Good morning, and welcome to the ConAgra Brands Q1 Fiscal Year 27 Earnings Q&A conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Matthew Nysis, Head of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us. Once again, I'm joined this morning by John Brase, our CEO, and Dave Marberger, our CFO. We may be making some forward-looking statements and discussing non-GAAP financial measures during this Q&A session. Please see our earnings release, prepared remarks, presentation materials, and filings with the SEC in the investor relations section of our website for descriptions of our risk factors, GAAP to non-GAAP reconciliations, and information on our comparability items. I'll now ask the operator to introduce the first question.

And at this time, we'll begin that question and answer session. To ask a question, you may press star and then one. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and two. In the interest of time, we do ask that you please limit yourselves to a single question. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Andrew Lazar from Barclays. Please go ahead with your question.

Great. Thanks so much. Good morning, everybody. Morning. Hi there. Maybe I want to start out. Can I respond to organic sales in fiscal 2Q to decline 2%? A bit heavier than current consensus. It looks like quarter to date, maybe scanner looks to be running maybe closer to flattish. So I guess I'm just curious if anything's changed in your 2Q top line outlook and whether it's elasticity or something else that might cause a sequential deceleration or perhaps it's just more prudent planning. Thanks so much.

Good morning, Andrew. Let me start and then I'll turn it over to Dave. But I think in general, you know, the pricing we discussed in the Q4 earnings call is really just hitting the market kind of as we speak. And so I would say in terms of our pricing assumptions, at this point, results are in line with how we plan the year. And I like the word you use, Andrew. I think we've taken a very prudent approach to our elasticity assumptions, and these assumptions remain unchanged, which is really frozen at more of a two-to-one elasticity that we've modeled for the year, and grocery and snacks at more of a one-to-one elasticity. Now, you know, in terms of, you know, competitors and followership, I would say we have not assumed any followership in our pricing moves. Obviously, if that happened, there could be, you know, some upside to those elasticity assumptions, but we have not modeled that in.

Great. Thanks so much. John, just one additional piece of color. So we got into 2%, down 2% organic for Q2. This contemplates Thanksgiving timing because you have the second quarter this year versus third quarter. So we may ship a bit below consumption in the second quarter because of the seasonal items may have some more consumption versus shipment. But the 2% is consistent, like John said, with our original planning posture. Great. Thanks so much.

Our next question comes from Peter Galdo from Bank of America. Please go ahead with your question.

Hey, good morning. Thanks for the question. Dave, just wanted to touch on the updated inflation guidance for the year, having moved kind of to the higher end of the five to six. I know you had kind of Q1 inflation in the five-ish percent range, more towards the low end, but just kind of how you see it pacing over the balance of the year and maybe just help us think about exit rate. Are we above that five to six as we get to Q4 and kind of how we might think about it again from a phasing perspective? Thanks very much.

Yeah, Peter, thanks for the question. Let me try to give you a little bit of color here. So as we talked about for Q1, we did have some favorability in proteins relative to our planning So we're a bit favorable, which drove some of the favorability we saw in Q1. But as we went through Q1, obviously, we've seen the acceleration in inflation around logistics or transportation costs really driven by the driver shortage and oil prices as well. So as we forecasted inflation, we're still in that 5% to 6% range for the year, we said, towards the higher end of the range. And really what's happening is The favorability that we've seen in proteins, which we would continue to see, is a little bit more than offset by basically the doubling of inflation in transportation versus where we planned it for the year. So it's kind of a tradeoff there. In terms of the flow of the year, we would expect, and we usually don't give this much detail, but I think it's important because I think there's some confusion on this inflation. We would expect our inflation rate in Q2 and Q3 to be higher than Q1. and then to be about the same and then we expect our Q4 inflation rate to actually be lower than Q3 so that's kind of the flow and as we sit here today we have no reason to believe that we wouldn't be wrapping on not just the transportation costs that we're seeing this year but you know things like edible oils and and kind of our corrugated aluminum we have a lot of areas where we're still seeing high inflation which we will have all during fiscal 27 I don't see a reason why we couldn't expect that we would wrap on that. So obviously, we'll have to get closer for that. But I feel like Q4 will be lower than Q3, and we should be wrapping on a lot of these higher inflation categories in our materials when we get into fiscal 28.

Great. Thanks very much.

Our next question comes from David Palmer from Evercore. Please go ahead with your question.

