Good day and welcome to the Conagra Brands Third Quarter Fiscal Year 2024 Earnings Conference Call. Note, this event is being recorded. I would now like to turn the conference over to Melissa Napier, SVP, Investor Relations. Please go ahead.

Good morning. Thank you for joining us today for our live question-and-answer session on today's results. Once again, I'm joined this morning by Sean Connolly, our CEO; and Dave Marberger, our CFO. We may be making some forward-looking statements and discussing non-GAAP financial measures during this session. Please see our earnings release, prepared remarks, presentation materials, and filings with the SEC, which can all be found in the Investor Relations section of our website for more information, including descriptions of our risk factors, GAAP to non-GAAP reconciliations and information on our comparability items. Operator, please introduce the first question.

The first question today comes from Andrew Lazar with Barclays.

I guess, Sean, based on scanner data, most expected some upside in grocery and snacks and maybe a bit more weakness in refrigerated and frozen. This dynamic was certainly more extreme in the quarter than many had modeled. So I guess in Grocery & Snacks, Conagra had about a 4% benefit from price mix and that was well ahead of what we thought. So curious kind of what drove that. And then in Refrigerated & Frozen, you talk about success in single-serve meals but trying to corroborate how we sort of marry that with the 8% organic sales decline in that segment and maybe that's more of a function of refrigerated versus frozen in some way. So those two aspects would be really helpful.

Yes. Let me unpack all of that for you, Andrew. As I said in the prepared remarks, things unfolded very much in line with what we expected. And as you heard us say, our investments in frozen have driven a nearly 7-point swing in our scanner volume from Q1 to the most recent 4 weeks, where volume came in down a fairly modest 1.2%. So very strong progress in frozen overall, which is important because that's been the focus of our investment. What you're seeing, and the reason for the optics being a bit confusing, is the reason the Refrigerated & Frozen segment in total numbers don't show the same magnitude of inflection is noise in the refrigerated part of the business, which was, by the way, also consistent with what we anticipated. Recall, our refrigerated businesses are predominantly pass-through categories and one of the rare areas in our portfolio where we've actually experienced deflation and rolled back prices accordingly as pass-through categories do. While that creates some short-term volatility in dollars until it's in the base as deflation passes through. Importantly, margins are preserved due to the lower COGS. The other dynamic that I'll point out there in Refrigerated & Frozen is, in addition to that piece, our table spreads business benefited in Q3 a year ago due to a large competitor having a particularly weak quarter due to supply chain challenges. So that's kind of some color on Refrigerated & Frozen and why the divergence between frozen and refrigerated. With respect to Grocery & Snacks segment, we also expected a solid quarter in the Grocery & Snacks segment, and we got it. And there were several factors there from pricing in tomatoes to bounce back in canned meat like chili, Vienna sausage, where you remember we had a recall in the year-ago period but also strong innovation like our new Wendy's Chili, where we've grown significant market share. Overall, our grocery brands are great consumer options for people seeking to make convenient meals at a great value. It's also a good mix for us. But I think the big picture is that one of the benefits of a scale, diversified portfolio is that, as they say, there are horses for courses. So you're inherently hedged when the macro environment is less stable than normal. Big picture for us. I like the volume momentum we saw in Q3. I like what I've seen so far in Q4, and I expect further progress from here.

Got it. And then I guess just lastly, obviously, volumes in the quarter were still down but a sequential improvement. So I guess you kind of talked to this a little bit but how would you characterize the current volume momentum? And would you expect volume trends to inflect positively by the time we get to the start of FY '25? Or are dynamics still such in the broader industry that it's a little bit hard to peg right now?

