Good morning, and welcome to the Conagra Brands Fourth Quarter and Fiscal 2022 Results Conference Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Melissa Napier, Head of Investor Relations for Conagra Brands. Please go ahead.

Good morning. This is Melissa Napier, Head of Investor Relations for Conagra Brands. I'm here with Sean Connolly, our CEO; and Dave Marberger, our CFO. Today, Sean and Dave will discuss our fourth quarter and fiscal 2022 results and provide some perspective on fiscal 2023. We'll take your questions when our prepared remarks conclude. On today's call, we will be making some forward-looking statements. And while we are making those statements in good faith, we do not have any guarantee about the results we will achieve. Descriptions of our risk factors are included in the documents we file with the SEC. We will also be discussing some non-GAAP financial measures. These non-GAAP and adjusted numbers 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 the earnings press release and the slides that we'll be reviewing on today's call, both of which can be found in the investor relations section of our website. I'll now turn the call over to Sean.

Thanks, Melissa. It's great to be working with you again. Good morning, everyone, and thank you for joining our fourth quarter fiscal '22 earnings call. I'll start with what we would like you to take away from the call this morning. Throughout fiscal '22, our team took decisive actions to offset inflation and invest in our business. We faced heightened costs throughout the year, but inflationary pressures were especially high in the fourth quarter. As a result, we implemented additional inflation-justified pricing actions to help offset the impact. We continued to make deliberate strategic investments in our business to better serve our customers and meet the strong consumer demand for our products. Physical availability is an important part of maintaining and building trust and loyalty. I'm pleased that our brands continue to resonate with consumers, demonstrated by broad-based share gains within the portfolio, particularly within our most strategic domains of frozen and snacks. We are continuing to drive growth, gain share in attractive categories, and we remain disciplined in executing the Conagra Way to create lasting connections with consumers. As we've communicated throughout the year, the external factors I touched on a moment ago, as well as investments we made to maximize service and product availability in the face of supply constraints, all contributed to increased margin pressure. We continue to pull levers to manage these factors, and we were pleased to see margin improvement materialize in the fourth quarter in Grocery & Snacks as well as Foodservice. This represents an important inflection point that we expect will extend to our Refrigerated & Frozen and our international businesses within fiscal '23. I also want to highlight the strong fourth quarter performance of our joint venture, Ardent Mills, which effectively managed through recent volatility in the wheat markets and continued to prove an effective hedge against inflation. Looking ahead to fiscal '23, we expect to see continued strength in our sales driven by strong innovation, the impact of pricing actions and progress in the supply chain to help offset continued inflation and elasticity. While we expect elasticity to increase incrementally from fiscal '22 levels as more inflation-justified pricing comes to market, we believe they will remain below historical levels. These expectations are reflected in the fiscal '23 guidance we're providing today. With this expected macroeconomic backdrop, we are lowering our long-term leverage target which Dave will discuss later. As you know, maintaining a strong and flexible balance sheet and keeping our investment-grade credit rating remain important to us. With that overview, let's take a look at the results. While we had planned for high inflation, it was higher than we anticipated. Slide 7 shows our cost of goods increased 16% in fiscal '22, far higher than the 9% we anticipated at the time of our fiscal '21 fourth quarter call a year ago. Inflation was particularly acute during the fiscal '22 fourth quarter when our cost of goods sold were 17% higher than year-ago periods and 24% higher on a two-year basis. The elevated levels of inflation we experienced in fiscal '22, particularly in the fourth quarter, required decisive actions in response. A critical part of that response included the inflation-justified pricing we implemented throughout fiscal '22. On Slide 8, you can see the change in on-shelf pricing by quarter. On-shelf prices for our brands rose across all three domestic retail domains compared to the same period a year ago and also increased in Q4 as we experienced additional inflationary pressures. We closely monitor the impact of these pricing actions on volumes. We've been pleased that price elasticity has remained below historical levels. Slide 9 demonstrates that unit sales have stayed largely consistent on a three-year basis even as the on-shelf prices for our brands have increased. Even in Q4, as more significant inflation-justified pricing took effect, the increase in elasticity was relatively modest and below historical norms. As we monitor the impact of our pricing actions on volume, we look at the relative impact between branded foods and private label. While private label is gaining some share more broadly in food, we have not seen notable migration toward private label in the heavily branded categories in which we compete. The superior relative value of our products continues to resonate with our customers and our consumers and the resiliency of our portfolio means we are well-positioned to take additional action in fiscal '23 if we continue to experience incremental inflation. As a result of our decisive actions, we're beginning to see the expected recovery in our margin performance. As I mentioned earlier, the fourth quarter represented an important inflection point as we saw margin improvements materialize in Grocery & Snacks and Foodservice, which helped drive fourth quarter operating margin improvement for the total company. As I already noted, we expect our Refrigerated & Frozen and International segments to deliver operating margin improvement as fiscal '23 progresses. As you can see on Slide 11, our team delivered solid Q4 results in the face of a highly dynamic and challenging operating environment. Compared to the fourth quarter of '21, organic net sales for the fourth quarter increased at just under 7%, with growth in all four segments. And importantly, adjusted operating margin increased approximately 100 basis points and adjusted EPS was up over 20%. I'd like to briefly detail our performance across our three retail domains, starting with our Frozen business on Slide 12. Frozen continues to be one of the strongest businesses in our portfolio and offers modern attributes, convenience and quality to make it the perfect fit for today's consumer. In Q4, we continued to deliver strong growth on both a one-year and three-year basis. And within this consumer domain, we've seen growth across key categories, highlighted by more than double-digit year-over-year growth in both plant-based protein and single-serve meals. Now let's talk about snacks. As shown on Slide 13, we've seen a meaningful acceleration in retail sales growth in our snacks business over the last three years. In the fourth quarter, our snacks business grew 11% year-over-year. That equates to 34% growth over the same period in 2019. In this domain, we've driven growth in key categories, including meat snacks, hot cocoa, microwave popcorn and salty snacks. Our retail sales of ingredients and enhancers and shelf-stable meals and sides have also been growing meaningfully over a three-year period, and that trend continued in the fourth quarter. As you can see on Slide 14, this business grew 5% year-over-year and 10% on a three-year basis. In particular, we saw a large increase in the retail sales for syrup, which was up nearly 20% in Q4 on a two-year basis. As we execute our Conagra Way playbook, innovation has remained a key to our success across the portfolio. Slide 15 shows the impact of our disciplined approach to delivering new products and a modernized portfolio. During the fourth quarter, our innovation outperformed the strong results we delivered in the year-ago period. And once again, our innovation rose to the top of the pack in several key categories, including with toppings, single-serve meals and plant-based protein. Looking at Slide 16, you can see that we continue to grow sales on both a one and three-year basis. Total Conagra retail sales were up 15.8% on a three-year basis for the year. We also continue to gain share in the important Frozen and Snacks categories, with our category-weighted share growth up both on a one-year and three-year basis. With that context, for fiscal '22, let's turn to our outlook for fiscal '23. We expect our strong brands, on-trend innovation, effective pricing and strengthened supply chain to drive top-line growth and margin improvement. Continued inflationary pressure in fiscal '23 is expected to result in incremental increases in elasticity, which overall, we anticipate will continue to remain below historical levels. Our outlook also reflects our expectation that we will have higher CapEx and interest expense in fiscal '23, lower pension income, and that the elevated performance from Ardent Mills in fiscal '22 will moderate. We look forward to sharing more details about our expectations for the year at our upcoming Investor Day. In 2023, we expect organic net sales growth of 4% to 5%, adjusted operating margin of approximately 15%, adjusted EPS growth of 1% to 5%. Before I turn the call over to Dave, I'll remind you that my team and I are looking forward to hosting an Investor Day on July 27 to discuss our plans for the future. In response to feedback, we've decided to hold our event in a virtual-only format to best accommodate our investors and analysts. Registration, dial-in and Q&A details for the virtual event are available on our website. Dave, over to you.

