Good morning, and welcome to the Conagra Brands First Quarter Full Year 2023 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Melissa Napier. Please go ahead.

Good morning. Thanks for joining us for the Conagra Brands first quarter fiscal 2023 earnings call. I'm here with Sean Connolly, our CEO; and Dave Marberger, our CFO, who will discuss our business performance. 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 these 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 filed 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. Good morning, everyone, and thank you for joining our first quarter fiscal ‘23 earnings call. Let's jump right in with what we want you to take away from our presentation shown here on Slide 5. Overall, Conagra delivered strong first quarter results. We had robust net sales growth across our portfolio, mainly due to the impact of our inflation-driven pricing actions coupled with ongoing limited elasticities. We continued to gain market share at the total portfolio level, particularly within our strategic frozen and snacks domains and drove solid profit improvement during the quarter. We also saw another strong performance from Ardent Mills, as effective management enabled the joint venture to continue capitalizing on volatility in the wheat markets. Our supply chain productivity continued to improve. However, we experienced some internal and external operational challenges during the quarter like many of our peers. These challenges led to both increased costs and inefficiencies, which more than offset the benefits from improved productivity and impacted our business in the quarter. I'll unpack this later in the presentation. We also continue to strengthen our balance sheet improving our leverage ratio during the quarter, while investing in our business and returning cash to shareholders. Finally, our solid start to the year reaffirms our confidence in the fiscal ‘23 guidance we announced last quarter. With that backdrop, let's dive into the results shown on Slide 6. As you can see, in the quarter, we delivered organic net sales of just over $2.9 billion, representing a 9.7% increase over the year-ago period; adjusted operating margin of 13.7%, which is down slightly compared to last year as a result of the supply chain inefficiencies I mentioned a moment ago; and adjusted earnings per share of $0.57, 14% higher than what we generated last year. Slide 7 breaks down our strong sales performance during the quarter. At the total Conagra level, retail sales grew by almost 9% compared to the first quarter of last year and just over 24% compared to three years ago. Our momentum continued as we gain share in the marketplace demonstrating the valuable connection our brands have with consumers. These share gains are most pronounced in our frozen and snacks domains, which increased share 0.8 percentage points and 1.5 percentage points on a one and three-year basis respectively. Diving further into our top-line performance by retail domain, you can see on Slide 8 that frozen generated a significant acceleration of quarterly sales growth on a one and three-year basis of 8% and 27% respectively. Clearly, our focus on catering to consumer preferences for convenience, quality, and great taste continues to resonate. Similar to prior quarters, this growth was led by key categories such as plant-based protein and single-serve meals which along with breakfast sausages increased sales by double digits compared to the first quarter of fiscal '22 while gaining market share from our competitors. Our snacks domain also continued to deliver strong sales growth on a one and three-year basis shown here on Slide 9. Compared to the first quarter last year, snacks retail sales increased 13%. And as you can see, we have delivered sustained growth versus the period three years ago, including 36% in the most recent quarter. In particular, we saw significant growth in sales of microwave popcorn, which increased more than 20% compared to the prior year. Our highly relevant staples domain also accelerated sales growth increasing 8% compared to the prior year and 15% versus three years ago. This was driven by strong performance in single-serve dinners and entrees, with toppings, pickles and canned tomatoes. Slide 11 highlights the relationship between price and volume over time. As I