Thanks. I wanted to ask you about pricing, the acceptance at retail. How much is that a factor into what you're thinking there, or is your price elasticity modeling just basically a price impact to the consumer in a vacuum of competitors, not also pricing? And I have a quick follow-up.

Yeah, thanks for the question. I think in terms of pricing, I kind of go back to my opening comments. I'd really say really in line with our expectations. And so we're really past kind of the customer acceptance of that now pricing is effective in market. And I would tell you that customer acceptance, there was no surprises versus our planning posture. And so that's how I think about pricing as we move forward.

And then I noticed you had some comments about not Not repeating a promotion from last year on the Sandwich Bros brand. Is that the kind of thing that we will be seeing throughout the year, that there'll be promotions that you already see that were not effective from a profitability standpoint? And is that baked into your guidance? And I'll pass it on.

Yeah, great question. And again, I think We continue to look at our promotional dollars through a real ROI mindset, and I think we've been really prudent of saying, hey, we're not going to repeat promos that have been dilutive to the company, and I think that's what you're seeing in some of this. Our next question comes from Tom Palmer from JP Morgan. Please go ahead with your question.

Good morning. Thanks for the question. I wanted to maybe just clarify on your second quarter expectations. You've got this high single-digit operating margin outlook. Incremental pricing is flowing through. There was the SG&A callout. I just want to make sure I kind of have my arms around the gross margin cadence here. Like, is there... A step down expected in gross margin as we move into 2Q, or is this really about the timing of SG&A that swings the margin lower?

Yeah, Tom, let me take that. There's really three drivers. If you would look at where we landed Q1 operating margin, let me just kind of go there. At 11.5% for Q1, we set higher single digits for Q2. There's really three drivers. One, as I just mentioned, we expect higher inflation in Q2 versus Q1. The second piece is the SG&A favorability that we had in Q1. It was roughly $0.03 of our EPS beat. Half of that was a one-time benefit. Half of it was timing where it didn't hit in Q1. It's going to hit in Q2. And then the third piece is accelerating our investment in A&P. So we expect to increase A&P as a percentage of net sales to 3% versus 2.3% as it was in Q1. So they're really the three drivers. So you will see a little bit of impact on gross margin from the higher inflation versus Q1.

Okay.

Thank you. Yep.

Our next question comes from Alexia Howard from Bernstein. Please go ahead with your question.

Great. Could I ask about leverage? So you've talked about the three times being the long-term target, and I think it increased a little bit this quarter to close to four times. I think you're saying that you'll still probably be at four times by the end of the year, or you've said through fiscal 27 it will remain at this four times? So how quickly do you expect to start on that deleveraging trajectory, and how quickly do you expect to achieve that goal? Thank you, and I'll pass it on.

Yeah, hi, Alexia. If you start with this year, yeah, we guided to expecting to finish the year at approximately four times on our leverage. We finished Q1 at 3.99 times. That's actually favorable to where we thought. Usually what will happen in Q1 and Q2 is our leverage will click up because we're very seasonal with our inventory, right? With our seasonal businesses and things like our tomato operations, we build all the inventory in Q1 and Q2. So obviously we use cash in the first half and then we have cash inflow in the second half. So that's very normal. So we're still on track with the approximately four times We don't get specific with this, but it's implied we do expect to pay down debt in the year, for the full year. Approximately $250 million of debt pay down is what we would expect for this year. Our target is three times. We are maniacally focused on getting there as soon as possible. As we get into fiscal 28, John talked about it, we're focused on improving margins and profitability of this business. So with improved profitability and the dividend adjustment that we made, we feel like we're going to be able to make great progress in fiscal 28 on getting that leverage down. We're not going to give you that number today, but we want to get to three times as soon as possible.

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

Our next question comes from Wells Fargo Securities. Please go ahead with your question.

Hi, everybody. Chris Carey. I wanted to ask about the next portfolio. Can you just give us a sense of maybe where you are on some of the interventions to improve performance? You talked about, I think, Popcorn, Slim Jim. What are the expectations more from a volume standpoint as you look forward and perhaps some of the elasticities over the medium term? And then just maybe not like a clarification, but just curious whether you're seeing Thank you for joining us.

