Release Date: April 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Conagra Brands Inc (CAG, Financial) reported a nearly 7-point swing in scanner volume from Q1 to the most recent 4 weeks, indicating strong progress in Frozen overall.
- The company holds a 51% market share in Frozen Single-Serve Meals, up 1.7 points versus a year ago, showcasing continued market leadership and share gains.
- Investments in marketing and innovation are showing positive ROI, with the company seeing responsiveness and good returns on their investments.
- Conagra Brands Inc (CAG) is on track to implement its connected shop floor program in half of its facilities in the next couple of years, which is expected to be key to margin expansion going forward.
- The company's supply chain team is driving critical cost savings, providing fuel for growth and helping to maintain and expand gross margins.
Negative Points
- Organic sales in the Refrigerated & Frozen segment declined by 8%, with the optics being affected by noise in the Refrigerated part of the business.
- Inflation has slowed but is still present, with a 2.9% inflation rate impacting margins by 1.9% in the quarter.
- The company's volumes are still down, although there has been sequential improvement, and the exact timing of when volumes will inflect positively is uncertain.
- There is a lag effect in margin pressure when new inflation leads to taking new pricing, which can temporarily affect profitability.
- Conagra Brands Inc (CAG) is managing a headwind from absorption due to lower volumes and a strategic decision to reduce inventory, which impacts production in plants.
Q & A Highlights
Q: What drove the 4% benefit from price mix in Grocery & Snacks, and how do we reconcile the 8% organic sales decline in Refrigerated & Frozen with the success in single-serve meals?
A: (Sean M. Connolly - President, CEO & Director) The Grocery & Snacks segment saw a solid quarter due to factors like pricing in tomatoes, a bounce back in canned meat, and strong innovation like Wendy's Chili. The divergence between Frozen and Refrigerated is due to noise in the Refrigerated part of the business, which includes deflation in pass-through categories and a prior-year benefit in the table spreads business due to a competitor's supply chain challenges.
Q: How would you characterize the current volume momentum, and do you expect volume trends to inflect positively by the start of FY '25?
A: (Sean M. Connolly - President, CEO & Director) The volume momentum is moving in the right direction, with a nearly 7-point swing in scanner volume from Q1 to the most recent 4 weeks. While not committing to a specific date for positive volume inflection, the company expects further progress and is focused on maintaining gross margins while making investments to drive volume improvements.
Q: Is the implied guidance for 4Q organic sales growth of around minus 2% prudent, considering easier comparisons and the lapping of the Americold issue?
A: (Sean M. Connolly - President, CEO & Director) The company's posture has been prudent due to the volatile macro environment. They expect sequential volume improvement and continued investment, which both impact the top line. Mix impacts can vary each quarter, and the company aims to be prudent in its guidance.
Q: What are your thoughts on returning to growth in sales for frozen entrees and frozen vegetables?
A: (Sean M. Connolly - President, CEO & Director) Frozen Single-Serve Meals continue to gain market share, and the company is focused on the superior relative value of frozen vegetables versus other choices. Investments and marketing support are ongoing, with a focus on value-added products in the frozen vegetable category.
Q: How are you reviewing your business as you contemplate guiding for fiscal '25?
A: (Sean M. Connolly - President, CEO & Director) The company is ROI-minded and assesses each brand's market fundamentals, competitive dynamics, and consumer needs. They are focused on driving volumes back positive while protecting margins, with a strong emphasis on cost savings and supply chain efficiency.
Q: Can you expand on the inflation impact to margins that got worse quarter-over-quarter?
A: (David S. Marberger - Executive VP & CFO) Inflation has slowed but is still present, with recent increases leading to new pricing and a lag effect on margins. The company is managing to its full-year inflation expectation, with inflation in areas like tomatoes, vegetables, sweeteners, starches, labor, and overhead.
Q: How would you characterize the positive pricing in the Grocery & Snacks business?
A: (David S. Marberger - Executive VP & CFO) The biggest benefit was from tomato pricing, with expected benefits and good elasticities. There was also a mix benefit in the quarter, driving a good mix for the company.
Q: Can you comment on productivity improvements in the foodservice channels?
A: (Sean M. Connolly - President, CEO & Director) The strong margin performance for foodservice is expected to continue, with opportunities across the international business and the retail business in the U.S. as well.
Q: Is private label becoming more of a problem in frozen vegetables or more broadly?
A: (Sean M. Connolly - President, CEO & Director) The company under-indexes versus private label, with some categories having more private label presence. In frozen vegetables, the focus is on the premium value-added space rather than the commodity vegetable tier, which is lower-margin and more commodity-oriented.
Q: What's driving the ROI on investments in Frozen, and what's behind the optics of the combined Refrigerated & Frozen segment?
A: (Sean M. Connolly - President, CEO & Director) Investments in Frozen have been skewed towards driving volume change, with a significant swing in consumption over the last couple of quarters. The noise in the R&F segment data is due to the Refrigerated part of the business, including deflationary categories and a ramp in the table spreads business.
Q: What changed relative to Q2 that now suggests gross margin will be better in the back half?
A: (David S. Marberger - Executive VP & CFO) The company has seen a lot of volatility in supply chain over the last 6 quarters. The core productivity programs are on track, and the company is executing without disruptions, allowing for better gross margin performance than previously forecasted.
