Good day, and welcome to the Conagra Brands Fourth Quarter Fiscal Year 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Brian Kearney. Please go ahead..

Good morning, everyone. Thanks for joining us. I'll remind you that we will be making some forward-looking statements today. While we are making those statements in good faith, we do not have any guarantee about the results we will achieve. Descriptions of the risk factors are included in the documents we filed with SEC.

Also, we will be discussing some non-GAAP financial measures. References to adjusted items, including organic net sales, refer to measures that exclude items management believes impact the comparability for the period referenced. Please see the earnings release for additional information on our comparability items.

The GAAP to non-GAAP reconciliations can be found in either the earnings press release or the earnings slides, both of which can be found in the Investor Relations section of our website, conagrabrands.com. With that, I'll turn it over to Sean..

Thanks, Brian. Good morning, everyone, and thank you for joining our fourth quarter fiscal 2021 earnings call. Today, Dave and I will discuss our strong fourth quarter and fiscal 2021 results, our expectations for fiscal 2022 and our perspective on how the Conagra Way playbook positions us for continued success in this dynamic environment.

Slide 5 lays out the key points we're going to cover today. As you saw in our release, we reported very strong results for fiscal 2021, and we could not have done so without our people executing the Conagra Way with excellence. Their dedication enabled us to capitalize on an unprecedented time of consumer demand.

Over the last year, we acquired and retained multiple years' worth of new consumers, and we grew share across categories, all while continuing to invest in the future. This translated into strong growth across the portfolio. We saw continued strength in frozen and snacks as well as increased relevancy for our large staples business.

The work we've done modernizing and premiumizing our portfolio continues to pay off. We believe our brands are healthier than ever and well positioned to manage through the current inflationary challenges. Dave and I will both share more about our approach to managing rising input costs later in the presentation.

But I can tell you now that we're taking aggressive actions on a number of fronts. It's also important to note that our plans provide for continued brand-building investments to drive consumer demand and further enhance brand health.

Our business remains very strong, but we are revising our fiscal '22 guidance to reflect the lag effect associated with the aggressive mitigating actions we are taking. Essentially, we see fiscal '22 as a tale of two halves, with the lag effect concentrated in the first half and particularly in Q1.

We expect many of our actions will start to flow through the P&L in Q2, setting up a second half adjusted EPS in line with what was assumed for H2 within our prior guidance.

Given our resiliency over the last year and the compelling consumer trends we're continuing to track, we remain confident in the underlying strength of the business and the opportunities ahead for long-term value creation.

As a result, this morning, we announced a 14% increase to our annual dividend, reflecting our Board's continued confidence in our outlook. Finally, we plan on hosting an investor meeting next spring to provide an update on our progress and discuss fiscal '23 and beyond. Be on the lookout for more information regarding the event.

We hope you can join us. So with that as the backdrop, let's jump into the agenda for today's call. We'll start with our business update and then cover our priorities and value creation opportunities in fiscal 2022. As you can see on Slide 7, we ended fiscal 2021 with a strong fourth quarter that was in line with our guidance.

As you know, our Q4 growth rates were impacted by the unprecedented demand we experienced in 2020 when at-home food consumption surged due to the onset of the pandemic and organic net sales increased 21.5%.

Given this dynamic, we'll reference some two-year figures throughout today's presentation to provide more helpful context on the underlying strength and trajectory of the business. And as you can see, on a two-year CAGR basis, organic net sales for the fourth quarter increased by more than 4%, and our two-year adjusted EPS grew by more than 22%.

On a full year basis, our organic net sales, adjusted operating margin and adjusted EPS were all up materially versus fiscal 2020. Continued execution of the Conagra Way playbook served as the foundation for our strong fiscal 2021 performance.

Within our industry, success is defined by creating meaningful and lasting connections between consumers and brands. We believe that our playbook is the most effective framework for delivering on that objective. Our modern approach to brand building is based on three tenets.

First, it all starts with developing superior products through perpetual modernization. Second, we ensure physical availability of our items, both in-store and online. And third, we drive mental availability of our products to ensure we remain salient and relevant with consumers. The foundation of the Conagra Way to brand building is our people.

Our exceptional results this past fiscal year reflect our team's dedication to executing the Conagra Way each and every day. I would like to pause and say a heartfelt thank you to Conagra's amazing team for rising to the occasion to support each other, our business, our communities, our customers and our consumers.

I'm extremely proud of the team's resilience in responding to the volatile environment throughout the year. We know our long-term performance is a function of the caliber and engagement of our team. That's why we're continuing to invest in our current employees and keeping the door open to talented new additions.