Really, our sweet treats portfolio continues to perform really, really well and had a very strong quarter Q1. And that's really behind both Snack Pack and Swiss Miss continue to really be performing very well in the market. I think permissible snacking, as you said, is really where we're not where we want to be there. And I think a couple of points of drivers there. The first is obviously we're very overdeveloped in our meat snacks and our seeds business and the convenience channel, which has been really challenged lately with the higher gas prices. But I think aside that, there's work to do from my standpoint in terms of an execution and a channel lens. We need to do a better job of participating where the growth is really coming from, specifically in the meat snacks category. As you take a step back and you think about meat snacks and popcorn and seeds, these are fantastic categories. And we are the market leader. And so it's our responsibility to kind of drive these categories forward. And so I think what you're going to see and you're already seeing as we go into Q2, a significant step up. in our brand building and marketing, specifically pinpointed at meat snacks and popcorn specifically there. But then also innovation, a major step up in innovation. We think those are the two critical levers that kind of get us back to a growth trajectory in those important businesses. On Cyclospora, just a quick one there. You know, we did see some benefit, but I would tell you nothing material as we think about Q1. And we also actually saw some offsets from Plycospora as you think about like our Wishbone salad dressing as an example. So again, nothing material there. But I think more than the one-time benefit, I think what's really important is this is a reflection of consumers coming to a brand they know and trust with Birdseye. And we did a great job of delivering for them. And so I think as you think about that brand, we've got such an opportunity to drive better, you know, more trial and more engagement with consumers. We deliver great taste, great convenience, and honestly reliability that they're looking for in their vegetables. So we think a great opportunity to continue to drive bird's eye.

Okay, thank you.

Our next question comes from Max Gunfort from BMP. Please go ahead with your question.

Hey, thanks for the question. Just coming back to the one QB in your reaffirmed outlook for the for the year. Obviously, it was a sizable EPSB first consensus, and I think first-year expectations, too. You did get some help from inflation. There was some SG&A timing benefit as well, and your inflation outlook for the remainder of the year has picked up. But I'm curious to what degree the reaffirmed outlook maybe has embedded additional conservatism in it, especially with regard to the ardent mills as well, given the weak price volatility. Thanks very much.

Yeah, Max, let me take that. Starting with Q1, you kind of hit it. We had, you know, a beat to our expectations, really driven by, I'd say, four things. Our SG&A, which was the timing, and then the one-time. We had the Ardent Mills benefit. We had the inflation lower than our internal forecast. And then we did get a bit of benefit on a tariff refund that we got in the quarter, which was close to a cent. When you look for the full year, SG&A, we talked about it, the one time's the one time, and then you have the timing, but that's pretty much on track. The big impact is the acceleration of transportation inflation. It's double the rate that we, and we had assumed inflation for transportation, and that's double the rate. The good news is that we have some other areas and materials where we're favorable to that, so there's a lot of puts and takes there. The other dynamic is We're just starting with our frozen pricing. And so we really need to see how this plays out. You know, we've been very clear on how we've modeled elasticities. You know, there could be a scenario where maybe that winds up being conservative, maybe not. So we just need to see how that plays out. And then Ardent Mills, we were favorable about three cents in the quarter to our expectations for Ardent Mills. Weed prices have been extremely volatile. If you just kind of look from May to now, they're up significantly, but they've been up and down. And so that creates trading opportunities for the commodity side of the ardent business. And so the thing with that is it's a little bit more difficult to forecast that with precision for the full year. So we thought it was prudent to hold the year. It's one quarter. And then we'll update at the half and quarter. If things continue as they do in Q1, then maybe we have some upside there, but we want to wait a little longer to see.

Very helpful. Thanks very much.

Our next question comes from Robert Moscow from TD Cowan. Please go ahead with your question.

Hey, thanks for the question. I don't know if I saw kind of a firm guide on gross margin for the year. Three months ago, I think the guide was kind of flattish. But now you have the higher costs. And the other element that I wanted to ask about, Dave, is in the frozen and refrigerated division, the volumes are going to be down like 10%. And at the same time, you are also increasing capacity, particularly in frozen chicken. So I'm just wondering, how are you managing through the leverage consequences of that? You know, is that a drag? Have you already put in into your numbers a drag from that dynamic?

Yeah, Rob, good questions. On the first one, we've held our guidance for operating margin for the year, so obviously gross margin is a big part of that. We've had puts and takes in the cost, and so we're still where we were before, which is relatively flat to the prior year in terms of gross margin. To your second question, yeah, obviously we have modeled the pricing and the elasticity impacts, and there's volume impacts where we have decreases in volume in our frozen business. We've modeled that. We've taken into account the absorption impact. So all of that is included in the guidance that we've provided, and we'll just see how that plays out.