mentioned on last quarter's earnings call, we continue to take strategic pricing actions during the first quarter to help offset ongoing COGS inflation. As you would expect, pricing has driven some volume elasticities both for Conagra and the overall industry. This tends to be most acute in the immediate aftermath of new pricing and wanes over time as consumers adjust. As you can see at the bottom of this slide, our net elasticities have remained nearly flat over the past few quarters. These relatively modest elasticities both compared to historic norms and our peers are a testament to the strength of our brands. As we monitor the impact of our pricing actions on volume, we also look at the relative impact between branded foods and private label. As you can see on Slide 12, private label has increased its dollar share of certain categories on average since 2019, including a jump in share gains at the beginning of this calendar year. However, it's worth noting that those share gains are much more modest in the categories in which we compete. We're confident that the continued investments in our brands as part of the Conagra Way will ensure they continue to resonate with consumers. These important efforts combined with our limited exposure to private label will help us retain the market share we've gained during the pandemic. Before I turn the call over to Dave, I want to talk about Conagra's supply chain and both the improvements and inefficiencies I referenced earlier. As I said, our supply chain continues to make progress. Pricing actions we implemented in the quarter and over the last year were largely able to offset continued inflation and our service metrics continued to improve in Q1. While we're pleased with what we've accomplished to date, our supply chain is not yet fully normalized. We've continued to see some discrete inefficiencies pop up that resulted in higher costs in Q1. I'll give you two examples to illustrate this. In our Foodservice business, we identified an off-spec finished good issue while producing product for a customer. We disposed of the product and lost manufacturing time during our diagnostic. This pulled sales and gross margin below where they should have been. My second example is in our canned chili and beans businesses, where late in Q1, we found cans that were off spec. No product was recalled. And while production is now back up and running properly, the lost inventory effect will linger into Q2 impacting volumes and margins. The point is, these types of challenges can result in downtime needed to determine and solve the root cause of the issue as well as proper testing to ramp production back up. That lost time can result in higher costs and less production. Looking ahead, we're not expecting these discrete supply chain interruptions to disappear overnight as the external environment remains dynamic. But despite these transitory disruptions, we are making good progress in the supply chain with core productivity continuing to improve. Accordingly, we remain committed to our operating margin target for the year and to the productivity targets we announced at our Investor Day in July. In summary, we're off to a strong start in fiscal ‘23, fueled by robust top line growth as a result of inflation-driven pricing increases and muted elasticities. Operationally, we continue to make progress in our specific areas of focus. For the balance of the year, we're planning for the operating environment to remain dynamic. While we expect consumer response to our brands to stay strong, we are planning for this quarter's volumes to be impacted by the supply chain disruptions I just outlined and from our most recent wave of inflation-driven pricing introduced to the market in early Q2. However, as I covered earlier, we expect this elasticity to wane over time. And while inflation remains persistent, we are starting to see moderation in certain areas and anticipate relief for commodities as the year unfolds. Overall, we're off to a great start, but one quarter doesn't make a year and we remain focused on delivering for our customers and consumers. We continue to see a clear path to achieving the guidance we issued for fiscal ’23 behind the strength of our brands and ongoing productivity initiatives leading us to reaffirm those targets. With that, I'll pass it over to Dave.

