Good morning, and welcome to the Conagra Brands' First Quarter Fiscal Year 2022 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, Investor Relations. 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 Web site, conagrabrands.com. With that, I will turn it over to Sean..

Thanks, Brian. Good morning, everyone, and thank you for joining our first quarter fiscal 2022 earnings call. Today, Dave and I will discuss our results for the quarter, our updated outlook for the remainder of the year, and why we believe that Conagra continues to be well-positioned for the future. Slide five lays out our key messages for today.

First, as everyone is aware, the external environment is incredibly dynamic right now, and we see many of these challenges persisting. But despite the complex operating situation, the ongoing dedication, resilience, and agility of our team enabled us to deliver solid Q1 results on the back of strong sales.

We continue to benefit from our proven approach to brand-building, and the breadth of investments we're making to increase consumer demand. These efforts drive brand health, which is evidenced by the continued strength of our sales, share, and repeat rates across the portfolio.

As a result, we believe our brands are well-positioned to continue managing through the current inflationary challenges, and support ongoing inflation-justified pricing actions. Looking ahead, we're reaffirming our EPS outlook for the year. However, we now see a slightly different path to achieving that EPS.

We expect inflation to be higher than originally forecasted, but we also see continued strength in consumer demand, even above our original expectations. We believe that consumer demand, coupled with additional pricing and cost-saving actions will enable us to deliver adjusted diluted EPS of about $2.50.

So, with that as the backdrop, let's jump right in. We know that our long-term performance is a function of the caliber and engagement of our team. And that has never been more true than today. I'm extremely proud of the team's resilience and agility in adapting to the dynamic environment we're currently experiencing.

As a result of our team's continued hard work and dedication, we've been able to successfully execute through sustained, elevated demand, and challenging supply conditions. First, as we've already mentioned, consumer demand has remained at higher levels than we expected due to macro forces, as well as the unique position of our portfolio.

This was a great problem to have, but it increases the demands on our supply chain at a time when the industry is navigating labor shortages, material supply issues, and transportation cost and congestion challenges. Taken together, these factors created an upper control limit on the amount of product we could produce and ship in Q1.

If we had the capacity to meet all of the demand, our numbers would likely have been even more impressive. However, our ability to deliver solid results amid this dynamic environment is a testament to our team's ongoing commitment to executing the Conagra Way playbook each and every day.

The Conagra Way playbook to portfolio modernization remains our north star in any operating environment. Regardless of the external factors that may influence short-term demand and supply dynamics in any given quarter, we define long-term success as creating meaningful and lasting connections between consumers and our brands.

We believe that our playbook is the most effective framework for delivering on that objective. Those of you who have followed us for a while will recall that our modern approach to brand building is more comprehensive than legacy industry practices.

Instead of anchoring our brand building predominantly in broadcast advertising that pushes new messages on old products, we anchor our investments and our efforts, first, in developing new, modern, and superior items.

Then, once we've created these more modern and provocative products, we invest to drive the physical availability of those items in-store and online. And finally, our investments to drive meaningful one-to-one communication to the right consumers at the right time, at the right place enable us to remain salient and relevant.

This comprehensive approach and unwavering commitment to modernizing and premiumizing our portfolio continues to pay off and enables us to better manage our brands within any environment. And as you could see on slide eight, our team delivered solid results during the first quarter.

As you know, our year-over-year growth rates were impacted by the elevated demand we experienced during the first quarter of fiscal 2021, when we were still in the early months of the pandemic.

Given this dynamic, we'll reference some two-year figures throughout today's presentation to provide more helpful context on what we believe is the underlying strength and trajectory of the business. As you could see, on a two-year CAGR basis, organic net sales for the first quarter increased 7% and adjusted EPS grew by nearly 8%.

Importantly, our solid performance in the first quarter was broad-based. Just take a look at slide nine. Total Conagra weighted dollar share grew 0.8 points on a two-year basis in the quarter, with share gains in each of our domestic retail domains; frozen, snacks, and staples. Innovation remained a key to our success across the portfolio in Q1.

Slide 10, highlights the impact of our disciplined approach to delivering new products and modernizing our portfolio. During the first quarter, our innovation outperformed the strong results we delivered in the year-ago period.

This reflects not only the quality of the products' launch, but also our efforts to support those launches with investments and capabilities that deliver deeper, more meaningful consumer connections.

And as you can see, our innovation rose to the top of the pack in several key categories, including snacks, sweet treats, frozen vegetables, and frozen meals. Our performance is a clear testament to the innovation and marketing engine at Conagra, and we believe the solid reputation we've built with customers and consumers.

