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

Okay. Good morning, everybody. I'm Alexia Howard with Bernstein covering the U.S. food sector. It's my great pleasure to welcome Sean Connolly, the CEO of Conagra Brands since 2015. Now Sean has been instrumental in contemporizing the company's frozen food division, realizing cost synergies from the Pinnacle Foods deal and stepping up innovation across the portfolio. Recently, the company has enjoyed a rebound in gross margins as pricing finally caught up with input cost pressures. Many thanks for being here today. And for those of you in the audience, if you have questions, please type them into the pigeonhole link, and we'll weave those in as well.

So then perhaps to kick us off, we can start with a higher-level question, Sean. How would you compare the challenges you face when you took on the CEO role at Hillshire Brands with the ones that you've seen at Conagra over the last 8 years?

All right. Great. Happy to tackle it. Thanks for inviting me Alexia. So glad to be here to kick you off this morning. So I was brought into the old Sara Lee, which then became Hillshire and Conagra really for the same reason, which was to engineer a wholesale transformation of 2 companies that had been around for quite some time and that we're in need of modernization. So the similarities between the 2 in terms of the challenge we faced were quite in line in that it was a wholesale transformation from portfolio, to capabilities, to supply chain, to culture. Pretty much everything you can think about had to be brought into the modern era after an extended period of what I'll call under management. And so the big difference between the 2 is the sheer scale and scope of Conagra. So it was a heavier lift to do all of that at Conagra. And the way we think about what we've been trying to do for the last 8-plus years is to really reshape the portfolio for sustainable growth and sustainable margin progress. And the way we've done that has been by turning what was once a diversified holding company into a pure-play branded food company largely based in the United States and largely focused today on the very attractive areas of frozen and snacks, where today, roughly 70% of our retail sales is concentrated in frozen and snacks. We were a very different company 8-plus years ago. And I'd say the big focus area for us as we've tried to reshape the portfolio has been on modernizing all these brand assets through a relentless approach to innovation. Same type of program we ran at Hillshire but on a larger scale at Conagra.

Makes sense. Okay. So how do you, as a company leader choose which opportunities Conagra should focus on and allocate resources to and which you'll let pass? I mean it's really the definition strategy, what are you going to do and what are you not going to do. Can you give an example of areas of focus and things you've decided not to pursue?

Yes, that is a great question. I'd say 1 of the chief responsibilities of a leader is to figure out how to allocate your precious but limited resources. And so placing bets on where to play and also where not to play, you got to get more right than you get wrong. And so as I just mentioned, our bet on where to play has really been on frozen and snacks, and that has really paid off quite nicely. We can talk about that in a bit. But the part you can't see is where not to play. So you can see it by virtue of things like the divestitures we've done, which tend to be more product lines that have become commoditized, have lower switching costs to private label, have profit pools that are shrinking. So the things we've divested are indicative of that. But overall, what we're looking for when we decide where to play is where are the sustainable paths to growth and where are the profit pools not only stable but growing. So a contemporary example of electing where not to play is in our plant-based meat alternative business. So we have a brand called Gardein. And all of you remember when the plant-based meat alternative world exploded. It all happened in the world of food service. It was all about beyond, and it was all about impossible, and it was all in quick-serve restaurants. Well, we had the Gardein brand at the time, which was growing nicely. But as you can imagine, we're not infinite in the capacity we have for the business. So we had to elect where to utilize the capacity for our Gardein business, and where not to do it. And all the buzz was food service, but that didn't make sense to us. And the reason it didn't make sense to us as being our top priority is all of our experience would say food service operators, particularly quick serve operators build their own brand. They don't build other people's brands. So when Impossible and Beyond emerged in a branded way in the world of quick-serve restaurants, we did not think that was sustainable. We thought as soon as scale was built, that will become an own brand product. And then the products will be RFP products that are put out to bid for the lowest cost provider. And we're really not a contract producer for food service operators as a top priority of the company. And we didn't want to use our precious supply on Gardein there. Interestingly, the buzz was also around burgers or burger alternatives at the time. And we elected not to put our focus there. We elected to put our focus on chicken alternatives because the #1 animal-based protein consumed by Americans is chicken. And so today, we are chicken-focused in the grocery store in the frozen section. That's what we decided to do. We decided not to chase the dream in the world of quick-serve restaurants as our top priority. And sure enough, as fate would have it, that is how the business has evolved. The foodservice quick-serve restaurant arena served to drive a lot of trial, particularly in burgers, and no one should have ever expected all of that trial would convert to repeat purchase. But that business has begun to soften, and it's begun to become more of a private label store brand type of operation. Same thing with the meat counter, by the way, in the grocery store, the butcher arena. Frozen to the contrary, that has remained branded and it's remained a growth engine and our growth on our Gardein business has been fantastic. And our launch of the Gardein Ultimate Chick'n line, which is our reboot of our chicken to a much higher quality product of chicken alternative has been a smashing success. So that's just 1 example. One other 1 I'll quickly mention because you all remember, it is -- remember when Blue Apron was hot, this notion of home delivery, direct-to-consumer that was on fire 4 years ago, and we just couldn't see a path to a sustainable profit pool there. So we elected not to put our resources there and I'm glad we made that choice.