Thanks, Sean, and good morning, everyone. I'll start with some highlights from the quarter and full year, which are shown on Slide 22. Overall, we feel very good about how we are exiting fiscal '22, and the way we navigated the dynamic operating environment that impacted our entire industry throughout the year. During fiscal '22, we delivered strong top-line growth with full-year organic net sales up 3.8% compared to fiscal '21, reflecting the continued relevancy of our portfolio to consumers. While higher-than-expected cost of goods sold inflation weighed on our adjusted operating margins throughout the year, we were encouraged to see Q4 operating margins improve versus year-ago. Overall, our full fiscal year '22 adjusted operating margins decreased by 312 basis points versus last year to 14.4%, which was in line with the revised expectations we provided during our third quarter call. Fiscal '22 adjusted EPS of $2.36 was also in line with our revised expectations. Turning to Slide 23, you can see our net sales bridge for the quarter and full year. During the fourth quarter, the 6.8% increase in organic net sales was driven by a 13.2% improvement in price/mix as a result of continued inflation-justified pricing actions as well as favorable brand mix. This was partially offset by a 6.4% decrease in volume. The headwinds from the divestiture of our Egg Beaters business and the impact of foreign exchange were the final contributors towards the 6.2% increase in total Conagra Brands net sales during the fourth quarter. The bottom half of the slide highlights the drivers of our net sales growth for full-year fiscal '22 versus the prior year. The highlight here is the 3.8% organic net sales growth that I just mentioned, which showcases the underlying health of the business and our ability to execute inflation-justified pricing actions. This point is reinforced on Slide 24, which shows the top-line performance of each of our segments. As Sean mentioned, we are pleased that net sales continued to grow across the portfolio for both the quarter and full year compared to the respective year-ago periods. We also continued to see market share gains, reflecting the strength of our brands. The sales momentum of the business is strong as we exit fiscal '22. We detail our adjusted operating margin bridge on Slide 25. In aggregate, our adjusted operating margin was 15% for the fourth quarter, approximately 100 basis points above the year-ago period. As you can see, we realized a 9% benefit from favorable price/mix and a 1.8% benefit from net productivity in our supply chain. Although our productivity in the quarter was below historic levels, given continued supply chain challenges, the rate was up compared to Q3, and we are seeing steady improvement in our supply chain operations as we exit fiscal year '22. The price and productivity benefits were more than offset by gross market inflation of 17.3%, which impacted our operating margins by more than 12%. I will unpack the inflation impacts in more detail shortly. Together, these factors contributed to the 147 basis point decrease in our adjusted gross margin for the quarter compared to the year-ago period. Advertising and promotion costs for the quarter decreased 38.7% driven primarily by lapping the significant increases in A&P during Q4 last year. This decrease contributed 1.1% to overall adjusted operating margin. Adjusted SG&A costs also declined during the quarter driven by decreased incentives and deferred compensation, contributing an additional 1.3% benefit. Slide 26 breaks down our adjusted operating margins by segment. We were encouraged to see both our adjusted gross margins and adjusted operating margins in our Grocery & Snacks and Foodservice segments hit inflection points during the fourth quarter and begin to improve compared to last year. The recovery in these segments drove the 13.5% year-over-year improvement in adjusted operating profit during the fourth quarter. Our Refrigerated & Frozen segment was most impacted by higher-than-anticipated input cost inflation in Q4, particularly in proteins and edible oils. The above-forecast inflation in refrigerated and frozen has pushed forward the lag until additional inflation-justified pricing is reflected in the market. As we have mentioned previously, we believe our Refrigerated & Frozen segment and our Frozen portfolio, in particular, is well-positioned for further success. Our International segment was also impacted by higher-than-anticipated inflation and some FX headwinds versus prior year. Pricing actions were implemented as planned but were not enough to fully offset the cost headwinds incurred. As Sean mentioned earlier, we expect to see operating margins expand in both our Refrigerated & Frozen and International segments in fiscal '23 as pricing actions catch up to the recent inflation. I would like to take a deeper dive into the gross market inflation we experienced during the quarter, shown here on Slide 27. Inflation continued to rise to over 17% above the high end of the range that we were anticipating at the time of our third quarter call. It