In addition to developing superior products, we also remained focused on physical availability during the first quarter through both brick-and-mortar and online. Slide 11 demonstrates how our ongoing investments in e-commerce continued to yield strong results.

Once again, we delivered quarterly growth in our $1 billion e-commerce business, both against our peers and as a percentage of our overall retail sales. We outpaced the entire total edible category in terms of e-commerce retails sales growth during the first quarter, just as we did throughout fiscal 2021.

E-commerce sales now represent more than 9% of our total retail sales; more than double what they were just two years ago. As we mentioned earlier, our solid top line performance during the first quarter was driven by strong demand, robust brand building investments, and inflation-justified pricing actions.

Slide 12 details the extent of our pricing actions to date. A few key points to keep in mind, first, we began implementing actions on some of our domestic retail products in the fourth quarter of fiscal 2021 in response to the inflation we began to experience last fiscal year.

The majority of our domestic retail pricing actions however just started to hit the market at the end of Q1 in response to the inflation we spoke to you about on our Q4 earnings call, in July. As a result, the benefit in the quarter is less than what we expect to see going forward.

You can see this playing out in the consumption data from the last four weeks, all of which are part of our fiscal second quarter. During this period, our on-shelf prices rose across all three domestic retail domains. Looking ahead, our original plans for the year included additional inflation-justified pricing in future periods.

Given the heightened inflationary environment, however, we now expect to take incremental actions beyond those original plans. Many of these actions have already been communicated to our customers, and the benefits will be weighted toward the second-half of the fiscal year.

We'll keep you apprised, but it's important that we stress that our pricing actions are not a blunt instrument. We take a fact-based approach to pricing within the portfolio. We use a data-driven approach to elasticity, and thoughtfully execute actions to align with customer windows.

As we look ahead, we remain confident in the fiscal 2022 EPS guidance we outlined on the fourth quarter call, but we now expect to take a different path to achieving that guidance. As mentioned, we now expect inflation to be higher than originally forecasted.

However, we believe that the combination of continued strength in consumer demand, incremental inflation-justified pricing, and additional cost-savings actions will enable us to offset the impact of that inflation. I'd like to briefly unpack these factors, starting with the update to our inflation expectations.

As you can see on slide 14, we currently expect gross inflation to be approximately 11% for fiscal 2022, compared to the, approximately, 9% we anticipated at the time of our fourth quarter call.

The bulk of the incremental inflation can be attributed to continued increases in the cost of proteins, edible fats and oils, grains, and steel cans since our Q4 call.

I want to emphasize that this is our best current estimate of gross inflation for the full-year, and does not account for the impact of supply chain productivity improvements or hedging. Dave will provide more color on inflation and the various levers we're able to pull to help offset its impact.

Even in the face of this acutely inflationary environment, we remain squarely focused on continuing to invest in our brands, and capturing this strong consumer demand. And, we're pleased to share, that the consumer demand we experienced during the first quarter exceeded our prior expectations.

As you can see on slide 15, our total company retail sales on a two-year CAGR basis were up nearly 7% in the first quarter with strong growth across our frozen snacks and staples domains. And when you peel back the onion further, you find even more evidence to underscore the durable strength of our top line performance.

The chart on the left side of slide 16 demonstrates that we continue to grow our household penetration during the first quarter, building upon the significant new consumer acquisition we've achieved over the past year and a half. But what I believe is even more encouraging is the chart on the right. We didn't just acquire new consumers, we kept them.

The data shows growth in repeat rates that demonstrates our new consumers discover the incredible products and tremendous value proposition of our portfolio. We're proud that our products are resonating with consumers, and that those shoppers keep coming back for more.

Importantly, our performance on these metrics, household penetration and repeat rates has not only been strong in the absolute, but relative to the competition as well. We're also encouraged by the elasticity of demand for our portfolio which has been better than previously expected.

Slide 17 demonstrates that our pricing actions to date have had limited impact on demand. As I mentioned, most of our pricing actions taken to date began to appear on shelf at the end of Q1. And you can see how that dynamic is being reflected in the data for September, which is part of our second quarter.

We continue to be cautiously optimistic that our elasticities will remain favorable as the full array of pricing enters the market. As evidenced by our strong penetration and repeat rates, the growing number of consumers had clearly discovered the convenience and value that our retail portfolio provides.

Taken together, the net result of these factors I just detailed is the reaffirmation of our EPS guidance and margin, and a few updates on how we expect to get there. We're increasing our organic net sales guidance to be approximately plus 1% up from approximately flat at the time of our Q4 call.

We're reaffirming our adjusted operating margin guidance to remain at approximately 16%. We're updating our gross inflation guidance to about 11% and we're reaffirming our adjusted EPS guidance of approximately $2.50.