Makes sense. You talked a little bit about Frozen being an area that you have focused on. Normally, we like to just keep focused on the long term in these conversations. But I -- the question has come up a lot recently on the frozen side. Can you make any comment on the Americold cyberattack situation that's recently come up and how it might affect you?

Of course. Happy to do that. The background on frozen. Frozen is our top priority as a company at Conagra. And my belief in frozen as a space occurred when I was the CEO of Hillshire Brands, 1 of our -- actually, our largest business there was Jimmy Dean, and we had a great breakfast sandwich business. It was a large and high-growth business that's sustained for a long time. When I got to Conagra, it did not make sense to me why frozen would be such a smashing success in breakfast, but not lunch, dinner, dessert, snacks appetizers. So -- and ultimately, it is a great choice for consumers. So that's why it became our top priority. And in the last 8 years, we've become the leading producer of frozen foods in the United States, taking over the lead of that space from Nestle and all of that success has been on the back of innovation. So this is a top priority for us. It's a big business for us. Americold is a significant partner for us, I think third-party logistics in the cold chain, transportation, warehousing type thing. And as you read in the news, they had a cyber event where they were hacked and that while temporary caused a disruption to parts of our frozen and refrigerated business for 9 days. So 9 days where we could not operate with the efficiency that we would typically operate and that created a backlog of orders that we had to scramble like crazy to try to clear before the end of the quarter. So 9 days is on a decent chunk of our frozen and refrigerated business. And our team did an awesome job. They did a fantastic job working right through Memorial Day weekend to try to clear as much of this as possible. So where do we sit today? Well, we are in the process of closing our books right now for fiscal year-end. So we do not have, as I sit here this morning with you, actuals on where we close the business. And so I'd point that out because it's just a fact. To get that, you're going to have to tune into our earnings call on July 13, and we'll give you that perspective there. So I realize that leaves you sitting there saying, "Well, how will this Americold situation in 9 days of disruption impact your print?" Well, again, we haven't closed the books, so I don't have final numbers, but let me try to be helpful if I can. In terms of how -- what I can see, which is not everything because we haven't closed the books, to me, we look like we're tracking very well at operating margin, EPS and leverage, which is good. I'm glad to see that. This is a top line issue, obviously, because of 9 days of disruption to ability to invoice, so depending upon how much of the backlog we cleared and we invoiced by the end of the quarter, I think we'll end up with our top line somewhere a bit below the implied Q4 guide that we had previously. So that's -- based on what I can see today, we're looking very good, tracking well, operating margin, EPS and leverage versus our implied Q4 guide and top line a bit below the implied Q4 guide based on what I've seen. We'll see how many we actually invoiced once the books closed, but that's my best estimate as we sit here today.

Perfect. Thank you so much, and obviously, a short-term blip that will soon be in the rearview mirror.