Sounds good. Thank you.

Our next question comes from Rob Dickerson from U.S. Bancorp. Please go ahead with your question.

Great. Thanks so much. John, I just want to ask you about the simplification process, kind of how you're thinking about skew rationalization and then maybe even brand rationalization. I realize you said last quarter, prepared remarks this quarter again, kind of looking at everything. But there was, it was noted in those prepared remarks that I guess you exited Celeste Pisa. And I'm just curious, I mean, clearly, when you exit that, that rationalizes SKUs. So like, are there parts of their portfolio such that you could simplify by just kind of stepping away from certain brands that are on lines that you have? And then I guess secondly, just kind of broadly, like, how are you thinking at this point about the manufacturing footprint? Thanks.

Hey, Rob, thanks for the question. And if you guys will indulge me, I'm going to go a bit long on this one because I think it really is important for you to kind of understand how we're thinking about this. I am incredibly excited about the opportunity we have to really reduce complexity across the enterprise. And I will tell you, SKU optimization is definitely one of those areas. As we've discussed before, we have an extremely long tail of SKUs that we are getting after. Right now, we stood up an internal work stream that's really looking to significantly reduce SKU count, and I put this work into two buckets. The smaller bucket, which you just alluded to, is There are certain brands and categories where we simply just don't see a future. And it just makes sense to exit those small, really unprofitable brands or low-profit brands as soon as possible. And so we made the decision, as you saw, with Celeste Pizza, which had a minor impact on net sales for Q1, about a 15 BIPs. But it was actually profit accretive to the enterprise. And I think we'll continue to look for more of those small opportunities that we do see in front of us. I think the larger opportunity, though, is what I'm really calling the simplification of our core platforms. And I want to use an example here that I think will bring this to life. Single-serve meals. We've got over 400 single-serve meal SKUs. And I believe there's a future where we can have a much simpler, more productive assortment. That doesn't mean for a second that we don't believe in the category, that we have any plans to seed distribution, or that we're going to stop innovating. I would say just the opposite. We want to double down in this business, and we think an optimized assortment can help drive velocity on our most impactful SKUs. In terms of SKU complexity, that's one component, but I would also tell you we're looking to optimize our formats and formulations. Thank you for joining us. It's going to drive procurement savings as we're procuring fewer items, but with greater scale. It's going to help us drive improved focus, which I think is so important. When we get focused on something, we execute with excellence. We need to focus our organization a bit more, and this will do that. And then finally, improve velocity on shelf, which is good for us, good for our customers. And so the last thing I'd say here is we're going to take a real measured approach in how we roll out the SKU simplification. We really need to coordinate this with our customer reset timing. and look at inventory impacts. So I would see the majority of this benefit from this work to happen more in fiscal 28, but the decisions are happening right now.

All right, great. That's very helpful. Thank you so much.

Our next question comes from Scott Marks from Jefferies. Please go with your question.

Hey, good morning, all. Thanks very much for taking your questions. Wanted to just ask a little bit about the consumer. You made some comments in the prepared remarks talking about the consumer just being thoughtful about where they're spending their dollars, obviously managing through a volatile environment. Any updates you can share with us in terms of what you're seeing? Have things improved, gotten worse? Just any changes that you've seen recently? Thanks very much.

Yeah, thanks for the question. And I think I would describe the macro environment as dynamic. That's probably an understatement. But in terms of the consumer, I would kind of say the words I would use is muted and it continues to be kind of bifurcated by income, no doubt about it. But having said that, we really haven't seen any material step change in consumer behavior. There's pockets. C-Store is an example that's been a bit more pressured in recent months because of the gas prices. Overall, I would say the consumer has been relatively stable and resilient. Our job is to continue to stay incredibly close to the consumer. We've got to evolve alongside how they're evolving and delivering the food they want, where they want it, but also, importantly, at the right value. This is what I love about our portfolio. We've got brands that compete all across the value spectrum. Value Brands like Banquet all the way up to more premium offerings like Healthy Choice. And so we've got a portfolio that can meet this dynamic consumer wherever they are.

Our next question comes from Lee Jordan from Goldman Sachs. Please go ahead with your question.