Well, it's one of the reasons why we're looking at this so closely. It's one of the reasons why I referenced the most recent 4-week scanner data in frozen being down a mere 1.2. We obviously are seeing and expect to continue to see further progress. We're not going to draw the line in the sand and say this is the month, this is the day where it's going to cross over. Next quarter, obviously, when we give FY '25 guidance and have our annual operating plans fully rolled up, we'll give you that color. But it's moving in the right direction; that's the bottom line. I mean this is a food thing; everybody wants to see volumes go in the right direction. I think companies and investors are willing to see investment in order to do that. But what I think people want to see overall is can you hold your gross margins while you're making those investments and getting the volume results that you want to see. And that's what was particularly encouraging to me in the quarter; we pretty much got the investments we intended to make, we've got the volume improvements that we wanted to see, we've got continued volume progress into Q4; and we've done all this while maintaining even expanding gross margins that we worked very hard to claw back after the initial compression from all the huge inflation we experienced a couple of years ago. So that, I think, is a positive and I think it foreshadows just continued momentum from here.

The next question comes from Ken Goldman with JPMorgan.

Just wanted to ask a quick question about Q4. Your implied guidance might suggest around minus 2% in organic sales growth. It's pretty similar to what you posted in Q3. Some might say it's a little prudent though. Just given you do have an easier comparison, both on 1-, 2-, 3- and 4-year basis, just looking that through, you have the lapping of the Americold issue. So I'm just curious if it's right to think that's a little bit prudent? Or are there maybe some offsets to that, maybe a little bit of less of a help from mix perhaps, just throwing that out there? Just trying to get a bit of color on those building blocks as you think about that.

Ken, I'll just provide a brief overall comment before passing it to Dave. After the last nine months of extended volume recovery, our approach has leaned towards being cautious due to the more volatile macro environment than anticipated. That's our current stance, which is why we did not include anything overly optimistic in our plans for the second half of the year. I believe this cautious approach will persist until the macro environment shows more consistent improvement. Overall, things are heading in the right direction, and I think we are well positioned for Q4. Dave, would you like to add anything to Ken's point?

No, I think you pretty much hit it. I mean, Ken, we're expecting sequential volume improvement and we've been talking about that and we've seen it through, but we also expect to continue investing. So obviously, both of those things impact the top line and you referenced mix. We do have mix impacts in this portfolio and they can be slightly positive or slightly negative any quarter. So as Sean mentioned, we want to be prudent but they are the three key drivers that get us toward the low end of the sales guidance range for the year.

Yes. And just also to think about it this way too, Ken, is our fiscal ends in May, which is kind of an odd month. But what's happening for us in May is our new innovation is rolling into the marketplace. We are focused at that point of the year, always on the next fiscal year and how do we build momentum in the next fiscal and peak events like Fourth of July, back to school. And so we're really getting so late in the year now that a lot of our attention is focused on getting these annual operating plans finalized and trying to set up next year to be as strong as possible, including around key dates and holidays and things like that.

And then while we're talking about next year, I realize it's too soon to provide any kind of quantitative numbers; I wouldn't ask for them, or quantitative information rather. But at CAGNY, you said you're doing what you can to be as close as possible to be on algo. And I was just curious where your level of confidence on that topic stood today? How you're thinking about maybe balancing what might continue to be a challenging consumer environment, I guess, with maybe what also could be some friendly top-line comparisons, progress on cost savings, cash flow and so forth. Just trying to think directionally how you guys are thinking about that now?

