The operator welcomes participants to the Conagra Brands’ First Quarter Fiscal Year 2024 Earnings Conference Call, where CEO Sean Connolly and CFO Dave Marberger will discuss the company's business performance. The call will also include forward-looking statements and non-GAAP financial measures. Connolly emphasizes the impact of macro dynamics on consumer behavior in the industry.

The company has faced challenges in Q1 due to a shift in consumer behavior, resulting in a longer recovery period for the industry. Despite this, the company has shown strong margin improvement and EPS growth, and has also improved their balance sheet. They are confident in their plans and reaffirming their guidance for the future. The shift in consumer behavior is temporary and has been caused by financial pressure and a need to stretch budgets. However, recent trends suggest that this behavior is starting to change. Discretionary purchases have been down, except for summer travel, and consumers have been actively reducing household inventory from the pandemic.

The article discusses the impact of the pandemic on consumer behavior and its effect on the food industry. Convenience-oriented food items have lagged as consumers prioritize more hands-on food prep and shift towards meals per many instead of meals per one. This has also led to a reduction in food waste and an increase in the use of leftovers. The industry has shown a slow volume recovery, but Conagra's recent trends show signs of improvement. In the quarter, the company delivered strong results with increased gross and operating margins, and earnings per share. Sales in the staples domain were flat, but the snacks domain has continued to grow. Conagra's brands in microwave popcorn and ready-to-eat pudding and gel have gained unit share.

Despite recent challenges in the frozen food domain, Conagra has maintained its unit share in important categories like single-serve meals and has seen a 22% increase in frozen retail sales over the past four years. The long-term trend of consumer demand for convenient, high-quality frozen foods supports the belief that the current softness is temporary. The company has also made progress in its supply chain and productivity initiatives and plans to continue investing in its brands.

The company is focused on protecting and driving its top line while investing in high ROI merchandising and advertising to support its brand. They are also prioritizing reducing debt and improving their net leverage ratio. The company reaffirms its fiscal '24 guidance, including organic net sales growth, adjusted operating margin, and adjusted EPS. The company is pleased with its profit and cash flow delivery and confident in its ability to achieve its full year guidance targets. In Q1, net sales decreased slightly due to the industry-wide slowdown in consumption, but gross margin and adjusted EBITDA increased. This was driven by pricing actions taken in the prior year and strong productivity.

In the first quarter, the impact of foreign exchange contributed to flat net sales for Conagra. The Grocery & Snacks segment saw a 1.2% increase in net sales, driven by gains in snacking and staples categories. The Refrigerated & Frozen segment was most affected by changing consumer behavior, with a 4.6% decrease in net sales. The International and Foodservice segments, which make up 20% of net sales, had strong performances and contributed to overall growth. The International segment saw volume growth and improved price mix, particularly in Mexico and Canada. The Foodservice segment also had positive net sales growth and a strong gross margin due to reduced supply chain costs. In the future, Conagra expects continued volume growth in the International segment and positive net sales growth in Foodservice.

In the first quarter, the company saw a significant improvement in gross margin, driven by a 4 percentage point increase in price mix and a 1.8 percentage point benefit from supply chain productivity initiatives. This was partially offset by cost of goods sold inflation. Operating margin also improved by 297 basis points, with all four operating segments showing an increase in adjusted operating profit and margin. Adjusted EPS also increased by 15.8%, primarily due to higher gross profit and lower advertising and SG&A expenses. The company's net leverage ratio decreased and net cash flow from operations increased, with a focus on reducing debt and improving financial metrics in the future.

In the first quarter, the company saw a significant increase in free cash flow and used it to pay off debt and fund dividends. They did not repurchase any shares and are reaffirming their guidance for fiscal '24. In the second quarter, they expect to see a decline in net sales but improved volume. They will also invest in merchandising and advertising. In the second half of the year, they expect to see growth in volume and net sales, with increased investments in trade and A&P. They conclude their remarks and open the line for questions.

The operator introduces the question-and-answer session and the first question comes from Andrew Lazar of Barclays. Lazar asks about the company's forecast for the second half of the year and whether they have given themselves enough flexibility to meet their full year guidance. CEO Sean Connolly responds by saying they have and that they are focusing on the back half of the year for improved top line progress. He also mentions the strong performance of the Foodservice and International teams. Lazar then asks about the company's targeted and disciplined spending, specifically in the frozen arena, and how they plan to ensure it remains disciplined.

In the paragraph, the speaker discusses the company's current position in terms of their supply chain and their ability to add promotional activity to drive sales. They mention that they will be selective in their promotions, focusing on highly incremental and high ROI events, and that they have room to invest further with consumers. However, they clarify that they will not engage in deep discount, low ROI promotions like they did in the past. The speaker also mentions that they expect a return to more typical consumer behavior in the second half, which will be driven by a mix of factors such as more favorable comparisons, less pricing, more trade, increased A&P, and new products.

