Good day and welcome to the Conagra Brands fourth quarter fiscal year 2020 earnings conference call. All participants will be in a listen-only mode. Operator instructions. After today’s presentation, there will be an opportunity to ask questions. 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 the 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 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 either in the earnings press release or the earning slides, both of which can be found in the Investor Relations section of our website, conagrabrands.com. Finally, we will be making some references to Total Conagra Brands as well as the Legacy Conagra Brands. References to Legacy Conagra Brands refer measures that exclude any income or expenses associated with the acquired Pinnacle Foods business. With that, I’ll turn it over to Sean.

Thanks, Brian. Good morning, everyone, and thank you for joining our fourth quarter fiscal 2020 earnings call. On behalf of Conagra Brands I want to start by expressing my heartfelt hope that you and your families are continuing to stay safe and healthy. On today's call, we’re going to address our fourth quarter and fiscal 2020 results, our expectations for fiscal 2021, and our perspective on why Conagra is uniquely positioned to succeed in this new environment. But first, I want to provide some context around what has brought us to this point. Over the past five years, we have been purposefully architecting one of the largest transformations in the food industry. When we embarked on this process, we made major strategic decisions on where to compete and how to win. After decades as a food conglomerate, we transformed into a pure play branded food company with a portfolio focused on competing in three domains; Frozen, Snacks, and Staples. We committed to perpetually reshaping our portfolio for better growth and better margins, and established a disciplined approach rooted in a playbook that we call the Conagra Way. This relentlessly principle-based playbook is filled with repeatable and scalable processes that focus on modernizing our iconic brands through superior food, contemporary packaging, and strong, consistent marketing investment. The Conagra Way is not just a way to build brands, but an operating model that has helped cultivate our agile, motivated, and highly energized culture. As I'll describe in more detail in a moment, fiscal 2020 saw unprecedented performance as we built upon the extraordinary progress we have made over the past five years. We further strengthened our business, including getting legacy Pinnacle back on track and delivered strong financial results. During the fourth quarter, in particular, our transformation was put to the test, and you’re seeing the fruits of our labor. Our modernized portfolio and agile culture enabled us to respond the increased consumer demand driven by COVID-19. At this point, the degree to which demand will return to historical norms is still uncertain, and the timing of the changes in consumer demand is also uncertain. However, we believe that demand will likely remain elevated in the near-term given both consumer perceptions about returning to work and eating outside the home as well as the fact that consumers are discovering and rediscovering the pleasures, conveniences, and tremendous value proposition of dining at home. Dave will cover the financials in more detail, but I want to let you know that we continue to be on track to deliver our fiscal 2022 algorithm and we remain committed to achieving our leverage target of 3.5 times to 3.6 times by the end of fiscal 2021. As we'll detail today, we believe our portfolio is optimally positioned to succeed in the new normal. We are focused on making the right investments to ensure that we can continue to safely and reliably meet consumers’ needs in fiscal '21 and the longer term. In today's presentation, we will cover our business update, the behavioral shifts we have seen, and how Conagra is well positioned to benefit from these shifts and what we expect going forward in terms of our near-term outlook and the opportunity to create long-term value. Beginning with our business update. Before I get into the numbers, I would like to recognize that our extraordinary results have only been possible because of the thousands of hardworking Conagra team members on the frontlines across North America. Here at Conagra, we talk about infusing a refuse to lose attitude and never before have we seen our team make such extraordinary efforts. The team's commitment has enabled us to meet the elevated demand from our customers and the communities we serve and deliver the strong results that we are announcing today. I couldn't be more proud of all that they have accomplished. To all of our team members, thank you, great job all around. During the fourth quarter, we experienced significant growth across our core operating metrics, including 21.5% growth in organic net sales, and a 108.3% growth in adjusted EPS. These results helped contribute to our rapid progress in reducing our leverage, and I'm proud to say that we ended the quarter with a net leverage ratio of 4.0 times, down from 4.8 times in the third quarter. As you can see on Slide 9, our growth was not confined to one area but was driven by strong retail sales across our portfolio spanning Staples, Frozen, and Snacks. Our strong growth in e-commerce continued to accelerate both on an absolute basis and as a percentage of our overall sales. The work we've done over the past several years to improve our e-commerce capabilities has certainly paid off. As consumers increasingly adopt online grocery shopping, our share of e-commerce sales has steadily increased. Slide 11 highlights that our disciplined approach to innovation is clearly working. Our absolute sales on new innovation introduced this year increased 43% compared to our innovation slate of fiscal 2019. As a reminder, we stated at our initial Investor Day that our goal was to have 15% of total sales coming from products launched within the past three years. Well, today I'm proud to say that we've consistently performed above that level. In a few minutes, we'll provide you some of the new innovation that we have in store for fiscal 2021 as we seek to build upon this success. As we've discussed previously, Frozen is an increasingly important domain for consumers, especially in today's environment. For the fourth quarter, total Conagra Frozen retail sales grew 26.2% over last year with strong growth across each Frozen category, including single serve meals, vegetables, multi-serve meals, and plant-based meat alternatives. And as Slide 13 shows, as we grew, we also gained share in the important Frozen Meals category during the quarter continuing a trend we've seen for some time now. The Conagra Way playbook continues to pay off. And while the trends have remained strong, there's even more opportunity particularly in frozen vegetables. Birds Eye faced some unique dynamics in the quarter. As I said earlier, the category remained extremely relevant for consumers. We continue to see robust demand for frozen vegetables and our retail sales up 26.5% during the quarter. Importantly, Birds Eye holds the top position in category share and has 2 times the share of the next branded player. Given the incredible surge in demand we experienced during the fourth quarter and our number one