified pricing actions and muted elasticities, reflecting the strength of our brands. Consumers continue to recognize the value our brands provide despite the higher prices, allowing us to gain share in key domains such as frozen and snacks.
Our top line growth was coupled with encouraging progress in a number of different areas of our supply chain that enabled us to operate more efficiently. Together, these factors as well as improvement in the inflationary environment helped us recover our margins to near pre-pandemic levels. As a result of our strong performance, we're raising our full-year fiscal '23 guidance for organic net sales, adjusted operating margin and adjusted EPS.
Finally, we're looking forward to seeing everyone who can make it to CAGNY this year. We plan to host our annual kickoff dinner on February 20 and are scheduled to present the following morning. We will follow up with more details on the event as we get closer.
With that, I'll pass the call over to Dave to cover the financials from the quarter in more detail.