Thanks, Sean, and good morning, everyone. I'll begin by discussing a few highlights from the quarter as shown on Slide 16. Overall, we are pleased with our start to fiscal ’23 and remain confident in our ability to achieve our full year guidance targets. We delivered strong organic net sales growth of 9.7% in Q1, reflecting the continued relevancy of our portfolio to consumers. Adjusted gross margin came in at 24.9% in line with expectations. Adjusted gross profit dollar growth was up 7.1% benefiting from higher organic net sales and continued progress on supply chain productivity initiatives, although supply gain operational challenges did impact our business as Sean referenced. The Ardent Mills joint venture continues to operate as an effective inflation hedge as favorable market conditions and effective management drove another strong quarterly performance reflected in the equity earnings line and contributing to adjusted EBITDA growth of 9.1%. Turning to Slide 17. The 9.7% increase in organic net sales was driven by a 14.3% improvement in price mix, a result of continued inflation-driven pricing actions. This was partially offset by a 4.6% decrease in volume, primarily due to the elasticity impact from those increases. The small headwind from the impact of foreign exchange was the final contributor to net sales during the quarter. Slide 18 shows the top line performance for each segment in Q1. As mentioned, we are pleased with the robust net sales growth and continued share gains across our entire portfolio, particularly within our domestic retail businesses. Our Grocery and Snacks and Refrigerated and Frozen segments achieved net sales growth of 10.5% and 9.6% respectively. The unfavorable impact of foreign exchange was reflected in the net sales decrease for our International segment. I'd now like to spend some time discussing our Q1 adjusted margin bridge found on Slide 19. We drove a 10.5% benefit from improved price mix during the quarter, reflecting previously communicated pricing actions. We also realized a 1.2% benefit from continued progress on our supply chain productivity initiatives, which is net of operational inefficiencies Sean discussed. These price and productivity benefits were muted by continued inflationary pressure with 15% gross market inflation impacting our operating margins by nearly 11%. Market-based sourcing had a negative margin impact of 1.6%. As commodity prices rose quickly last year, we benefited from locking in contracted costs that were lower than the market and have rolled off this quarter. As a reminder, even when commodity inflation eases, we will not immediately realize a benefit as our costs may remain higher than the spot market due to timing of contracts. This is transitory and a product of a dynamic operating environment. Slide 20 breaks down our adjusted operating profit and margin by segment. We were pleased that higher organic net sales and supply chain productivity drove increased adjusted operating profit growth across three of our four segments in Q1. The strength of our Grocery and Snacks segment stands out on this slide, with adjusted operating margin in the segment increasing by 90 basis points compared to a year ago. Although Refrigerated and Frozen operating margin was down 21 basis points in Q1, this segment's gross margins were better than Q4 gross margins, demonstrating gross margin inflection that we expect to continue year to go. Inflation, supply chain pressures, and elevated operating cost headwinds offset higher sales and realized productivity in our Refrigerated and Frozen, Foodservice, and International segments. Before unpacking adjusted EPS on Slide 21, I'd like to provide some context on the goodwill and brand impairment charges that impacted our reported numbers. During the quarter, we made the decision to reorganize the reporting structure for certain brands in our Refrigerated and Frozen segment. In connection with these changes and in accordance with GAAP, we conducted an evaluation of goodwill for impairment. Given the increases in the current interest rate environment, which has further increased from the rates we recently used in our standard Q4 impairment testing, a higher discount rate primarily drove the non-cash goodwill and brand impairment charges of $386 million for the quarter in reported SG&A expenses. The charges are not shown on the slide because they do not impact our adjusted numbers, but all reconciliations can be found in the tables at the back of this presentation. Our Q1 adjusted EPS increased $0.07 or 14%. Higher sales and gross profit, Ardent Mill's strong performance, and a slight benefit from adjusted taxes were the primary positive contributors to our adjusted EPS performance in the quarter. These positives were offset by higher adjusted SG&A from the comparison to lower incentive compensation in the prior year's first quarter, as well as lower pension and postretirement income and higher interest expense. You can see how we are continuing to strengthen our balance sheet on Slide 22. At the end of the quarter, our net leverage ratio was 3.9 times, down from 4 times at the end of fiscal ‘22. We expect to end fiscal ’23 with a net leverage ratio of roughly 3.7 times. Keep in mind that historically Q2 is a heavier use of cash quarter from a working capital perspective. So we expect progress on our net leverage reduction to be greater in the back half of the fiscal year. CapEx decreased by $30 million year-over-year to $125 million during the quarter, while free cash flow increased $138 million from negative $15 million in Q1 ‘22, partially due to the accelerated receipt of outstanding receivables as we capitalized on certain customer payment terms. We paid $150 million in dividends in Q1 fiscal ’23 an increase of $18 million compared to Q1 a year ago, highlighting our commitment to returning capital to shareholders. And we repurchased $50 million worth of shares in the first quarter, in line with our stated objective of offsetting dilution from our share-based incentive compensation plans. We will continue to evaluate the highest and best use of capital to optimize shareholder value as we progress through the fiscal year. Once again, we are reaffirming our fiscal ’23 guidance across all metrics given our strong quarter and expectations for solid performance for the balance of the year. Before opening up the call for questions, I want to walk through the considerations and assumptions behind our guidance. We continue to expect the inflationary environment to persist, but moderate through calendar year ‘23, which will result in a low-teens inflation rate for our fiscal year ’23 weighted towards the first half of the fiscal year. We also expect previously communicated pricing actions in light of these costs to become effective early in the second quarter, likely causing volume to decline. We recently communicated some additional pricing that will be effective in Q3. However, the magnitude will be smaller and more targeted than previous pricing actions. As always, we will continue to monitor inflation levels and prices as needed to manage future volatility. We expect CapEx spend of approximately $500 million in fiscal '23 as we make investments to support our growth and productivity priorities, with a focus on capacity expansion and automation. Finally, we anticipate interest expense to be roughly $410 million and pension and postretirement income to be approximately $25 million for the year, driven by the higher interest rate environment. Our full year tax rate estimate is approximately 24%. To reiterate, we are pleased with our strong start to the year and remain confident in our outlook for fiscal ‘23. Our ability to deliver solid results amidst such a dynamic environment is a testament to the hard work and skills of our team, the strength of our brands, and our execution of the Conagra Way playbook. Thank you for listening. That concludes our prepared remarks for today's call. I'll now pass it back to the operator to open the line for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Andrew Lazar from Barclays. Please go ahead.