brand position, we hit a ceiling on capacity. Furthermore, we made the decision to temporarily close a plant during the quarter due to COVID-19, which further constrained capacity. The good news is the plant is safely back up and running flat out. In addition, we've made the strategic decision to bring on more external partners to fulfill demand and rebuild inventory. These investments in our supply chain will allow us to efficiently meet the elevated demand we're seeing today and expect to see going forward. This is an important example of that investment, and I will expand on this in a few minutes. Turning to Snacks, recall that our Snacks business over indexes to convenience stores, which saw softer traffic due to COVID-19 during our Q4. Also, the Seeds category was impacted by the postponement, and in many areas of the country, cancellation of baseball and softball season. Baseball and Seeds go hand-in-hand and the loss of those opportunities had a negative impact on the category. Even despite these discrete headwinds, the Snacks business delivered a terrific 20.1% year-over-year growth and a 26.4% growth on a two year basis. And on Slide 16, you can see our performance in Staples, a category that is more relevant than ever before. Our total Staples business grew an incredible 46.3% for the quarter. The six brands to the right are our largest Staples brands, accounting for over 50% of our Staples sales at retail pre-COVID and each experienced considerable growth in the quarter. These businesses are proving to be a distinct benefit to our portfolio. But while we're pleased with our results for the quarter and the year, we are particularly excited about what the quarter has taught us about the opportunity that lies ahead as consumers have shifted their behaviors and eating habits. Slide 18 shows some of the key ways in which we're seeing consumers’ behavior shift in response to COVID-19. Many consumers are rediscovering the enjoyment associated with at-home eating, whether it's making fun baked goods, cooking with the family or enjoying a movie night with some snacks. Numerous consumers are also discovering new things about food during this time. Many are learning how to truly cook for the first time or discovering they can recreate restaurant favorites at home. We believe that many of these activities have staying power and are likely to persist even after a post-COVID world in whatever new normal we settle into. We also believe our broad and refreshed portfolio of innovative products is best suited to meet consumers’ needs as they engage in these food behaviors. And Slide 19 shows the strong growth during the quarter across our iconic brands, demonstrating how well suited our portfolio is to meet these behaviors. Our ability to meet the changing consumer needs is balanced across our three domains. Slide 20 shows how household penetration grew during the quarter in Staples, Snacks and Frozen. And as we've been able to modernize and innovate our iconic brands, we are attracting younger consumers. Slide 21 shows that new consumers to our brands over indexed in the younger millennial and Gen X market segments. Driving new trial is always a key focus for us. The investments that we've made over the past five years in updating our food with bold, on-trend flavors and modern food attributes were premised on the belief that if we can get people to try our food, they will come back for more, and that is exactly what's happening. Slide 22 shows the continuously improving repeat rates from consumers who tried our foods for the first time in March, when the pandemic really started to accelerate in the U.S. The improved repeat rates are broad-based across many of our iconic brands. Importantly, when we attract new triers to our brands, they are coming back to purchase again more often than they did a year ago. It's worth noting that this trend holds true for the big three pinnacle brands, validating our work over the last 12 months. As Slide 24 shows, we're not just seeing an increase in repeat buyers, but we're seeing an increase in the frequency at which they return. Customers are not just coming back for more, they're coming back time and time again. And looking to the strength of our trial and repeat results on an absolute basis, we are outperforming our peers in terms of new trial. Let's take Frozen as an example. Slide 25 demonstrates how our Banquet, Healthy Choice and Marie Callender's brands are leading frozen single serve peers in new buyer acquisition. And as Slide 26 shows, these new frozen buyers are disproportionately coming from the millennial and Gen X market segments similar to what we see in Total Conagra trends. And like the Total Conagra trends we discussed, not only are we attracting new buyers, but we're seeing higher repeat rates in our Frozen segment than our peers. Similarly, despite that supply constraints we face that I noted earlier, Birds Eye continued to lead its category in terms of both new consumers and repeat purchases compared to peers during the quarter. All of these trends have important implications for our value creation opportunity as we look ahead. We believe the dynamic environment in which we find ourselves provides a unique window of opportunity to maintain the current momentum, such that we maximize our long-term value creation potential. To make that possible we need to make investments focused on doing everything in our power to ensure the physical availability of our products. Instead of choosing to simply accept the elevated demand as transitory and focus on maximizing near term margins, we have chosen to bolster the long-term earnings potential of our company. We plan to accomplish this through investing in the key areas you see on this slide to include increasing capacity, both internal and external, innovation, inventory, e-commerce and safety. By investing behind today's elevated trial rates, we will build relationships with new consumers and maximize consumer conversion. The lifetime value of these consumers easily justifies these actions. Slide 31 shows some highlights of our fiscal ‘21 innovation slate. Some of these items began launching in Q4, and we will continue to roll out these new products throughout the year. Overall, we are confident that the investments we're making will produce strong ROI. They will also maximize our long-term value creation and ultimately shareholder value. Turning to our guidance on Slide 32, we know that you would like as much information about our expectations for the year as possible. Given the very dynamic nature of the external environment, forecasting the full year right now is more difficult than normal. As of today, therefore, we're providing Q1 guidance. We hope that when we report Q1 results, we will be in a position to give you a further update on our outlook. While we don't expect the next few months to drive as much change as the past few, we expect to know a lot more by then. Dave is going to go into more depth regarding the guidance. So I'll just hit the highlights here. During the first quarter of fiscal 2021, we expect to deliver organic net sales growth of 10% to 13%, adjusted operating margin of 17% to 17.5%, adjusted EPS of $0.54 to $0.59. As I said earlier, we remain on track to reach our fiscal 2022 targets outlined on this slide, as well as our de-leveraging ratio. With that, I'll turn it over to Dave.