In fiscal '21, our team's engagement was clearly evident in their intense focus on capturing opportunities. As I mentioned earlier, the pandemic created a unique environment for new consumer acquisition, and we were able to capitalize by having modern products available when and where consumers wanted them.

We estimate that over the course of the last fiscal year, we gained the equivalent of more than four years' worth of incremental new buyers. COVID effectively amplified new product trial at a level rarely seen in our industry.

In the chart on the left, on Slide 10, you can see the increase in household penetration across our portfolio during fiscal 2021, clear evidence of the magnitude of our new consumer acquisition. But what's even more encouraging is the chart on the right. We didn't just acquire new consumers, we kept them.

The data shows that our new consumers discovered the tremendous value proposition our portfolio provides, and we're proud that our products are repeatedly appearing in pantries and freezers across America. Importantly, our performance over the last year was not only strong in the absolute, it was strong relative to the competition.

We performed better than our peers in terms of household penetration and repeat rates and we continue to gain share. Keep in mind that we delivered these results despite hitting an upper control limit on the amount of product we could produce in certain categories. If we had additional capacity, these numbers would likely be even more impressive.

Our disciplined approach to modernization and innovation across our product portfolio is key to our success. As you can see on Slide 11, we delivered an impressive innovation slate in fiscal '21. Our performance on innovation launched and sold in fiscal '21 surpassed the record performance we set in fiscal '20.

And importantly, our innovation outperformed the competition. This strong outperformance is why even during the height of the pandemic, customers continued to ask for our new products. This is a clear testament to the innovation engine at Conagra and the solid reputation we built with customers and consumers.

Slide 12 highlights a handful of our important launches in fiscal '21. We continued our successful Gardein co-branding strategy with the launch of Marie Callender's Pot Pie with Gardein protein.

We continued to modernize and premiumize Birds Eye with the launch of vegetable bakes that are as good as any side dish you can order from a Chicago steakhouse. We began modernizing the Hungry-Man brand with the launch of the Double Meat platform that satisfies the hungriest of appetites.

We also continued to work on Duncan Hines with the Instagramable EPIC line of Baking Kits along with our keto-friendly mixes. And we found even more ways to keep evolving our Healthy Choice Power Bowls with the launch of these vegetarian and vegan options.

I'm particularly excited about the Birds Eye breaded vegetables platform we launched in fiscal '21. It's already started to take off with 3 of the cauliflower wings products being among the best-selling SKUs in the frozen vegetable category this year. If you haven't tried them, you're missing out.

We supported the launch with a robust advertising campaign to drive awareness and mental availability. This campaign included digital, social and TV advertising. In addition to mental availability, we remain focused on the physical availability of our products in Q4, whether it's through brick-and-mortar or online.

Slide 14 demonstrates how our ongoing investments in e-commerce have continued to yield results. Growth in our $1 billion e-commerce business continued in fiscal 2021, both against our peers and as a percentage of our overall retail sales.

We consistently outpaced the entire total edible category in terms of e-commerce retail sales growth during the year. E-commerce sales now represent nearly 8% of our total retail sales. And importantly, our success in fiscal 2021 was broad-based. Just take a look at Slide 15.

Total Conagra retail sales grew an impressive 11.7% on a 2-year basis in the fourth quarter with contributions from each of our retail domains. On a 2-year basis, we delivered double-digit growth rates in retail sales across our frozen and snacking domains and a solid 5.2% growth rate in staples.

Let's dig into each domain a bit more, and let's start with frozen on Slide 16. Over the last 2 years, our frozen retail sales have surged across desserts, single-serve meals and multi-serve meals. We've also seen consistent growth in retail sales of frozen vegetables.

All in, our strategic frozen business grew 13.5% over the 2-year period ending in fiscal 2021. And importantly, our buyers repeatedly returned to our frozen products. As you can see on Slide 17, consumer repeat rates for our leading frozen brands have been stronger than for the competition. Turning to Slide 18.

Our snacks business has seen similar success, delivering strong 2-year retail sales growth of 21% in fiscal '21, led by increases of more than 25% across hot cocoa, microwave popcorn, ready-to-eat pudding and meat snacks. As with frozen, consumer repeat rates for a number of our leading snack brands beat those of competition during the fiscal year.

Staples was also a meaningful contributor to our success. On Slide 20, you can see the strength of our staples portfolio. Staples retail sales increased 5.2% over the past 2 years, spurred by steady growth across key staples categories.

Having increasingly rediscovered the joys of cooking last year, consumers reengaged with our staples products in a meaningful way. As you can see on Slide 21, the solid performance from staples was not isolated. We saw strong 2-year growth rates across many of our largest staples brands.

