Good morning, and welcome to the Conagra Brands Q1 fiscal year 2027 earnings Q&A conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Matthew Neisius, Head of Investor Relations. Please go ahead.
Good morning, everyone, and thank you for joining us. Once again, I'm joined this morning by John Brase, our CEO, and David Marberger, our CFO. We may be making some forward-looking statements in discussing non-GAAP financial measures during this Q&A session. Please see our earnings release, prepared remarks, presentation materials, and filings with the SEC in the investor relations section of our website for descriptions of our risk factors, GAAP to non-GAAP reconciliations, and information on our comparability items. I'll now ask the Operator to introduce the first question.
At this time, we'll begin that question-and-answer session. To ask a question, you may press star and then one. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and two. In the interest of time, we do ask that you please limit yourselves to a single question. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Andrew Lazar from Barclays. Please go ahead with your question.
Great. Thanks so much. Good morning, everybody.
Morning.
Hi there. Maybe want to start out, Conagra's pointing to organic sales in fiscal Q2 to decline 2%, a bit heavier than current consensus. It looks like quarter to date, maybe scanner looks to be running maybe closer to flattish. I guess I'm just curious if anything's changed in your Q2 top-line outlook and whether it's elasticity or something else that might cause a sequential deceleration, or perhaps it's just more prudent planning. Thanks so much.
Yeah. Good morning, Andrew. Let me start, and then I'll turn it over to Dave Marberger. I think in general, the pricing we discussed in the Q4 earnings call is really just hitting the market as we speak. I would say in terms of our pricing assumptions, at this point, results are in line with how we plan the year. I like the word you used, Andrew. I think we've taken a very prudent approach to our elasticity assumptions, and these assumptions remained unchanged, which has really frozen at more of a two-to-one elasticity that we've modeled for the year and Grocery & Snacks at more of a one-to-one elasticity. Now, in terms of competitors and followership, I would say we have not assumed any followership in our pricing moves. Obviously, if that happened, there could be some upside to those elasticity assumptions.
We have not modeled that in.
Great. Thanks so much.
And just, John, if you're just one additional piece of color. So we guided to down 2% organic for Q2. This contemplates Thanksgiving timing because you have the second quarter this year versus third quarter. So we may ship a bit below consumption in the second quarter because of the seasonal items may have some more consumption versus shipment. But the 2% is consistent, like John said, with our original planning posture.
Great. Thanks so much.
Our next question comes from Peter Galbo from Bank of America. Please go ahead with your question.
Hey, good morning. Thanks for the question. Dave, just wanted to touch on the updated inflation guidance for the year, having moved kind of to the higher end of the 5%-6%. I know you had kind of Q1 inflation in the 5%-ish range, so more towards the low end, but just kind of how you see it pacing over the balance of the year and maybe just help us think about exit rate. Are we above that 5%-6% as we get to Q4 and kind of how we might think about it again from a phasing perspective? Thanks very much.
Yeah, Peter, thanks for the question. Let me try to give you a little bit of color here. As we talked about for Q1, we did have some favorability in proteins relative to our planning. We were a bit favorable, which drove some of the favorability we saw in Q1. But as we went through Q1, obviously, we've seen the acceleration in inflation around logistics, our transportation costs really driven by the driver shortage and oil prices as well. As we forecasted inflation, we're still in that 5%-6% range for the year. We said towards the higher end of the range. Really what's happening is the favorability that we've seen in proteins, which we would continue to see, is a little bit more than offset by basically the doubling of inflation in transportation versus where we planned it for the year.
It's kind of a trade-off there. In terms of the flow of the year, we would expect, and we usually don't give this much detail, but I think it's important because I think there's some confusion on this inflation. We would expect our inflation rate in Q2 and Q3 to be higher than Q1 and then to be about the same. Then we expect our Q4 inflation rate to actually be lower than Q3. That's kind of the flow. As we sit here today, we have no reason to believe that we wouldn't be wrapping on not just the transportation costs that we're seeing this year, but things like edible oils and kind of our corrugated aluminum. We have a lot of areas where we're still seeing high inflation, which we will have all during fiscal 2027.
I don't see a reason why we couldn't expect that we would wrap on that. Obviously we'll have to get closer for that. But I feel like Q4 will be lower than Q3, and we should be wrapping on a lot of these higher inflation categories in our materials when we get into fiscal 2028.
Great. Thanks very much.
Yep.
Our next question comes from David Palmer from Evercore. Please go ahead with your question.