Thanks, Sean. And good morning, everyone. Before I discuss the details of the quarter, I want to take a moment to wish you all well. I hope you and your families are continuing to stay healthy and safe. I'll kick off this portion of the call by pointing out a few highlights for the quarter and the full fiscal year, which are captured on Slide 34. Overall, we're very pleased with our performance for Q4 and the fiscal year. As Sean discussed earlier, in the fourth quarter, the COVID-19 pandemic led to unprecedented demand in our retail businesses, which more than offset the softer food service demand. This increased retail demand, combined with our strong execution, enabled us to exceed the most recent full year fiscal '20 guidance for total company sales, profit and free cash flow metrics. The key takeaways for Q4 and fiscal '20 are: organic net sales increased 21.5% in the fourth quarter and 5.6% for the full year; adjusted operating margin increased almost 400 basis points for the fourth quarter and over 100 basis points for the full year; adjusted EPS more than doubled in the fourth quarter and grew 13% for the full year; and adjusted EBITDA increased 21.6% for the full year to just under $2.3 billion, helping to reduce the leverage ratio to 4.0 times at the end of fiscal '20. Let's start with the net sales bridge on Slide 35. As you can see, our 21.5% organic net sales growth in the fourth quarter was driven by 21% volume growth with price mix contributing half a percentage point. Divestitures were a 310 basis points headwind in the quarter. This headwind will diminish sequentially as we continue to anniversary the divestiture closing dates going forward. Foreign exchange was a 70 basis point headwind in the quarter with the weakening of the Mexican peso, representing about two-thirds of the headwind. This was a bit higher than we were expecting for Q4. Finally, the 53rd week added 810 basis points to the quarter, which was more of a net sales tailwind than we expected due to the elevated COVID related demand at the end of the quarter, taking total reported net sales growth to plus 25.8% for Q4 versus a year ago. Turning to Slide 36, you see our sales summary by segment. In the fourth quarter and the fiscal year, we saw strong growth across our three retail focused businesses. Our Grocery & Snack segment reported very strong organic net sales growth of 40.4%. The Grocery business proved to be a significant asset as consumers reengaged with convenient shelf stable products to facilitate and enhance the at-home eating experience. The Refrigerated & Frozen segment continued to perform very well in the quarter. The segment reported organic net sales growth in each quarter of this fiscal year and has now had positive organic net sales growth in 11 of the last 12 fiscal quarters. This consistency shows that our modernization efforts have been working and are sustainable. The International segment’s 19.8% organic net sales growth was due to strong growth in Canada and better than expected growth in the Mexican and export businesses due to the pandemic. Foodservice reported an organic net sales decline of 31.5% which was better than expected, as many restaurants continued to serve consumers with curbside pickup, drive-thru or partial capacity. Slide 37 outlines the progress we've made on our Q4 adjusted operating margin versus the prior year. Throughout the quarter, our gross margin expansion levers such as realized productivity, pricing, mix, and COGS synergies continued to be effective. We also benefited from volume-driven operating leverage in the quarter, approximating 100 basis points. These tailwinds were partially offset by increased COVID related costs, dilution from significant Foodservice operating margin declines and a 170 basis point headwind from inflation, resulting in a net gross margin improvement of approximately 110 basis points. Given the already increased demand for food at-home, we chose to pull back a bit on A&P in the quarter. That coupled with increased net sales, drove a 100 basis point improvement to operating margin. While adjusted SG&A expense increased 5.7% in Q4 versus a year ago, net sales grew much faster, resulting in a 180 basis point tailwind to operating margin. Turning to Slide 38, you can see that our adjusted operating profit was $562 million in the quarter, an increase of 63.5%. Adjusted operating margin increased just below 400 basis points to 17.1%. This chart clearly summarizes the outstanding operating margin improvement during Q4 in our Domestic Retail and International segments. This was partially offset by our Foodservice segment, which had significantly lower operating profit due to the 32% organic net sales decline, unfavorable fixed cost to leverage on net sales decline, higher inventory write-offs and higher input costs. Turning to Slide 39, we’ve summarized the various drivers of adjusted diluted EPS in Q4 versus a year ago. As you can see, our adjusted EPS increased $0.39 in the quarter, representing growth of over 100% from the same quarter last year. While the increase in EPS is primarily driven by the increase in operating profit associated with the net sales