rose most acutely for commodities that are particularly difficult to hedge, including chicken and pork. Even though we forecasted a significant acceleration of our chicken and pork costs in Q4, as depicted in the charts on the right, actual inflation came in even higher, especially in chicken, which hit record levels compared to our expectations as of the Q3 call. We continue to pull on a number of levers to offset the elevated costs, including an additional round of inflation-justified pricing actions implemented during the fourth quarter of fiscal '22 that will be effective in the first quarter of fiscal '23 and new pricing that will take effect in the second quarter of fiscal '23. Another strong performance by Ardent Mills also proved to be an effective inflation hedge in our Q4 results. Slide 28 details our adjusted EPS Bridge for the quarter compared to last year. The sales increase and recovery of overall operating margins was the primary driver of the increase in our adjusted EPS during the fourth quarter contributing $0.09. We also saw a $0.02 benefit from our equity method investment earnings, which increased 42.1% during the quarter to $48 million due to solid results from Ardent Mills as effective management at the joint venture allowed it to capitalize on volatile market conditions. The benefit from pension and postretirement non-service income and higher adjusted taxes were the additional drivers of our EPS change. The $0.65 in adjusted diluted EPS that we generated for the quarter brought our full year adjusted EPS to $2.36, down 10.6% from fiscal '21. On a two-year compounded annualized basis, full year fiscal '22 adjusted EPS increased 1.7%. Turning to Slide 29, you can see our balance sheet and cash flow metrics for the quarter and full year. We feel good about ending the year with a net debt-to-EBITDA ratio of four times, which was generally in line with the target we outlined during our third quarter call. We aim to continue decreasing this ratio moving forward as we prepare for more market volatility, which I will discuss in more detail shortly. Capital expenditures decreased by $42 million year-over-year to $464 million, or 4% of net sales. Lastly, we continue to prioritize returning capital to shareholders as we paid $582 million in dividends in fiscal '22. I'd now like to spend a minute talking about our guidance for fiscal '23. Slide 30 outlines our expectations for our three key metrics, including organic net sales growth of plus 4% to plus 5%, adjusted operating margin of approximately 15% and adjusted EPS growth between plus 1% and plus 5%. In addition, we aim to continue reducing our long-term net debt-to-EBITDA ratio to three times, as I alluded to earlier. The macro environment remains volatile, and this target reflects our strategy to maintain an even stronger balance sheet as we navigate continued headwinds moving forward. And we continue to remain committed to a solid investment-grade credit rating. Before we open the line up for questions, I want to unpack the assumptions behind our guidance shown here on Slide 31. We expect the high inflationary environment we experienced in fiscal '22 to continue into fiscal '23, with levels in the low teens off of the fiscal '22 gross market inflation up 16%. As I noted, we have communicated additional inflation-justified pricing actions to help offset these elevated costs, which we anticipate being realized during the first and second quarters of fiscal '23. And we are keeping a close eye on how these actions impact elasticities. We forecast the environment to remain dynamic through fiscal '23 with elasticities increasing from fiscal '22 levels, but remaining below pre-COVID historical levels. From an investment perspective, we expect CapEx spend of approximately $500 million as we prioritize reinvesting in the business as a lever to combat inflation with a focus on capacity expansion and productivity enablers. We also plan to increase our SG&A investment to support talent, infrastructure, and continued automation. Interest expense is anticipated to be roughly $410 million for the year, pension and postretirement income around $25 million, and our tax rate estimate is approximately 24%. These three items combined represent an approximate $0.13 headwind to fiscal '22 adjusted EPS and are incorporated into our fiscal '23 EPS guidance of plus 1% to plus 5%. The higher interest rate environment is the main driver of the expected interest expense increase in pension income decline. We anticipate Ardent Mills having another strong year but expect fiscal '23 results to moderate versus fiscal '22, particularly versus the elevated performance in the second half of fiscal '22. To reiterate, we are confident about how Conagra ended the year and are optimistic about our future opportunities. We are looking forward to walking through these opportunities and our strategies to unlock them in more detail at our Investor Day later this month. That concludes our prepared remarks for today's call. Thank you for listening. I'll now pass it back to the operator to open the line for questions.