Before I turn the call over to Dave, I want to briefly reinforce some of the longer term tailwinds, we believe will benefit us for years to come. This includes enduring trends that predate the COVID-19 pandemic and new consumer behaviors adopted over the past 18 months.

As a reminder, we have a proven track record of successfully attracting Millennials and Gen Z consumers at a higher rate than our categories as a whole.

By attracting younger consumers now, we create the groundwork for future growth not only to these younger generations offer the opportunity to drive lifetime value, they're larger than the Gen X generation that immediately proceeded them. Historically, younger adults have eaten at-home less than older generations.

The meaningful shift towards at-home eating tends to happen during the family formation years. And particular, we know that annual frozen category spend per buyer increases in households with young kids, and it increases further as the kids grow up.

Importantly, almost half of Millennials have yet to begin having kids and we fully expect their consumption of Conagra Products will grow along with the growth of their families. Another enduring trend is the growth of snacking, which has long been the fastest growing occasion in food and shows no signs of slowing down.

We have a very strong $2 billion ready to eat snacks business that spans multiple subcategories, where we either have the fastest growing brand, the largest brand, or both. The COVID-19 pandemic has only served to accelerate these existing trends and create additional long-term growth drivers.

One of the primary drivers for more at-home eating is the shifting workplace dynamics that are meaningfully changing weekday eating behavior. This includes both the contracting workforce and the rise of remote work. As more people work from home or exit the workforce, the more likely these people are to eat at-home, particularly on weekdays.

Importantly, some aspects of remote workforce adoption are expected to be permanent. The way we work is changing and that's driving changes in consumer eating habits as well. More time at-home also means more time devoted to preparing meals. Younger consumers are acquiring new skills and developing new food habits at a formative age.

The behavioral science tells us that when people learn to cook in early age, they continue to cook at elevated levels as they get older, and consumers of all ages are rediscovering their kitchens, and cooking more at home. Across all these long-term tailwinds, we believe our portfolio is uniquely positioned to meet the needs of today's consumers.

Our frozen portfolio offers hyper-convenient meals and sides perfect for the quick work lunch or family dinner. Our snacks and sweet treats portfolio caters to those looking to experience bold, anytime flavors at home, while enjoying time with friends and family.

And our staples portfolio offers the simple cooking aids and meal enhancers that both experienced and first time cooks are seeking. In summary, on average portfolio has delivered against the recent behavioral shift better than the competition.

And as we move beyond the pandemic, and millennials and Gen Z's continued age, we believe that our brands are well positioned to become an even more regular part of their routines. Now that I've highlighted our performance for the quarter and strong positioning for the future, I'll turn it over to Dave to provide more detail..

Thanks, Sean, and good morning, everybody. I'll start by going over some highlights from the quarter shown on slide 21. As a reminder, our year-over-year comparisons reflect the lapping of extremely strong demand for at-home food consumption during the early months of the pandemic.

For that reason, we are also including two-year comparisons for a number of important metrics to provide helpful context regarding the underlying health of our business. We are pleased with the overall results of the first quarter, which has Sean discussed reflected our ability to successfully navigate the current dynamic environment.

Organic net sales declined by 0.4% compared to a year ago, and increased 7% on a two-year CAGR. Adjusted gross profit and adjusted operating profit both decreased year-over-year, but were flat on a two-year basis, demonstrating our ability to offset the double-digit inflation experienced in the business during the quarter.

I also want to highlight the increase in our advertising and promotional spend on both a one and two-year basis. These investments reflect our continued commitment to building and maintaining strong brands. Turning to slide 22, I'd like to spend a few minutes discussing our net sales for the quarter.

On an organic net sales basis, the 0.4% decrease during the quarter was driven by a 2% decline in volume from lapping last year's elevated demand. This decline was almost entirely offset by favorable brand mix, and the pricing actions we've taken to date in response to the inflationary environment. There are two items I want to call out on price mix.

First, as a reminder, the majority of our domestic retail pricing actions just started to hit shelves at the end of Q1. So the benefit in the quarter was limited compared to the benefits we expect to receive over the course of fiscal '22.

Second, our 1.6% benefit from price mix lapses 70 basis point benefit in the prior year period that was associated with the true up of fiscal '20 fourth quarter trade expense accrual. Without that item, the current quarters price mixed benefit would have been plus 2.3%.

Divestitures resulted in a 110 basis point decline in net sales during the quarter and foreign exchange provided a 50 basis point benefit. Together, these factors drove a 1% decline in total Conagra net sales for the quarter compared to a year ago.