Interestingly on that, Alexia, because volumes have been a real hot subject in the industry. And -- so even with this Americold disruption that we had at the end of the quarter, what I had mentioned to everybody on our last quarterly call is the industry has taken a massive amount of inflation-justified pricing over the last few years, and the elasticity of demand that we've seen has been very benign and very consistent versus historical norms, and that has remained the case. And so what I shared on the last quarterly call is what happens when you start to lap these pricing and inflation super cycles is actually quite mechanical. Of course, you're going to see dollars come down when you start to wrap the pricing. And then the volume declines, while benign, they're still intact that you see will begin to abate. And that's exactly what we've seen. In fact, if you look at our scanner data for the last 6 weeks, and I look at it week by week by week, so I can see the trends, even with this Americold situation causing us in subparts of our frozen and refrigerated business to have some out of stocks on shelf, which obviously prevent items from scanning we have had industry-leading unit volume change versus year ago performance versus our 5 nearing peers. And that's good. And if you tune into our call on July 13, I'll give you more color on exactly what we're seeing volumetrically. But interestingly, we're beginning to actually see volume growth in parts of our portfolio. And so I think that kind of shows you the mechanical nature of how these trends change once you begin to wrap the initial pricing that you took.

That makes sense, and we've seen that in previous cycles, I guess. So linked to that, actually, COVID definitely presented a unique set of opportunities and challenges for the U.S. packaged food sector and then obviously followed more recently by supply chain disruptions and inflation. As we move towards a more regular long-term growth algorithm, are we likely to see a hard or a soft landing for the group? That's, I think, the big debate out here in the investment world.

Yes. So the word I would use, I wouldn't think in the world of food, I don't think of it as a hard or a soft landing. I think of it as a fairly predictable pivot. As I've said a couple of times, this is a highly mechanical process. when you get hit with inflation, you take price. You go in to take that price and there is roughly a 90-day lag before it gets reflected on the shelf. You have margin compression mechanically during that 90-day lag and you begin to recover that margin compression after that 90-day period. If you have the price in wave 2 and wave 3 as the industry did, that cycle repeats again. At some point, the waves of inflation and the waves of pricing abate, which is where we are now, and then at some point, you wrap the pricing that you took. When that happens, the gaudy dollar sales growth that you've seen in food that's well above historical norms will come down and the volume declines associated with elasticity of demand will abate. And so it's a pivot, and that's what you're seeing. How that pivot plays out for each company is dependent upon when each company started its pricing cycle and when they wrap. So for companies like ours that experienced inflation earlier, we priced earlier, you'll see the dollars come down earlier and then you'll see the units improve and that's what's happening right now. So I think barring a resurgence of inflation, you'll see companies move toward their longer-term algorithm. I know everybody wants to know what week that will hit. It will be different for every company, but it will be back to really a few percentage points of inflation every year being offset by productivity, low single-digit sales growth is kind of where a lot of people's algorithms are. And in noninflationary times that happens usually on the back of low volume growth. And within a diversified portfolio, it will be higher in categories like snacks and lower in categories like grocery. So it's a pivot, and that's what I think you're seeing in the data right now. The dollars are coming down, the unit declines are abating. And the real follow-on question a lot of folks have is, well, what comes next? Will it be a return to promotion? Will there be pricing rollbacks, things like that? And I'm sure Alexia you will want to get into some of that.

Yes, actually. Well, actually, let's just segue straight into that because 1 of the questions is, what are you seeing in terms of pricing getting harder, maybe promotional activity coming back, what does that mean as we look out into calendar '24, don't need guidance, but just the shape of the pricing curve.

