The Conagra Brands Fourth Quarter Fiscal Year 2023 Earnings Conference Call has begun, with Melissa Napier, Head of Investor Relations, introducing Sean Connolly, CEO and Dave Marberger, CFO, to discuss the business performance. Napier mentions some forward-looking statements and non-GAAP financial measures that they will be discussing, and Connolly will start with a business update on the quarter and fiscal year, followed by their thoughts on 2024 and beyond.

The team was able to deliver strong results in a dynamic operating environment for the full fiscal year. The results for the quarter showed organic net sales growth of 2% and adjusted gross margin of 27%, while the full year results showed 6.6% organic net sales growth and 17.4% adjusted EPS growth. The team was able to execute against their fiscal '23 strategic priorities, including pricing to offset COGS inflation, cost savings initiatives, and reducing net leverage ratio.

The fourth quarter saw slightly softer elasticities than usual, but still well below historical norms and in line with competitors. The company was able to recover its gross margins and saw improvement in service levels due to supply chain initiatives. It is also investing in technology and modernization. To maintain brand strength, the company has been innovating since 2018, launching new products during the pandemic which have generated nearly $1.8 billion in retail sales. The focus of the innovation has been on frozen and snacks domains.

Conagra has experienced growth in the frozen and snack categories, increasing their share by nearly 500 basis points. Their unit sales have held or grown share in the top 10 frozen product segments and their two largest snacking platforms, meat snacks and microwave popcorn, have also gained unit share. In fiscal '24, they anticipate a transition to a more normalized environment, with tailwinds such as the wrapping of supply chain disruptions, and headwinds such as the inflation super cycle.

The operating environment is normalizing, allowing for productivity initiatives and investments in innovation to deliver strong results. However, there are three headwinds that could impact earnings performance: shifting consumer behavior, deflationary single ingredient brands, and a reduction of pension income and contributions from Ardent Mills. These headwinds suggest that consumers are buying fewer items overall, potentially due to more travel intensive summer plans, and may be a temporary behavior shift.

Conagra has made progress in the past year, successfully implementing inflation-justified pricing, driving gross margin recovery, reducing net leverage, and rebuilding inventory levels. This enabled them to deliver strong full year results that exceeded their original fiscal '23 expectations. The quarter and full fiscal year results are highlighted on Slide 24. They plan to maximize competitiveness this year through investments in their business and innovation lineup, and they expect organic net sales growth of 1%, an adjusted operating margin of 16%-16.5%, and an adjusted EPS between $2.70-$2.75.

In fiscal '23, there was strong top line growth, with full year organic net sales up 6.6%. Margin recovery was successful, increasing adjusted gross margin by 226 basis points and adjusted operating margin by 125 basis points, resulting in strong full year adjusted EPS growth of 17.4%. In the fourth quarter, price mix improvements led to a 7.1% margin gain, while supply chain productivity initiatives contributed an additional 40 basis point net benefit. Despite transitory supply chain disruptions from the cybersecurity incident at Americold, all segments delivered solid sales growth.

In the fourth quarter, pricing and productivity benefits were offset by inflationary pressure and market-based sourcing, which decreased margins by 2.1% and 3.3% respectively. The Refrigerated & Frozen segment saw a 286 basis point improvement in adjusted operating margin, while the Grocery & Snack segment saw a 248 basis point decrease due to inventory reserves and unfavorable manufacturing overhead absorption. The International segment increased adjusted operating margin by 497 basis points, and the Foodservice segment saw a 75 basis point decrease due to transitory asset write-offs. Additionally, impairment charges driven by the increased discount rate impacted reported profits in the Grocery & Snack and Refrigerated & Frozen segments.

Slide 29 shows that the year-over-year EPS growth of 17.4% was attributed to the operating profit increase of $0.41. Slide 30 includes the key balance sheet and cash flow metrics, with net leverage ratio of 3.63x and net cash flow from operating activities reflecting inventory investments. Year-to-date CapEx was $362 million and capital was returned to shareholders in the form of dividends and share repurchases. Slide 31 outlines the expectations for organic net sales growth, adjusted operating margin growth, and adjusted EPS between $2.70 to $2.75. Slide 32 provides a closer look at the drivers of the adjusted EPS guidance.

The company anticipates a 2-4% growth in adjusted EPS for the upcoming year, offset by higher interest expenses, a reduction in pension income, and lower income from the Ardent Mills joint venture. Inflationary pressures and supply chain operations are expected to ease in the upcoming year, and the company is making investments in capacity expansion and automation with a CapEx spend of approximately $500 million.

Conagra is making investments to drive $300 million in gross productivity savings in fiscal '24 and expects to reach a net leverage ratio of 3.4x by year-end. They also announced a 6% increase in their annual dividend, reflecting confidence in their outlook. They are transitioning to a more normal operating environment and are committed to their long-term financial algorithm. They believe they are well positioned for long-term value creation.

Sean Connolly and Dave Marberger discuss their expectations for organic sales growth in the coming year. They expect 1% growth in organic net sales for the full year, and for trends to improve as the year progresses. They explain that pricing will be wrapped at the beginning of Q2, leading to stronger price mix in Q1 but slowing significantly afterwards.

Dave Marberger explains that there were supply chain disruptions and deflation in certain categories that will result in lower prices on some brands. He also states that there will be incremental merchandising and trade with strong ROI. In terms of customer inventory levels, there are no significant differences compared to historical levels.