Slide 23 shows our net sale summary by segment, both on a year-over-year and a two year compounded basis. As you can see, we've had strong two-year compounded net sales growth in each of our three retail segments with a slight decline in our Foodservice segment. Net sales for the entire company have increased 7% on a two-year CAGR basis.

Our two-year annual sales growth rate for the domestic retail segments is tracking closely with the retail consumption growth achieved over the same period.

Turning to adjusted operating margin, slide 24 details the puts and takes of our first quarter results; first quarter inflation was 16.6%, driving our adjusted gross margin decline of 530 basis points compared to a year ago.

We delivered 550 points of benefit from our margin lever actions in the quarter inflation justified pricing, supply chain realized productivity, cost synergies associated with the Pinnacle Foods acquisition and lower pandemic-related expenses. However, these benefits were more than offset by the very significant inflation.

Note that the 16.6% inflation shown on the slide represents gross market inflation for Q1, and does not include hedging or sourcing benefits. We capture hedging as part of our realized productivity. For the first quarter, our net inflation, inclusive of hedging was high single-digits.

Our Q1 adjusted operating margin was also impacted by year-over-year changes to A&P and adjusted SG&A. As I previously mentioned, we continued to increase our investments in A&P in the quarter. The adjusted operating profit and margin by segment for the quarter are shown on slide 25.

As a reminder, we expect our first quarter of this fiscal year to benefit the least from our inflation justified pricing actions. It's also worth highlighting again, that our adjusted operating profit is flat on a two-year basis. Over a two year period, we have completely offset double-digit inflation while also increasing investment in the business.

As you can see on slide 26, our Q1 adjusted EPS of $0.50 was heavily impacted by inflation as well as by a slightly higher tax rate.

These headwinds were partially offset by strong performance from our Ardent Mills joint venture, lower net interest expense, and a slightly lower average diluted share count due to our share repurchases during the quarter.

Turning to slide 27, we ended the quarter with a net debt to EBITDA ratio of four times, which was in line with our expectations and reflects the seasonality of the business. Our cash flow from operations and free cash flow were also both in line with our expectations for the quarter.

Our CapEx increased year-over-year, as we remained focused on continued capacity investments to maximize physical availability of our products. We also continued to return capital to shareholders during the first quarter. We repurchased approximately $50 million of common stock and paid approximately $132 million in cash dividends.

As a reminder, the Board of Directors approved a 14% increase to our annual dividend in July. We paid our first dividend at the increased quarterly rate of $0.3125 per share, or $1.25 per share on an annualized basis shortly after the conclusion of Q1.

As we've already detailed today, we continue to experience cost of goods sold inflation at a level that is both significant and in excess of the level projected at the time of our Q4 fiscal '21 earnings call. We now expect gross cost of goods sold inflation to be approximately 11% for fiscal '22.

We previously expected gross inflation of approximately 9%. This heightened inflationary pressure is coming from increases across many inputs, particularly proteins, edible fats and oils, grains, and metal-based packaging. We are also seeing increasing costs and transportation given marketplace dynamics.

We have strong plans in place to mitigate the impact of this inflation. First, we will leverage sourcing and hedging given our sourcing and hedging positions. We only expect two-thirds of the 200 basis point increase in gross inflation to impact the fiscal '22 P&L.

Regarding quarterly flow, we expect about half of the net impact from this heightened inflation to hit in the fourth quarter. We expect the other half to impact Q2 and Q3 about equally. As a reminder, the benefit of hedging actions is classified as realized productivity in our schedules.

In addition to hedging and sourcing, we expect to have a number of drivers to help offset inflation in fiscal '22. As Sean already detailed, these drivers include higher than expected consumer demand, lower than expected elasticities of demand and incremental inflation justified pricing beyond our original plan.

As Sean noted, the benefits of our incremental pricing actions will be weighted towards the second-half of the fiscal year. We are also taking additional actions to enhance supply chain productivity through the balance of fiscal '22.

And as always, we will maintain a disciplined approach to cost control, which continues to be a hallmark of our culture. We now have additional cost savings actions planned beyond what was included as part of our initial guidance for the year. In summary, we intend to leverage our full range of margin drivers to offset the impact of inflation.

We expect to realize the benefits from these drivers as the year progresses. With the benefits weighted towards the second-half of the year, we continue to expect margins to improve sequentially over the remainder of fiscal '22.

The updated inflation expectations, the higher-than-expected consumer demand, and the comprehensive actions we are taking to combat rising costs are all reflected in the updated fiscal '22 guidance we issued this morning. We remain confident in our original adjusted EPS guidance of approximately $2.50 for the year.

But the path to achieve that guidance has changed. We now expect organic net sales growth of approximately 1%, compared to our prior expectations of approximately flat growth. Also, we expect our adjusted operating margin to continue to be approximately 16%, but seize the modest compression versus our original forecast.

