Hi, thanks for joining us today. I'm Tom Palmer. I cover the food space here at JPMorgan, and I'm thrilled today to have with us Sean Connolly, CEO of Conagra Brands, and Dave Marberger, the CFO. Conagra Brands is a U.S. packaged foods company that sells a wide range of frozen, refrigerated, and shelf-stable products. Its biggest categories include frozen entrees, frozen vegetables, meat snacks, and popcorn. Sean has been CEO of Conagra since 2015, and Dave, CFO, since 2016. Sean, it's been an unusually challenging period for volume growth for large packaged food companies. Among other considerations, we've seen the rise of GLP-1 drugs, a growing awareness, I think, of smaller brands, more scratch cooking, more price-sensitive consumer following a period of elevated inflation. You've seen a lot in your career.
To what extent do you think there's been a structural change in demand for packaged food versus perhaps more transitory impacts?
Sure. Thanks for having us, Tom, and good to see everybody. For those online, thanks for tuning in. You know, I don't think this is really as complicated in hindsight as it might seem. If you look at the group in our industry over the last, call it, five-plus years, you've seen somewhere in the neighborhood of 40%-45% cost of goods inflation, which then triggered matching pricing actions for the vast majority of that five-to-six-year period. Cumulatively, what we've got is a consumer who is strained, and when the consumer is strained, it tends to show up in the volume line. Now, if you look at the scanner data that was released yesterday, I think for the past four weeks, our volumes were down a point and a half.
It is not as if we are a country mile off of the midpoint of our long-term algorithm, but we are off, and we are off because consumers are making some of these behavior shifts in response to that massive amount of cumulative inflation. Now, as to the money question that I know many investors are asking right now, which is, is this cyclical or is this structural? You know, it would be nice if we could give a simple answer that speaks to everything and say the answer is one or the other. It is not. I would say the answer varies by category, and therefore your analysis needs to be done by category.
If you're looking at a category where the behavior shift that you're studying is tied to value-seeking behavior, if it's a response to consumers searching for more value, my experience would say that is likely to be a transitory behavior shift. Why? Because that is not a behavior shift that the consumer, left to their own devices, would choose to make. They would rather not make that shift. They are making that shift because they are trying to live within their budget, and they're making a switch to something that they would rather not do but feel like they're compelled to do. After a period of time, usually not long, fatigue in terms of that purchase behavior sets in, and they revert to their previous behaviors. That is typically what we would see. It is not terribly different from yo-yo dieting.
You know, people aren't happy with where they stand in terms of health and wellness. They might go on a diet. They don't really like the choices that they're switching to. Fatigue sets in, and then they switch back. We see similar types of behaviors when consumers make purchase behavior shifts that are compelled by the march toward value. On the other hand, if you're looking at a category where the behavior shift is tied to a fundamental change in consumer preference, that's one, I think, that manufacturers have to study more closely. You know, I look at what's going on right now with less alcohol consumption, less sugar consumption, less carb consumption. There seems to be just more of an overall focus on health and wellness, particularly among younger consumers. That could prove to be a stickier behavior shift.
Fortunately, we don't compete in a lot of those categories, but when I do see something like that, it makes me think of manufacturers needing to change their innovation priorities and tailor them to what consumers are looking for today, which, after all, frankly, is what we do in the consumer packaged goods business anyway. We're constantly responding to changing consumer desires and tastes. I don't think it's a simple answer as to whether or not it's structural or cyclical, but I would say the vast majority of the behavior shifts we've seen have been in response to this significant run-up in cost of goods, which then triggered pricing, which then triggered value-seeking behavior, and that tends to be more transitory in nature.
Thanks for that. I think that does explain a lot of the private label share gains that we have seen in certain categories. Recently, we have also seen a bit more from larger brands, or sorry, from larger brands losing share to smaller, maybe perceived better-for-you brands. What are your thoughts on how large food companies and maybe how you are currently responding to that environment and maybe what's to come?