Overall, we're pleased by the performance across our retail business, both within the quarter and over the fiscal year. And as fiscal '22 begins, we believe our branded portfolio is stronger than ever. So let's talk about what we see looking ahead.

We have a unique opportunity in fiscal '22 to leverage our current momentum and maximize long-term value-creation potential. New behaviors and habits created during the pandemic resulted in an elevated and sustained level of at-home eating.

Shoppers are engaging or reengaging with our products now more than ever, creating a larger, high-quality consumer base. To sustain this engagement, we plan to continue making investments in the physical and mental availability for our products.

This includes building additional capacity to fulfill consumer demand making further strategic e-commerce investments, pursuing efficient and thoughtful marketing campaigns and introducing a robust fiscal '22 innovation slate.

As we invest in our brands to create new and stronger connections with our consumers, we will also strategically navigate the inflationary environment that accelerated quickly during Q4 and continues today. We're aggressively pulling on all our margin levers to minimize the inflation-related profit lag during the first half.

Regardless of near-term cost challenges, we plan to stay focused on the long-term priorities of our business, including continued investments to further support our brands.

Our objectives are ultimately focused on driving long-term value creation achieved by pursuing growth in frozen and snacks and maintaining our staples portfolio as a reliable contributor. Let's spend a few minutes on our fiscal '22 innovation plans for each of the domains. I'm excited to provide you a preview of what we have in store.

Starting with frozen, once again, we have high expectations for our innovation slate. Slide 24 highlights some of the frozen products that will be rolled out during the year. Hungary-Man has responded very well to recent innovation.

We're extending its new Double Meat platform with this Double Chicken Bowl, which is sure to satisfy any big, bold appetite. Our broad snacks portfolio also provides us with plenty of opportunities to innovate. And here is just a sample of our fiscal '22 slate.

Among the products on deck, household favorite Duncan Hines will soon be offering additional EPIC kits with versions of classic cookie mixes that combine many of the brand's delicious ingredients. Our highly relevant staples portfolio is also receiving a new slate of innovation as shown on Slide 26. Notably, our great P.F.

Chang's brand is launching a variety of new restaurant-inspired products. Also, as more consumers seek plant-based foods, Gardein continues to expand its portfolio with new offerings, including a new line of plant-based chili.

Overall, we're confident that the investments we're making in product innovations across our portfolio will produce strong ROIs. Ultimately, long-term brand health is dependent on the type of perpetual modernization that we're committed to here at Conagra.

Before I turn things over to Dave to walk you through the financials, I want to quickly touch on our thoughts around inflation and our updated guidance for fiscal 2022. Dave will discuss the cost environment in more detail, but I want to reinforce that we are aggressively pulling on all of our levers to navigate the current inflationary environment.

We began executing our aggressive response plan in fiscal 2021, given the inflation we were already seeing and talking to you about in Q3. The incremental inflation that arose as Q4 unfolded called for additional actions, and you can be assured that we've begun to respond accordingly.

As I've shared in my remarks, we're also not pulling back from investing in the business. We remain squarely focused on long-term value creation. But I also know that a more short-term focused question on all of your minds is, will Conagra take list pricing increases. And the short answer is yes.

In fact, we began implementing pricing actions on some of our products in the fourth quarter related to the initial inflation we experienced. The very early read on the data from those actions is that our elasticities look good so far. And we have more pricing coming.

Because our pricing is being implemented strategically and thoughtfully, we're cautiously optimistic that our elasticities will remain strong as our full array of pricing enters the market in fiscal '22.

As I mentioned last quarter and earlier in my presentation, we expect the negative impact of the cost inflation to hit our financials before the beneficial impact of our responsive actions, including our pricing. This timing mismatch is expected to be particularly impactful in H1 and more specifically in Q1.

The resulting pressure on our first half margins impact our full year profit. And as you saw in the release, we're updating our fiscal '22 guidance as a result. Organic net sales growth is expected to be roughly flat to fiscal '21.

This results in a CAGR over the 3 years ending fiscal '22 of approximately 3.5% compared to our original target of 1% to 2%. Adjusted operating margin is expected to be approximately 16%, and adjusted EPS is expected to be approximately $2.50.

Although the substantial increase in inflation over the last few months has negatively impacted our profit guidance for the year, we remain confident in the underlying strength of the business. Even with the lag effect I've discussed, our full year guidance delivers significant improvements compared to our fiscal '19 starting point.