Thanks very much. Good morning, everybody.

Hey, Andrew.

Good morning.

Hi. I've got two questions. I guess first off, have you seen any change in sort of volume trends elasticity or retailer reaction since the new pricing has come into play in 2Q, or since announcing the more targeted pricing for 3Q? And again, are you just sort of being, I guess, more prudent in the way you're forecasting your sort of volume and elasticity going forward? Just trying to get a sense if anything has changed that you see that we don't see like let's say in the data yet?

Sure. Andrew, here's how I think about elasticities. We had this material, and they are benign and stable. We kind of shared this concept of stable net elasticities. The way to think about that is, that is basically the combination of waning earlier pricing elasticities being offset by elasticities associated with more recent pricing. But the net effect is flat and benign elasticities this far into an inflation and pricing cycle; I view that as very, very positive news. As we mentioned at our Investor Day, our elasticities have consistently been better. And by that, I mean more benign than our peers, and that reflects the strength of our brands and the important work we've done to modernize our portfolio. Now as you look ahead, and this may be nuanced, but it's an important nuance, at this point, given how stable our elasticities have been, I expect continued strong elasticity coefficient, but we are pricing more of the portfolio. So those coefficients apply to a larger volume base, which is why we've planned for some incremental volume weakness. It's not that the elasticity coefficient has changed; it's that that benign elasticity is now being applied to a broader piece of the portfolio. So that's why as you look at in the industry, as you look at competitors that have pricing and dollar sales that go from plus 7% to plus 14% to plus 20%, you're going to see volumes move directionally along with that. But what you've seen in our company and more broadly is that the volume effect is quite modest compared to anything that we've seen historically. And I think most importantly, it's been very stable from an elasticity coefficient standpoint.

Great. Very helpful color. And then, I guess, I want to go a little bit deeper on gross margin. It's improved sequentially, I think, for the past sort of five quarters. I think you had previously said that fiscal 1Q was really the quarter where Conagra would see the largest sort of mismatch, right, between pricing and cost of the year in ‘23. So I guess, could we see gross margins start to expand year-over-year starting in fiscal 2Q, as the Street still has lower gross margins year-over-year? And I guess if not, why would that be? I understand some of the operational issues, but you had some of those in 1Q, but margins still came in better than the Street was looking for. So any color on that I think would be helpful because again, we're trying to get a read on for you and the industry sort of the timing around the potential for actual margin recovery as opposed to just covering the sort of the dollar cost, if you will?

Yeah. Let me tell you how I think about kind of margins overall, then Dave getting a little bit more of the detail here. But margins are heading in the right direction, and we expect that to continue. But it's not necessarily a straight line because obviously the external environment remains dynamic. If you think about last quarter, we saw year-on-year margin expansion in Grocery and Snacks and Foodservice. This quarter, we gave a little of that back in Foodservice due to the transitory operational issue I discussed a few minutes ago, but we made good progress in Frozen and Refrigerated. Plus core productivity is in a good place. So you take all of that and couple it with strong brands, broad-based pricing, and benign and stable elasticities that I just mentioned. Overall, I'd say it bodes well. Dave, do you want to build on that?

Yeah. Sure. So, Andrew, we don't give specific quarterly guidance, but we do expect sequential improvement in gross margin and operating margins moving forward based on the assumptions we have now. We expect the highest percentage of inflation for the fiscal year in the Q1 we just delivered. So we expect the percentage will moderate moving forward. We're seeing the full magnitude of pricing from fiscal ’22 in the quarter, but we also took pricing during Q1 and we've taken additional pricing at the beginning of Q2. So we will see the full impact of that starting in Q2. And we also expect to see some gradual improvement in our net productivity as the supply chain and service levels continue to normalize. So all those things give us confidence that we'll improve our margin sequentially moving forward.

Thanks very much.

The next question comes from Ken Goldman from JPMorgan. Please go ahead.

Hi. Thank you. You reiterated your outlook for low-teens COGS inflation this year. I don't think it was expected that you’d alter this outlook. But, Sean, you said you're seeing some maybe initial relief in some areas; and we can surely see that chicken and pork prices have dropped, and those are two areas that were troublesome for you in the past. So I guess I'm curious, as we think about some of the COGS tailwinds, are there any other key drivers that have become more difficult, I guess, recently that would offset that? I guess I'm asking in a nutshell, are you more optimistic or pessimistic about cost inflation in general for the year than you were a quarter ago? Thank you.