Thank you. And we will now begin the question-and-answer session. And our first question today will come from Andrew Lazar with Barclays. Please go ahead.

Great. Can you guys hear me okay?

Yes, we can hear you now.

Thank you very much. I appreciate it. To start, I understand that elasticity is currently below historical levels as you've mentioned. However, the volume decrease appears to be greater than what we've observed from other food companies, all of which have implemented similar or more pricing increases than Conagra on a year-over-year basis. I'm trying to understand if elasticity is potentially catching up with your company more than it is for others, or if there are other factors at play. Several companies have begun to mention the advantages they are experiencing from the shift to at-home dining from dining out, which might be reducing the expected elasticity at this point, considering all the pricing adjustments. This raises a question about your assumption that the lower historical levels of elasticity for 2023 are conservative. Where does that perspective come from? I have a follow-up question as well.

Yeah, Andrew, it’s Sean. I’ll answer that. It’s clear from the data that we are experiencing trading that others have mentioned, and the demand for our products is still very strong. As shown in the slide, brand health is in a good position, and I would say that we are not facing anything unique in elasticity. Based on what we are seeing right now, the answer is a definitive no. Consumer demand has remained robust. These elasticities have been significantly better than the historical norm. However, I want to highlight the supply chain constraints. While we are making progress, these constraints are still present. They were a factor in Q4, and we observed retailers deplete their inventory quicker than we could restock it. This has limited parts of our portfolio, including some of our fastest-growing and strongest brands, such as Refrigerated & Frozen. We will provide a comprehensive update on the significant work happening in the supply chain. We are making strides, and we have an exciting transformation plan ahead, which we'll share on our Investor Day in a couple of weeks. We will also preview some exciting new innovations that are entering the market and will continue to drive strong sales. For now, my main points are that our brands are performing well, innovation is thriving, and the pricing power we’re seeing is strong. Despite this strong pricing power, elasticities remain below historical norms. The supply chain is progressing, but it hasn't fully returned to normal yet. Looking ahead, our outlook for 2023 seems prudent.

That's helpful, thanks. And then I guess on your full year guidance, even putting all the below-the-line items sort of aside for a minute, seems to imply a high single-digit increase in EBIT growth. Even with your comments, I think even last quarter about the need and desire to ramp up A&P spend in fiscal '23, in a still kind of inflationary environment. So trying to get a sense of what are the key drivers to get there and your level of confidence in that type of growth on the EBIT side. Thanks so much.