Importantly, we expect that the impact of our aggressive mitigating actions will cause second half adjusted EPS to rebound to be in line with what was assumed for H2 within our prior guidance. We're excited about the path the business is on, and we're ready for another dynamic year ahead. Thanks for your time, everyone. Dave, over to you..

first, how consumers purchase food as restaurants, offices and schools continue to reopen; second, the level of inflation we ultimately experience; third, the elasticity impact as consumers respond to higher prices; and finally, the ability of our end-to-end supply chain to continue to operate effectively.

Slide 38 shows the progression of our fiscal '22 inflation expectations, the continued acceleration being the biggest driver of the change in our guidance. When we initially gave our fiscal '22 targets at our Investor Day in April of 2019, our models assumed an annual inflation rate of around 3%.

At the time of our third quarter call, in April of 2021, we expected fiscal '22 inflation to come in at twice that level around 6%. Importantly, as of the Q3 call, we still saw a path to deliver our fiscal '22 targets. Not only is our brand health strong as evidenced by the strong consumer demand, we know how to pull on all margin levers.

That said, there is a limit to how much cost increase we can absorb in the short term given the timing lag that Sean and I have discussed. And as all of you know, inflation has continued to rise sharply since April. We now currently expect fiscal '22 inflation to come in around 9%.

The difference between the 6% we expected a few months ago and the 9% we expect today equates to approximately $255 million in additional costs during fiscal '22. The bulk of this inflation can be attributed to continued increases in the cost of edible fats and oils, proteins, packaging and transportation since the timing of our Q3 call.

While we are able to hedge some of our inputs, others, particularly certain proteins are not easily hedged. As Sean mentioned, we have various levers at our disposal that we are actively and strategically pulling to manage this inflation, but the profit lag effect is real.

For example, certain pricing actions can take 90 days to enact or a cost savings initiative may not be actionable until later in the year when a contract is up for review.

So while we anticipate being able to successfully manage inflation over time, the continued sharp increases to input costs we are currently experiencing will take some time to overcome.

And given our disciplined approach to managing the business for the long term, we will not reduce investments to meet the guidance target at the expense of the long-term health of our business. Slide 40 lays out the change in our adjusted EPS expectations in a bit more detail. We are updating our fiscal '22 adjusted EPS guidance for 3 items.

First, consistent with our prior divestitures, we are removing $0.01 for the Egg Beaters divestiture that we announced today. Second, the largest driver of the change is the significant $0.41 per share increase in inflation since Q3 that I just discussed.

And finally, we have identified many ways to manage and offset this increased inflation, including additional productivity and cost savings initiatives as well as substantial pricing actions that Sean and I have discussed.

Again, the bulk of these margin offsets will start to hit our P&L in the second quarter and continue to increase in the second half, which is why we expect second half EPS to be in line with what we assumed for second half EPS in our prior fiscal '22 guidance. Slide 41 lays out some of the key assumptions that underlie our fiscal '22 expectations.

On the top line, we expect organic net sales growth to be stronger in the second half of the year compared to the first. We expect children to return to in-person schooling and more employees to start returning to in-office work in the fall.

So while we expect continued strong demand for our products, we also expect COVID-19-related volume benefits to start to slow at the end of our first quarter. Additionally, we have good acceptance from customers on our pricing actions so far, but we expect the majority of our pricing to start hitting the market at the end of Q1.

We expect the timing of the scale-up to benefit the second half. We also expect our second half operating margins to be better than the first half. This is driven by our expectation that Q1 will be the most pressured quarter of the year. Q1 is expected to have the highest inflation rate of the year and benefit the least from pricing.

At the same time, we have planned strong investments behind A&P and innovation for the first quarter. As the year progresses, we expect margins to improve as the inflation rate decelerates and the impacts of our margin lever actions take hold.

As you heard Sean discussed, we also plan to continue maintaining strong brand-building support throughout the year to sustain the long-term health of the business. Turning to Slide 42. I think it's important to highlight that we expect the actions we are taking in fiscal '22 to create some tailwinds heading into fiscal '23.

As we mentioned, we expect our second half EPS to be in line with what we assumed for second half EPS in our prior guidance. So as we head into fiscal '23, we expect our profitability trend to be in line with our prior expectations. We expect our brand building and innovation actions to help maintain retail demand above pre-COVID-19 levels.

At the same time, we expect to retain the consumers we have attracted during the pandemic while continuing to attract more. Next, the pricing and productivity actions we are taking will have year-on-year -- year-over-year benefits in fiscal '23 until we lap them.