Ken, I'll make a brief comment and then pass it to Dave. We're noticing some signs of improvement in certain commodities, which is encouraging. We've been in an inflation cycle longer than we anticipated, and it has lasted longer than expected. However, I see some promising developments emerging. That said, when there is a contraction in certain commodities, the contracts may not cease immediately when we start receiving favorable news about the future. This negative sourcing aspect is simply part of reaching the end of such cycles. On the bright side, I am pleased with how our purchasing team has handled this situation; as we approach the end of an inflation cycle, it's important not to overcommit. I believe the team has done a commendable job in this regard. Dave, do you have anything further to add?

Yeah, for sure. So regarding inflation, Ken, Q1 came in largely in line with the art market estimate that we had, which that's the first time that's happened in several quarters, right? The market has just continued to be very volatile. So we like to believe that that's a proxy for a little bit less volatility moving forward. The inflation estimate for the full year is still low teens. So that's a double-digit number off of two years of very high inflation. So it's not like we're in a deflationary environment. But we feel like that we use our market indicators; we feel like that we've adequately estimated and planned and built some conservatism into our forecast for this. So, listen, the last year and a half has told us that things can change very quickly. But based on Q1 coming in where we thought based on our forecast, based on procurement that Sean just talked about with a very strong team, as we sit here today, we feel good about our estimates and how it will affect each quarter going forward.

Thank you. I have a quick follow-up. One of the more pessimistic views on the industry is that as your customers' consumer base begins to weaken and vendor gross margins improve, some retailers may start to demand more from you and your competitors, possibly in the form of increased promotions or in-store advertising. We have not seen any signs of this occurring, and your comments today suggest you haven't seen it either. However, I'm interested to know if you have heard any discussions in the industry or within your categories about competitors becoming more aggressive on pricing and promotions, or if your customers are pushing back as list prices continue to rise. The data doesn't seem to indicate such trends, but as Andrew mentioned earlier, sometimes data doesn't provide the complete picture. Thank you.

Yeah. Ken, I think the two most common words I've heard from customers in the last year plus is supply sureness. That is the priority. Making sure that we can continue to get our service levels moving in the right direction so that they've got the products in stock. They don't want to go through out of stock, especially now as we're about to enter the holidays; that's a particularly sensitive period. So if you think about it with the supply chain not yet fully normalized across the industry, I think the last thing anybody wants to do right now is to pour fuel on the fire and exacerbate inventory issues, out-of-stock issues, things like that. So I think the environment remains pretty rational right now, and I have no reason to believe that's not going to continue for the foreseeable future.

Thanks so much.

Thank you.

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

Hey. Good morning, folks. Thanks for squeezing me in.

Good morning.

You mentioned service levels still subdued. Can you give us an update on where they stand and how that compares to where you were maybe last quarter?

Service levels have improved significantly, which is very encouraging. While the situation is better, we need to recognize that improvements vary by category. During the peak of COVID, some companies experienced service levels dropping to the 50s, but recently, many have recovered to over 90%. Some categories are still experiencing high demand, and we wish we could produce and sell more of certain items. Overall, the supply chain is showing clear signs of progress, both within our company and across the industry. Service levels have notably improved, and core productivity is on track. However, there are still challenges, as you may have heard. The external environment remains fluctuating, which is why we believe it’s wise to adopt a cautious approach looking ahead. As mentioned regarding Q2, we plan to implement some additional pricing across our portfolio, which will have a minor impact. We anticipate that supply chain challenges will persist for some time, and we believe this is the best strategy as we approach the end of the year. Overall, service levels are indeed making significant strides.

And Sean, as you continue to improve, would you expect promotional activity to improve with it?

I think we're quite a ways from that. If you look at our volume base, the percentage of the total volume that is promoted is one of the lowest levels in the industry. This has been a deliberate part of our strategy, but we're not opposed to promotion. We do promote certain brands at specific times of the year because it drives incremental volume. For instance, the work we do around holidays is important; if you're not promoting during holidays, you risk missing sales, and we want those sales for their strong return on invested capital. We have become very focused on selectively pursuing promotions with a high return on investment, and we’re currently at record lows in this area. At some point, that will increase modestly, but I do not anticipate any material change.

Understood. Makes sense. Thanks for your time. I’ll pass it on.

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

Thanks, operator. Good morning, everyone. I have two quick questions. First, could you provide some insight into the challenges mentioned regarding Foodservice, specifically with chili and beans? Could you clarify the extent of the impact on volume or revenue, as well as margins? I'm trying to understand how much better the situation might have been without these issues.