Thanks. I wanted to ask you about pricing. How much is that a factor into what you're thinking there? Or is your price elasticity modeling just basically a price impact to the consumer in a vacuum of competitors, not also pricing? I have a quick follow-up.
Yeah, thanks for the question. I think in terms of pricing, I go back to my opening comments. I'd really say, really in line with our expectations, so we're really past the customer acceptance of that now pricing is effective in market. I would tell you that, customer acceptance, there was no surprises versus our planning posture. So that's how I'd think about pricing as we move forward.
I noticed you had some comments about not repeating a promotion from last year on the Sandwich Bros. brand. Is that the kind of thing that we will be seeing throughout the year, that there'll be promotions that you already see that were not effective from a profitability standpoint? Is that baked into your guidance? I'll pass it on.
Yeah, great question. Again, I think we continue to look at our promotional dollars and do a real ROI mindset. I think we've been really prudent of saying, "Hey, we're not going to repeat promos that have been dilutive to the company." I think that's what you're seeing in some of this simplification, really focusing on those high leverage elements that can bring value to not only the consumer, but also to the shareholders. We're going to continue to make that a part of how we operate. But I would tell you again, all those assumptions have been embedded into the fiscal year forecast.
Thank you.
Our next question comes from Tom Palmer, from JP Morgan. Please go ahead with your question.
Good morning. Thanks for the question. I wanted to maybe just clarify on your second quarter expectations. You've got this high single digit operating margin outlook. Incremental pricing is flowing through. There was the SG&A call-out. I just want to make sure I have my arms around the gross margin cadence here. Is there a step down expected in gross margin as we move into 2Q? Or is this really about the timing of SG&A that swings the margin lower?
Yeah, Tom, let me take that. There's really three drivers. If you would look at where we landed Q1 operating margin, let me just go there. At 11.5% for Q1, we said higher single digits for Q2. There's really three drivers. One, as I just mentioned, we expect higher inflation in Q2 versus Q1. The second piece is the SG&A favorability that we had in Q1. It was roughly $0.03 of our EPS beat. Half of that was a one-time benefit, and half of it was timing, where it didn't hit in Q1. It's going to hit in Q2. The third piece is accelerating our investment in A&P. So we expect to increase A&P as a percentage of net sales to 3% versus 2.3% as it was in Q1. They're really the three drivers.
You will see a little bit of impact on gross margin from the higher inflation versus Q1.
Okay. Thank you.
Yep.
Our next question comes from Alexia Howard from Bernstein. Please go ahead with your question.
Great. Could I ask about sales leverage? You have talked about the 3 x being the long-term target, and I think it increased a little bit this quarter to close to 4 x. I think you are saying that you will still probably be at 4 x by the end of the year, or you have said through FY 2027 it will remain at this 4x. How quickly do you expect to start on that deleveraging trajectory? How quickly do you expect to achieve that goal? Thank you, and I will pass it on.
Yeah. Hi, Alexia Howard. If you start with this year, yeah, we guided to expecting to finish the year at approximately 4 x on our leverage. We finished Q1 at 3.99x. That is actually favorable to where we thought. Usually what will happen in Q1 and Q2 is our leverage will click up because we are very seasonal with our inventory, right? With our seasonal businesses and things like our tomato operations. We build all the inventory in Q1 and Q2, so obviously we use cash in the first half and then we have cash inflow in the second half. That is very normal. So we are still on track with the approximately 4 x. We do not get specific with this, but it is implied. We do expect to pay down debt in the year for the full year. Approximately $250 million of debt pay down is what we would expect for this year.
Our target is 3 x. We are maniacally focused on getting there as soon as possible. As we get into FY 2028, John Brase talked about it. We are focused on improving margins and profitability of this business. So with improved profitability and the dividend adjustment that we made, we feel like we are going to be able to make great progress in FY 2028 on getting that leverage down. We are not going to give you that number today. But we want to get to 3x as soon as possible.
Great. Thank you very much. I will pass it on.
Our next question comes from Wells Fargo Securities. Please go ahead with your question.
Hi. Good morning, everybody. Chris Carey.
Hey, Chris.
I wanted to ask about the snacks portfolio. Can you just give us a sense of maybe where you are on some of the interventions to improve performance? You talked about, I think, popcorn, Slim Jim. What are the expectations more from a volume standpoint as you look forward and perhaps lap some of the elasticities over the medium term? Then just maybe, not like a clarification, but just curious whether you're seeing or you thought you saw any benefit in your frozen business from Cyclospora related demand, and if that's a factor in how you're viewing the next few quarters in frozen. Thanks.