Sure, Andrew. So if you take it from the top, we guided to low teens inflation off of the 16% this year. So we float that. We think that's going to be higher actually in Q1. And as the year goes, the percentage will come down, but low teens is what we assume there. We're assuming that our supply chain productivity, which came in at 1.8% for Q4, we expect that as our supply chain continues to stabilize that, that will improve as the year goes on. We obviously have a big impact of pricing in ’23, the carry-in pricing, which will be significant. And then as I talked about in my comments, we have pricing that is actually in market now in Q1 and will actually be in market in the beginning of Q2 as well. And so a big impact from pricing. And we do expect that both our SG&A and A&P investment will grow at a greater rate than the sales guide. So we are investing in both of those areas. But given the pricing, given the ramp-up of productivity and given inflation at low teens off of what was a high base in fiscal '22, we feel comfortable with what that's going to do in terms of our EBIT growth for '23.

Thanks very much.

And our next question will come from Ken Goldman with JPMorgan. Please go ahead.

Hi, thank you. A large food company recently mentioned that in the November quarter, the financial impact from increased pricing could match the effect of inflation, with pricing potentially offering a net benefit afterward due to a lag effect. I'm curious if you see a similar trend. Specifically, when could we expect pricing to at least match inflation in dollar terms this year? I understand it may be challenging to give a precise answer, but I would appreciate your general thoughts.

Ken, I'll give you my thoughts on that and mechanically how it works, and Dave you can add anything if you want. But these inflation, as we've experienced over the last year or so, it tends to come in waves. And that means we take successive waves of pricing. Each one of those pricing actions then triggers its own lag effect, which lasts about 90 days. Once you get through that lag effect, you really start to see the benefit of the pricing in the P&L. And then the following year, when you wrap that lag window, you really start to see some meaningful year-on-year improvements in the profitability. The tricky thing is if you have to feather in new pricing actions, you also feather in lag. So that's why each year is different because you've got different levels of waves of inflation and you've got different responses. The good news is, hopefully, this inflation cycle is getting mature. We've been pretty aggressive in getting the actions into place. And after you get through those 90 days, you can start to see some benefits. And we don't have, as you know, a lot of categories that are fewer pass-through categories like a coffee. We have a couple, we've got a couple of neat businesses, but we don't have a lot of those. So to me, the positive thing here, while inflation is tough to deal with, is as I've said before, it also can help liberate some of these brands from some of these legacy price thresholds where they can get stuck for a period of time. And if you do that and then you kind of get past the year and you wrap some of the immediate challenges you face, some good things can happen in the P&L, and that's not unprecedented at all. Dave, do you want to add to that?

Yes. Let me expand on that and connect it to the guidance. Ken, a concise way to think about it is that our organic net sales guidance is 4% to 5%. We anticipate price/mix to be in the low teens and inflation to also be in the low teens. Therefore, if that holds true, the pricing dollars will surpass the inflation dollars next year.

Great. That's very helpful, Dave and Sean. Thank you. And if I ask a quick follow-up, is there any way to sort of quantify the impact of those supply chain constraints on your volumes in the fourth quarter, even if roughly? I think it would maybe help some people understand or get a better sense of how much that affected you? And is there a chance that this year, you'll see maybe a reversal of that effect as your production improves and retailers hopefully replenish some inventory?

Yes. I won't provide specific numbers, but it's specific to the category. We can clearly see this trend. The most significant area, as I noted earlier, is Refrigerated & Frozen. As you all know, our Frozen business is our most strategic focus. We've maintained consistent strength there. Our Frozen Meals business does not see trade-down alternatives. This is a key component of our portfolio and includes some of our strongest brands. We've contributed to nearly all the growth in that category. I don't foresee any changes to that underlying strength. We are working to get our suppliers back to full capacity and to restore our service levels to the traditional high 90% range. Dave, would you like to add anything?

Yes. And you just said it. I think a lot of times we think of when we talk about supply chain, we think of the labor in our plants and our distribution centers, which is a key part of it, and we're seeing that come back. But another key part that is really impacting us in particular categories is supply, ingredient supply. So our suppliers and making sure that they're able to supply. And so if we're missing an ingredient, we can't produce. And so that's part of the impact. So we're working through that. We're making progress. But as Sean said, that did impact volumes, particularly in Refrigerated & Frozen this quarter.

Thanks. I look forward to the Investor Day.

Thanks.

And our next question will come from David Palmer with Evercore ISI. Please go ahead.

Thanks. On supply chain savings, I would imagine those were difficult to capture in fiscal '22, given all the COVID-related forces. And I would also imagine that there was significant friction costs, which you talked about last quarter. Could you perhaps talk about your assumptions for those supply chain friction costs going forward '23, how that would compare to '22 and also supply chain savings, how you think that, that capture will be in fiscal '23 versus '22?

