Release Date: July 11, 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 steady positive inflection on volume over the past three quarters, indicating successful consumer engagement.
- The company achieved volume consumption growth in key segments such as snacks, frozen meals, refrigerated, and international businesses.
- Despite investments to nudge volumes, Conagra Brands Inc (CAG) was able to expand its margins.
- The frozen single-serve meals business saw growth, and Birds Eye gained market share again.
- Conagra Brands Inc (CAG) held or grew market share in 80% of its frozen and snacks businesses, indicating strong brand performance.
Negative Points
- The outlook for fiscal '25 is considered prudent, with lower sales and EPS guidance than expected, reflecting cautious consumer behavior adaptation.
- Q1 is expected to have lower gross margins due to higher SG&A expenses and lower sales volumes in the international business.
- The foodservice segment experienced a 10% volume decline, attributed to QSR weakness and the elimination of low-profit business.
- There are still some grocery categories, such as canned foods, that require more investment to improve performance.
- Conagra Brands Inc (CAG) faced impairments due to higher interest rates, lower industry market multiples, and revised net sales assumptions.
Q & A Highlights
Highlights from Conagra Brands Inc (CAG) Q4 2024 Earnings Call
Q: Sean, you mentioned a gradual transition to a more normal operating environment in fiscal '25. Why is this adjustment taking longer, and does it require more investment than initially anticipated?
A: The transition is a process, not an event. Our investments are working, as shown by steady positive inflection on our volume over the past three quarters. We saw volume consumption growth in Q4 in our snacks, frozen meals, refrigerated, and international businesses. This indicates that our strategy is successfully engaging consumers, and we were able to expand our margins despite the investment.
Q: Can you elaborate on the pricing and competitive environment in the frozen space as we start the new fiscal year?
A: We invested in frozen, resulting in volume consumption in frozen overall returning to flat. Our largest frozen business, single-serve meals, is already growing in volume, and our shares hit record highs. The positive news in the frozen business is driven by merchandising, advertising, and innovation, not just pricing. Consumers are returning to convenience after a period of trading down.
Q: Your sales and EPS guidance is lower than expected, yet you expect volume acceleration. Can you explain the prudence in your outlook?
A: We have seen three straight quarters of volume trend improvement. Our guidance is prudent as it recognizes consumer adaptation as a process. It embeds conservatism around consumer buying behavior but also allows flexibility for continued investment behind volume growth, which is our top priority.
Q: Can you clarify the first quarter outlook, especially regarding gross margin and SG&A expenses?
A: Q1 last year had significant price mix, so we are wrapping on that. We expect improvement in volumes but still down year-on-year. SG&A will be higher due to last year's incentive compensation accrual. Gross margins will be stable for the full year, supported by productivity and manageable inflation.
Q: What specific challenges are you facing in different categories, and what types of investments are you making?
A: We have seen volume decline in frozen virtually disappear over three quarters due to targeted investments. Merchandising has been high quality and reasonable. We focus on hitting price thresholds that drive maximum lifts. Each category has specific strategies, such as price gaps in canned tomatoes.
Q: How are you balancing productivity savings with maintaining product quality?
A: We do not cut product quality for productivity. Our focus has been on investing in technology to run our plants more efficiently and reduce waste. We have consistently invested in food quality and packaging to ensure our products remain high quality and appealing to consumers.
Q: Are you seeing differences in performance between brands that skew towards lower-income consumers versus higher-income consumers?
A: Value-seeking behavior has been seen across all income levels. Lower-income consumers are more sensitive to price thresholds, and targeted investments in high-quality merchandising events have resulted in higher lifts. Overall, consumers are ready to return to their normal buying rates with the right nudges.
Q: How are you addressing competitive pressures and private label development in your categories?
A: We have seen value-seeking behavior across all categories. We have a few areas, such as canned foods, where we will put more investment. Our strategic spaces are back to flat or growing volumetrically, and we are holding or gaining share in 80% of our key strategic domains.
Q: What is the outlook for Ardent Mills, and how should we think about its contribution to your financials?
A: Ardent Mills has two businesses: flour and commodity revenue. The latter involves trading activities that are difficult to forecast precisely. We will provide guidance based on our latest estimates and update quarterly. The current guidance reflects our best estimate.
Q: Can you provide more context on your pricing strategy and its impact on overall pricing trends?
A: All our pricing is inflation-justified. We took pricing in fiscal '24 due to significant inflation in tomatoes and cocoa. These will wrap in fiscal '25. The impact on price mix will be a tailwind, but increased trade merchandising investment will be a headwind. We expect stable gross margins for the full year.
Q: How are you managing your grocery and staples business, and are there plans for divestitures?
A: We have invested in some refrigerated businesses and saw volume growth. We are open to divestitures if they create value for shareholders. Our strategy includes investing in businesses we own, adding bolt-ons that enhance growth and margins, and divesting non-strategic assets.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