Great. I'll take both of those. If you think about snacking, let's start with the positives. Our sweet treats portfolio continues to perform really well and had a very strong quarter Q1, and that's really behind both Snack Pack and Swiss Miss continue to really be performing very well in the market. I think permissible snacking, as you said, we're not where we want to be there. I think a couple of points of drivers there. The first is obviously we're very overdeveloped in our meat snacks and our seeds business in the convenience channel, which has been really challenged lately with the higher gas prices.
But I think aside that, there's work to do from my standpoint in terms of from an execution and a channel lens, we need to do a better job of participating where the growth is really coming from, specifically in the meat snacks category. As you take a step back and you think about meat snacks and popcorn and seeds, these are fantastic categories, and we are the market leader. It's our responsibility to kind of drive these categories forward. I think what you're going to see, and you're already seeing as we go into Q2, a significant step up in our brand building and marketing, specifically pinpointed at meat snacks and popcorn specifically there, but also innovation, a major step up in innovation.
We think those are the two critical levers that kind of get us back to a growth trajectory in those important businesses. On Cyclospora, just a quick one there. We did see some benefit, but I would tell you nothing material as we think about Q1. We also actually saw some offsets from Cyclospora as you think about our Wish-Bone salad dressing as an example. Again, nothing material there. But I think more than the one-time benefit, I think what's really important is this is a reflection of consumers coming to a brand they know and trust with Birds Eye, and we did a great job of delivering for them. I think as you think about that brand, we've got such an opportunity to drive more trial and more engagement with consumers.
We deliver great taste, great convenience, and honestly, reliability that they're looking for in their vegetables. So we think a great opportunity to continue to drive Birds Eye.
Okay. Thank you.
Our next question comes from Max Gumport from BNP Paribas. Please go ahead with your question.
Hey, thanks for the question. Just coming back to the Q1 beat and your reaffirmed outlook for the year. Obviously, it was a sizable EPS beat versus consensus, and I think versus your expectations, too. You did get some help from inflation. There was some SG&A timing benefit as well, and your inflation outlook for the remainder of the year has ticked up. I am curious to what degree the reaffirmed outlook maybe has embedded additional conservatism in it, especially with regard to Ardent Mills as well, given the wheat price volatility. Thank you very much.
Yeah, Max, let me take that. Starting with Q1, you kind of hit it. We had a beat to our expectations, really driven by, I think, four things. Our SG&A, which was the timing, and then the one time. We had the Ardent Mills benefit, we had the inflation lower than our internal forecast, and then we did get a bit of benefit on a tariff refund that we got in the quarter, which was close to a $0.01. When you look for the full year, SG&A, we talked about it, the one times, the one time, and then you have the timing, but that is pretty much on track. The big impact is the acceleration of transportation inflation. It is double the rate that we had assumed inflation for transportation, and it is double the rate.
The good news is that we have some other areas in materials where we are favorable to that. There is a lot of puts and takes there. The other dynamic is we are just starting with our frozen pricing, so we really need to see how this plays out. We have been very clear on how we have modeled elasticities. There could be a scenario where maybe that winds up being conservative, maybe not. So we just need to see how that plays out. Ardent Mills, we were favorable about $0.03 in the quarter to our expectations for Ardent Mills. Wheat prices have been extremely volatile, right? If you just kind of look from May to now, they are up significantly, but they have been up and down, so that creates trading opportunities for the commodity side of the Ardent business.
The thing with that is it is a little bit more difficult to forecast that with precision for the full year. So we thought it was prudent to hold the year. It is one quarter, and then we will update at the half. If things continue as they do in Q1, then maybe we have some upside there, but we want to wait a little longer to see.
Very helpful. Thanks very much.
Our next question comes from Robert Moskow from TD Cowen. Please go ahead with your question.
Hey, thanks for the question. I do not know if I saw kind of a firm guide on gross margin for the year. Three months ago, I think the guide was kind of flattish, but now you have the higher cost. The other element that I wanted to ask about, Dave, is in the Refrigerated & Frozen division, the volumes are going to be down, like, 10%. At the same time, you were also increasing capacity, particularly in frozen chicken. I am just wondering, how are you managing through the leverage consequences of that? Is that a drag? Have you already put into your numbers a drag from that dynamic?
Yeah, Rob, good questions. On the first one, we have held our guidance for operating margin for the year, so obviously gross margin is a big part of that. We have had puts and takes in the cost, so we are still where we were before, which is relatively flat to the prior year in terms of gross margin. To your second question, yeah, obviously, we have modeled the pricing and the elasticity impacts, and there is volume impacts, where we have decreases in volume in our frozen business. We have modeled that. We have taken into account the absorption impact. All of that is included in the guidance that we provided, and we will just see how that plays out.