The company is expecting stronger merch investment in the second half of the year, and their A&P is focused on their biggest brands. However, there has been a shift in consumer behavior, where they are selectively splurging and tightening their belts in other areas. This is a temporary tactic used to adjust to changes in their financial commitments, rather than a judgment on the value of a specific brand. It is important to understand this difference from normal elasticity effects.

The company expects behavioral shifts in consumer habits to be temporary and plans to increase advertising and trade spend in the second half of the year. This investment is higher than originally planned due to tougher volume trends in the first quarter. The company does not anticipate a scenario where pricing growth turns negative.

The speaker discusses the company's projected 2-3% organic sales growth in the second half and the areas where they are focusing their efforts to achieve this, specifically their frozen and snacks businesses. They also mention that their portfolio has not been significantly impacted by private label brands or price rollbacks due to deflation.

The company has businesses that are reliable contributors and are doing well in meal creation and simple meals. They are expecting an improving consumer environment, aggressive merchandising, good innovation, and favorable comps to help them deliver strong numbers. There were disruptions in the prior year due to a fire, canning issues, and a recall, but they expect improvements in those categories. The frozen business has been a top performer in the packaged goods industry for the last 40 years and the company remains optimistic about its growth.

The speaker is addressing a question about the company's frozen meals business and clarifying that they did not lose market share in the first quarter, despite some promotional activity from a competitor. They also mention that the outlook for the second half of the year has improved, with low single-digit organic sales growth expected due to easier comps, innovation, and advertising. The speaker acknowledges that these factors could have been known earlier, but they are taking advantage of the current consumer environment and making the most of it.

The company believes that the consumer environment will be more favorable and there will be pent-up demand for certain products. They are in a good position to invest and expect high returns. Their International and Foodservice businesses are also performing well. The company expects a slight decrease in gross margin in the second quarter but it will remain at a similar level in the second half. This may result in a gross margin of around 27% for the year, similar to last year. The company is still holding their inflation assumption at 3% and this is important for them to achieve their margin guidance.

The company experienced a positive impact in the first quarter, with strong productivity despite headwinds from absorption. They are confident that volumes will increase in the second half, leading to a benefit in absorption. However, they gave a range for margin guidance due to potential variability. In response to a question about the Nielsen tracking data, the CEO clarified that they are looking at unit movement rather than dollars, and are waiting for a bend in the trend to indicate a shift in consumer behavior.

The speaker discusses recent data showing an increase in unit movement for Conagra and other competitors in the industry, which was expected to happen earlier but did not materialize. They believe this metric is crucial for success and are focused on it. The speaker also mentions various supply chain issues that impacted sales and profits last year, but does not provide a specific number. The analyst asks about the impact of perimeter deflation on the frozen category, to which the speaker does not provide a direct answer.

The speaker is discussing the competitive landscape and how it may impact pricing and promotional spend in the next few quarters. They also mention the growth of fresh produce in the perimeter of stores and how it may be impacting frozen food sales. The speaker believes that convenience is the most important trend in the consumer packaged goods space and expects the current trend of consumers cooking at home to be temporary. They believe that convenience will continue to be a major factor in consumer habits and practices.

The speaker discusses the strong performance of their frozen brands and the high growth they have seen in the past five years. They also mention the impact of wage inflation on their costs and how they have factored it into their estimates. The speaker acknowledges skepticism about their ability to reach their volume growth goals in the back half of the year, but emphasizes that one quarter does not make a year and they are on track to meet their goals.

The company is facing a temporary shift in consumer behavior, but expects to see progress in the second half of the year due to favorable comparisons and increased investment. They are focused on delivering a strong 2024 and setting up momentum for 2025, and are closely monitoring costs and looking for opportunities to drive savings. The Ardent Mills joint venture is also performing well and could provide additional cash for the business.

The company is focused on productivity and agility, and is willing to make changes to adapt to the current dynamic environment. They have a lean and adaptable team, and are committed to investing in the future success of the business. They manage for long-term value creation and success with the consumer.

The speaker discusses the importance of balancing sales and profit during short-term shifts in consumer behavior. They emphasize the need for patience and pragmatism when responding to these shifts, rather than trying to force change. They also mention a competitor's unsuccessful attempt at promotional spending and the importance of investing in the right areas at the right time.

Alexia Howard from Bernstein asks how the industry can prepare for potential changes in consumer behavior, particularly in response to the impact of GLP-1 drugs. However, Sean Connolly, the operator, views this differently and explains that their company has a team of demand scientists who study consumer behavior and trends in healthy eating. They constantly adapt their products through innovation to stay up with these trends, and if there are changes in consumer eating patterns, they will evolve their innovations accordingly.

The speaker discusses how the company adapts to changing consumer trends by constantly evolving their products over a period of five, 10, or 15 years. They emphasize the importance of staying externally focused and studying consumer trends in order to incorporate them into their products. The company's top priority is currently de-levering, but they will consider M&A opportunities in the future, likely in the frozen and snacks categories.

The conference call has ended and the operator thanks everyone for participating. Melissa Napier, who is in charge of Investor Relations, offers to answer any further questions. The operator then ends the call and everyone is thanked for their participation.

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