Conagra Brands, Inc. (CAG) Earnings Call Transcript & Summary

Hello, everybody. Thanks for tuning in. I hope everyone is staying safe and healthy. While I wish we could connect in person and share some of our great food, we are thrilled to have the opportunity to speak with you today. Before I jump into the presentation, let me remind everybody that Dave and I will be making some forward-looking statements today. We encourage you to read the legal disclosure provided in our presentation and in the documents we file with the SEC. Let me start by summarizing the 4 things I'd like you to take away today. First, we compete in attractive categories with consumer-preferred brands. Second, we deploy our assets via modern, repeatable and scalable processes, processes that work. And third, we're well positioned for long-term success and significant value creation. And fourth, we're reaffirming our fiscal 2022 targets with a small adjustment for the impact of the recent Peter Pan divestiture. We'll dive into each of these areas and share the great work our teams are doing to delight consumers and support our customers. I'll start with an overview of who we are and then walk you through how we win. We'll spend the bulk of our time today providing our thoughts on COVID-19's impact on the future before sharing some on-trend innovations we expect to launch in the months ahead. With that, let's dive in. Conagra Brands is a highly focused branded food company with approximately $11.5 billion in annual sales. About 90% of our sales come from the United States, and more than 90% of our sales are in the retail channel. Our branded portfolio of iconic and emerging brands span 3 consumer domains: frozen, snacks and staples. Our frozen and snacks portfolios account for about 2/3 of our retail sales and serve as our main growth engines. Staples is our third domain with our portfolio incorporating products that consumers rely on. Because of that reliance, they're very important to our retail customers. Within Conagra, these brands have historically been reliable contributors and a source of cash to help us fuel growth in other parts of our portfolio. Let's take a closer look at each of these domains, starting with frozen. Now for those of you who follow Conagra, you know we are very passionate about frozen. We think it's an ideal food form for today's consumers. And we have tremendous scale in the domain. Over calendar year 2020, we recorded nearly $5.9 billion in frozen retail sales, making us the largest player in U.S. frozen food. Frozen has long been important to the American consumer and the category is large. But it languished for quite a few years, not because consumers didn't trust the temperature state, but because they didn't like the food. At Conagra, we saw this as an opportunity. Several years ago, we began to reimagine our frozen portfolio by responding to changing preferences and incorporating modern food attributes into our wide array of iconic brands. We then added even more breadth to our frozen portfolio by acquiring Pinnacle Foods during fiscal '19. The results of our disciplined approach and portfolio investment have been clear. Since beginning our work on frozen in fiscal 2017, the business has grown by $1 billion, and we see lots of runway ahead. Snacks is our other significant growth driver. We've got a strong $2 billion ready-to-eat snacks business that spans multiple subcategories where we either have the fastest growing brand, the largest brand or both. In fact, nearly 80% of our snacks brands are gaining share in their respective categories. And overall, Conagra has the second fastest-growing snack portfolio, with a growth rate 3.3x higher than the snack domain as a whole. And just like in frozen, we have proven that we know how to drive snacks growth. Competing in snacks requires a different approach. The emphasis must be on agile innovation, novelty, experimentation and winning at the point of purchase. The right price pack architecture and disruptive displays are critical for success. In fiscal 2018, we began the process of standing up the Snacks business by changing the organizational mindset to unleash the full potential of our strong brands. Since then, our Snacks business has transformed from posting a retail sales decline of roughly 3% in 2017 to delivering continuously accelerating growth, surpassing double-digit growth in the past year. And finally, we have a terrific staples portfolio. We think about this portfolio according to consumer need. About 30% of our staples retail sales are from products that deliver a Heat & Eat meal. However, 70% of the retail sales from our staples portfolio come from attractive ingredients and enhancer products that are attractive to those rediscovering their kitchens and cooking more at home. Brands in our Staples business have the #1 or #2 position in 64% of ingredients and enhancer categories. That number is 80% in Heat & Eat meals. As we mentioned earlier, our Staples business serves as a reliable contributor in our portfolio, with its share flat since fiscal 2017. This steady performance, coupled with strong margins has allowed the staples domain to be a consistent source of cash for Conagra. All of this is made possible by the tremendous Conagra team. Together, we've built a differentiated culture. We're a lean and agile business, and our purpose goes beyond profits. We're focused on serving our customers and delivering growth for our shareholders while continuing to foster inclusion, support our local communities and make a difference for our environment. We're proud of the work we've done, particularly in terms of helping respond to the challenges of food and security in our communities. We've also established clear goals around building a more diverse team and introducing additional measures to protect our planet. So with that overview of who we are, I'd like to take a few minutes to discuss how we win and the unique approach that enables us to do so. Simply put, we win because we create connections between our consumers and our brands. That's the overall objective and the key to our success. We make connections with consumers by deploying marketing investments via a modern brand building approach. As exemplified by the graphic you see here, the foundation of everything we do is building superior products with modern food attributes, great taste and contemporary packaging. Once we have the product right, we need to make sure that consumers and customers have access to it across all channels. And we support the mental availability of our products to ensure we connect with consumers in the right place at the right time and with the right messages. This brand building approach is part of what we refer to as the Conagra Way. I'd like to spend a few minutes unpacking each of