Hi, thank you. Good morning. Thanks for taking my question. Justine, if you could provide more detail on the changes in your approach for the step-up and the A&P spend. It sounds like you've had some early traction. Just curious, what's been working? How are you measuring that return? And where are you allocating the step-up and spend you're planning to do in 2Q?

Yeah, as you think about A&P, this is a big one for me. We have so many great brands, but if I'm being truthful, we haven't consistently invested behind them at the levels that are required to drive that brand affinity and awareness. And so we have a tremendous opportunity to communicate more with consumers to ensure they understand we've got great value propositions out there, and our job is to make sure they fully understand it. And so as you think about the investments, I'm really pleased in two fronts. One, we're investing more. and two, we're getting that money to work a lot harder for us. And this is kind of this new modern marketing machine that we're building internally that I think can become a real competitive advantage As you think about where we're focusing these investments, it's really in three places, single-serve meals, meat snacks, and popcorn. We're going to be very, very targeted in those important growth ambitions. Your last point is a good one, too. We're already seeing some really positive results in terms of improved reach and engagement from some of the changes that we're doing. We've Thank you so much for joining us.

I think you're mostly fixed exposure, but I did think you had a little bit of floating, so just kind of remind us where your exposure is there. And then I also thought you may have some refinancing needs in the relative near term, so just how are you thinking about that in this interest rate environment as well? Thank you.

Let me take that. The first one, we're pretty much 100% fixed right now. The only variable debt that we have is our commercial paper. And so we use that as sort of our working capital needs. So we're very high percentage fixed. So we're really not exposed to the interest rate environment now. Yes, we do have two bonds coming due this month. We have a $500 million note and a $260 million note. We actually went into the market in July and financed ahead, and so we issued a $500 million note. The rate came in at 5.4%. At the time, it was actually pretty good there given what rates have done since then. So from the proceeds of that and just our normal kind of borrowing capacity, we're very comfortable refinancing these notes this month.

Very helpful. Thank you.

And our next question comes from Carlo Casella from JP Morgan. Please go ahead with your question.

Hi. Somewhat on that last question as well as Alexia's earlier question on leverage, have you had conversations with the agencies? Because we've seen in some cases other peers that have cut their dividend and focused on deleveraging but still gotten downgraded. Do you think they're kind of changing their view at all on your business?

We talk to the agencies all the time, and so they're very clear on our financial policy, our priority of using our discretionary cash flow to pay down our debt as quickly as possible. So we're always working and talking to the agencies. They obviously looked at our cut of the dividend as a positive in terms of our credit rating and our position. So, you know, they know where we're going. They know what our priorities are. So now it's a matter of just continuing to get that leverage down. We know the markers for, you know, levels where if you, you know, leverage exceeds certain levels, you may be putting investment grade at risk. We're not near those levels and we're moving in the right direction, which is down with our leverage. And they know that. So that's that's you know, that's our strategy. That's our focus. And they're very aligned with that.

Okay, that's great. And just one follow-up on Ardent Mills. How do we think about the volatility in wheat and how that flows through the numbers? I know it's a benefit for this quarter, but how should we think about that going forward?

Yeah, so think of Ardent Mills as really two different businesses. They have the business where they, you know, They mill flour and they sell flour at a margin and they're selling flour to the, you know, Domino's, pizzas of the world and everything. So they're dealing with the same volume dynamics that the entire food industry is, but they do an amazing job of providing great customer service that's a competitive advantage for them. That business is more stable and more flattish. If you look at the other part of their business, it's what we call commodity revenue. And that's the trading opportunities they create when you have volatility in the wheat markets. And so that's what we saw in Q1. And the hard part there is, you know, when that comes, it's a little bit difficult to forecast with precision, but generally with more volatility there. Ardent Mills will benefit from that volatility with their commodity trading business. And the good news for us is we're very aligned from a capital allocation perspective. So in terms of profit, we have a minimum of 80% cash flow conversion on that profit, and we're very aligned with Ardent and our partners on that philosophy.

Okay, that's great. That's super helpful. Thanks.

Thank you.

And ladies and gentlemen, at this time, we'll be ending today's question and answer session. I'd like to turn the floor back over to Matthew Nises for closing remarks.

Thank you, Jamie, and thank you all for joining us today. Feel free to reach out to Investor Relations with any additional questions. Have a good day.

And with that, we'll conclude today's Q&A session and conference call. We do thank you for joining. You may now disconnect your lines.