We also plan to continue executing our realized productivity programs to benefit our longer-term margins. Finally, while we expect to have reductions in COVID-19-related costs in fiscal '22, we believe there will be additional opportunities to reduce these costs even further in fiscal '23. Turning to capital allocation.

As noted in our release this morning, our Board of Directors has approved a 14% increase to our annual dividend, which is summarized on Slide 43.

I'm pleased that our strong balance sheet and our confidence in the long-term health and profitability of the business has put us in a position to raise our quarterly dividend to $0.3125 or $1.25 on an annualized basis beginning in September.

This new dividend level represents a 50% payout ratio based on our fiscal '22 EPS guidance, which is in line with our longer-term targets. Before I close, I also want to provide some brief color on our tax asset in the disclosure you will see in our upcoming 10-K filing.

As some of you remember, when we sold our private label business in 2016, we incurred a tax capital loss of approximately $4 billion that we could apply as a carryforward to offset capital gains generated through fiscal year-end '21.

We always held true to the principle that we would not divest assets solely because of the existence of the asset, but our team has repeatedly looked for opportunities to maximize the asset's use.

Since 2016, we utilized approximately half of the asset as we divested businesses that either weren't a strategic fit with our portfolio or were valued in excess of our internal expectations by another party. We also utilized a portion of the asset in connection with the Q4 fiscal '21 restructuring of our ownership in Ardent Mills.

And before year-end, when the carryforward expired, we took additional actions that we believe should allow us to utilize a portion of the remaining capital loss carryforward in future period. We are currently engaged with the IRS regarding these actions and plan to continue to update our disclosure on this matter as the process unfolds.

It's important to note that there is no guarantee that we will be successful in achieving this favorable treatment of the tax asset. However, if we are successful, we could have some additional opportunity for future tax efficiency as we continue to strategically manage our portfolio of brands and investments.

That concludes our prepared remarks for today's call. Thanks to everyone for listening. I'll now pass it back to the operator who can open the line for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And today's first question comes from Andrew Lazar with Barclays. Please go ahead..

Good morning. Thanks for the question..

Good morning..

Good morning..

Good morning. I'd like to start off with your commentary around the timing lag, obviously, of pricing to inflation.

Would it be your expectation that the EBIT margin exiting fiscal '22, would be within your initial 18% to 19% forecast range, suggesting, let's say, no structural impediments? And if not, I would be curious as to why that would be?.

Yes, Andrew, the absolute earnings power of the business as we exit the year is expected in dollars to be right where we thought it was previously. So our focus there as we take through these transition windows and take price is on protecting pricing dollars.

And then our outlook beyond '22, we'll lay out in more detail when we do our investor meeting. But suffice it to say, we continue to see margin runway in the business as we move ahead, and we'll get into details on that later.

Dave, do you want to add some more color to that?.

Yes, just to build on that. So Andrew, our run rate earnings, as Sean said, for the second half, is the same as it was in our previous guidance. And that should really be the base as we think about fiscal '23 earnings. Regarding margins, the pricing we're taking is to offset inflation dollars, which compresses our operating margin in the short-term.

But we expect our operating margins are going to improve in the second half versus the first half as the pricing fully hits the market, and we feel good about the runway for expanding margins as we get into fiscal '23.

So we're going to give more specifics on our updated long-term algorithm in our spring investor meeting, but we feel good about how we'll exit '22 and the runway for margin going into '23..

Got it.

And then if organic sales, let's say, slows more than expected in fiscal '22, which I think some investors are clearly concerned about, just given the challenging comps and such, trying to get a sense of how much risk that puts to your $2.50 EPS guidance or really, in other words, how much flexibility perhaps you've been able to build in to deal with some variability that could come in organic sales growth..

Yes, Andrew, Sean here. As I've said many times, some years, you get to your sales number on the back of volume. Some years, you get there on the back of price. And obviously, this is a year of inflation, which means a year of price.

And what I can tell you is, overall, we think our sales outlook is a prudent guide based on prudent assumptions, particularly around stickiness and elasticities. We did plan for some stickiness, but as Dave said in his prepared remarks, we also plan for some erosion to creep back in as we get closer to fall.

On elasticities, our early elasticities do look good versus our estimates. And in my mind, they're likely to be aided by the ubiquity of the price increases in the grocery store. I think you call it strength in numbers. But in addition to that, even more so by higher prices in away-from-home food, which could further help stickiness.

On top of those factors, we expect improved supply, which is going to help our service. We have an excellent '22 innovation slate.

Our '21 innovation slate still has a lot more trial yet to happen, and we will be adding back some very select and prudent promotion dollars because we have confidence that the sales they'll generate will be incremental versus not adding them back. So overall, we like where we sit at the top line..