We expect the increase in dollar profit from higher net sales, together with incremental cost saving, to offset the incremental net inflation dollars. As I explained on last quarter's call, this guidance is our best estimate of how we will perform in fiscal '22.

But our ultimate performance will be highly dependent on multiple factors, including, first, how consumers purchase food as food service establishments continue to reopen and people return to in-office work and in-person school. Second, the level of inflation we ultimately experience.

Third, the elasticity of demand impact as consumers respond to higher prices. And finally, the ability of our end-to-end supply chain to continue to operate effectively as the pandemic continues to evolve. Before turning it over to the operator for Q&A, I want to reiterate Sean's comments regarding our confidence in the resiliency of our business.

Our ability to deliver sold results amid such a dynamic environment reflects the continued dedication of our team, as well as the strength of our brands, and the Conagra Way playbook. That's for listening, everyone. That concludes my remarks. I'll now pass it to the operator for questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrew Lazar of Barclays. Please go ahead..

Great, thanks very much. Maybe to start off, many companies in the food space are certainly seeing better top line but have had incremental trouble servicing that demand efficiently due to the labor challenges, and sort of other supply chain disruptions.

I guess Conagra is looking for higher sales than initially expected, and sort of a similar margin for the full-year, so really improved operating profit dollars.

And I was hoping you could provide maybe a bit more color on the sort of the key buckets, and maybe quantify some of those key puts and takes for us, because I guess that's where I'm getting a bit of pushback this morning in terms of the higher operating profit that you would now see in light of all these challenges? And then secondly, just what would be the offset to the better operating profit for the full-year that keeps EPS roughly in a similar place for the full-year? Thanks so much..

Good morning, Andrew. Let me take the first part of your question. And, Dave, you can add here, and just comment a little bit on the supply chain situation. Well, as you were implying with respect to supply chain, it is a daily grind, so I am incredibly appreciative and proud of our team.

Clearly when demand from consumers is this strong at the same time that the supply chain is strained, service can suffer. And to manage that to the best of our abilities and maximize our sales, we attack each of the root causes as aggressively as we can.

So, with respect to the labor environment, it is about recruiting as aggressively as we can, and then keeping people healthy when they get in the door. With respect to materials and ingredients, it's about keeping the pressure on suppliers and having contingencies. And with respect to logistics, it's about being as creative and aggressive as we can.

And so, in times like these, it does come down to agility and resilience, and that's really how our culture is wired. And we talked about having a refuse to lose attitude every day, and in the end these supply chain challenges will ultimately abate.

And when they do, the fact that our consumers have such affinity for our products sets us up very well for the future. So, that's really out goal, is to do everything within our power to get as many boxes of our products as we can out the door to help offset some of the cost pressures. Dave, you want to add anything to that on the --.

Yes, let me address your operating profit margin question, Andrew. As I mentioned in my prepared remarks, given the dynamic of increasing profit from our higher sales dollars offsetting the dollar impact of inflation, the math on that compresses margins a bit. So, we expect higher sales at same operating profit.

So, our guidance on operating margin was approximately 16%. We were expecting to tip a bit above that in the previous guidance. Now, we're expecting to tip a bit below it, but we're still sort of guiding to approximately 16%. So, that's the dynamic on your operating profit question.

As you look at the -- kind of the bridge to roughly how we get there, last quarter I gave a bridge, just updating it now. We expect 800 basis points of operating margin headwind from the 11% gross inflation, with our inflation going up.

We expect about 490 points of operating margin tailwind from the costs coming out, including our realized productivity and that includes our hedging and sourcing as well as our lower COVID costs and the Pinnacle synergies.

And we expect about 190 basis points of operating margin tailwind from all of our price mix actions, including our pricing, merchandizing products, and segment mix. And then a little bit of a headwind on SG&A to operating margin. So, that's sort of the rough bridge to get you to the little bit below 16%..

Great.

And then just the EPS staying about the same, I guess now that you've kind of said -- talked about the margin a little bit, I guess there's no significant change in sort of below-the-line items necessarily, versus what you had expected previously?.

No, we have -- you see, we had a good quarter for Ardent. And so, you might have a little bit of benefit there, but our tax rate was a tick higher as well, so they kind of wash..

Great, thank you..

The next question is from Ken Goldman of JPMorgan. Please go ahead..

Hi, thank you. Are there any -- Dave, are there any notable tailwinds or headwinds just as we think about modeling the second quarter? Yes, I know you don't give full guidance, but maybe just so we can avoid some surprises. Yes, I know you've said many times the progression of fiscal '22 pricing and savings will be back-half loaded.