Well, you're 100% right. We will give you our complete and total view of fiscal '25 on our next call. I think for this call, the key messages to our investors are we are getting momentum on the volume line. We are moving kind of toward that Mendoza line here that everybody wants to see us cross over at some point. Exactly when that happens, as you've heard from other companies, I think you'll get more perspective on that in the coming months as people finalize their plans. That will be true of us. But make no mistake about it, we've been watching the consumer for their readiness to kind of re-establish their typical behaviors. We've said we're willing to kind of nudge them along if we see that readiness. We've been methodical in not only monitoring their readiness but putting the investment out there to nudge them and measuring the response very carefully. We're getting a good response; we're getting close. It's not as if the momentum is slowing; if anything, it has accelerated in the last quarter. So I think all I can say at this point is I like the setup. We just have to continue to do more of what we've been doing, continue to drive it. This is that mindset of volume is important, but so is protecting margin. And that's one of the things in our materials today that you saw is why our supply chain team is so important. That work we've got going on in supply chain to really maximize cost savings provides critical fuel for growth, and we expect that to continue. Over the long haul, that's how we're going to drive volumes back positive again. We got really tremendous stuff going on in supply chain with cost savings right now. As you saw in our Chief Supply Chain Officer, L.A. Ely's presentation at CAGNY, we are on track to implement our connected shop floor program in half our facilities in the next couple of years. That is outstanding performance overall. If you look across the industry, that's a leading position in the industry and that will be key to margin expansion going forward. So we're very excited about that work and the legs that it still has in front of us.

The next question comes from David Palmer with Evercore.

A question on Frozen. I'm curious, particularly on the frozen entrees, what are your thoughts there about a return to growth in sales in that business? And if there's any sort of juxtaposition that you would make between frozen entrees and frozen vegetables and how you view the challenges and opportunities for each in returning to growth?

Sure. David, you saw in the presentation today that in Q3 of '24, our frozen single-serve meal business achieved over a 51% market share, which is up 1.7 points versus a year ago. If you remember Tom McGough's comments from CAGNY, we have just become the leading frozen food producer in the United States, largely because of the success we've had in frozen single-serve meals over the last 5 years. Our performance there continues to be stellar, and we continue to gain share. By the way, I've made the comment many times that we under-index as a company in terms of competing with private label. Nowhere is that truer than in frozen single-serve meals. For example, the entire size of private label in frozen single-serve meals is 1.8 points. Our business is at 51.2 points of market share. Our growth in unit market share in the last quarter was 1.7 points, which is almost the total equivalent of private label. We like our position and our market and the market structure there. We like our brands and we feel great about it and it's been a growth juggernaut for us for the last 5 years and I see no reason why that won't continue. In terms of Birds Eye and vegetables, earlier in the year, we saw consumers exhibit value-seeking behaviors. For example, we saw some trade down from fresh and frozen vegetables to canned vegetables despite the obvious quality trade-offs. Birds Eye is also one of the businesses that we are investing against with a clear focus on the superior relative value of frozen vegetables versus other choices. The advertising we're running now is directly comparative, as I mentioned to you previously and features the clear benefit of our Stay Fresh flash freezing process, which basically freezes time for the consumer and keeps our vegetables at the peak of freshness until the consumer is ready. It's a clear advantage. In the most recent 4 weeks of scanner data, Birds Eye grew overall share even though our focus is really on the value-added tier. So we've got investments there, we've got momentum there and it's an important brand. You're not going to see us slow down on the marketing support and the innovation front.

I just wanted to follow up on Ken's question. Maybe one way to ask is how you are going to be really reviewing your business in the coming months as you contemplate how you're going to be guiding fiscal '25? Is it simply just volumes getting closer to flat overall in the business? Or are there any areas of the business you would be particularly focused on that will really help you think about how you guide for '25?

Well, I think the way I think about it principally, David, is we are an ROI-minded management team. We are not bashful about putting investments out there to support our brands if they drive the impact that we want to see in the marketplace, which in turn drives the return on investment. So where we are in our typical annual operating planning process is brand by brand, looking at the market fundamentals on what's happening within the brand dynamics, the competitive dynamics of the category, what do we know about the need for those consumers in those categories to have some kind of stimulus to kind of nudge them back to their normal behaviors, and what kind of lift can we expect. We do that on a brand-by-brand basis and that ultimately leads to our investment profile. So we're in the midst of that right now. We've obviously run a lot of what you might consider to be test markets starting in Q2 in terms of those investments and understanding what those ROIs are. We're racking it up right now. But what's encouraging is we are seeing responsiveness and we are seeing good ROI, and I think that bodes well going forward.