Thanks very much..

And our next question today comes from Ken Goldman at JPMorgan..

Hi, two for me, if I can. First, I think industry standard in this industry is for pricing, especially list pricing really to be on a 60- to 90-day lag after it's announced.

Is there any delay or lag in that timeline from what you're seeing? Just thinking about the timing of inflation versus when your pricing comes in? Or is it really within a range that you think is pretty typical for this industry?.

Yes. Sure, Ken. Let me unpack that for you. First of all, we have ample tools to navigate inflation and the lag to pricing is no longer than normal. On pricing, the way it works is pretty straightforward. First, you don't generally get a customer to accept inflation-justified pricing until they're confident it's not transitory inflation.

So it's not the day it shows up. It's after it's clearly established. Once that happens, it's around 90 days before you see the impact in the P&L. And then if inflation keeps moving, and this is what we've been dealing with, you take additional waves of action and the clock starts over.

So if you look at where we were after our Q3 call, when inflation had run up to 6%, we were still finalizing our '22 AOP and we still saw a path to our previous EPS range.

But since that time, inflation accelerated further by over $250 million, and that prompted us to develop additional plans to offset the additional inflation, and we've been hustling to implement those plans. But mechanically, there is a real lag effect.

And when you have multiple waves of actions, at some point, you can't offset the increasing inflation in short-term windows, at least not without doing things that would ultimately destroy shareholder value like cutting investments in the business or investments in our people. So overall, we feel really good about our company.

Our business has been very strong across the board. We continue to lead in innovation. We've delevered as planned. We continue to raise our dividend, and our people remain highly engaged. Now we've got inflation. It happens. You deal with it, and we are. The team is taking, my judgment, all the right actions.

And the portfolio, importantly, is better positioned to navigate this dynamic than it was previously in the years gone by. So the net of all of this is a temporary window of profit pressure followed by a strong rebound. And that's how these cycles work when they're managed well, and that's how it will unfold from here.

And specifically, as Dave just said, as we exit the year, the run rate earnings power of the business is expected to be exactly where we thought it would be before..

Okay. That's very clear. Thank you. And then for a follow-up, you did talk about a few levers to manage inflation besides just pricing. One of them is optimizing fixed cost leverage.

I wanted to ask about that because you'll probably have negative sales growth this year, including the divestiture of Egg Beaters, so I'm not quite sure where that sales leverage or that fixed cost leverage comes from. You also talked about customer charges. I wasn't sure what that meant.

You talked about acquisitions and divestitures just as an item in there. I wasn't sure where you were going with that. So any help with those three sort of levers to offset inflation would be helpful. Thanks..

Yes, Ken, let me take a shot at this. Let me approach it by talking about operating margins. So we finished fiscal '21 around 17.5%. So our guidance of approximately 16% is 150 basis points reduction. So if you kind of look at the key drivers, it obviously starts with inflation, which is approximately 9%.

This is the estimated market inflation before coverage. So that creates about a 650-basis point headwind to operating margin. Our total realized productivity, which is our core productivity, our sourcing coverage, Pinnacle synergies and then the reduction of the COVID costs are over 5% of last year's COGS.

So this is a tailwind to operating margin of about 400 basis points. The net impact of all of our pricing actions, mix actions is a tailwind of about 150 basis points.

And this includes our pricing for the year, which is somewhere between 3% to 4%, and that's not an annualized number because of the lag, partially offset by a bit of certain increased merchandising programs and then the mix with Foodservice. So there's a lot in there. There's a lot of puts and takes.

But in terms of our core productivity, when you include the reduction of COVID and the sourcing benefits, we're over 5% of cost of goods sold against that 9% inflation. So those are the key drivers..

All right. Thanks, Dave. .

And our next question today comes from Bryan Spillane with Bank of America..

So Dave, just a first question from me is just on, it seems like the guide, the $2.50 guidance implies some benefit below the operating profit line. So I'm not sure if I missed it, but it seems like it's -- if you just take flat sales on a 16% margin, you get to around $2.30. So there seems to be a $0.20 gap between that.

So is there -- can you just help us with below the operating profit line, maybe what some of the puts and takes are there?.

Yes. I mean, we have 2 major things there with pension income and then our equity interest, which is primarily Ardent, and then our tax rate. We expect the tax rate to be 23% to 24%. So that will be in line. So it's really benefits that we're going to get from Ardent and pension..

Okay. And then second one, just related to cash flow. I know you've got your rapid deleveraging targets for the end of '21.