Sure. It is a really interesting dynamic because historically, when we have seen a run-up or growth in smaller boutique brands, one of two things, or both, have to be in place. The first is just a fundamental lack of innovation from the major manufacturers. I do not really think that is happening right now. That was happening, what I will call, in the height of the 3G era, when everybody was focused on SG&A reduction and not focused on innovating. That created a vacuum. The smaller brands filled that vacuum, created a bit of a cottage industry. The Expo West industry, as I call it, was born. I do not really see that going on right now. The second one, though, has been happening, which is, again, back tied to the runaway inflation of the last five years and consumers in the pursuit of value. That has led to channel shifting in shopping behavior.
The second dynamic that we've seen historically is when you see shoppers switching channels in the pursuit of value, and the channels they are shifting to happen to be retailers that purposefully feature more smaller brands and less larger brands. Take the Club channel as an example because they want to create a treasure hunt environment. You might, and by the way, when that happens at the same time that other channels are weak, like Seastore over the last few years, you can see a mixed shift across channels, and that mixed shift also is connected to a shift in the kinds of brands that are merchandised. We've seen that in a couple of our categories.
We actually saw it in meat sticks, and we say, "All right, we've got to have a response to this." Our response in that case was an acquisition, and we made the acquisition of FATTY Smoked Meat Sticks because we believe that FATTY Smoked Meat Sticks can compete with any smaller boutique brand on the planet when it comes to meat sticks because it offers the exact same health and wellness benefits but a measurably superior taste benefit. We have done that. We have been thrilled with the performance of the business in the year we have owned it. We have significantly increased the size of the business, and frankly, we are just getting warmed up.
At the end of the day, a big company like ours is going to have a combination of large brands that compete primarily in well-developed large channels, but also a mix of some smaller boutique brands that play in alternate channels because that is what those merchants want to carry in terms of their mix. We have a bunch of stuff going on there. Some of it, by the way, is acquired. Some of it is built, and we have built some things from scratch. We have a new snack business right now that we built organically that basically operates like a boutique brand right now, and it is called Vlasic Pickle Balls. It was pretty simple logic. You know, the fastest-growing sport in America the last three years has been pickle ball. We happen to be the leading pickle producer in the United States.
Vlasic Pickle Balls, put it together, and we've got a winner that happens to work in some of these alternate channels the way I just described.
Right. Thanks. Switching over to frozen entrees, I mean, that has been one area where maybe you've had heightened investments here ongoing. You've got the baked chicken line, I think, coming online here soon, and then later this year, fried chicken, or I guess later this fiscal year. Maybe we could cover just what drove the need for this expansion, get an update on kind of where we stand in progress, and what are the benefits maybe that we might see through the P&L as we think about these facilities coming online in coming periods?
Sure. Let's take it from the top, frozen, and then talk about chicken, the importance of chicken within frozen. We are the largest frozen manufacturer in North America. We're probably the largest manufacturer in frozen food in the world. It is a major strategic priority for us. Frozen is great because it's just a temperature state. I like to say, if you can dream it, we can freeze it. It is fresh food that can be incredibly healthy for you, incredibly clean label, loaded with protein, loaded with vegetable nutrition, and then we flash freeze it at the peak of freshness. Strategically, one of our priorities is continuing to preach the benefits of frozen because it's in your freezer. It's on call ready when you are. It's not going to spoil.
We've got to preach it so that the world kind of understands that frozen food is just a temperature state, and it's perfect for your busy lifestyle. That is what we want to do. We want to continue to drive household penetration into frozen year in, year out. Last year, we had an interruption in our service. We were growing our frozen and refrigerated business. I think by the end of Q2, we were north of 3% volumetrically, which is a good number. We had seven straight quarters of volume pickup as we kind of started seeing the consumer getting ready to get back to a convenience behavior and get back out of scratch cooking. This year, our focus has been recovering our service after the interruption we had in February, and we've been doing that.
We've got our service levels now back north of 98%, which is very encouraging. If you double-click a layer down and you say, what's growing the most within frozen, one of the things that is hard to miss is chicken-based meals. Protein in general, I think you all have heard the news, is on fire right now. That shows up in snacks. It shows up across all different types of protein, from plant-based to animal-based. Within the animal-based protein world, chicken is absolutely on fire. Historically, most of our capabilities in chicken are in what I would call baked/roasted. We had tremendous capability there. We had a major capital project queued up for this summer to modernize that facility, given the incredible strain we had on that facility through just strong demand. We did not quite make it to the finish line on that.