David, let me give you just kind of a quick way to think about it, and Dave, you can add anything. As we plan our '23 in terms of supply chain, we're not planning for a complete reversal of the supply chain friction that we've experienced over the last year. As you know, as we've said before, we prioritized doing what it took this past year to get as many units of our products out the door as we could. And that had a cost to it, and it was less efficient than normal. We are assuming some progress because we are seeing some progress in some green shoots in supply chain. But from a planning posture standpoint, we're not assuming everything gets back to bright. There will still be some inefficiencies in there according to what we planned. When we see in a couple of weeks, we're going to take you through that in quite some detail. And in addition, some investments we are making to really transform and modernize supply chain so we can capture some good margin opportunities that we see going forward. So we'll take you through that in a couple of weeks. Dave, do you want to add anything to that?

Yes, sure. So David, if you look at the Q4 Bridge, our productivity net of the offsets was 1.8%. That was better than the 1.5% we had in Q3. As you know, historically, we run about 2.5% to 3% of productivity if you kind of look back pre-COVID. So the way to think about '23 is we will gradually ramp our productivity numbers back to what we were historically, and we're just gradually, with each passing quarter, we expect to continue the improvement in the operations.

You mentioned in one slide that you have a relatively high contribution from innovation compared to your peers. I wonder how you view the potential for increasing the impact of innovation in 2023, given retailers' ability to absorb it in the post-COVID period. Additionally, what portion of that is included in the 2023 plan, considering there may be higher expenses related to promotions and other growth initiatives? Thank you.

Well, I'd say both are in the plan for '23. We are assuming very strong innovation performance, and we are investing behind that innovation. So you're seeing A&P rise in support of that innovation. If you look at our track record now of these successive launches of innovation that we've had, when we started this journey and our real first big innovation slate was I think as far back as '16-'17, there was some concern what happens when you wrap this success? Well, each year, our innovation waves have gotten better and stronger than the year before. And our '22 results were fantastic versus a very successful '21. We're expecting fiscal '23 innovation to be even stronger than that, and we're investing behind that. We do have demand from our customers for that innovation. So it's sold in. And interestingly, as we told you before, even during the height of the pandemic, we paused innovation a lot less than what I expected at the time. We had tremendous customer demand for our innovation even then, and we kept the train rolling. So that's all baked into the plan for this year.

Thank you.

And our next question will come from Alexia Howard with Bernstein. Please go ahead.

Good morning, everyone.

Good morning.

Can you provide insights on the gross margin trajectory moving forward? I understand you're not offering formal guidance. However, considering the inflation appears to be higher than anticipated and the next pricing changes will not take effect until the second quarter, should we expect significant near-term pressure on gross margins? Will there be an anticipated improvement throughout the remainder of the year? I have a follow-up after that.

Yes, Alexia, that's right. When you look at inflation, given our exit rate of 17%, we're expecting low teens inflation for all of fiscal '23. But we expect that inflation rate to be higher in Q1 given the exit rate. So as we go forward, we expect the percentage inflation will come down versus Q1. So that would and then the pricing that we're taking in Q1 and Q2 comes in. So you should see gradual improvement of gross margin as '23 progresses.

Great. Thank you. And then just as a follow-up, you mentioned favorable mix across a lot of the segments this time around. Could you just give a qualitative description of what was going on and whether that's expected to continue, and I'll pass it on.

Yes. A lot of that is brand mix, Alexia. So we have a big portfolio. So depending on the mix of what we sell, we will see benefits. So when we see growth in brands like Slim Jim, some of our core frozen items, those things have better kind of sales and margin mix. So it's really at the brand level that's driving that.

And you'd expect that to continue presumably into '23?

Yes. We always manage that for favorable mix. Mix is always one that's tricky because there's a lot that goes into it. But generally, we're always managing our portfolio to drive favorable mix for sure.

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

And our next question will come from Chris Growe with Stifel. Please go ahead.

Hi, good morning. Thank you.

Good morning.

I have a question to start with and a follow-up. Regarding Ken's previous question, last quarter, Dave, we discussed the gap between pricing and inflation, specifically the $0.30 in EPS. Since then, inflation has increased, and you have implemented more pricing to address that. Is there an expectation or a part of your guidance that incorporates that $0.30 or whatever the updated figure is for fiscal '23? Perhaps this could be reflected in the second half as you align pricing with inflation.

Yes, Chris. If you examine our guidance, you'll see that our estimate for price/mix is in the low teens, and inflation is also in the low teens, so that will reflect in our results. The $265 million we mentioned last quarter was not guidance; it was a pro forma figure. The guidance we provided for 2023 indicates a growth range of 1% to 5%, which includes a $0.13 headwind from nonoperational items related to pension, interest, and tax. This translates to a range of about $251 million to $261 million. We are not planning to increase Ardent as significantly and are focusing on investing in SG&A. Therefore, when you consider these factors, it's clear that we are factoring in a recovery from the lag in our fiscal 2023 guidance.