The next question comes from Chris Carey with Wells Fargo.

One thing that did stand out was that the inflation impact to margins did get a little bit worse quarter-over-quarter. Can you just expand on that if that's driven by commodities, non-commodities? I think you mentioned tomatoes with respect to some incremental pricing. Just any context on what is driving that and if there are any nuances.

Yes, I'll briefly comment on that, Chris, and then hand it over to Dave. While inflation has slowed, we are still experiencing an overall inflationary environment, and some recent increases have necessitated price adjustments. This brings its own challenges, as there is a lag effect involved. We have previously discussed how this operates. Essentially, when new inflation occurs, we implement new pricing which creates a temporary margin pressure until the adjustments are fully reflected. After that, there tends to be a quick turnaround. That could be part of the situation. Dave, would you like to elaborate further?

Yes, just a little color. Our inflation rate as a percentage of cost of goods sold for the quarter was 2.9%, which drives the 1.9% margin impact that you see in the materials. We are still on track for we said full year approximately 3%. We're still on track for that, maybe a tick above that. The inflationary areas you mentioned, tomato, as we talked about that, we've taken pricing. That was a big driver of the price mix in Grocery & Snacks for the quarter. We've also seen inflation in vegetables, differences in ingredients and sweeteners, and starches. We have some inflationary areas. These things ebb and flow. We still have inflation in our manufacturing operations, both with our labor and overhead, and transportation is relatively flat, a little bit inflationary. So we're pretty much in line. It is slightly higher but generally, we're managing it to the full year expectation.

Okay, perfect. Just and then a follow-up regarding the comment on pricing, just you mentioned tomatoes among other things in the Grocery & Snacks business. How would you characterize the positive pricing there in the quarter? Was that due to your anomalies in the base period, anomalies in the quarter itself? Or are we looking at what appears to be a more durable positive price mix for that division from here on with new pricing or lingering pricing that is now being fully reflected in the P&L. Thank you very much.

Yes, I mean we obviously got the biggest benefit from the tomato pricing and we saw the expected benefits there. The elasticities were good and in line with what we expected. We also had a benefit of mix in the quarter. So our price/mix which was a little over 4% for the quarter, we did get a benefit of mix which contributed as well. Many of our businesses in Grocery & Snacks are progressing as we expected, and so that's driving a good mix for us. That was part of the equation as well in the quarter.

Next question comes from Alexia Howard with Bernstein.

Okay. So can I ask to begin with just about the productivity improvements in the food service channels? It seemed as though they were particularly strong this quarter. Is that likely to continue going forward?

It was definitely a strong margin performance for food service. There's been a little bit of weakness in traffic in food service but I'd say overall it was a very good quarter. I think that is just an example of the productivity and total cost savings performance we expect across the portfolio, Alexia. Food service has opportunities, but we've also got opportunities across the international business and the retail business in the U.S. as well. So we expect strong continued cost savings performance across the total portfolio.

Great. And then can I just hone in on private label in the frozen vegetable area? There seems to be some confusion out here about whether private label is becoming more of a problem just broadly or whether it's actually still fairly contained. Is there anything that you're seeing in frozen vegetables or more broadly that would suggest it's becoming more of an issue? Or is it really that the supply chain challenges have been overcome on the private label side but there doesn't seem to be any major red flags or anything on the horizon?