the 3 key pillars of this modern approach, starting with superior products. Before we get to developing great food, we look at the data. We focus on behavioral data rather than survey data to help us understand what consumers actually do versus what they say they do. We study the behavioral data and search for growth pockets or the characteristics that are driving the growth. Then we leverage our great chefs, product teams and state-of-the-art facilities to create on-trend products and packages that give the consumer food they want to tell their friends about. That includes foods with old, provocative flavors, modern health attributes and sustainable packaging. The results show that our data-driven approach works. It enables us to make products that are viewed as more modern. Looking at the frozen single-serve meals category as an example, we are outperforming peers in delivering modern attributes across 2 important consumer categories: better-for-you meals and indulgent meals. With a consistently refreshed portfolio of superior products, we invest in omni-channel availability to deliver our products to consumers. We start with traditional investments, such as shelf space and in-store displays, but our investments also include nontraditional retailer investments, like online merchandising and activation, retailer data access and retailer media services. And the proof is in the results. Our 2-year growth rates across the full range of brick-and-mortar channels are up across the board. Of course, we all know growth is also taking place beyond bricks-and-mortar channels. Growth in our $1 billion e-commerce business has outpaced the entire total edible category in terms of retail sales in each of the past 6 quarters. And over the last 52 weeks, nearly 80% of our brands have increased their share within eCommerce. And that brings us to the third piece of our modern approach to brand building, mental availability. Recall, our objective is to make connections with consumers. And we think the best way to do that is through a tailored and targeted approach that reaches them where they are. As a result, our media investments have shifted dramatically from traditional high-frequency mass marketing vehicles to very modern digital vehicles. In fiscal 2020, we dedicated more than 80% of our media investment to digital. These digital investments include eCommerce retailer platforms, social channels, online video, browser search and more. The reason for this shift in spend is clear. It provides a much higher return. Digital search has been shown to provide far superior lifts as compared to any other media investment. And it's important to note that digital investment does not just drive e-commerce sales. A recent study shows that 70% of all purchases are digitally influenced, whether the actual purchase is ultimately made online or offline. Our always-on marketing approach efficiently drives mental availability to reach consumers when they're making decisions. Simply put, when people are starting to think about purchases in our categories, we want to ensure that our brands are top of mind. When you take a step back, you'll find that our total brand building investment has remained strong and steady. What's changed is the mix of our spend, which is determined by leveraging advanced analytics. We identify which aspects of our A&P spend provide the best ROI. Sometimes the insights point to more traditional investments like mass marketing. But the choices for investment today are much broader. And other times, the highest ROI comes from packaging or e-commerce investments. A few additional points are worth noting as you consider the impact of our marketing spend over the last several years. First, as we noted earlier, our brand-building approach starts with investments in our products to improve presentation and taste. The chart you're looking at speaks only to the brand building investment after we've completed product development or upgrades. Second, our gross sales have increased over the past several years. Therefore, the steady investment as a percent of gross sales represents an increase in absolute investment. In summary, we continue to optimize our brand-building investments and remain focused on supporting our brands with all available tools. And our model is clearly working. Total Conagra weighted dollar share has continued to rise over the last 4 years, reaching 29% in fiscal '21 year-to-date. And we're seeing the results across our growth domains with frozen and snacking, increasing 2.2 and 3.2 points, respectively, versus fiscal '17. The Marie Callender's brand provides a great example of our brand-building in action. Marie Callender's has a competitor that spent 5.5x more than Marie on advertising over the last year. Look at the brand's relative performance in 2 frozen product categories, pot pies and bowls, as shown here. Marie Callender's has driven more sales at a higher velocity, attracted more buyers and had better repeat rates. This model is indicative of our unique approach. We invest across our portfolio to build brands, make connections and drive sales, not just to accumulate eyeballs. An important attribute of the Conagra Way is that it's evergreen. Not only has it served us well in the past, but it leaves us better positioned for the future. Clearly, the world has changed in many ways as a result of the pandemic. We believe that recent shifts in consumer behavior, coupled with macroeconomic trends suggest that at-home eating will remain elevated for some time. And we believe that Conagra is uniquely positioned to deliver against the opportunity. The pandemic clearly accelerated our strong performance across each of our domains. Total Conagra retail sales have grown by more than 18% during COVID. While the entire industry benefited from increase in demand, it's worth noting that Conagra gained category share against our peers. Not only did COVID accelerate sales, but it also accelerated new buyer acquisition. Since the onset of COVID-19 in mid-March, we've gained the equivalent of an estimated 4.5 years' worth of incremental new buyers. COVID has effectively supercharged new trial at a level rarely seen in our industry. Importantly, we're not just acquiring just any type of buyer. We're winning with younger consumers. We're attracting millennial and Gen Z consumers at a higher rate than our categories as a whole. Historically, younger adults have eaten at home less than older generations. Historically, a meaningful shift toward at-home eating occurs during the family formation years and COVID has accelerated the timing of this shift. By attracting younger consumers now, we're building superior consumer lifetime value. Importantly, the data shows that these new younger buyers are stickier across our entire portfolio. As you