We ran into some quality and consistency issues just a couple of months before we were to start that, but now that is up and running, and it is very far along. Last year, we also saw that fried chicken absolutely exploded. Now, it should not be a tremendous surprise to everybody because if you look at the world of QSRs and the success of Chick-fil-A and Raising Cane's, all of that type of stuff, fried chicken is one of the most beloved forms of food in America. That should carry over to the grocery store. We created a product called Banquet Mega Filets last year, which basically mimics what you could get at some of those QSR names I just called out. We had absolutely awesome results. Our velocities were way in excess of what we predicted, and frankly, we ran out of capacity.
Historically, we had much more capability internally in baked and roasted, a little bit in fried. The growth of demand in fried has led us to have to reconsider everything from what we've got internally to the partners we have on the outside, and that work is underway as well.
Thanks for that. I think one of the extensions maybe of what we saw a year ago when, as you noted, the very strong volume performance was aided by merchandising and promotional activity. I know you've been asked a lot on your views on promotional activity over the years, but maybe an update on where we stand today in terms of ramping back up to promotional levels that you would like to target to drive that volume growth and the response you're seeing maybe across some different categories.
Sure. You know, I shared a chart at the end of last quarter that you all can find online that showed us and the industry, and it's really uncanny. Everybody's in a very tight bandwidth in terms of percent volume sold on deal, and I basically call it pre-COVID levels. Everybody is pretty spot on to pre-COVID levels of percent volume sold on deal, and encouragingly, depth of discount has not been deeper than pre-COVID, meaning people aren't giving away the farm in order to try to stimulate volume. It looks pretty rational overall. That's been the environment. As far as we're concerned, we're not quite there yet because we had the service interruption. When you have a service interruption, it takes, you have to rebuild confidence with your customer that you're going to be able to fulfill the amount of product that's needed for those events.
Our goal was to get that trust back in place before we got to this holiday season. I feel good about where we stand right now, but we're kind of inching our way back. We saw progress last quarter. We still have some room to go. I think the thing that you all read about every day is our lifts right now in response to promotion as strong as they've been historically. You know, the answer is not no. The answer is it varies by category. If you look at our Q1 as an example, we had precisely the same lift in our last quarter Q1 that we had in the year-ago period. We haven't seen any diminishment in terms of lifts for our particular categories.
In fact, last year, before we had our service interruption, we had outsized lifts on a lot of our categories and frozen in particular. I attribute that to fatigue from the consumer doing scratch cooking for the previous year and basically saying, "I've had enough of all the prep and cleanup and everything associated with scratch cooking, even if it's a better value." I think lifts are specific to the category, and it kind of comes back to my first statement around, is the state of the union in any given category, structural or cyclical, if it's tied to value-seeking behavior and there's fatigue setting in on that behavior shift, I think you have a chance of a very good lift in terms of your merchandising right now. I think you'll see that in our holiday business coming up.
If you are participating in a category where the behavior shift is tied to a change in consumer preference, it would not surprise me that you would see a lower lift because they are buying something different. Snacking is a good example where there has been a massive behavior shift away from the high-sugar, high-carb snacks and sweet treats to more protein snacks, and we have been the beneficiary of that in our seeds business and in our meat sticks business.
Thanks. Maybe switching over to the margin side. This year, excluding tariffs, one of your main sources of inflation relates to protein. You've indicated, I think, that roughly 12% of your COGS basket would be protein-exposed. Maybe within that basket, any update on trends that you're seeing and kind of what the key protein types and within it, maybe the key protein cuts that we should be thinking about?
Sure. So just to ground us in our guidance, we've guided to 7% overall inflation for this year, 4% core inflation, 3% tariff-related. We expect to mitigate about 5.5% of that. So within the core inflation, as you mentioned, our materials are about 60% of our total cost of goods sold. We're seeing double-digit inflation in our overall protein basket, right? So that's beef, that's chicken, that's turkey, that's pork. They're really the big drivers. We've been asked a lot recently. We're starting to see chicken prices come down, and that's true. We're seeing that, but we're also seeing beef prices go up, more pork prices go up, and turkey prices going up even further. There's a lot of puts and takes. Our guidance is consistent with kind of where we were in the beginning of the year.