And so just given the implied sort of drop in operating income in '22, would you expect to still be within your targets on leverage? Or might it drift up a little bit? And if you could also help us with the CapEx number for '22, that would be helpful..

Yes. Sure. So Bryan, we're still on our target of 3.5x. As we always have at Conagra, we have a seasonality, right? So we will build inventories really in the first half of the year. So you'll see a spike up in our working capital.

So you always see kind of you'd see leverage kind of spike up seasonally and then it would come down, so by the end of the year, we're back in line where our target is. So you can expect that again this year.

The one question is, from an inventory perspective, where we want to lean in a little bit more depending on where the business is and where demand is and build some more safety stock versus where do we plan it. But we'll manage that in the overall aggregate of kind of managing cash flow.

So that's the plan, but there is a seasonality as we go through, and it clearly spikes up Q1, Q2 and then it comes down in the second half.

And I'm sorry, what was your second question?.

Just capital spending, if you could help us with the CapEx for this year, '22..

Yes, we're estimating $475 million in CapEx in fiscal '22. And big piece of that is our continued construction of our new Birds Eye plant, which we're very excited about..

The next question today comes from David Palmer of Evercore ISI..

Just eyeballing Slide #40, that bracket that you labeled the timing lag effect. It looks like something like $0.15 per share in earnings. And just putting that into an annual EBIT margin headwind, it would be something like 80 basis points or so or maybe double that if it all happens in the first half.

So it would feel like based on the rough math that you're implying something like EBIT margins in the 14 in the first half, 17 in the second half.

Does that seem about right? Is that the sort of cadence you're thinking about?.

Yes, I think that's fair, David. I would say Q1, and I said this in my prepared remarks, we do expect that to be the lowest margin quarter of the year because we're going to get hit with the highest inflation rate and the pricing will not fully be in effect.

So that's probably going to be more in line with where we came in for Q4 fiscal '21, but then you'll clearly see a ramp-up. So the way you're looking at it, I would say, is accurate..

And I don't want to be too greedy, but you did mention that some of the productivity initiatives would be perhaps even more back-weighted than the pricing.

So thinking about -- and I know you're not going to give us guidance for fiscal '23, but I want to think about, realistically, if that 17 can build up even higher going forward, as you have some catch-up in some of the productivity that goes with this big spike, perhaps historic spike in input cost into next year.

And then I just want to squeeze in one more and that is on growth spending. What sort of growth spending are you baking into fiscal '22? And I'll stop..

Well, just one quick comment on outlook beyond '22. We're not going to get into detail today, David. But our playbook around here is around perpetually reshaping the portfolio for better growth and better margins. And so there are a lot of things that we think we can continue to do over time to drive both growth and both margins.

One of the things that we've been doing for the better part of 5 years now is premiumizing the portfolio. And that is -- we historically, as many of you know, have been around for a while, had a lot of our products that were very low priced $1 or below. We've worked hard to get those price points up.

It's one of the interesting things about our company in this window we're in right now is we still think our products' price points have room to move north based on the quality that we offer and the modernization that we've put into our innovation.

And sometimes you need a catalyst to continue to get those price points really in sync with the value proposition that we're offering.

And so the optimist in us here is actually looking at some of what we're navigating here as a positive thing because it continues to fuel our premiumization and modernization strategy, which ultimately leads to better dollar realization per unit and better margins over time..

Yes, just on the spending side, our Q1 A&P is going to be up. It was down in Q1 of fiscal '21. That was partially COVID related.

But if you look at kind of the run rate where we finished the last 2 quarters in fiscal '21 and kind of where we're going to be in first quarter of fiscal '22, that's a good kind of run rate for A&P as we think about the full year '22..

And our next question today comes from Jason English at Goldman Sachs..

Congrats on a strong finish to the year. A couple of quick questions. First, I think you've mentioned that your back-half EPS guidance is unchanged from what you expected before. I don't recall what your back-half EPS guidance was.

So can you remind us of what your expectations were and I guess where they still are?.

Yes. Just -- this is a language thing, but we didn't say that the EPS guidance because we didn't give back-half EPS guidance for the 2 quarters. We gave guidance for the year.

But the notion we're trying to get at here is that the earnings power of the business in the back half is exactly where we thought it would be at a dollar basis, what was embedded within our existing algorithm.

Would you say that any differently, Dave?.

Yes. Another way to think about it is a little under half of our annual EPS has historically come from the second half. So yes, if our prior guidance had an assumption that was pretty close to that split, so if you look at our prior guidance range and apply that math, you should be in the ballpark for H2 for this year..

That's really helpful. And I want to go similar to Mr. Goldman's questions on the puts and takes to offset the inflation. You've got trade optimization on there. And I think you're not the first company to sort of highlight it.