So, hopefully, people have gotten that message.

But is there anything specific we should be reminded of, additional trade accrual lapse, anything like that?.

Yes, Ken, I would tell you there's nothing like that. Really, the second quarter, we're going to see more of a benefit from price mix versus what we saw in the first quarter. The gross inflation is going to be roughly the same as we saw in the first quarter. So, it'll be the second-half where the percentage of gross inflation will start to decline.

It'll still be up, but it will be at a lower rate. The second quarter inflation -- gross inflation is going to be roughly the same. So, it's going to be the increased benefit from price mix..

Okay, thank you for that. And then one for me, Sean, we've seen some labor strikes at [Mondelez] (ph). And now, it looks like there's some fairly major ones at Kellogg.

As you look at your relationships with your employees, in general, how much risk do you think there is for, I guess, a similarly unfavorable event with Conagra? I realize these things are so hard to forecast, I'm just curious for your broader thoughts there..

Yes, it's, as I just mentioned in my earlier remarks, it's a tight labor market. And it takes a lot of ingenuity and creativity and effort to attract and retain employees to the best of our ability.

So, we're obviously always trying to cultivate the strongest possible relationships with our employees so that they feel good about coming to work every day. And I feel good about where we sit right now, but it's -- there's no denying, it's a daily grind.

And I'm really proud of what the team is doing, because we are able, as you saw in our Q1 sales, to produce at levels that, while the service may not be where we want it to be, it's very strong in the absolute, and that's our goal, is to keep the trains rolling..

Great, thanks so much..

The next question is from David Palmer of Evercore ISI. Please go ahead..

Thanks. Just a quick one, Dave, on the inflation front, the second-half of fiscal '22, what's your visibility on that inflation, and perhaps just specifically, what is that rate that you anticipate for the second-half that goes with the 11% for the full-year? And I have a quick follow-up..

Yes, I mean we were 16.6% Q1. We'll be in that general area for Q2. So, obviously, for total 11%, we're kind of higher single digits for the second-half..

Okay.

And visibility on that, is that fairly contracted or could you give us percentages on that?.

Yes, I mean kind of years ago we're 35% to 40% locked in for the rest of the year. So, there's just as I've talked about in the past, David, there's just starting commodities like proteins where we're limited in our ability to lock in, you know, things like edible oils, we do a better job and can lock in more. So, that's where we are right now.

So, it's our best estimate right now, our procurement team does an amazing job really understanding the dynamics in each one of these categories. Really every one of them varies you know whether it's weather related impacts sort of wheat and resins more, the oils is more of a like capacity in terms of demand and renewable diesel.

So, every category just has different dynamics, and they're all over it. So, but that's our best call as of now..

And then the follow-up really is about the long-term. I mean, you had some long-term targets 18% plus EBIT margins, 1% to 2% top line, you're obviously going to be blowing away that organic sales number. But there's a bit of an interesting timing and dynamic cost and price environment that's going on this year.

I'm wondering if you still see that the 18% plus being something that's in play over the medium-term? Can you get back there, in other words, is this 16% that we're at this year or roughly, is that really a timing thing or do you think about things maybe differently, more in terms of getting back to gross profit dollars, not gross, the margins that you would have had? How are you thinking about that? I'll pass it on..

Hey, David, it's Sean. Yes, obviously, we're not going to get into specifics today on future margins. As you know, we plan on doing an investor meeting in the spring, but also as you know, our focus is not only on absolute margin, but importantly, margin trajectory in the future.

And we've always had levers in place to help us capture a positive trajectory as we move forward. Not to mention, the pricing actions that we're taking today sets us up well we believe for a future in terms of overall price realization per unit and margin. So we'll leave it at that for now. And we'll share more as we get toward our investor meeting..

Thank you..

The next question is from Alexia Howard of Bernstein. Please go ahead..

Good morning, everyone..

Good morning..

Can I ask about the productivity outlook for the year I mean, if you were to parse out the impact of hedging and maybe also separating out the impact of the COVID related costs coming out? Are you able to give us a sense for the underlying productivity improvements and how much more of the cost synergies from the Pinnacle deal remaining here? Are we coming to the tail-end of that?.

Yes, let me start with the last question first, we have about $10 million left in the Pinnacle synergies, $10 million year to go. And we should have those all in by the end of the fiscal year.

As I mentioned previously, we expect 490 basis points of margin tailwind coming out of our realized productivity, it's a little difficult to get really precise with how much is hedging sourcing versus how much is just core realized productivity? There's a lot moving around, there's a little bit of overlap there as we're driving savings, because of scale we have in buying a particular commodity, but then that commodity is inflating, and then we're hedging it.