Sounds good. Thank you.
Thanks.
Our next question comes from Rob Dickerson from BTIG. Please go ahead with your question.
Great. Thanks so much. John, I just want to ask you about the simplification process, how you are thinking about SKU rationalization, and then maybe even brand rationalization. I realize you said last quarter, prepared remarks this quarter again, kind of looking at everything. It was noted in those prepared remarks that, I guess, you exited Celeste Pizza. I am just curious, I mean, clearly when you exit that rationalizes SKUs. Are there parts of their portfolio such that you could simplify by just stepping away from certain brands that are on lines that you have? Then I guess secondly, just kind of broadly, how are you thinking at this point about the manufacturing footprint? Thanks.
Hey, Rob. Thanks for the question. If you guys will indulge me, I am going to go a bit long on this one because I think it really is important for you to kind of understand how we are thinking about this. I am incredibly excited about the opportunity we have to really reduce complexity across the enterprise. I will tell you, SKU optimization is definitely one of those areas. As we have discussed before, we have an extremely long tail of SKUs that we are getting after. Right now, we stood up an internal work stream that is really looking to significantly reduce SKU count. I would put this work into two buckets. The smaller bucket, which you just alluded to, is there are certain brands and categories where we simply just don't see a future.
It just makes sense to exit those small, really unprofitable brands or low profit brands as soon as possible. We made the decision, as you saw, with Celeste Pizza, which had a minor impact on net sales for Q1, about a 15 basis points impact, but it was actually profit accretive to the enterprise. I think we will continue to look for more of those small opportunities that we do see in front of us. I think the larger opportunity, though, is what I am really calling the simplification of our core platforms. I want to use an example here that I think will bring this to life. Single-serve meals. We have over 400 single-serve meal SKUs, and I believe there is a future where we can have a much simpler, more productive assortment.
That doesn't mean for a second that we don't believe in the category, that we have any plans to cede distribution, or that we're going to stop innovating. I would say just the opposite. We want to double down in this business, and we think an optimized assortment can help drive velocity on our most impactful SKUs. In terms of SKU complexity, that's one component. But I would also tell you, we're looking to optimize our formats and formulations. We just have to do a better job of eliminating non-value-added complexity that the consumer, quite frankly, isn't willing to pay for. As we're looking at this, we're not just looking at SKUs, we're looking at formats and formulation as well. I think as you fast-forward, this is going to do several things for us. It's going to drive stronger operational efficiency.
It's going to drive procurement savings as we're procuring fewer items, but with greater scale. It's going to help us drive improved focus, which I think is so important. When we get focused on something, we execute with excellence. We need to focus our organization a bit more, and this will do that. And finally, improve velocity on shelf, which is good for us, good for our customers. The last thing I'd say here is we're going to take a real measured approach in how we roll out the SKU simplification. We really need to coordinate this with our customer reset timing and look at inventory impacts. I would see the majority of this benefit from this work to happen more in fiscal 2028, but the decisions are happening right now.
All right, great. That's very helpful. Thank you so much.
Our next question comes from Scott Marks from Jefferies. Please go ahead with your question.
Hey, good morning, all. Thanks very much for taking our questions. Wanted to just ask a little bit about the consumer. You made some comments in the prepared remarks talking about the consumer just being thoughtful about where they're spending their dollars, obviously managing through a volatile environment. Any updates you can share with us in terms of what you're seeing? Have things improved, gotten worse, just any changes that you've seen recently? Thanks very much.
Yeah, thanks for the question. I think I would describe the macro environment as dynamic. That's probably an understatement. In terms of the consumer, I would kind of say, the words I would use is muted and continued to be kind of bifurcated by income, no doubt about it. Having said that, we really haven't seen any material step change in consumer behavior. There's pockets, C-store is an example that's been a bit more pressured in recent months because of the gas prices. Overall, I would say the consumer's been relatively stable and resilient. Our job is to continue to stay incredibly close to the consumer. We've got to evolve alongside how they're evolving and delivering the food they want, where they want it, but also importantly, at the right value. This is what I love about our portfolio.
We've got brands that compete all across the value spectrum, value brands like Banquet, all the way up to more premium offerings like Healthy Choice. We've got a portfolio that can meet this dynamic consumer wherever they are.
Our next question comes from Leah Jordan from Goldman Sachs. Please go ahead with your question.
Hi. Thank you. Good morning, and thanks for taking my question. Just seeing if you could provide more detail on the changes in your approach for the step up in the A&P spend. It sounds like you've had some early traction. Just curious, what's been working, how are you measuring that return, and where are you allocating the step up in spend you're planning to do in 2Q?