But I guess my question is, in regards to the COVID duration, we seem to have gone through a period where there is tremendous trade optimization during COVID when promotions are pulled from the system.

Are you implying that there's opportunity to pull back even further on trade? Because I think a lot of us and a lot of investors, in particular, are expecting just the opposite to happen. We'll lap the period where trade was subdued and promotions were subdued and they'll come back into the system and be a net price offset.

You seem to be implying the opposite is true.

And I'm just curious if that's indeed the case; and if so, why?.

Yes. I think the thing you got to do here, Jason, is we've got to double-click down on what is trade, what's within trade. Trade is kind of a catch-all term. And within that catchall basket, there, historically in our experience, had been a lot of inefficiency. And as you've seen us do over the years, we've tried to purge a lot of that inefficiency out.

And then there's some stuff that is under the heading of trade that works. So we see both opportunities to continue to get more efficient in some of the areas that have historically been inefficient in trade, and that could be fixed cost trade. It could be unhelpful promotions. So those are things where we can continue to get more efficient.

By the same token, there are -- as I mentioned earlier, there are some opportunities to feather back in some trade to drive incremental volume. And the operative word there being incremental. And so we're -- this is the promotional investment part of trade spend.

So the way I think about it is this, there's good promotional investments, meaning strong IRR. And those are the ones that drive incremental sales, sales that simply would not happen, but for the promotion. Then there's bad promotion investments. And those are the ones that do not drive incremental sales but merely cannibalize higher margin base sales.

If you think about the height of the pandemic, we sold everything we could make as base sales. So promoted sales were inherently not incremental, which is why across the industry, you saw promotions fall.

On the other side of the pandemic, base sales start to normalize, and that does leave room for good promotional investments to drive incremental sales, and those are sales that help overall sales and profitability.

So the key to being good trade managers, trade spend managers are being able to identify those buckets where there's inefficiency continue to purge that out but not be blind to opportunities to drive incremental sales and profit, the good IRR investments.

And that's why you got to get into the details on this giant catch-all bucket that we all call trade..

And our next question today comes from Chris Growe of Stifel..

I just had a question for you first and just to make sure I understand on the level of inflation. It's 9% on a market basis.

What is it though for Conagra inclusive of, say, the hedging and sourcing benefits? What's the right percentage to -- even if it's back of the envelope to kind of figure out for the company overall?.

Chris, we kind of talk about that in kind of the market inflation, which is the 9% and then all of the offsets, including the hedging. So that's over 5% of total cost of goods sold. So we don't break out the specific piece. So we kind of included in total productivity..

Okay. Got it.

And then I'm just curious, can your second half margin be up versus the second half of fiscal '21? So rather than sequentially, can it be up versus the prior year because of the pricing that's coming through?.

Yes. I'm not going to get into that level of detail, but it clearly is up versus the first half..

It's really -- our focus -- as you go into these acute inflationary periods, Chris, our focus becomes how do we recapture every profit dollar. And the math will affect in the short term the percentage, but we're focused on recapturing the profit dollars. And that's the earnings power that we expect to be spot on as we get to the back half..

Yes, Chris, let me -- we will be up versus second half of '21..

Okay. Yes. I didn't -- I appreciate that color.

And just one final quick one would be that as you think about your pricing, and I'm looking ahead maybe it's second half, maybe fiscal '23, but do you expect that pricing would more than offset the dollar inflation coming through the business at some point in time when you achieve that full pricing? Can you achieve that level of pricing? A lot of companies are talking about that.

We'll see if it happens. So I'm just curious if you're thinking of that the same way..

Well, we'll see how it plays out.

I mean this is the way these pricing -- these acute inflationary periods work, Chris, is the -- you get -- the inflation is your foe in the early days, and it could be your friend as you lap it in the first quarter or 2 that you lap it because you got the pricing at that point baked in, and hopefully you've reached a new equilibrium in terms of cost and you start to see meaningful margin recovery.

That's why on a kind of a rolling 12-month basis once we get through this first quarter, you're going to see -- you're going to -- at that point in time, you're going to see a very strong performance in the business overall.

But this is why being fulsome in our approach to offset inflation, including broad-based pricing across our categories across the portfolio, is a huge piece of the game. And I'm very pleased to see that the team is executing it the way we want it..

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for the final remarks..

Great. Thank you. So as a reminder, this call has been recorded and will be archived on the web as detailed in our press release. The IR team is available for any follow-up discussions that anyone may have. Thank you for your interest in Conagra Brands..

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day..