Sure, Bryan. I'll address that. Looking at our margin bridge presented in the deck, we saw a realized productivity in other COGS of plus 1.2%. Clearly, those two issues had an impact. While I won't specify an exact amount, our target for core productivity in that category is around 3% of cost of goods sold, which translates to about a 2.2% margin improvement. We achieved 1.2%, indicating about a 1 percentage point impact. It's important to note that this wasn't solely due to what Sean mentioned; we faced additional factors like absorption and other challenges. Sean highlighted a couple of examples that contributed to the headwind against our core productivity figure. We're encouraged by the core productivity in the plants and are making significant headway, but some of these isolated issues, which we consider temporary, are affecting that number.

We are aware of the markets you are monitoring to assess our progress, and an important aspect for all of us is our margins. Last quarter, I mentioned that we initiated a collection procedure on two of the four segments a year ago. At that time, we indicated that we expected positive changes in the other two segments as the year progressed, which we still believe. However, we did lose some ground in Foodservice during the quarter. While Foodservice is a small part of our overall portfolio, the issues that arose in this segment had an impact. This is why we are seeing some fluctuations. There are specific causes that emerged unexpectedly, and we don’t want this to be interpreted as a sign of broader systemic issues in Foodservice; we didn’t lose ground for underlying reasons. The situation is related to the specific instance we described in the prepared remarks.

Okay. And then just one other follow-up is just given the recent Hurricane Ian in Florida and the impact there, anything that we should be thinking about with regard to, I guess, this quarter, either pull forward of sales or any impact on operations? Just anything we should be thinking about there?

Bryan, I don't think so. That's a really tough one to call because obviously, some people, unfortunately, are not in a position where they can shop right now or their stores might be closed. And so you can argue that there might be miss sales because of that. By the same token, maybe their pantry inventories were obliterated and have to be replenished in the future. So it's just too early to know exactly what that looks like. And in the scheme of the whole national business, I don't anticipate that, that would be a material disruption one way or another. Dave, do you want to add?

Yeah. And just the last part of that, there was no material impact on our operations as a result of the hurricane.

Okay. Thanks, guys.

Thank you.

Thank you.

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

Hi. Thanks for the question. Actually, a few small ones. Was there any benefit from reloading inventory in the quarter? I think you mentioned it as a headwind inventory de-loading and forth, so I want to know about that. Also, I took a peek at 2Q last year. It looks like there was a pretty sizable hedging benefit, maybe 200 basis points in 2Q last year. Do you think that will be a 200 basis point headwind this year as a result of the duration of hedges?

Sure, I'll start. Sean, feel free to add anything. Regarding your first question, Rob, we have been shipping in line with consumption. In Q1, we shipped slightly more than consumption, but compared to Q1 a year ago, we shipped a bit less. Our days of supply with retailers and their inventories match what we've seen in previous years and align with our expectations. We don't see any major issues with retailer inventories at this time; we're in the desired position and essentially shipping according to consumption, so there’s no significant loading or deloading happening. For your second question, as highlighted in our first-quarter results, we did experience negative sourcing due to favorable contracts expiring, and this will continue. This is factored into our estimates. We account for market inflation and the timing of when contracts or hedges end in our forecasting. While I won’t provide a specific number as you requested, this is our general approach to forecasting and planning for the full year.

Okay. Just a quick follow-up maybe for Sean. I think the plan is to increase A&P spending this year, but it was flat in the first quarter. Is anything getting shifted into the next three quarters?

Let me start that, Rob, and then I'll hand it over to Dave. I believe you're asking if we have a solid plan to support our brand-building activities, and the answer is definitely yes. Our dollar sales over the past 52 weeks compared to three years ago have increased by over 19%, while volumes during that same period have remained relatively flat despite significant pricing adjustments. The brand support we have in place is robust. For those who did not watch our Investor Day presentation, I recommend checking out Darren Serrao's insights on our approach to brand building, as advertising and promotion is just one aspect of it. That was very informative. Now, Dave, could you elaborate on how our A&P spending has developed in Q1 and the outlook for the remainder of the year?

Yeah. Sure. So we had given guidance that we expect A&P will grow above our organic net sales for the full year. So this is a timing thing. We expect A&P will ramp up year to go. If you just look at where we came in at Q4, if you look at A&P in Q1 versus Q4, we're up $16 million or over 30% just on a kind of sequential basis. So we expect A&P to ramp up year to go.

Thank you.

The next question comes from Cody Ross from UBS. Please go ahead.

