Sean Connolly
President and Chief Executive Officer at Conagra Brands
Thanks, Melissa. Good morning, everyone, and thank you for joining our third quarter of fiscal '23 earnings call.
Slide 5 outlines what we'd like you to take away from today's call. Our top priority coming into fiscal year 2023 was margin recovery, following the unprecedented environment of the last two years with COVID and the inflation super cycle. To facilitate that margin recovery, our executional focus has been on inflation-justified pricing, supply chain improvements and the pruning of low-margin volume, a strategy we have successfully deployed before and refer to as value over volume. And three quarters up the way into the year, our plan is working.
In Q3, we delivered our second consecutive quarter of strong gross margin recovery, our pricing execution continued to be excellent, while elasticities remain muted and consistent. Our volume performance again led our near and peers versus our pre-pandemic baseline. And our supply chain continued to improve with service levels exceeding 90%. This improvement allowed us to rebuild inventories to appropriate levels and support most of the strong demand from our customers, but there were exceptions, as we experienced temporary manufacturing disruptions in certain categories that prevented us from being in stock. Despite this, we had strong results in the quarter overall, and we are updating our guidance for the year, including increasing our expectations for adjusted EPS growth and tightening the ranges for net sales growth and operating margins.
With that overview, let's dive into the results on Slide 6. We delivered organic net sales of approximately $3.1 billion, representing a 6.1% increase over the prior year period. Our adjusted gross margin of 28.1% represents a 409 basis point increase over the third quarter of last year. And our adjusted operating margin of 16.9% represents a 321 basis point increase over that same period. Adjusted EPS rose 31% from last year to $0.76 per share. The year-to-date results underscore the strength of our performance, with growth across all four metrics, including 8.1% organic net sales growth, compared to the prior year period and the robust margin improvements we set out to achieve at the beginning of the year.
Slide 7 shows the sustained recovery of our gross profit margin for a second consecutive quarter. Again, this margin recovery was our top priority for the year. Why? Because our gross margins fund our innovation program, and that innovation has been the centerpiece of our playbook and our success in driving sustained category growth in our two strategic focus areas, Frozen and Snacks. This recovery therefore, means you should continue to expect a relentless stream of provocative innovation and brand building support as we go forward.
In fact, looking at Slide 8, you can see that Conagra is one of the only companies in our peer set, whose gross margins are essentially on par with pre-pandemic levels. Importantly, our brand strength and innovation pipeline position us well to maintain solid growth and healthy gross margin going forward.
As I mentioned at the beginning of the call, our sales growth was primarily driven by inflation-justified price increases, coupled with ongoing muted elasticities. Slide 9 shows the relationship between elasticities and price increases. As you can see, elasticities have remained remarkably consistent and benign over the last eight quarters, even as we increased the price per unit of our products to help offset ongoing COGS inflation.
And Slide 10 shows our elasticities are among the best in the industry. The modest elasticities, which are well below historic norms and have remained consistent in the face of our inflation-justified price increases, are testament to the strength of our brands, the execution of our pricing strategy, and the limited impact of private label competition.
Turning to Slide 11. As you can see, at the total Conagra level, retail sales grew by 5.5% compared to the third quarter of last year, and by 24.7% compared to three years ago. To put some context around the 5.5% number, three points. First, there was a fair amount of noise in the year-over-year comps for the peer set in Q3. Some companies had a very weak year-ago period, due to supply chain challenges, while we had pockets of real strength in the year-ago period, due to Omicron, and strong customer support for products that had recently come off allocation.
Second, we continue to prune low-margin volume, most notably, resuming our opportunistic value over volume strategy on select brands. This included eliminating 10 for 10 promotions on both value to your vegetables, and canned products such as Chef Boyardee and Hunt's tomatoes.
Third, we experienced manufacturing disruptions in certain categories, that led to out-of-stocks in the quarter, most notably impacted were our canned meals and sides businesses specifically canned pasta, canned beans, canned chilly and canned meat, all part of our grocery portfolio. In frozen, we had one noteworthy disruption as our fish business was on allocation, which led to out-of-stocks during the peak lent season. This was due to a fire on our fish frying line as reported in our second quarter 10-Q.