So, it's all in one bucket, and it's why we report it that way. So we've historically averaged 3% realized productivity, and we're still on that same track, there's obviously a lot of other costs floating around, but we still feel really good about our core realized productivity delivery that's in that 490 basis points of benefit.

So that's what I would say..

Great, thank you.

And then as a follow-up, and the leverage at four times, I mean obviously, given the pandemic related benefits that you've enjoyed for several quarters now there was a bit of a bump to EBITDA, might we expect the leverage to take up a notch or two over the next couple of quarters just because the EBITDA numbers might be normalizing?.

Yes, Alexia, so this level the four times is in line with our expectations, and it reflects the seasonality of the business as we increase our spending on inventory to prepare for our heavier sales quarters which are Q2, Q3. So yes, we expect leverage to peak in Q2 and then come back towards our target level in the second-half..

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

The next question is from Jason English of Goldman Sachs. Please go ahead..

Hey, good morning folks. Thanks for slotting me in. A couple of quick questions here, first, the outlook for inflation to moderate from 16% gross inflation in the front half of the year to somewhere in the high-single-digit range.

What sorts of cost levels are underpinning that? Are you assuming that that spot costs come in? Are you assuming spot costs continue to inflate and the rate of inflation just moderates as we lap prior-year, any more specificity or color you can give to help us understand, that would be appreciated?.

Yes, the biggest thing there Jason is the lapping, right. So we really started to see inflation pick up in the second-half of last year, really pick-up in Q4. And so we are lapping on those bigger basis, and so, it's kind of more the run rate of kind of where we are, but that's the biggest driver for a second-half being more high single-digits..

Cool, I'm just going to paraphrase to make sure I understand it.

It sounds like you're saying you're kind of assuming spot runs flat from here and if we cycled the run up last year, which caused the moderation, correct?.

Yes..

And then in terms of the pricing build, can you put some teeth on this for us? I understand that sort of underlying absent lapping the trade accrual, you're running around 20 to 30 bps of price growth this quarter.

What does that look like? Clearly, there's a step-up from the price increases, you took at the end of the quarter or would you expect meaningfully higher price in the second quarter, where are we going to be run rating at the end of the year?.

Yes, so last call, I talked about price mix for fiscal '22 of 3% to 4%. Given this update, we're really more at 4% plus for the year. So, as you know, obviously with us delivering the 1.6% price mix in Q1, that puts you to sort of the higher 4%, kind of to go, so that's what we expect. We took some pricing the end of fiscal '21.

But we took a big amount of pricing last month of Q1, so we really didn't see the benefit. So we'll start seeing that benefit starting in Q2. So that really supports that kind of estimate for total price mix.

Sean, anything you want to add?.

I just say in addition to that, we've got more pricing coming in the second-half, and some of which was not contemplated in our original plan. And if we've got to take more yet we will, it's all [indiscernible] based. And in the meantime, demand has been very strong, while elasticities have been negligible..

Sure, for sure, makes sense. Thanks, guys. I'll pass it on..

Thank you..

The next question is from Robert Moskow of Credit Suisse. Please go ahead..

Hi, thank you for the question. Dave, I was surprised to not hear you mentioned freight and transportation and the increase in inflation guide from 09 to 11. You really just talked about food and packaging.

Why is that, is that located elsewhere?.

No, it's in there. And I mentioned freight and transportation in my prepared comments.

So that was I did mention that, I was giving examples of particular commodities and dynamics, but absolutely it's a very challenging environment right now with transportation in terms of not just cost but the reliability of trucks and you staff up to ship and making sure that trucks show up.

And so there's a lot going on there, so that that's part of the 11%, for sure..

Okay, so that's definitely. Okay, thank you.

And also about the timing of the new price increases, can all of that happen in fiscal '22 or do some of it spill over into '23, just because of timing?.

Well, the actions, Rob will take place within '22. And so we'll start getting the benefits in '22 undoubtedly, and then some of the benefit will continue to spill over into next year, where we will be lapping a period where we didn't have the pricing in place.

So that's one of the reasons we think the setup looks good as we kind of get through this because these cycles usually proven to be transitory in terms of the rate of change. And so the fact that the pricing in a broad based way will be in place and then the rate of change, it will abate. That is where the good setup lies..

Okay, but all of it can hit the shelves in fiscal '22, right?.

Yes, you should be seeing it in the Scanner Data app. So, the next wave that comes in the second-half, you'll see show up in the Scanner Data as we get into the second-half..

Okay, all right, thank you..

The next question is from Bryan Spillane of Bank of America. Please go ahead..

Hi, thank you, operator. Good morning, everyone.