You know, a lot of these categories, particularly beef, are at historic highs. You know, herds are at lows that we have not seen in supply since the 1950s. You know, this is just a supply-demand dynamic. You know, we are continuing to manage it tightly. We take positions. We can freeze amounts of our proteins, which we do when it is advantageous for us. Generally, we are on the spot market with this buy. We are managing through it. We talked about the chicken supply. We are paying a premium right now because we have to go to a co-man for the baked chicken as we make the investments in our plant, but we are pleased that is on track.
The second half of our fiscal year, we should start to see the benefit of bringing more of that production in-house and not having to go to the third-party co-man for that.
Okay. Thank you. On the tariff front, I think that's been another source of inflation you've called out. Maybe just an update on where we stand today. Are you seeing pockets of relief as we see early trade deals come across? I know that the main exposure is China, where maybe less likely to see near-term relief, but just an update, I guess, on where we stand here.
Yeah. As I said, 3% roughly was our estimate for tariffs for this year gross before mitigation. More than 50% of that is related to tin plate and steel for our canned good. We have a lot of canned good businesses with Hunt's and our chili business. We do not see those tariffs coming off. At least there is nothing now that indicates that is the case. We have different impacts based on some of the other tariffs in different countries, but that is spread out kind of across several different countries, just different supplies that we bring in. Again, there has not been a material change in our current estimates. You know, we are hopeful that, one, we can continue to mitigate the gross tariffs and maybe have some opportunity there. We are working every day on that.
You know, every day there are changes that are taking place, so we just monitor it closely. No material change to our guidance as we sit here today.
Okay. Thank you. I guess the extension of all this would be the pricing actions and maybe offsetting pricing actions down the line as potentially some of this inflation eases. What is your view on, one, pricing for these inflationary items over the last year or so, and two, your view on whether there might be some give back or some maybe incremental promotion to stimulate demand if we do see a more favorable cost environment?
Sure. I think to answer that, you got to kind of consider the last five years and how the inflation environment and pricing environment has played out for our company. We are in the fifth or sixth year of outsized inflation. I would say, on principle, we priced to offset that inflation for the first, call it four and a half of the six years. As investors know, about a year or so ago, a lot of the feedback from investors was, "Hey, it's time to get volumes moving. You cannot shrink your way to prosperity as a CPG. Let's get the volume line moving." We were one of the first companies to say, "We agree with that.
We think that long-term cash flows will be best served by our brands having a strong relationship with consumers and volumes being strong. We began investing in strategic parts of our business in order to move volume, specifically in frozen and in snacks. We saw seven straight quarters of virtually linear responsiveness to that, resulting in volume growth by the time we exited Q2 of last year. That is when we ran into the service interruption in frozen. We have been working our way back from that right now.
We went into this fiscal year with a plan of prioritizing volume in our frozen and snacks business so we could see consistent recovery there and prioritizing margin protection and dollar sales in certain parts of our grocery business where we were experiencing the most acute inflation, namely our canned business, where we have these major tariffs impacting our COGS line. That was kind of the plan. I call it a horses-for-courses year, meaning our strategic businesses need to continue to demonstrate strength volumetrically, and our cash flow businesses need to do just that. They need to maximize cash, which means we will price there to offset inflation, and we are doing that, particularly in our canned food business, which starts at the end of Q2 and mostly in the back half of the year.
In terms of potential deflation being on the horizon on commodities like meats, would that result in a rollback of prices because it's a pass-through category? For us, the answer is primarily no because we didn't roll them up to begin with. In the last year or so, we've continued to experience inflation in things like chicken and other meats, as Dave has discussed, but we've not increased the price of our frozen business on average because we've been prioritizing volume. Our retailers know that. They know that we didn't price to offset that. We've basically invested margin in those businesses in the service of volume. Therefore, if we get relief, which we expect we will, we've always got it historically. On the other side, you would not expect a commensurate rollback in pricing. If anything, what it's really going to mean to us is significant margin help.