and margin increases, we also had higher income from Ardent Mills, as COVID related demand was a net benefit. We also estimate a $0.05 per share benefit from the 53rd week. Slide 40 summarizes the excellent progress we've made on our overall synergy capture from the acquisition of Pinnacle Foods in fiscal year '19. We realized $39 million of incremental synergies during the fourth quarter, bringing our total cumulative synergy capture since the close of the Pinnacle acquisition through the end of fiscal '20 to $184 million, exceeding our fiscal '20 goal of $180 million. Importantly, we remain on track to deliver our total synergy target of $305 million by the end of fiscal '22. As a reminder, we have reinvested $20 million from our synergy realizations to-date into longer term business opportunities, such as products and packaging improvements and innovation-related retailer investments. As I stated on our last earnings call, we expect stronger cash flows in Q4 due to the normal seasonality of our business and the expected increase in retail demand from COVID-19. As a result, we updated our free cash flow expectations to be north of $950 million for fiscal '20. Fiscal '20 ended with the company generating approximately $1.47 billion of free cash flow, which was well above those revised expectations. Some of this benefit was timing related. Due to the significant increase in sales, we reduced our days of inventory on hand during the quarter, which positively impacted Q4 free cash flow. We expect to build that inventory back as we progress through fiscal ‘21, which will be a headwind to free cash flow. It is not yet clear as to the exact timing of the fiscal ‘21 inventory rebuild. Another timing item in Q4 was from federal tax payment deferrals, pushing payments from Q4 into Q1 of fiscal ‘21. We estimate the combined impact of these timing items on free cash flow between fiscal ‘20 and fiscal ‘21 to approximate $350 million. Turning to Slide 42. From the close of the Pinnacle acquisition in Q2 fiscal ‘19, through the end of the fourth quarter in fiscal ’20, we've reduced net debt by nearly $2 billion. In the fourth quarter, we reduced gross debt by $271 million and net debt by $725 million, improving our leverage ratio to 4.0 times at the end of Q4, down from 4.8 times at the end of Q3. What’s not shown on this slide, but it's important to note is that we improved to the funded status of our pension plans during fiscal ‘20 by $80 million, with the total under funded status declining to approximately $50 million. For context, the pension plans under funded status were approximately $565 million at the end of fiscal ‘17, a reduction of over $500 million. This significant improvement was driven by planned pension contributions, lump sum payments to participants and actual returns on plan assets exceeding expectations. In addition to the significant progress we made towards de-leveraging in fiscal ‘20, we also further strengthened our liquidity position. We obtained a $600 million 3-year senior unsecured term loan, which remains undrawn. This facility provides us with additional flexibility to repay debt maturity through fiscal ‘21 and positions us to refinance termed fiscal ‘21 debt majority at attractive rate with prepayable debt. As a reminder, we also have a $1.6 billion undrawn revolving credit facility. Given where we finished fiscal ‘20 from a net debt perspective and given the continued momentum we expect in Q1 as outlined in our guidance, we are confident in our ability to achieve our targeted net debt to trailing 12 months adjusted EBITDA leverage ratio of 3.5 times to 3.6 times by the end of fiscal ‘21. And importantly, we continue to remain committed to a solid investment grade credit rating. In addition, we continue to remain open to smart divestitures that can help sculpt top-line performance and generate cash flow to accelerate de-leveraging. While we continue to evaluate portfolio actions, we will not pursue any divestitures that are not value creating for the long-term. As we approach our targeted leverage ratio, we continue to evaluate opportunities to use capital allocation to drive shareholder value. Slide 44 outlines our guidance for the first quarter of fiscal ‘21 and our fiscal year ‘22 algorithm. We are expecting the elevated retail demand to continue into Q1, although at a lower rate than Q4, leading us to our Q1 organic net sales expectation of plus 10% to plus 13%. We continue to expect the favorable operating leverage from the elevated volumes in Q1 to offset the additional COVID related costs. Therefore, we expect adjusted operating margin to be in the range of 17% to 17.5%. These operating margin increases, put with expected improvement in our below the line items, lead to expected EPS range for the first quarter of fiscal ‘21 of $0.54 to $0.59. As I already mentioned, we remain confident in our ability to hit our leverage ratio target of 3.5 to 3.6 times by the end of fiscal ‘21. And lastly, we are today reaffirming our fiscal year ‘22 algorithm, which is outlined on this slide and in the earnings release. Thank you, everyone. That concludes my comments. I'll now pass it back to Sean.