So pricing, in general, we always like to say pricing is not window based. It's principle based. If we experience cost inflation in our basket of goods, we will take inflation-justified pricing. So as inflation is moderating and the need for additional pricing kind of abates, then what you'll see is a return to innovation-driven growth. And if you look at the growth our company has delivered in frozen and snacks as an example, virtually 100% of that growth has come on the back of innovation. So a return to extremely robust innovation after there was some pullback in innovation during COVID, when people were trying to maximize unit volume and keep the shelf as simple as possible, that's, I think, what you're going to see. And then so -- right now, we -- as we mentioned on the last call, the pricing that we planned to take was intact and in place. But we said if we experience additional inflation, we reserve the right to take additional inflation-justified pricing. We'll see how that plays out as we get into the year ahead. And then the other big question is, will there be an increase in promotion? And I think what we've said and others have said is promotional levels in general in food have come down versus historical norms. Frankly, they're less efficient today than they were years ago in terms of the lift you see in some categories. But the big difference is customers -- retail customers have gotten far more sophisticated in harnessing the data that they sit on to really drive higher ROI activities. And so they have other priorities these days as do we. But there is some room to grow Alexia in terms of quality, high ROI promotions. What I've said in the past is particularly around holidays where you kind of have a baseline of volume, and then there's a holiday spike that is incremental on top of your baseline. We like to promote during those holiday seasons because it's binary either. You get that holiday volume or your competitor does. And it's good ROIC when we get it. So as an example, this past year, 1 of our businesses in Frozen is our fish business. We had a fire on our fish line. And so we were limited in terms of our fish supply and we were not in a position to do a lot of promotional activity on our fish business during Lent. Well you sell a lot of fish during the Lenten season. And so that's an example of the kind of promotion that we would like to do more of. We do a lot of holiday promotion on our frozen pie business, on our vegetable business when people are entertaining and those promotional activities have been somewhat diminished. So as we build that capacity, build back inventory levels as we have been. We'll dial in some of those higher ROI ones, but I don't see a return to intensive deep discount deals, things like that. And then with respect to, will there be any rollbacks of prices in food that you should see. It's always been the case in food that on what I'll call pass-through categories, you tend to see more price going up and price going down. So think coffee, cooking oil, peanut butter, liquid eggs, businesses like that. we were in some of those businesses at 1 point in time. We've divested out of those businesses because of some of the volatility and the growth of private label in some of those categories. But I would anticipate that categories like that, that are more commodity in nature, you'll see the typical up and down movement that you've seen. The good news is for Conagra, we don't have a lot of those categories.

Makes sense. Actually, can I just do a follow-up? You made a comment that promotional activity has become less effective in recent years. Is there a reason for that? Is it the consumers have shifted their behavior or is it a category-specific situation?

Well, I think it's less effective versus what. In the old days, when there was not a lot of innovation and a lot of provocative stuff on the shelf, there was some deep discount promotion in order to mobilize volume. So it was -- and it was true of Conagra, if you look at Conagra back in early 2000s through 2014, not a lot of innovation. So the 1 way that you would stimulate volume movement was through more of these deep discount deals. In the last 7 or 8 years, company's -- big food companies have gotten much more committed to building out their innovation slates and really driving provocative innovation on the shelf. And quite frankly, when you have provocative innovation on the shelf, you don't need deep discounting to move it. The consumer concludes that the modern attributes of those new innovations are motivating enough and intriguing enough that they want to try it. So we don't do a lot of -- if you look at our promotional levels, pre-COVID versus -- or I'm sorry, back in 2015, 2014 versus today, they're significantly below because it's just more cannibalistic. It's just less necessary than it was when you really had no other drivers for that demand.

Makes sense. Can you talk about the company's approach to innovation and maybe how it's shifted over time since you joined the company? Is more of this now outsourced through greater use of M&A or licensing deals? Or is it still very much in-house?