Sure. That makes sense. I have a question about advertising and promotion. To clarify, you anticipate it will increase in fiscal '23. Additionally, E&P was down this quarter, which seems to be related to comparisons. Considering the overall pressure on the brands, I wonder if the total pressure was lessened or possibly offset by the promotional investments that are occurring. Can you elaborate on how this above-the-line spending has affected the pressure on the brands?

Chris, we're going to get into this in quite a bit of detail in a couple of weeks. We talk through how we create these connections between our consumers and our brands. But what I'd say is our total investment has been very strong, and it remains very strong. And in any given quarter, we might toggle investment below the line. We might toggle it above the line depending upon what we think in that window is right for the business. So for example, if we're in a launch window for new innovation going to market, we will put more money above the line for everything from slotting to in-store sampling on those new items, getting it on to an end display so people can discover it. If we're not in a launch window, but we're more in a sustaining window, we're driving repeat, we might spend more on e-commerce and search and things like that. So we're constantly toggling our spend to what we think is going to be most effective and most efficient in that window. And we've got a big innovation slate this year. So we've got some good trial-generating support for that in our A&P line. At the same time, we've still got good support to get those things on shelf, get the right high-quality physical availability. So overall, it's working. And this is an important topic, and one that we do want to get into in a couple of weeks with you.

Thank you.

Thanks.

And our next question will come from Robert Moskow with Credit Suisse. Please go ahead.

Thank you for your question. I have a couple of points to address. Dave, you've mentioned low teens price and mix along with low teens COGS inflation, which explains the profit dollar growth in the relationship. However, when examining the gross margin impact on your slides regarding price and mix, it appears to be significantly lower than the expected run rate for price and mix. I believe this is due to the mix itself, particularly since snacks are growing faster than other sectors of the business, and that may affect the gross margin negatively. Can you break down the price and mix further to show how much is attributed to actual price increases? Additionally, do these two elements offset each other, considering the price and COGS inflation?

Yes. What I would say, Robert is that you have to remember that when we quote price, right, so this quarter, it was 13%. That's always going to be lower in terms of the margin impact, right, of that price. Same thing with inflation. Inflation was 17%, but the margin impact of that was 12%. So it's really the same thing. The price if we're low teens price next year, that's going to equate to a lower margin impact, but then the same thing on the low teens inflation, right? So we're quoting a percentage of either the sales or percentage of the cost of goods sold, but when you translate that into a margin impact, it's lower. So it's really that relationship.

Okay. And maybe a follow-up, in your press release, when you talk about the reasons for the volume decline, it really is all about price elasticity. It doesn't say anything about supply chain constraints or inability to serve customers. So is it just not material enough to show up in the price release that supply chain constraint?

There are several factors at play, Rob. Elasticities are occurring, and they are occurring well below historical norms, as I've mentioned, and we are not able to ship to our customers at the same rate that they are depleting inventory. So both are contributing factors. Currently, people are keen to understand how consumer demand is holding up despite very strong pricing, and it is holding up extremely well compared to historical standards, but it is not perfect. Dave, would you like to add something?

Yes, I would like to add that in the press release, we will discuss the key factors more thoroughly. Elasticities are clearly the primary driver of volume. There were some supply constraints that we addressed as requested, but the main driver remains the elasticity.

Okay, thank you.

And our next question will come from Bryan Spillane with Bank of America. Please go ahead.

Thank you, operator. Good morning, Sean. Good morning, Dave. I just had Dave two questions for you related to, I guess, related to the balance sheet. The first one is just given the net interest expense this year being impacted by higher rates, is that a fixed number now? Or if rates were to move in one direction or another, is there a potential that net interest expense could move?

Yes. We have analyzed all the anticipated rate increases for the year and estimated their impact. If the forecasts regarding the number of rate increases are accurate, that is how we arrived at our projections. The variable aspect of our debt is primarily our commercial paper, while most of our debt is fixed in terms of rates. Additionally, we considered the average borrowing for the year due to certain timing related to working capital. We have incorporated the current forecasts for rate increases into our calculations.

Okay. But given that it's really just tied to the piece that's like CP, there shouldn't be a material move one way or another.

Yes, I agree that it's all dependent on our current situation.

Can you elaborate on your previous comments about leverage and leverage targets? With the market moving towards four times leverage, it seems like equities are currently more affected by leverage than they were a year ago or even on January 1. Beyond the anticipated growth in EBITDA for fiscal '23, are there additional measures or actions you can take to possibly speed up the deleveraging process?