Before we open up for Q&A, I'd like to say a few words about diversity and inclusion at Conagra. We are deeply saddened by the recent events we've seen unfold across our nation. It's heartbreaking and unacceptable that racism and racial injustices continue to exist around the world. Our goal at Conagra is to work together in a constructive manner where everyone has a voice and has the opportunity to be heard. D&I is not only part of our value system at Conagra, it's a business imperative. We serve a wide cross section of the population and therefore it makes clear sense our organization represents the consumers we serve. D&I has always been a focus for Conagra Brands. But like many others we can and will up our game. We are working with an external diversity and inclusion consultancy to help us identify specific opportunities that will have the most impact. We're also hosting listening sessions with employees throughout the organization. Overall, we are determined to be part of the solution and we look forward to continuing to share reports of our progress along the way. Thank you. Now let's open it up to Q&A.

Operator instructions. Our first question comes from Andrew Lazar with Barclays. Please go ahead.

I wanted to start off if I could with the company's reaffirmation of its fiscal ‘22 targets. Specifically, while I understand certainly the rationale for perhaps not yet providing full fiscal year ‘21 guidance, the fact that you're comfortable reiterating fiscal ‘22 EPS means at least to me that there should be some good progress in ‘21 versus ‘20 to be able to achieve ‘22 guidance in a reasonable way where I guess not all of the EPS growth needs to come-in in ‘22 versus ‘21, if you see what I'm saying. So, any perspective you can add around that, whether I'm thinking about that in the right way even though I understand not providing specific guidance for this fiscal year?

Yes, sure. Andrew. Here's how I think about this. Clearly, since nobody can accurately predict what will happen with COVID and the range of outcomes is very wide, calling ‘21 with any accuracy is virtually impossible. But when you step back and you look at where we landed in ‘20, if you look at the momentum of the business, the continued elevated demand, the new triers, the very strong repeat, and synergies remaining on track, our view is that it would be hard to argue that we're not on a path to the ‘22 targets. And the real question for us is just kind of, you think about our prepared remarks today on trial and repeat is whether these dynamics that we're seeing currently offer incremental long-term upside beyond our ‘22 algorithm. Obviously, we're not going to comment on the longer-term algorithm, but certainly, these are positive markers, and we have elected to invest behind that option for lack of a better phrase.

That's helpful and that's a good segue into my follow up, which is, certainly appreciate all of the data and the metrics on trial, household penetration, repeat rates and the like. And of course, none of us have a crystal ball regarding where consumption and growth rates for many of your key categories ultimately settle out. But in light I guess of the metrics you have discussed, I mean, would it be your expectation that for some of your key categories Conagra should see an elevated rate of growth versus let's say pre-COVID for a more prolonged period of time? The investments that you discussed on the call with respect to incremental capacity and such would seem to support that thought process, but again wanted to hear it from you and get some clarity.

Yes. I think the phrase I used earlier was, we see this as a unique window. Something is happening that is above and beyond what our normal marketing programs would do. COVID has introduced this dynamic where, as you saw on the slides earlier, consumers are legitimately rediscovering certain things in their house whether it's their kitchens, their freezers, being together and they like it. They're also discovering that some of the things that they thought existed actually have changed quite a bit. So, for example, the quality of frozen food. And as you know, we've spent the last five years dramatically transforming our products. So, you put both of those things together, and there is clearly an element of pleasant surprise that consumers have when it comes to cooking at home. And given the tremendous value proposition of cooking at home and that we are in a recessionary environment, it's entirely plausible that these dynamics persist for some time, especially with the news changing hourly on COVID and what's happening with positive cases. And we believe that once people try our products, this data supports that we stand a very good chance they'll come back again and again and again. So, we are investing today in order to maximize long-term value creation potential of this portfolio and really seize any option that there is further upside beyond our current algorithm.

Our next question comes from Ken Goldman with JP Morgan. Please go ahead.

I think I need to check what was in my smoothie this morning, because on Slide 31, I thought I saw a unicorn llama wearing sunglasses on a box of Act II, that I must be hallucinating.

You did not, llamas are hot.

I didn't know that.

As is Act II Ken, you probably may not have known that either. Act II is on fire.

I didn't know that until I saw your slide. So, I appreciate that. A couple of questions from me if I can. And Dave, you may have answered this when you talked about not being clear on the timing of the inventory rebuild. But in your first quarter organic sales guidance, is there any benefit baked in there from an inventory load by retailers or is that sort of what you expect consumption to be as well roughly?