Okay. Thanks for that. We started off our discussion a little bit recap of the last couple of years and maybe some volume trends broadly and the root causes. Today, I think we're in a bit of an evolving environment. When we think about the current quarter and what we're seeing October into November, maybe an update on consumer behaviors that you're seeing just with some of the timing of SNAP, the hurricane laps, and kind of how you see that playing out as we look towards the conclusion of your second quarter.
Yeah, I would say, you know, it's probably a little bit lumpy in the first part of the quarter because you got the hurricane in the year ago. You have got cessation of SNAP payments for a short period of time this year, and we will see how in the next couple of weeks how that plays out. As I mentioned in our last quarterly call, our outlook for the second quarter was that the persistent consumer weakness, specifically value-seeking behavior, particularly among lower-income households, which frankly translates to younger people mostly, would persist into Q2 and beyond.
We have continued to see that, and you hear about it every day when you put on Squawk Box in the morning, and whether it is a food service operator or it is a manufacturer or it is CPG beyond food, it is the exact same thing, which is you have got lower-income households whose real wages have not kept up with the cost of the stuff they are buying. They are compelled to continue to struggle to make these trade-offs to operate within their budget. That has continued, but we also expected a lot of that. What is unique to us in the quarter is that we pushed some of our major merchandising events later in the quarter this year than we did last year because we have been rebuilding supply.
We also had a big beginning of Q2 last year when we had a hurricane hit at the exact same time we had major merchandising events, which drove outsized lifts. We did not have that this year. Now we have got SNAP cessation for a period of time, which I think, you know, it is real cash. I think what it will show is just a deferral of purchases until once those get paid, but I do not anticipate any net-net changes in that overall. It is a challenging environment. You know, it needs to improve, but ultimately, for it to improve, the consumer has got to get some relief somehow. They have got to get some relief either in terms of their real wages and their cash flows, or they have got to get some relief in terms of the cost of goods.
In terms of the implications to manufacturers, should this consumer pursuit of value persist, I think the first place it affects us is we think about the innovation pipeline. If you look at the innovation pipeline among major CPGs in the last 10 years, a lot of what's been most impressive and innovative, I would say, is on the higher-end scale. It's a lot of clean label, a lot of organic, very sophisticated ethnic meals, things like that. If value becomes a priority, I think you'll see some of those benefits continue to resonate with consumers, but it'll have to show up within a price pack architecture that prioritizes value. I think, you know, the way we think about it is we have to track this. We have to see how sticky some of these behavior shifts are, and then we have to be agile.
If it means we have got to shift some of our innovation pipe building from being more premium products to more value-oriented products, we can do that all day long. You know, that is what we do as manufacturers, and we have got to respond to what the market signals are telling us in terms of consumer desire.
Thanks for that. In the back half of this fiscal year, there is embedded a bit of an improvement in terms of some underlying volume trends. I think specific to Conagra, a portion of that is the lapse from a year ago and some of the pullback in merchandising. A portion of it maybe is taking a bit of a view on how the consumer environment progresses. One, maybe get a kind of overview of how you're seeing those two items. As we think about the back half, the main swing items that might put you more to the high end or low end of your outlook.
Yeah, I break it for us into kind of three parts: frozen, snacks, and then grocery. Frozen, we're going to have easy comps in the back half of the year because we had supply interruption last year. That is clear. We're going to have merchandising back in. That should be strong performance. On snacks, I think the most noteworthy thing versus a year ago is c-store is performing well again. Our Slim Jim business is really doing well again. And FATTY is, you know, FATTY is growing at something close to 100%. That is positive. Popcorn remains, you know, we're having Ange's. We moved our timing on our major event. That went from, you know, a negative comp because we did not do it in the last quarter to a positive this quarter. Things like our seeds business is very strong.
I think you'll see continued very strong performance out of our protein snack business. Within grocery, it's a bit of a different strategy. That's where our canned foods reside. Those we will price. We understand that that will have an elasticity effect, probably close to a -1. You know, that's baked into our plan as well. There, it's more about dollars and margin recovery than it is about volume.