Yeah, as you think about A&P, this is a big one for me. We have so many great brands, but if I'm being truthful, we haven't consistently invested behind them at the levels that are required to drive that brand affinity and awareness. We have a tremendous opportunity to communicate more with consumers to ensure they understand we've got great value propositions out there, and our job is to make sure they fully understand it. As you think about the investments, I'm really pleased in two fronts. One, we're investing more, and two, we're getting that money to work a lot harder for us. This is kind of this new modern marketing machine that we're building internally that I think can become a real competitive advantage.
As you think about where we're focusing these investments, it's really in three places, single-serve meals, meat snacks, and popcorn. We're going to be very targeted in those important growth ambitions. Your last point is a good one, too. We're already seeing some really positive results in terms of improved reach and engagement from some of the changes that we're doing. We've gotten a lot more targeted in who we're going after, how we're going after them, and our messaging is just sharper and more compelling. I think this is a tremendous opportunity to use this increased focus on brand building to help kind of return us to growth and drive brand relevance.
That's very helpful. Thank you. My follow-up was just on interest expense. I saw it was reiterated for the year. We've had the move higher in rates here recently. I think you're mostly fixed exposure, but I did think you had a little bit of floating, so just kind of catch up, remind us where your exposure is there. I also thought you may have some refinancing needs in the relative near term. Just how are you thinking about that in this interest rate environment as well? Thank you.
Yeah, Leah, let me take that. The first one, we're pretty much 100% fixed right now. The only variable debt that we have is our commercial paper, and so we use that as sort of our working capital needs. We're very high percentage fixed, so we're really not exposed to the interest rate environment now. Yes, we do have two bonds coming due this month. We have a $500 million note and a $260 million note. We actually went into the market in July and financed ahead, and so we issued a $500 million note. The rate came in at 5.4%. By the timing, it was actually pretty good there, given what rates have done since then. From the proceeds of that and just our normal kind of borrowing capacity, we're very comfortable refinancing these notes this month.
Very helpful. Thank you.
Got it.
Our next question comes from Carla Casella from JPMorgan. Please go ahead with your question.
Hi. Somewhat on that last question as well as Alexia Howard's earlier question on leverage, have you had conversations with the agencies? Because we've seen, in some cases, other peers that have cut their dividend and focused on deleveraging, but still gotten downgraded. Do you think they're kind of changing their view at all on your business?
Yeah, Carla, we talk to the agencies all the time, and they're very clear on our financial policy, our priority of using our discretionary cash flow to pay down our debt as quickly as possible. So we're always working and talking to the agencies. They obviously looked at our cut of the dividend as a positive in terms of our credit rating and our position. So they know where we're going. They know what our priorities are. So now it's a matter of just continuing to get that leverage down. We know the markers for levels where if leverage exceeds certain levels, you may be putting investment grade at risk. We're not near those levels, and we're moving in the right direction, which is down with our leverage, and they know that. So that's our strategy, that's our focus, and they're very aligned with that.
Okay, that's great. And just one follow-up on Ardent Mills. How do we think about the volatility in wheat and how that flows through the numbers? I know it was a benefit for this quarter, but how should we think about that going forward?
Yeah. So think of Ardent Mills as really two different businesses. They have the business where they mill flour and they sell flour at a margin, and they're selling flour to the Domino's Pizza of the world and everything. So they're dealing with the same volume dynamics that this entire food industry is, but they do an amazing job of providing great customer service that's a competitive advantage for them. But that business is more stable and more flattish. If you look at the other part of their business, it's what we call commodity revenue, and that's the trading opportunities they create when you have volatility in the wheat markets. And that's what we saw in Q1. And the hard part there is, when that comes, it's a little bit difficult to forecast with precision.
But generally, with more volatility, Ardent Mills will benefit from that volatility with their commodity trading business. And the good news for us is we're very aligned from a capital allocation perspective. So in terms of profit, we have a minimum of 80% cash flow conversion on that profit. And we're very aligned with Ardent and our partners on that philosophy.
Okay, that is great. That is super helpful. Thanks.
Thank you.
Ladies and gentlemen, at this time, we will be ending today's question and answer session. I would like to turn the floor back over to Matthew Neisius for closing remarks.
Thank you, Jamie, and thank you all for joining us today. Feel free to reach out to investor relations with any additional questions. Have a good day.
With that, we will conclude today's Q&A session and conference call. We do thank you for joining. You may now disconnect your lines.