Well, I think obviously, the core operations are the key driver, and we do expect for '23 to be down versus where we ended fiscal '22 on leverage. Obviously, as you've seen us over the last five to six years, we've done a lot of portfolio reshaping and divestitures. And so obviously, this is just a base forecast. So any divestitures we would have could reduce leverage further depending on what we would execute.

Okay, so my question is whether you have options beyond just organic deleveraging. Are there other actions you could take to support that process?

Yes.

Okay, perfect. Thank you.

And our next question will come from Jason English with Goldman Sachs. Please go ahead.

Jason, you might be muted. We can’t hear you.

Thank you. Yes, indeed, I was. I was like two-thirds into my question, too. So thanks for the shout-out. So thanks for slotting me in. I have two questions. First, on volume, on a three-year stack basis in Grocery & Snacks and Frozen & Refrigerated you're kind of back to flat to where you were pre-COVID this quarter. And you're guiding to like a high single-digit, almost 10% type volume decline next year, suggesting that you expect eating occasions coming to your portfolio to be well below pre-COVID despite what you're talking about sort of trade-in or away-from-home and despite what you've been saying about retention of eating occasions post-COVID. How do we square all that?

Our approach for the 2023 plan is to be cautious. We want to avoid a scenario where we feel the need to make drastic adjustments regarding elasticities or supply chain recovery. The environment remains unpredictable, and we believe it's best to take a careful approach for fiscal 2023. Events will occur that differ from initial expectations, and we must be prepared to manage those situations. This is the context we are operating in, and it reflects our mindset as we develop our plan.

Yes, that makes sense. It seems prudent. And separately, I'm in an event right now with a lot of your customers. And it's kind of depressing. They're talking about all this cost pressure, the limited ability to pass it through the consumer, the meaningful margin squeeze they are under. And you're the third food company in a row to get up and talk about the ability to price above inflation and get margin recovery, which we saw this quarter, you're guiding to for next year. It kind of flies in the face of how I've always thought about the balance of power between the industry. Was it may be a bit more balanced rather than the sort of incongruent balance that we're seeing right now where CPG guys are saying they're going to flex a lot of muscle, while your customers are feeling a lot of pain. What's evolved to kind of cause that balance to pivot in this direction? And why do you believe it's durable?

No, I wouldn't characterize it the way you're characterizing it, Jason. I mean when you go into these macroeconomic dislocations that we've experienced, the pain tends to come in waves. And manufacturers get hit with a lot of the pain early in the cycle, and that comes in the form of margin compression, as you've seen we've gone through in the last year, a lot of that associated with the lag effect. And then the lag effect is a transitory effect that you do emerge from. So it's not as if what you're doing as you move through that cycle is you're recovering lost margin points as opposed to adding fresh new firepower at the profit line. That's not what's happening. This is about profit recovery. And that's an important thing. Manufacturers have to recover their margin, why? Because the top priority for our retail customers is growth. And our retail customers here at Conagra know that our innovation has been the absolute key to driving growth for their categories. They need and want that innovation to continue, but they know that that innovation costs us money. We have to have healthy margins to be able to build out that innovation and get it to our customers in the market. And so they know we've got to take inflation-justified pricing to recover our margins after we go through these windows where we experienced the compression that happens early in the inflation cycle. And that's exactly kind of how things are playing out.

Got it. Understood. Thanks. I’ll pass it on.

And our next question will come from Cody Ross with UBS. Please go ahead.

Good morning. This is Simon Negin filling in for Cody Ross. The past two years have presented unprecedented challenges and demonstrated the importance of a strong organization. Moving into another period of uncertainty, what are some of the areas that you've changed and doubled down on that will continue to aid in navigating tough waters?

That sets the stage nicely for our Investor Day in a couple of weeks. We have areas of ongoing improvement and progress, such as our innovation program, which has been consistently strong for over five years and is only getting better. There are also new developments that are exciting and present opportunities for margin improvement, particularly in supply chain transformation and modernization, which we will discuss in a couple of weeks. From a team perspective, our culture has remained remarkably strong throughout COVID. Our office has been open since June 15, 2020, and maintaining team cohesion is crucial because our work is spontaneous, iterative, and creative. Being together is essential for us to keep our innovation agile, and we will continue to strengthen this moving forward.

Great, thanks so much.

And this will conclude the question-and-answer session. I'd like to turn the conference back over to Melissa Napier for any closing remarks.

Great. Thanks to everyone for joining us today. Bayle and I will be around all day for any follow-up questions. And as Sean mentioned, we are really looking forward to our Investor Day in a few weeks. You can visit our Investor Relations page on our external website for more information about Investor Day as well as the link to register. Thanks, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.