Okay. Thanks for that. Look, I know it's early, but I will ask on very early thoughts, I guess, on fiscal 2027. I think one thing you've laid out here today is the potential for some outsized earnings growth should inflation really ease and you get a swing the other direction. As we think about kind of the progress you expect to see into 2026, what carries over into 2027 and what can you kind of build on as we move into 2027 above and beyond what we expect to see in the back half of 2026?
The first thing that will carry over is strong innovation performance. We had very strong innovation performance last year. Our innovation performance so far this year is outperforming that, which is super encouraging. We have a lot of it as programming really yet to hit. We also have some recovery in some of our key categories, not the least of which is meat snacks, where we are the largest player in the world. That is important. We have meaningful recovery on the horizon in frozen, where we had major momentum through the second quarter of last year, and we are clawing our way back, and we are starting to see that momentum build again. Those are all positives. We also have new capabilities going forward in chicken, which feeds a major part of our frozen portfolio that we have not had before.
That will be helpful not only with the service element, but it'll be helpful with the margin element as well because we've had to go out of our normal playbook with higher cost solutions to serve a lot of, to create a lot of the products that we've been serving over the last six months. That will abate over time as well. I think, you know, the wild card is what happens on the cost of goods line. If we get meaningful relief, any kind of relief on the cost of goods line, that will help us claw back a lot of the margin that we've invested in the name of volume stability this year.
Yeah.
Anything I missed, Dave?
Just we will be wrapping on some pricing that we're taking, particularly with the cans in the second half and some of the sweet, kind of the cocoa and sweeteners that we've priced on. And then a thing that has impacted us the last, you know, two to three years has been fixed overhead absorption. As volumes have been down, that impacts us, particularly in our frozen business. So the throughputs just aren't like you have in a grocery business. And so as volumes start to come back and ramp up, you know, there's the flip of that. You get some real tailwinds from that. And so again, that depends on timing and inventory, but that should be a tailwind for us if the volumes come back in 2027.
Yeah. The only other thing that I mentioned before that I think is a dynamic that we'll all have to continue to watch is, you know, there's been just an unusual amount of channel switching from shoppers all the way back to the start of COVID. At the beginning of COVID, you saw a lot of shoppers shift from the big box retailers to local mom-and-pops because they thought it would be safer and they could avoid COVID if they'd shop at a small grocery instead of a giant supercenter. More recently, as people are pursuing value, you've seen the opposite happen. You see people go back to the larger places because they think they're going to get a better value there, or maybe they'll go to Club Channel, or maybe they'll go to hard discounters. You know, that's been a very dynamic environment.
It is hard for your innovation to keep up with that dynamic because we build our innovation so that we can talk to retailers about it, show them what we have got, and they slot it in to go into the planogram sometimes a year later. What happens if there are changes within the year and there are channel needs and, oh, that channel is more important today? Agility, there is a premium on agility for innovators like us. I think we have now had an opportunity to say, okay, if some of these channel shifts are going to be sticking with us, let us build some winning solutions for some of these customers that in the past maybe were not beneficiaries of a lot of our innovation.
I think that's going to be an interesting dynamic to see as well because we're kind of agnostic to, you know, who we build it for. It might look a little differently because different merchants have different priorities in terms of the design of the stuff they want to put on their shelves. We can, we have, I can assure you, we have all kinds of stuff within our portfolio from really cool boutique brands to Marie Callender's and something that'll service major grocers. We can tailor our mix based on where the pull is.
Okay. Shifting over a bit to capital allocation, your net debt to EBITDA running a bit higher than your long-term target. Your dividend payout, and I know free cash flow is probably going to be meaningfully higher than EPS this year, but the dividend payout is running higher than you've seen in the past, and I think probably higher than you would target over time. How do you balance targeted debt reduction with the desire to maintain the dividend? Because it seems like, at least for this year, the decision leads to maybe a little bit less debt reduction. Is this largely contingent on seeing some earnings recovery in coming years? Just any update there. Thanks.
You want to take that?