can see, our new brand buyers have higher repeat purchase rates than other category buyers across the board: in frozen, snacks and staples. Again, while the entire industry benefited from higher repeat rates, our portfolio clearly outperformed peers. And we believe this comes back to the investments in our products and brands. The Conagra Way has positioned us to win in this environment. And we're not going to rest on what we've accomplished today. We're going to capitalize on the behavioral trends that COVID has accelerated, including cooking and eating together, enjoying the convenience of frozen and at-home entertainment and snacking. We'll start with the new cooking and eating habits. People are eating at home and families are eating together significantly more when compared to pre-COVID levels. And one of the primary drivers for more at-home eating is the increase in working from home. Importantly, some aspects of the remote workforce adoption are expected to be permanent. A recent study of executives found that nearly 80% of respondents felt that office culture could be maintained with employees physically in the office less than 5 days a week. The way we work is changing and consumer eating habits are changing with it. Our portfolio of brands and products uniquely meet these consumers' needs. Our frozen portfolio offers hyper convenient meals and sides perfect for a quick lunch or family dinner. Our snacks and sweet treats portfolio caters to those looking for bold, any-time flavors while celebrating or enjoying at-home entertainment. And our staples portfolio offers simple cooking aids and meal enhancers that both experienced and first-time cooks seek when preparing meals at home. The second behavior trend that we are tailor-made to capitalize on is the acceleration of the adoption of frozen foods. From March to November 2020, consumers included a ready-to-eat or Heat & Eat food in 47% of their dinner occasions. They increased their consumption of frozen foods by more than 9% and the youngest demographics, Gen Z and millennials, drove frozen food growth by an outsized margin. And we expect the millennial demographics frozen adoption rate to continue to grow. We know that annual frozen spend per buyer increases in households with young kids and it increases as the kids get older. To put this in perspective, during the important family formation years, there will be 25 million or almost 40% more millennials than there were Gen X-ers. Almost half of millennials have not yet started to have kids, and we fully expect their consumption of Conagra products will grow along with their families. Overall, our frozen portfolio is winning. And we are confident it is the best position to continue to do so in the future. In the frozen single-serve meals category, Conagra drove 95% of the total category dollar growth from fiscal years 2017 through 2020. And during COVID, many of our frozen brands have grown considerably faster than their respective categories. Consumers have found the convenience and the quality of frozen foods during COVID. Conagra's portfolio has delivered against this behavioral shift, better than the competition. And as we move beyond the pandemic and millennials and Gen Z-ers continue to age, our brands are well positioned to become an even more regular part of their routines. In addition to enjoying more food cooked together at home, and including frozen as a key part of those meals, consumers are making what we believe is a significant and lasting shift to at-home entertainment. People have increased their time spent watching digital video by over 40% in 2020. And research suggests that they fully intend to continue that behavior post pandemic. A recent study found that 70% of consumers would rather watch new movies at home, helping to push projected home theater investment up 9% through 2025. These changes are directly propelling at-home snacking. We've seen overall snacking increase significantly. While the increase can be seen across all generations, the most significant growth has been in the younger Gen Z and millennial segments. Our Snacks businesses have outperformed our peers and are well positioned to continue to win from meat snacks to ready-to-eat and microwave popcorn to ready-to-eat pudding and gels and hot cocoa, we've outperformed our categories year over year and gained share. Again, this demonstrates how our investments have paid off, and consumers are turning to our products as they adopt new eating behaviors. Don't just take my word for it, listen to these consumers share their perspectives on their evolving eating trends. [Presentation]

Now that we've detailed our strong positioning for the future, we're excited to share a preview of our latest slate of on-trend new innovations, which will begin to hit shelves in the months ahead. We're tapping into new benefit areas to maximize health and satiety with Healthy Choice Max, a 40% larger bowl with more protein. And to satisfy even the most intense pizza cravings, we're rolling out a Mega Banquet Pizza, double stuffed with mega protein. We're continuing to evolve our plant-based Gardein line. We're introducing a slate of new products, including QSR-inspired forms and innovations like chickpea and falafel burgers. And for those who are health-conscious but have an indulgent craving, we're expanding our low-sugar lifestyle and keto-friendly offerings with new products from Reddi-wip, Duncan Hines and Healthy Choice. We're reinventing the classic pot pie with a modern, on-trend twist. Our new offering for Marie Callender's has a crust made with cauliflower. We're also rolling out even more P.F. Chang's favorites, with expanded lines of proteins and dressings, so consumers can recreate that restaurant experience at home. We're bringing new news to the frozen meal aisle with Birds Eye's value-added meal helpers such as these sheet pan meals and skillet sides as well as simple solutions to address modern wellness trends. We're making the leading meat stick bigger and bolder than ever, adding provocative flavors to Slim Jim. We're also adding a line of lunch box ready versions of the brand's popular varieties. We're adding an extended array of old experiences and fun flavors to our popcorn lines just in time for the new movies hitting streaming services this year. On Duncan Hines, we're introducing epic upgrades that will make sweet activities sweeter than ever. We're also introducing new formats to snackify old favorites like Van Camp's, Armour and Wolf Chili. And we're evolving our offerings to incorporate more plant-based fiber bowls and new recyclable cubes. Innovation will be further expanding in fiscal '22. That's just a sample of what we have in store. And with that, I'll turn it over to Dave to share more about our strong financial performance.