While these discrete issues suppressed our volume in Q3, the root causes have been largely resolved and we expect volumes to rebound sequentially from here. Importantly, when you take the noise out of the short-term view and compare our growth versus the stable baseline of three years ago, you see our performance has been strong on both the top and bottom lines. Dampening the results versus this time period normalizes for the volatility across demand, inflation and supply chain throughout the pandemic and demonstrates that Conagra is a top performer among our peer set.
Slide 12 details our top line performance on a three-year basis, as measured over the prior 52 weeks and compared to our near and peer group, who are footnoted in alphabetical order at the bottom of the slide. Among this group, Conagra continued to rank second in dollar sales growth, and first in unit sales performance, just as we did in Q2. This remains true when you look at the same chart isolating the third quarter. And post Q3, the syndicated scanner data has shown our unit sales trends improving, in fact, in the four-week period ending 3/25 [Phonetic], our units ranked in the middle of our near and peer group on a two-year CAGR basis. Our continued top-tier pricing execution and volume performance is made possible by the strength of our brands, and the superior relative value that our products provide to the consumer.
Let's take a look at our top line performance during the third quarter by retail domain, starting with frozen on Slide 14. We maintained our momentum, delivering strong retail sales growth on both a one and three-year basis, improving 4% and 23%, respectively. This growth was driven by a number of our key categories, including breakfast sausages and single-serve meals. Towards noting, that this performance comes on top of very strong performance for our frozen domain in the year-ago period, when the Omicron outbreak influenced consumers in-home eating behavior. For example, single-serve meals grew 12% last year, creating a two-year stack of 18% in that category.
Turning to snacks on Slide 15. You can see a similar story. We drove a 7% increase in retail sales, compared to the third quarter of fiscal '22 and a 39% increase over the third quarter of fiscal '20. The continued momentum in this domain is broad-based across a number of categories. Compared to last year, seeds was up over 22% and baking mixes and microwave popcorn both rose more than 10%. Meat snacks grew 6% year-over-year, building on-top of the 22% growth in the year-ago quarter, a period when meat snacks were coming-off allocation and our customers were eager to fulfill demand for our leading products in this category.
We also continued to drive growth in our highly relevant staples portfolio, despite the discrete supply chain challenges in some of our canned meals and sides businesses, that I noted earlier. Our staples portfolio increased retail sales, 7% compared to the third quarter of last year and 20% compared to the same period three years ago. This growth was led by whipped toppings, which grew more than 18% on a year-over-year basis.
Turning to Slide 17. While we experienced transitory supply chain friction, we also continued to make progress on our supply chain initiatives during the third quarter, which benefited from continued headway on our ongoing productivity initiatives, which remain on track to achieve the targets we outlined at our most recent Investor Day, and more moderate increases in COGS as anticipated. These improvements to our supply chain led to improvements in the service we provide our customers. While we're making good progress in supply chain, it's not back to normal and industry-wide challenges persist. However, we are recovering as expected and we see more room for improvement as we advance our productivity initiatives and the macro environment continues to normalize.
Overall, we're confident we will deliver on our top line and margin guidance for the year, and we're raising our bottom line estimates. With that in mind, we are updating our guidance to reflect that we now expect organic net sales growth of 7% to 7.5%, we expect adjusted operating margin of 15.5% to 15.6% and we're increasing our expectations for adjusted EPS growth to range from USD2.70 to USD2.75.
Before I hand the call over to Dave, I want to reiterate our confidence in the path ahead. We have successfully executed pricing actions in response to inflation, that inflation is moderating and elasticities remain remarkably consistent and benign. We're moving past discrete supply chain disruptions and continue to make progress on our margin expansion initiatives, such as productivity and value over volume, all within an environment that is normalizing. And as we look at more recent scanner data, we are already seeing improvements in sales trends and we expect that momentum to accelerate through the end of the fiscal year. Overall, Conagra continues to benefit from strong brands, strong processes and strong people, which are all working together to drive sustainable growth and margin expansion.
With that, I'll pass the call over to Dave to cover the financials from the quarter in more detail.