Sean Connolly explains that there are a few product categories that are likely to experience deflation in the upcoming fiscal year due to the cost of single ingredients. These categories include oil, dairy, and meat products. He also states that they are expecting to lower list prices in a few key categories.

Dave Marberger and Sean Connolly discussed the new pricing and how it is affecting inflation. They noted that there will be some "surgical pricing" on select categories to offset inflation, but that productivity is also helping to tackle inflation. Marberger added that there will be pricing on tomato-based products in early Q2 due to significant tomato inflation in fiscal '24. He also noted that there will not be broad-based price rollbacks across the category. Kaufman asked about the guidance for 40 to 90 basis points of operating margin expansion, to which Marberger responded that it will come primarily from gross margin improvement, with A&P and SG&A staying the same percentage of net sales, and productivity, price mix, and targeted Q2 pricing driving the improvement.

Conagra has experienced success with their frozen food business in the past, but in the fourth quarter of fiscal '23, they experienced supply chain disruptions and shifts in consumer behavior that impacted their share performance. Despite this, they remain optimistic about the future of their frozen food business, and plan to focus on premiumizing their vegetable offerings instead of low tier products.

Dave Marberger explains that the disruption caused by Americold led to a backlog of shipments in May, which caused a decrease in sales in Q4. These missed shipments will be recovered in Q1, as they are simply shipments that were not able to be sent out.

Sean Connolly and Dave Marberger discussed the impact of being out of stock in some stores due to shipment issues, and how it could not be recovered. Cody Ross asked if it was fair to assume that the first quarter would be the high watermark for organic sales for the year due to the wrap around price. Dave Marberger stated that they do not guide by quarter, but that Q1 will still have the big impact from price mix. He also discussed Ardent Mills, noting that they have a lot of visibility and that the level of profit they are guiding to is consistent with where the business came in in fiscal ‘22. He further noted that it is a young business with investments and a trading aspect that continues to grow.

Sean Connolly explains that when looking at data from the food space, Conagra and its five nearest peers are in the same place in terms of unit performance change from a year ago. He also notes that everyone's volume is down just over 6% in the past few periods, with no difference in that volume change from 13-week data to 4-week data. He suggests that this could be due to a shift in consumer behavior, though the exact cause is still unknown.

Sean Connolly explains that Conagra is okay with category building promotions that have a positive return on investment. He also mentions that they like certain holiday promotions to drive volume, but they haven't been able to do so due to supply chain issues. Now that supply chains are servicing above 95%, they plan to increase promotional intensity.

Conagra has avoided deep discount, low ROI promotions in order to grow categories with innovation and quality display. However, they are prepared to do what is best for their business in the current environment with consumers cutting back. They have not seen a lot of deep discounting to-date, but they are monitoring the situation closely.

Sean Connolly and Dave Marberger responded to Ross' question about whether there would be top and bottom line declines throughout the year. Connolly explained that the year would be characterized by dollars and volumes moving in different directions due to pricing carryover, and that it would not be linear month-to-month or quarter-to-quarter. He encouraged everyone to focus on driving the business for the long-term.

Dave Marberger explains that Conagra has made significant investments in working capital and that their free cash flow did not convert to being able to pay down debt as they wanted. However, they expect to pay down debt with discretionary cash flow in fiscal '24 and working capital to be a slight tailwind for the year. He also states that with modest working capital improvement and $500 million in CapEx, they should approximate a 90% free cash flow conversion in '24. Steve Powers then asks about wraparound pricing and supply chain disruptions.

Sean Connolly and Dave Marberger both discussed the hunkering down of consumer behavior and its effect on the company's outlook. They believe the disruption is temporary and will revert to normal behavior as consumers adjust, although they are not able to specify exactly when that will happen. They have built some conservatism into their guidance for the first half of the year. They also emphasize that they will not be providing quarterly information.

Dave Marberger and Steve Powers discuss the pricing and volume of the supply chain disruption catch up, with Marberger noting that they do not want to get too precise with exact volume and pricing. Marberger also states that paying down debt is the priority and that they do not see anything material that should impact free cash flow in terms of reaching their goal of a 3x leverage ratio by the end of fiscal '26.

Dave Marberger discussed Conagra's debt, working capital, and elasticities. He mentioned that 88% of their debt is fixed and 12% is variable, so they are motivated to generate discretionary cash flow to pay down debt. Regarding working capital, there is a normal seasonality to the business with an inventory build during the first and second quarters. Elasticities overall were in line with peers and below the historical level in the fourth quarter, but consumer softening has led to softer elasticities overall, with Conagra's elasticity relative to peers weakening and moving towards the historical 1:1 level.

Sean Connolly explains that elasticity analytics measure consumer demand response to a change in pricing at a brand level, and that these analyses have consistently shown a benign response to pricing actions compared to historical norms. He goes on to explain that the behavior shift seen in the fourth quarter is a different animal, as it is a set of coping tactics to the higher cost environment, such as buying less, rather than a consumer response to a particular brand's pricing action.

The question-and-answer session concluded with Melissa Napier thanking everyone for joining and offering Investor Relations to answer any follow-up questions. She wished everyone a wonderful day before the conference was concluded.

This summary was generated with AI and may contain some inaccuracies.