Yes. Let me frame that up for you. So you've got the big picture of how that works. Overall, as a company, we under-index versus private label. That is obviously category-specific. Some categories have more private label. A good example is canned tomatoes, where you basically have Hunts, private label, and then some kind of regional brands that are smaller in the area. One of the other categories where there is a larger piece of private label is frozen vegetables. But as you think about vegetables more broadly, vegetables are sold frozen, they're sold in the produce section, and they're sold in the canned food section in the center of the store. There's been a lot of movement between that as value-seeking behaviors have been out there. About 6 months ago, we saw some trade out of frozen into canned and we're seeing that come back. Within frozen vegetables, Alexia, there's the commodity vegetable tier, the premium steamer, and then value-added tiers. For the last 2 years, we've been focused on building our business and our innovation pipeline in the premium value-added space and actually pulling back on the commodity vegetable space, doing more value over volume, as you've heard us talk before. The reason for that is because that's a lower-margin business. Not surprisingly, it's more commodity oriented. There's a role for us to play; that business plays a role for us as a company in terms of overhead absorption in our vegetable plants, but our aspiration is not to be the world leaders and fastest growers in the commodity vegetable tier within frozen because that's arguably a bit of a misuse of our resources.

The next question comes from Rob Dickerson with Jefferies.

Great. Sean, just a question specific to frozen. I mean it sounds like the ROI on the investments have been attractive. You seem very upbeat and encouraged by the momentum in the business. But at the same time, when we think about what's happened in the quarter, doesn't really seem like a lot of that was driven necessarily by upside within that volume component within Refrigerated and Frozen. I'm just curious, as you speak to those investments, are we talking kind of more promotional activity, you're doing better and better and bigger pack sizes? Just trying to gauge your perspective as to why the ROIs are good and kind of what you're doing right because optically, as we look at the number in the segment, which does include refrigerated, it's not really better and there was, I think, a little bit of an easier compare. Just trying to gauge a little bit more color on that one piece.

Yes. To avoid getting too caught up in the appearance of the combined Refrigerated and Frozen segment, if you refer to Page 10 of our presentation, the consumption in our consumer domains clearly illustrates the impact of our investments. We've focused our investments largely on frozen, as it is a strategic business for us. The consumption volume change shifted from a decline of 7.8% in the first quarter of fiscal '24 to a decline of 2.8% in the third quarter of '24, and in the first month of the fourth quarter, it has decreased to about 1.2%. This reflects the nearly 7-point improvement in consumption we've experienced over the last few quarters. It's a significant development for the category, and it would be difficult to find a larger change across the broader food sector. The fluctuations in the Refrigerated and Frozen segment data are primarily due to the refrigerated side, which I currently don’t have specific volume or dollar figures for. This is influenced by the reduction in prices resulting from deflationary trends and the growth we've seen in our table spreads business. This volume movement is the basis for my ROI comments, and it clearly shows a substantial change.

And then just a quick question on gross margin, very simplistically. Clearly, I hear all your comments in the prepared remarks around productivity efficiencies, pricing, and grocery and snacks all positive. But I'm just curious like what changed relative to coming out of Q2, right, in early January? Because I think the commentary previously for the year was gross margin would probably be similar in the back half relative to Q2 but now it seems like it will clearly be better in the back half relative to Q2. That kind of took place over the course of 2 months. So it seems like something changed to the upside?

Rob, over the last six quarters, we've seen quite a bit of volatility in our supply chain. When we forecast gross margin, we need to consider all operational scenarios. A year ago, we were facing recalls and other challenges that affected our profitability. As Sean mentioned, our core productivity programs are on track, and we're focused on executing projects, which is generating benefits. Inflation remains a factor, and we are continuing our investments, which impact our margins. However, we are experiencing headwinds from absorption due to decreased volumes. It's significant that we are reducing our inventory and managing our production levels. Luckily, we haven't encountered the same disruptions in our supply chain as we did in previous years. Given the current environment, we are optimistic about our ability to fund the necessary investments, execute our productivity initiatives, and achieve the gross margins we aim for. While one quarter doesn't define an entire year, we are encouraged by our results this quarter and plan to build on this momentum.

All right. Super. Thanks, Dave. Appreciate it.

This concludes our question-and-answer session. And that concludes the conference call. Thank you for attending today's presentation. You may now disconnect.