Yes. So, Ken, you saw that in Q4 we shifted consumption everywhere except refrigerated and frozen; that was really driven by Birds Eye. In this environment, it is difficult to predict exactly when retailers are going to build inventories. As we put our Q1 guidance together, we clearly started with assumptions. We try to make assumptions about whether there will be additional shipments to build inventory, particularly in frozen. But again, in this environment it is difficult to predict given the significant demand that is still there.

Just to comment on that, Ken, just more broadly. Retailers are at some point going to rebuild inventories I would imagine in all their categories. And if you think of in the last several years, the focus on on-time and full was the focus we've talked about recently with retailers putting more facings against high velocities, retailers paid out of stocks. So, that is not going to change. And at some point, I would imagine that inventory levels would revert to kind of historical norms. The question of course, is when will that happen? Because, the way that happens is one of two things or both have to happen. Either demand has to slow or capacity has to increase. We've seen demand slow recently, but it's still at very, very high levels. You also heard me talk about how we are making investments to increase capacities but there's an upper control limit to how we can do that. So, for the foreseeable future, in the near term, we are running flat out and much of what we make and leaves our plant is going straight through to the consumer. When that slows down and the inventory levels build back is one of the wildcards that’s virtually impossible to predict. And while, I've got you, since you raised Act II, I want to link your question on Act II, back to Andrew's question which is, will any of what we're seeing now persist? Interestingly, one of the things that you're seeing now and you're reading about now is movie studios are going to direct release at-home, on-demand. And there's some questions around what's going to happen with movie theaters going forward. As that happens, people will be watching movies as a group at home at a level we probably have not seen before. We're already experiencing this. And the shift in our microwavable popcorn business has been dramatic, reflecting that new behavior. That could very well be a persistent thing, but it may depend in part on what the movie studios ultimately choose to do, but those are the kinds of things that seem to be logically tracking in our favor, but we need to see how long they persist.

Okay, that's helpful. Thank you. As a quick follow-up, we're hearing rumblings in the trade that retailers may be considering getting more aggressive on pricing in the back half of calendar 2020 because of the economic environment, and they might ask some vendors to help with pricing. We haven't seen any hard evidence of this yet. From your perspective, are you hearing any incremental pricing pressure from your customers?

Not really, Ken, at this point. I would say it's probably a function of two things. First, our portfolio has a very strong value segment. Brands like Banquet and others already offer extremely favorable value and historically have proven very resilient in a recessionary environment. The other piece is that in many categories you continue to see out-of-stocks because throughput is flat out and demand still exceeds production availability, and therefore you only exacerbate that problem when you price promote in that type of category. So I think it will be category specific. I will point out, though, that in our Q4 we did honor most of our promotional commitments because those were longstanding commitments. We have a principle of not backing out. Going forward, I would expect our average prices may move north a little bit near term because we are likely to see less discounting and price promotion activity. However, I wouldn't want you to interpret that as less retailer investment; it's more likely a shift in the profile of retailer spend rather than a reduction in the absolute level—less discounting, more brand building, more new habit creation. For example, creating loyalty for our Frozen brands among millennials by making click-and-collect behaviors habitual and increasing our e-commerce spend with retailers is a positive, constructive alternative in a supply-constrained environment to a price-promotional approach.

Our next question comes from David Palmer with Evercore. Please go ahead.

Thanks. Good morning. That fiscal ‘22 guidance, it's obviously closer than it's been before and it's also above consensus and it might be hopefully the first full year without this COVID issue. So related to that, what are the key one or two variables that you'll be watching and thinking about that would make the mid-to-high end of that guidance possible? And I have a follow-up.

Well, I think the way I bring it up earlier is, we have momentum on the business and we are investing to maintain that momentum. And as we maintain that momentum, we have a very good chance of continuing to bring more households into our portfolio and then converting them to multiple time repeat purchasers. That's really the logic flow as to how you get right in the heart of that, that long-term top-line profile.

I would just add to that, just obviously the synergy number that we have, making sure that, that stays on track, we feel good about it, we're on track. We affirmed it again. But making sure we deliver that managing all our other core productivity programs to be able to offset inflation.

That recall was got us a long way there on the bottom line side of the long-term algorithm. That alongside the additional volume and any operating leverage associated with, it's obviously a good thing for our portfolio.

And then just to follow up. The free cash flow conversion of earnings, obviously that relationship of CapEx to D&A, but how do you see that in ‘22 free cash flow versus that earnings target?

I mean we had guided to greater than 95%, I think was our guidance. And that again shouldn't change. I did comment that as it relates to fiscal ‘21, because we finished fiscal ‘20, with very strong free cash flow and some of that was timing, right? So it was about $350 million of benefit that we received in Q4, due to basically inventory working capital benefits and some timing on tax payments that's going to flip into fiscal ‘21. So when you look at ‘20 versus ‘21, you're going to see a super high conversion in ‘20 that's going to come out in ‘21 for the $350 million, but ‘22 we should be back in balance.

Our next question comes from Nik Modi with RBC, please go ahead.