Thanks, Sean, and hello, everyone. We delivered a very strong first half of fiscal '21. The business performance is a testament to the outstanding execution by our teams across the company. We delivered double-digit growth in organic net sales, adjusted operating profit and adjusted EPS versus the same period a year ago. This performance generated strong free cash flow, which enabled us to hit our debt leverage target ahead of plans. And importantly, we have been able to achieve these results while continuing to strategically invest in the business and remaining focused on delivering our long-term commitments. Among the commitments that we've remained focused on during the last year are the ones that we set after acquiring Pinnacle Foods in the second quarter of fiscal '19. As you know, we previously completed the operational integration and our corporate SAP conversion. We're now starting to make good progress converting the acquired plants to SAP. Also, as you know, prior to COVID, we had done some heavy lifting on the innovation pipeline for key Pinnacle brands and begun to apply our value-over-volume strategy to the portfolio. These efforts were beginning to deliver a higher quality net sales base and improved growth prospects for legacy Pinnacle brands pre-COVID. During COVID, the brands we acquired in the Pinnacle transaction have played an important role in our overall growth. I'm pleased that even with the challenges that COVID presented to our employees, we continued to capture cost synergies over the last year. We remain on track to deliver our $305 million cost synergy target by the end of fiscal '22. This synergy level approximates 10% of pre-acquisition Pinnacle Foods net sales, which is top quartile for M&A in the sector. We also remain on track to reach the fiscal '22 EPS that supported our accretion target when we first announced the transaction. Overall, we continue to make great strides on our integration and remain confident in the long-term strategic merits of the Pinnacle acquisition. Turning back to the near term. Today, we are reaffirming third quarter fiscal '21 guidance. Our guidance does continue to assume that the end-to-end supply chain operates effectively during this period of heightened demand. The Peter Pan divestiture has closed this quarter, but we expect it will have an immaterial impact on Q3 adjusted financial results. As I mentioned on our last earnings call, we do expect input cost inflation to pick up starting in Q3. Fortunately, we have a variety of levers that can be used to offset potential pressure to our margins, including pricing adjustments, overall mix management, cost savings and other measures outlined in this chart. We believe the capabilities we have built in this area position us to handle increased inflation and effectively manage the related impact on our business. We are slightly adjusting our fiscal '22 guidance to include the impact of the divestiture of Peter Pan. While most of our fiscal '22 targets remain unchanged, the expected annualized impact of the divestiture is a reduction of $0.03 to adjusted EPS. Absent the Peter Pan divestiture, we would not be modifying our fiscal '22 guidance. I'll finish today with a few brief comments on capital allocation. As we continue to drive shareholder value going forward, we plan to maintain a balanced capital allocation policy. Here, you can see examples of our capital allocation track record. We've continued to make investments in the business while returning a significant amount of cash to shareholders through dividends and repurchases. As a reminder, in September, we announced a 29% increase in our annualized dividend. We have also managed our debt effectively and maintained an investment-grade credit rating while executing acquisitions and divestitures. Looking ahead, we plan to remain disciplined in executing on our balanced capital allocation philosophy. In conclusion, we hope we've left you with a clear understanding of how our ongoing execution of the Conagra Way playbook has positioned the business to excel, both in the current environment and the future. We expect that our leading brands and proven, repeatable and scalable approach to brand building and innovation will result in Conagra continuing to deliver long-term profitable growth and significant value creation going forward. And lastly, we remain committed to our fiscal '22 financial targets. Thank you for your confidence in us and your investment in Conagra Brands.