Hey. Good morning. Thank you for taking our question. I just want to go back to your pricing actions that you noted to be effective in 3Q. Can you just describe how much is it, what parts of your portfolio it is in, and then how much is locked in at this point?

Hey, Cody. It's Sean. We're not going to share the specifics about the pricing for competitive reasons, but these pricing actions are targeted and focused on certain parts of the portfolio, rather than being applied broadly. We have significant pricing changes occurring now in Q2, with more targeted actions anticipated later. We’re not sure what will happen after that; if necessary, we'll implement further changes, but that's our current strategy. The positive takeaway, as I mentioned earlier, is that the elasticity coefficients remain unchanged. They are stable and low overall, which is encouraging considering the numerous pricing adjustments already implemented in the market. These coefficients reflect how consumers are responding to our brands, and we are not seeing any shift in sentiment. The changes in volume are due to the pricing affecting more parts of the portfolio, which will have a mild impact. However, until the previous pricing elasticity decreases, it will continue to build. This is how the dynamics of pricing and elasticity work; they rise and fall. The stability in net elasticity coefficients is a very encouraging sign.

Thank you for that. And then just one quick question on SG&A. SG&A ex-A&P was up 10% or so. It looks like incentive comp drove about 8% of that. Is that correct? I mean how should we think about SG&A and incentive comp for the remainder of the year? Thanks.

Sure, Cody. I’ll address that. As we mentioned at the start of the year, we anticipate that our SG&A will rise at a faster rate than our sales. We were clear about this. Incentive compensation for fiscal '23 will be higher compared to fiscal '22. There was also a timing consideration for the incentive compensation in Q1, which contributed to a 10.5% increase in adjusted SG&A for that quarter. A portion of this increase is due to the timing of incentive compensation, while some is attributed to a straightforward rise. However, we have clarified that we expect SG&A to grow at a rate surpassing sales growth for the entire fiscal year '23.

Great. Thanks. I’ll pass it on.

Thank you.

The next question comes from Chris Growe from Stifel. Please go ahead.

Hi. Good morning.

Good morning.

I have a question regarding pricing. You mentioned additional price increases in the second quarter and some smaller targeted increases in the third quarter. At that point, will your pricing fully counteract inflation? Might that happen sooner due to the wraparound effect of pricing? I would like to understand how this will progress throughout the year.

Certainly. Our approach to pricing has been based on justifiable inflation. When we implement price increases, they are directly linked to the inflation we are experiencing, and we have acknowledged that there has been a lag. The price increases from Q1, those we implemented at the start of Q2, along with the smaller, more strategic increases we've planned for Q3, are all related to this inflation. At this stage, considering the inflation we have recognized and projected, we have cumulatively offset that inflation. The consumption data reinforces this; if you compare total dollar consumption over the past 52 weeks to three years ago, our dollar consumption has increased by nearly 20%, while our volumes have remained mostly flat. This indicates the type of pricing trends we are observing in the market, which aligns with the cost inflation we're encountering. Thus, the consumption data supports our overall recovery.

Thank you for that. I have another question regarding some of the supply chain and operational challenges the industry is facing. Many companies seem to be experiencing fewer issues this year compared to last year, although there are unique factors that may vary. I would like to understand if the challenges you mentioned this year are more significant than last year. Additionally, in terms of your current gross margin, what are those operational challenges, and how much are they impacting your gross margin today? What improvements do you anticipate as supply chain operations stabilize?

Chris, it's Sean. I'll address the first part and then let Dave talk about its impact. This is a situation where people in my position need to be cautious not to hope for too much. Some disruptions occur unexpectedly and can resurface even when you think things are improving. We can experience periods where these issues seem to decrease in frequency, which is encouraging, but then new challenges can arise again. This is the nature of the friction we encounter. I want to be clear that I don’t believe these issues will disappear quickly. From a planning perspective, we assume they will continue to occur. However, we are closely monitoring to see if the frequency of these occurrences is indeed decreasing. We don't want to get ahead of ourselves, but that is what we are hoping for. Dave, would you like to add anything?

Sure, Chris. Referring back to what I mentioned in response to Bryan's question, looking at our margin bridge is a good starting point. For Q1, our realized productivity and other costs of goods sold increased by 1.2%. Our target for realized productivity is 3% of cost of goods sold, which translates to a 2.2% improvement in margin. We achieved 1.2% of that target, meaning we are 100 basis points short of having all that realized productivity contribute directly to our bottom line. There are additional investments that we typically make, and the issues Sean mentioned accounted for that 100 basis points of headwind. Moving forward, we expect to see improvements as conditions stabilize, so that’s the approach to consider.