Yes, we've done some bolt-ons and we've done some licensing deals. But far and away, the largest part of our innovation is organic innovations that we build ourselves. And the real intriguing piece behind that is the way we go about building our innovation slate. So 1 of the things that I mentioned that we did as part of the Conagra transformation is really ratchet up the company's innovation capabilities. And 1 -- within that, 1 of the things we installed was a demand science group. And this is an advanced analytics organization that has access to tons of data pools, which interestingly, we're able to now apply things like machine learning and AI to help us harness that and use it more effectively and efficiently. But that demand science group starts out by actually going out and just casting a wide net and gathering the data on all the stuff in food and beyond food in CPG more broadly that is growing and then they study the attributes that drive that growth. Is it keto? Is it grain-free? Is it organic? Is it something that is carbon neutral? There could be many attributes driving that growth. Then we bring in our culinary team and our brand folks and say, well, all these other -- these attributes that we see driving growth in CPG more broadly, which of them would make sense to design into our product categories and into our products? And then we elect where to do that. So we find empirical evidence of stuff that is growing, apply logic and experience to say, do the attributes that are driving that growth makes sense on our brands and our categories and then we turn our chefs loose and our package designers, and we build out our stuff. And then we take it to consumers, and we ask them what they think of it. And so that is a very quantitative approach. It starts very quantitative, and it concludes being very culinary, and it has worked incredibly well, and it's a scalable, repeatable model. I kind of started this approach back in the Hillshire days, we've refined it when I joined in 2015, we started with frozen. We really finished tackling the frozen portfolio by about 2018. We moved this approach over to standing up a snack company as we call it, and we applied it to our Snacks business and it works. So M&A, yes, licensing, yes, it had some interest now and then. But this approach that we do to our core businesses has worked, and we continue to drive it. And I use the word relentless because each year, we have to wrap a successful prior year of innovation. And so the question -- I remember you asked me, Alexia, in the early days, what happens when you have to have to wrap this? Well, what happens when you have to wrap it is you've got to have the next best thing out there. You can never get complacent. And we live in this society where people are kind of overstimulated by all this provocative stuff, and they want provocative stuff. They don't want products that look out of date. So we are constantly studying trends, constantly working on the next wave and constantly trying to stay 2 steps ahead of our competition in this world of -- this world where people want exciting provocative stuff, and it works. We got a well-oiled machine and it keeps getting stronger every year.

Great. Can we move on to digital capabilities? It seems as though we're in the midst of a revolution in terms of machine learning, AI, all of those types of capabilities. Where the Conagra has it had the most impact? And what can the company do now that it couldn't do 5 years ago? And maybe what's on the horizon in terms of what could be down the road?

Yes, it's a great question. I'd say the biggest area is supply chain. And if you look at food relative to other industries, the food industry supply chain is more manual, less modern than other higher-margin industries. And in part, that's because the higher margin your -- the industry that you compete in, the more likely you can invest capital around things like sensors and machines and get a good return on that capital. So as some of these technologies now have become more affordable, and you're seeing the food supply chain modernize. So where we're using automation, robotics, AI today to improve the way we operate and really improve our profitability is things like harmonizing supply and demand so we can optimize inventory management, really dialed in production schedules. That is synced up with the demand signals that we're getting from retailers and from consumers. Things like logistics optimization and freight optimization would be the second piece that comes to mind. Third, things like channel optimization for our products. We have some products that work really well in the big name retailers and we have other products that are really designed for more specialty channels, things like promotional optimization and even pricing optimization for new products. All of that stuff is being impacted today by our ability to harness technology. And then on the forecasting piece, it's -- we have access to tons of data, lots of different streams that historically were siloed. Now we've got the ability to use AI to basically capture all of those different streams, integrate them and use them to draw better conclusions and build better outcomes, and that's helped us do a better job in forecasting and really it's less of a manual process. Where we're just beginning to see the application of AI and these other technologies is on the demand building side, the innovation side. So I mentioned the demand science team and the ability to study all these growth attributes. Well, again, that's 1 of those areas where we've got many historically siloed data pools. Now we can integrate them, and we can use AI to cut across these siloed data pools and look for patterns and look for things that are growing and then basically optimize what attributes do you think we can build into our next wave of innovation. So it's earlier days on the innovation and demand side than on the kind of profit building and supply chain side. But early innings, I'd say still today versus where we'll be in 5 years, but coming on rapidly.

Sticking with the digital capability improvements. Is it in the last 2 or 3 years that it's really started to take off? And what innings are we in?