Just two quick questions from me. When you think about the guidance that you provided for the estimated quarter, I am just curious if you could provide some perspective on how you're thinking about the demand. I asked this only because obviously in recent weeks and recent days the case surge is really massive in very populous states, which I reckon would probably reaccelerate some of the at-home food consumption as the reopening slows. So I just want to get perspective on that. Sean, maybe you could provide some perspective around innovation timing and how things are shaping up with retail in terms of the next weeks and how you're thinking about your innovation flow over the next six months or so. Thanks.

Sure. On the first piece, if you go back to the beginning of this thing, Nik, what happened was we had this massive initial surge, right, with pantry stocking and alike, and that went a long way toward kind of depleting our inventories and really starting to deplete customer inventories. Since then, while we haven't been at the level of that initial surge, demand has been extremely high. So, we've got categories where we've hit the ceiling where we're just flat out, we've got categories where we've made some early progress and starting to kind of catch up. But with another surge, that's just going to put more strain on it. So we are focused. It's interesting that we're typically focused on optimizing demand. And now we're in this environment where we are really heavily focused on optimizing supply because we're really up against it. And that has been the case in the early days of our Q1 look and if you look at the scanner data, it’s been pretty strong. And that's all previous news of these upticks. So we've got to monitor it. We're doing everything in our power to add additional capacity so that we can protect the upside to the best of our ability, but it is going to be strained near term. And we are investing to make sure that, that happens. Did you have anything else to add on that point, Dave?

Yes. Just briefly, for organic net sales, we do expect strong growth from the domestic retail businesses. So as Sean said, and you see in consumption, just to get a little color on the other segments, International is going to be relatively flat. We had a really strong Q4. We don't expect to see the organic net sales growth in Q1 to that level and then continued declines in Foodservice like we saw in Q4.

Now with respect to innovation, let me before I comment on forward-looking innovation, you can see the whole perspective on Q4, because recall at CAGNY we had talked about how some of our customer base had moved up their shelf resets in Frozen, and I'm sure many of you are curious what happened with that with respect to COVID hitting? Well, you may be surprised to learn that the vast majority of our customers proceeded as planned in Q4 with their earlier Frozen resets. And that's good news. We see our exciting fiscal ‘21 innovations on the shelf and they look great and we are hustling to try to keep them in stock because they're obviously getting good trial. And also with respect to Q4 innovation in total, which includes the innovations we launched earlier in the year, Q4 innovation was up over 25% versus the prior Q4. And it definitely had some benefit in it versus the prior Q4 shipments of the following year's innovation coming a little bit earlier and that's because of those Frozen shelf resets that we talked about. But the reality is, despite what you've heard about us doing reductions to maximize throughput, and things like that, we have continued to have strong favorable reaction from our retailers on our new innovation. And we continue to feel super strong about the slate we've got out there and expect it to perform well this year. As you've seen in the last few years, every year's innovation has outperformed the prior year’s for the last several years. And there's no reason to expect this year wouldn't continue albeit we have a few more wildcards that we are dealing with than in previous years.

Our next question comes from David Driscoll with DD Research. Please go ahead.

I wanted to start with Grocery & Snacks and Frozen & Refrigerated on Slide 9. Sean, you’ve got nice metrics here. But I’d like your impression: you’ve repeatedly said over the years that you expect Frozen to be a critical growth area in the grocery store. Looking at these fourth-quarter results, which were obviously heavily affected by COVID, Staples is growing much faster than Frozen, likely due to the initial stock-up. Can you explain how you expect Frozen to grow relative to Staples going forward? Should Frozen be about half of Staples as this graph suggests, or should Frozen begin to be much stronger on a relative basis after we move past the initial stock-up in March and April?

Well, Slide 9 is actually pretty consistent with what I would expect, having worked in and around staples products for much of my career. Whenever you see any kind of crisis hit, people will load their dry goods pantry, which has a tremendous amount of holding power. And you tend to see more of a pantry load dynamic because of the holding power of the pantry relative to a freezer. Most freezers are incredibly limited in space, and that's one of the governors you see on Frozen. Interestingly, one thing we didn't put in the deck is the sales rate of standalone frozen freezers. If you had gone to Home Depot or Best Buy in the last few months in search of a freezer, you would not have been able to find one. So clearly consumers are recognizing there's a limit to what they can fit in their freezer. In my household, we get to the point where you go to the store on a day shipments have arrived, you want to buy stuff, but you have nowhere to put it because your freezer is full. So that's the governor you have there versus staples. That said, while I might expect the two to converge more going forward, staples present a super value proposition. Chef Boyardee, and this may be a function of what the consumer household balance sheet looks like going forward and how long a recessionary environment persists, is a tremendous value proposition and should continue to perform well in that kind of environment. Furthermore, if people are learning to cook again and cooking from scratch, many of the staples products we have, like PAM cooking spray or our beans and tomato businesses, ought to remain elevated. These are things you can use in multiple, different recipes throughout the week rather than using the same thing again and again. I'm not going to try to forecast how these will perform relative to one another. The key point we wanted to make today is that all three of our consumer domains have been elevated and are enjoying this notion of rediscovery and discovery that I talked about.