Okay. I should appreciate that. Thank you.

The next question comes from Nik Modi from RBC Capital Markets. Please go ahead.

Good morning, everyone. Sean, I appreciate your efforts in managing pricing, but when reviewing the household penetration metrics, it appears that some of your larger brands are performing below pre-COVID levels. Could you provide some insight into your plans for improving household penetration in this inflationary environment? Additionally, are you concerned that the price differences have decreased between certain frozen prepared meals and quick service restaurants, given the rising inflation in off-premise dining compared to on-premise?

First of all, regarding the second point, I have no concerns about that. The pricing comparison between eating out and dining at home continues to strongly favor at-home options. We haven't even officially declared a recession yet, which contributes to the stable elasticities we are observing. Consumers are currently perceiving a much better value in eating at home rather than going out. In certain categories, such as frozen single-serve meals, there really isn't a significant trade-down option. We offer a range from value to mainstream to premium products, and the business remains robust. Concerning household penetration, I noticed your recent research. It's important to consider seasonality when analyzing this metric, as it can vary significantly by company, category, and season. Therefore, it's crucial to make apples-to-apples comparisons. In the context of the current pricing cycle, we expect to see some short-term impacts on household penetration as consumers hold off on purchases. This trend is evident in shopping data, where consumers are making fewer larger trips and postponing purchases, leading to a slight decline in their buying rate. Overall, we are not seeing any noteworthy concerns regarding household penetration at this time.

Great. Thanks for that perspective.

The next question comes from Pamela Kaufman from Morgan Stanley. Please go ahead.

Hi. Good morning.

Good morning.

I wanted to follow up on your pricing plans for the upcoming quarters. Can you clarify if those were included in your initial guidance at the start of the year? Additionally, how has your outlook for organic sales changed this year compared to last quarter? Do you still anticipate a low teens price mix, or will it be higher now? Are you also expecting softer volumes compared to your initial expectations?

Yes, Pam. Regarding the pricing we're implementing, we don't set prices until we see clear signs of inflation. It needs to be justified by inflation for our customers. The decisions we're making for the latter half of the year weren't finalized at the start of the year when we provided our guidance. However, there have been some favorable developments in the first quarter as well. If we keep experiencing new inflationary pressures, we will adjust our pricing further and keep you updated on the timeline, accounting for any delays. This trend will persist. Dave, do you want to...

Yeah. Just to build on that. So the Q1 and Q2 was in our guidance and in our forecast. Q3 no.

Got it. Okay. Thanks. And then just in terms of your guidance, Q1 results were ahead of consensus expectations, but curious if they were in line with your forecast and wondering why you maintained your full year guidance despite the upside in the quarter.

Yeah, Pam. Clearly, Q1 was a strong quarter, and that's good news, but it's still early. The environment remains dynamic, and we just prefer to get a bit further into the year before we make any new declarations about how we expect to finish the year.

Okay. Thank you.

Thanks.

The next question comes from Carla Casella from JPMorgan. Please go ahead.

Hi. Thank you for taking my question. It seems that your leverage will still be in the high 3s range by year-end. I'm curious if, on the M&A front, you plan to wait until you bring your leverage down to your target range, or if the right acquisition arises, would you consider temporarily increasing your leverage? What are your thoughts on M&A, and do you have any plans for asset sales to balance this if an appropriate opportunity comes up?

Sure. This is Sean. I'll take the question. We've been very focused on reducing our debt and deleveraging on schedule, and we will continue to prioritize that. I'm confident in the commitments we've made. Regarding mergers and acquisitions, we don't have anything specific to share at the moment, and we aren't currently looking at any large deals. Our main focus remains on deleveraging. However, we always keep an eye on smaller opportunities that could benefit our business in the future. There’s also a defensive reason for this; we want to ensure that valuable assets that could help us don’t end up with competitors. So, while we’re always looking, our primary goal is still on reducing our leverage. That's how I would summarize it.

Thanks a lot. Have you mentioned the time frame for achieving three times your target?

No, we didn't provide a specific time frame as it's a long-term target. We mentioned in the prepared remarks that we estimate leverage will be around 3.7 times by the end of the fiscal year.

Okay. Great. Thank you.

Thank you.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Melissa Napier for any closing remarks.

Thank you very much to everyone for joining us this morning. Investor Relations is around if you have any follow-up questions.

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