Yes. It's -- we're in the early innings. I would say it started to take off pre-COVID. But what happened during COVID was everything that everybody -- all of us were doing to drive higher level of sophistication into supply chain basically got put on pause because we were manually just trying to get units out the door then because you had workers in plants who are being quarantined, we had workers who are out with COVID, and it was all about keeping people fed. We had a real service to provide consumers, keeping people fed, and there was massive disruption to the labor pool and our supplier pool during that time. So productivity programs got put on hold, a lot of the modernization had got put on hold. So I'd say it started in the 5 years pre-COVID. It took a pause and now it's ramping up pretty materially. And it's evolving so rapidly. I don't think anybody really knows exactly what all of this will look like in 10 years' time because it is moving very quickly.

Great. You've talked in the past about deepening your relationship with retailers through more open sharing of first-party data sources and focusing on in-store marketing. Can you talk about what kinds of data are now being shared that weren't available a few years ago? And is this now more of a 2-way street versus the old category management model where manufacturers would basically tell the retailers what to put where on shelf?

Yes, it's a -- that's a really great question. And as I mentioned a few minutes ago, our retailer partners have become much more sophisticated today than when I was starting out 30 years ago, the data, frankly, was always there because scanners have been in place for a long time. What's really come about in the last 10 years is the ability for the industry to harness this data. I mean, mountains of data that were always there that were under leveraged now because of things like AI, can be leveraged and conclusions can be drawn that will then influence the actions that both retailers and manufacturers take. So the investment that retailers have made in the capabilities within their own shops in order to harness this data, really pull insights out of the data and then partner with manufacturers to turn those insights into action that will drive growth for both parties, that's really what it's all been about. So in the old days of category management, in the very early days, it was manufacturers bringing insights from their own analyses to retailers. But then even in the last 20 years, it pivoted to the retailer is giving you access to their data, but using the manufacturers' analytical resources to interpret that data and then bring those insights back to the retailers so they can take action. Now it's truly a radical collaboration where the data is more sophisticated, the tools to kind of draw insights out of the data is more sophisticated. And specifically, what we can see are we can see household level anonymized purchase behavior. And so we can understand if -- what people are doing in terms of repeat purchase, depth of repeat, if they stop making a repeat purchase, what are they buying instead, that you can really understand the open set nature of what our products are in people's consideration sets. You tend to think of on a shelf, you've got widget A, with widget B right next to it and people choose between the 2. But that's not the way what the data always shows you. The data might say, if people stop choosing widget A, they might be buying something 5 aisles over as an alternative. It's not just the thing that's next to it. So now we can see all that in the data, and it helps us to really optimize our innovation, optimize our shelving, optimize our pricing and make sure that we haven't missed any key demographics in terms of the product design that we build.

We've got a question that's coming from the audience about private label. And why is private label still relatively benign? I mean it's kind of unusual given the level of price increase. Is it due to a structural supply chain from capacity coming off-line? Or is there a timing change? And maybe linked to that, why are price elasticities holding in as well as they have?

Yes. So it really it is what we're seeing in our portfolio. The level of interaction our portfolio has with private label is below average. And we have seen benign and consistent elasticities of demand on our products given the pricing versus historically what we would see. So historically, we would see an elasticity factor of what we'd call a minus 1, which simply means if you take 10% price increase, you might see a 10% volume increase. What we've seen is elasticity of demand is closer to minus 0.5. So that would say if you take a 10% price increase, volumes, it would be about a minus 5 for a period of time and then consumers adapt to new pricing and those elasticities wane. In the old days, there would be maybe more trading down. There's less of that today and lots of people are wondering why is that the case? Well, my view on that is a major factor here is the fact that because of COVID, all these consumers that were eating a lot of their food away from home previously were then forced to start eating in the home. So at home eating levels became elevated during COVID. Then immediately after COVID, the inflation super cycle hit, prices went up. Those consumers were still eating at home, and they had a choice to make. The stuff in the grocery store is more expensive. Do I go back to what I was doing before and buy away from home or do I stay eating at home? And a lot of them stayed eating at home. Then the choice becomes, well, do I continue to buy the branded product that I started buying during COVID? Or do I switch down to private label? And if you think about that, the choice is pretty vast in terms of before I was eating out, now I am eating branded in home, do I really want to trade all the way down from my previous eating of away-from-home to a private label product, and they've elected not to. They feel like they've already made a trade down. There's already been a sacrifice that has been made, and that is 1 of the factors that I believe has contributed to this reduced elasticity of demand. The other big thing, though, Alexia, is the structural stuff that is happening that is leading people to continue to eat more of their food products at home, things like hybrid work, more working from home means more breakfast and lunch at home. And if you're going to have breakfast and lunch at home and previously when you were going into the city to work, you were eating out for lunch, do you really want to trade down to a private label product, do you want to buy a Conagra Healthy Choice Power Bowl. They've concluded, I want to buy Healthy Choice Power Bowl. That's part of it, things like people getting their entertainment at home, instead of going back to theaters in full force, now people are streaming their entertainment, and that means they're buying Orville Redenbacher popcorn for the microwave at home instead of buying movie theater popcorn away from home. And that already is a trade-off going all the way down to a store brand, unless you're in products that are more commoditized like the ones I mentioned before, cooking oil, liquid eggs, peanut butter, things like that. By and large, a lot of the consumers have continued to stick with brands.