That's helpful. Dave, I just wanted to follow up on SG&A. In the fourth quarter as a percent of sales, if the SG&A was down significantly versus kind of what the churn rate that we had seen in the prior few quarters, what do you expect on a go forward basis? Can you get that SG&A as a percent of sales to continue to be reduced for the next bunch of quarters? Any color there? I mean I know you're not giving exclusive guidance but just any color on how you're thinking about SG&A as a percent of sales? Very helpful.

Sure, Dave. So at a high level, obviously a lot of the synergy that we're getting from Pinnacle is SG&A. In fact, more than half of the synergy to-date has been from SG&A. More will come in cost of goods sold moving forward. So that is starting to work its way in quarter by quarter into our actual results. So as I look to Q1, because we gave specific margin guidance in Q1, a big part of the operating margin improvement versus the prior year is actually because of the leverage on SG&A. So the 17% to 17.5%, a good amount of that improvement is the SG&A leverage. Gross margin, there is a lot of puts and takes with all the different costs, so there would be more moderate improvement there, but it's mostly SG&A. So we start seeing that leverage in a bigger way starting in Q1. And you'll continue to see leverage going forward. I'm not going to give you specific numbers but that's the color for Q1 for SG&A.

But the leverage does continue even if you don't give exact numbers. You're confident that the leverage continues in the following quarters.

Yes, obviously it depends on sales, right? But yes, we book the SG&A costs out and we're going to continue to see that benefit.

Our next question comes from Robert Moskow with Credit Suisse. Please go ahead.

Actually a couple. I think, talking to investors, a lot of the controversy around Conagra does still revolve around this long-term EPS range because it is so much higher than your fiscal '20 results. And I was wondering in August, when your proxy gets published, do you think is that a peek at the three year cycles for fiscal '20 to fiscal '22 and the EPS target that's in there for executive compensation. Because I think that would give people a better sense of how management is being incentivized in relation to the target that you've given us. I think that'll be the first cycle that we'll get to see how executive comp is related to that range. Is that a fair assessment?

Yes. Rob, the way I'd respond to that is, big picture, our Board has a very strong pay for performance philosophy. As such, the targets in our incentive programs are anchored in our annual and long-term financial plans and consistent with the guidance that we provide to investors. So with respect to the 2020 proxy, we expect our disclosure to mirror that of past years. We will provide details on the fiscal '20 to '22 program overall, including the growth CAGRs that are in the program. And you'll see that management and shareholder interests are aligned with respect to the ‘22 numbers.

And a quick follow-up. I remember last year there was a lot of inventory deloading in the Frozen section related to the shelf resets. Given what you've said now about the resets being done, are there going to be any kind of inventory reload in first quarter and is that part of your guidance or is your guidance really related to consumption and consumption will reflect shipments?

I think, near term Rob, we're playing catch up. We're trying to keep up with demand, or have continued to come in and inventories have been depleted and it varies obviously by category. So as long as demand remains elevated, it's more of a flow-through to consumption in pantries I think than a rebuilding an inventory. Now that is going to vary by category because you don't see the same level of pull category by category. So you can almost model out categories with kind of more muted pull or probably rebuilding inventories categories were pull remains extremely strong. We're probably continuing to run flat out and scanning a lot of what we're producing.

Our next question comes from Bryan Spillane with Bank of America. Please go ahead.

Hi, good morning, everyone. So just two quick ones and I might've missed it, but Dave on capital spending for fiscal ‘21, given I guess what some of the commentary that's been made about investments, even if you can't give a pinpoint number directionally, would it be close to what it's been historically? Or is it going to be higher than normal this year?

Bryan, I did not mention it specifically, but as we look to fiscal ‘21 based on the investments that Sean outlined, particularly investments to shore up capacity and supply, we will be increasing our CapEx. Right now our estimate is that we'd be about a $100 million above where we landed fiscal ‘20 in terms of CapEx.

Okay, great. Thanks. Sean, as a follow-up to Rob Moskow's question about incentive compensation, have you made any adjustments, either with frontline employees or at an organizational level, to focus more on being in stock and keeping up with demand, as you described before, rather than trying to stimulate demand? I'm trying to understand whether you've changed the incentive mix a bit to ensure CapEx projects happen on time and to improve service levels.

Well, for our salaried employees, our short-term incentives are really a function of sales, profit, and cash flow, and employees are clearly incentivized to maximize those. In the last quarter, the real focus for us has been in our facilities: ensuring the health and safety of our employees so we can keep our plants running and honoring those employees for being heroes on the front lines during this intense COVID period. We have made investments to recognize and support our frontline employees accordingly. That's what has been in place, and as I mentioned earlier, I couldn't be more pleased with the incredible refusal-to-lose attitude we've seen, especially on the frontline.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Kearney for any 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 discussions anyone may want. So thank you for your interest in Conagra Brands.

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