So first question for me, just Dave I know we've talked a lot about inflation, but just can you comment at all on maybe any tightness in availability of supply of inputs and more specifically like the Tomato crop in California was stressed by the heat over the summer, we're hearing that there's some tightness in availability of steel cans, and maybe some other produce items.

So just can you just give us any color on like availability of raw materials? And is that at all having an impact on, I guess, basically sales, right, are you at all supply constrained just on availability of raw materials?.

Yes, Bryan, Sean. With my earlier comments within the kind of strain, as I'll call it within supply chain, the three buckets that I mentioned are labor, obviously, materials and ingredients and logistics. So we're working all three of those buckets aggressively every day. And there are periodically you'll see a particular input, that will get strength.

And so we've got to go the extra mile to get our fair share of what's available, but also have contingency plans so that we can shift our mix as necessary, if we have to go through a period where we get shorted on a particular ingredient, we will try to make it up with other products that we've got capacity to kind of push out the door.

So, this is why I describe this as kind of a daily grind is, this is a year of perseverance, where we've got to make sure we are on top of what is available, get the maximum quantity, we can keep our people healthy, get the trucks to get the products to our customers, and get as many boxes of our stuff out the doors we can because on the other side of that challenge is tremendously strong consumer demand.

And we want to take full advantage of that, because our depth of repeat helps us to capture the lifetime value of these consumers. So it's volatile, we're dealing with it, every company in our space is dealing with it and I think our team is doing a really good job in the phase of it..

Okay, and then just a follow-up, I guess in terms of the strong demand, and the pricing is just Sean, can you talk a little bit about how you're approaching some of the holiday windows? I guess it's worth thinking about pricing as a function of list price increases, and promotional frequency and depth.

Is there more of an opportunity to take advantage of those holiday not needing to promote as aggressively I guess, in the holiday windows just simply because demand is strong and those are periods where people are going to show up in shop anyway? Or is it more getting more price realization outside of those holiday windows?.

Yes, it's interesting, Bryan. Somebody asked me recently, why don't customers just try to shape demand downward by taking more price than the inflation is and my answer was, that's not the way customers tend to behave. I can't say I've ever seen a price above inflation to steer demand downward. But they have been willing to accept price increments.

And on our end, when you're in a strange supply situation, we do look at promotional reductions to keep demand in check and not exacerbate supply challenges.

So it's we work with our retailers on some of the stuff that they like to get out on the floor during the holidays, you've got two aspects of those holiday promotions, you've got the location, getting it out on the floor, and then you've got the amount of discount, the magnitude of the discount.

Certainly, we want to help our consumers to find our products during the holidays. But the magnitude of the discount does not need, we don't need to fan the flames of supply challenges. So you make a very fair, reasonable point much how we behave during the height of the pandemic with respect to promotion..

Okay, thanks, Sean. Thanks, Dave..

Thanks, Bryan..

The next question is from Priya Ohri-Gupta of Barclays. Please go ahead..

Great, thank you so much for taking the question.

Dave, appreciate your comments around sort of the seasonality of the leverage, I think just given the difficulty and sort of parsing through some of the trends in the last couple of years as we think about sort of your forward-looking trends, is this cadence and leverage that you discussed or the up tick into the first quarter continuing into the second quarter in terms of net leverage before coming back in the back half something that we should expect on a go forward basis?.

Yes, Priya, so that's as we look at fiscal '22, we'll click up in Q2, we'll peak in Q2, and then we'll come back down in Q3 and then Q4.

That's it is, it's hard to look historically because of the M&A activity we've had, but if you had a more normalized pattern that's what you would see for the business, given the seasonality, because we sell a lot of product in our second and third quarters.

And so, there is a lot of investment in working capital as we go through the first-half, so yes, that's sort of how it will play out..

Okay, that's helpful.

And then, as we think about just that improvement in the back-half, should we anticipate most of that, I mean, I guess just given some of the EBITDA dynamics this year, how much of that should come from additional debt paid down whether it's sort of CP oriented or any other potential directions that you could take?.

Yes, we're constantly looking at that previous I don't want to quote an exact number, where kind of debt is going to come in, we target a leverage ratio, our kind of leverage ratio target is 3.5 times. So that's what we're always managing to.

So it's really kind of the dynamics of kind of the debt and EBITDA and so we kind of look at it holistically like that manage to the ratio..

Okay, that's helpful, and to confirm, we should be back at that 3.5 by year-end?.

Yes, we're moving towards that. So that -- not saying we'd be exactly at 3.5 by the end of the Q, but that's generally kind of where we'll be tracking to..

Okay, great. Thank you..

Okay..

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Kearney for closing 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 calls that anyone may have, feel free to reach out. Thank you for your interest in Conagra Brands..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..