Yeah, let me take that. It all starts with capital allocation. Sean and I discuss this all the time. We discuss this with our board at every meeting, and it is just something that is top priority for us. We always talk about a balanced approach to capital allocation. What does that mean? That means investing in the business, managing your debt, providing an attractive return to shareholders, and if there is M&A opportunities that, you know, depending on the timing. That is what we balance. We have balanced that, you know, and we will continue to do that. When I look at each one of those, investment in the business, if you look at this fiscal year, we are increasing our CapEx 16% in our forecast. We are increasing our trade merchandising. We continue to invest in innovation. We expect our A&P to be up.
We are making significant investments in the business. When you look at debt, our leverage ratio has gone up, and that's been solely because we rebased our earnings based on inflation, right? The debt, we paid down $1 billion in debt the last 12 months and the last fiscal year, and we're forecasting to pay down another $700 million in debt this year. We're not at that leverage ratio target, but we continue to pay down debt. We held our dividend flat, which is providing consistent returns and attractive returns to our shareholders. We're not doing any opportunistic share repurchase. That's the one give there in terms of the shareholder. We felt like we are balancing the capital allocation approach.
I understand the question that comes up because of the dividend yield, but the fact of the matter is that we're very balanced in our approach. If you look at our kind of estimates, we will grow back into our payout ratio. We do expect our profits to go up going forward. Just to get everyone grounded with our guidance this year, we took our EPS down $0.25 versus last year just from net inflation. The inflation that we could not cover, that's $150 million of operating profit. That just hit us this year. We called it out. We put it in our guidance, but we expect over time that we're going to claw that back. If we do get some benefit of lower than sort of historic inflation the last few years, then that could accelerate.
That's how we look at it. We feel very comfortable with that approach. We talk to our board about it all the time. Sean and I talk about it every day. Sean, I do not know if you want to.
Yeah, you know, we just had a long conversation around animal proteins. Animal proteins are particularly high right now. We have elected to not take broad-based pricing in our frozen meals business because we're prioritizing a return to volume growth. That, in the short term, is going to pressure our margins, going to pressure our cash flow. We don't think that's a structural dynamic at all. In fact, as we just discussed, animal proteins are cyclical. They go up, they come down. Because we have not taken price in response to them going up, we would not anticipate reducing price in response to animal proteins coming down. That will be margin flow back. When that happens, that will be an improvement in our cash flow, you know, as that occurs.
Right now, on certain businesses, frozen and snacks, our priority remains on that very strong connection between our brand and our consumer and getting volumes north of the Mendoza line, as I've been calling it.
Thanks. Sticking to capital allocation for a moment, we have seen both opportunistic acquisitions in recent years, such as the FATTY acquisition, also tactically some divestitures in certain businesses, like we saw with Chef Boyardee. As you look forward, how do you feel about the portfolio composition today? Are there categories where it might make sense to be more tactical with kind of adding brands to areas that you're maybe already strong but could fill in from maybe a positioning standpoint?
Yeah, certainly over time, we've done a lot of inbounds. We've done a lot of outbounds. We're open to all the above. I think right now, as Dave pointed out, our focus in terms of capital allocation is on paying a healthy dividend, investing in the business, and paying down debt. We're really not in the market. We bought FATTY last year, but our primary focus is on what we've already discussed in our plans. Going forward, you know, we sold Chef Boyardee. We sold fish recently. That was part of the earnings rebase as we built that. I think going forward, what you should expect from our company is that every five years, a meaningfully larger chunk of our total portfolio sales will be focused in frozen and snacks. That means that our grocery business will decline.
You know, we're open to additional actions. You know, I know there's a lot of conversation these days around what's happening with one of our competitors and splitting the company into two. I've got loads of experience liberating either specific businesses or splitting whole companies like when I was at Sara Lee. What I would say is, you know, sometimes those types of actions can create value. 50% of the time, they destroy value. You have to be very cognizant of what you're working with. When typically those types of transactions create value is when both parts end up getting acquired at a premium. When one part gets acquired at a premium and the other part has multiple weakness, you might be lucky to get back to break even. If neither get acquired, you can actually destroy value.
The data would suggest in those deals, about half of them work, half of them don't work. We're certainly open-minded to anything that creates value for shareholders. We're also very thoughtful in our analysis because at the end of the day, we want to create value. We don't want to roll dice. You know, we're open to all of the above in the pursuit of value creation, and we're very, very thoughtful about whether or not it's going to create value for our shareholders.
Maybe I'll follow up quickly on that last topic and ask a bit differently. How intertwined? You have multiple temperature states in your business. How intertwined are the two sides of that business, the shelf stable versus the refrigerated and frozen from a supply chain standpoint?
You know, when you're a single company operating within a single geography, there's a lot of entanglement, not just in supply chain, but in terms of how you go to market. Usually, it's the same Salesforce. You've got the same people working on these businesses across the board. It's very different from when I was at Sara Lee, as an example, where we had a European coffee business and we had a U.S. food business, and the two were not entangled in any such way. For a company like ours, there can be lack of entanglements in a supply chain. You might have a frozen plant that's separate from a shelf stable plant, but they're plenty entangled in terms of how you go to market. What that means is simply when you separate those assets, there are several things you have to consider.
One is there are one-time costs associated with standing up a new organization. Two is there are disynergies associated with both parts that you then separate because you no longer have the procurement scale that you had when you were together. Three is costs move around. Some costs that previously had been allocated to one business by virtue of just allocation will actually move in an activity-based way and potentially flow to the other piece of business, which could change the margin structure on each of the parts. There is, you know, the wild card as to what happens with multiple when you have these assets separated. Those are all things that you have to factor into your analysis as you consider whether or not it's going to turn out to be the 50% winning camp or the 50% value destruction camp.
Thanks. Wanted to ask on Ardent Mills. It's a business where we have seen, I think it doesn't necessarily fit in with the rest of what you do, but it also does generate a good bit of earnings for you. We have seen quite a bit of earnings improvement in recent years relative to where it might have been five or six years ago. How do you view the role of Ardent Mills within Conagra? What's kind of the future for that business? As we think nearer term about its earnings profile, should we think about it as, and I guess consistent with guidance, it's more consistent with recent years versus still opportunity there for growth?
Sure. Dave, you want to talk about Ardent?
Yeah, sure. So, you know, Ardent Mills is, you know, a little over 10-year-old business now, joint venture with us and Cargill and CHS. Operationally, the business continues to do very well, right? They're the kind of share leader in the U.S. in terms of flour millers. They have great kind of geographic placement of their mills and their supply. Their customer service is outstanding. They really have a point of difference. There are really two parts to that business. There is sort of the kind of the milling flour and selling it at a margin to customers. Then there is the commodity revenue where they can make money on all the arbitrage and trades and them understanding those markets. That part of the business is all driven from volatility. That is correlated to wheat prices. When wheat prices are low, not as much volatility.
When there's more a spike in prices, that can drive more volatility for a lot of reasons. That is opportunity for Ardent Mills. We always sort of look at the center line because we can't estimate that sort of commodity part of it. We just kind of go with what we think the center line of the estimate is in our guidance. There can be some volatility around that. That supports the guidance for this year. We've done a lot of work in working with them. We have a board structure. I'm one of the three Conagra members on that board. I work closely with Sean. We have a great CEO that just went in over a year ago. The free cash flow conversion on Ardent has improved significantly over the last three years. We are really aligned there.
That's, you know, we've been pleased with that.
Yeah, it's not lost on us that as investors look at our portfolio, you see a branded pure play company with this JV attached to it that's a milling business that is different. It's a different animal. You know, listen, it's been a very nice hedge during the volatile time since COVID, and it's performed extremely well. We're open-minded in the future as to, you know, that business, whether or not that remains part of us or not. The only thing I'll say is it is a joint venture. You know, don't assume that it's a snap of a finger to kind of exit a joint venture. It's more complicated than that. When joint ventures are built, they're often built so that they are going to be there for a lasting period of time. Otherwise, it can be hard to draw joint venture partners into it.
This is one that predates me joining the company. It has been a very good performer for us. We'll stay open-minded as to the role it plays going forward.
Sean and Dave, thanks so much for being with us today.
Thanks for having us.
Thank you.
Thanks everyone for joining.
Thank you.