Makes sense. How else has the emergence of e-commerce changed your relationship with the retailers?

So our e-commerce business today at Conagra is about 9% of our sales. It has grown pretty steadily during COVID, we had huge numbers, as you can imagine. And -- but then even in the last 6 months, we've continued to see incredible resurgence of growth in e-com. The majority of our e-commerce sales are what I'll call click and collect. So bricks and mortar customers who have shoppers that are shopping online. And so and people always ask, is that as profitable, it's the same profitability as our core business. And so that has been a real growth area. And because it is growing so rapidly compared to the retailers in-store sales numbers, it remains a major investment area and a major priority for retailers. So our approach to building relationships with retailers, it starts with the scale and the scope of our products, retailers need our products. They're very important in their shoppers' baskets. So therefore, they're very important to the retailer sales line. But we also like to listen to what are our retailers' priorities, what are their areas of focus because we want to partner with them on that. We'd rather partner with them than let our competitors sign up to partner with them first. So when e-com became a top priority for bricks-and-mortar retailers, we were first in line to say, "Let us help you with this, let us co-invest with you." So that's been a big priority area, and they're getting tremendous growth out of it, and it's helping their weighted average total top line sales, and it's certainly 1 of our fastest-growing pieces of our business.

Before the pandemic, retailers seem to be embracing smaller challenger brands with simpler ingredients as a way to differentiate their offerings and drive traffic. Then all that went out the window during COVID as the assortment refocused down into a smaller number of leading brands and SKUs. And I think e-commerce actually helped that as well. As we emerge from all of this, do you think retailers are going to start to look for the surviving smaller challenger brands once again? Or is that chapter over?

It's not over. There's a role for those brands. But I think what's most interesting is to go back to kind of the root cause of when was that cottage industry born of, I call them Expo West brands, the boutique brands, and why was it born? And the answer is quite simple. Major food manufacturers somewhere in the early 2000s, mid-2000s moved away from really driving consumer insight that leads to great innovation and having relentless innovation into pure blood margin expansion. And so you remember the whole move in our industry toward margin expansion focus. It was the top priority. And think about that. When innovation dries up from the major food manufacturers and the retailers need growth to sustain their business something is going to give. And what I saw in the first 20 years in my career, tremendous barriers to entry for small boutique brands to really build a beachhead and they were capital barriers to entry, things like slotting fees that were there that they could not afford. All of a sudden, out of desperation of growth, these retailers would waive the slotting fees, we will take your cool stuff with no slotting at all because I got to get growth somewhere. I'm not getting it from the major food manufacturers. And so that built a cottage industry that then became a big industry. And then the major food manufacturers obviously have woken up and they've recommitted to innovation. We have demand science and building out major relentless innovation programs on the big brands. And what we see is if you -- and we see this over and over again in the data, if you design the same growth attributes into 2 brands, 1 small boutique brand and 1 big iconic brand, the difference in sales between the 2 will be dramatic in terms of velocities, units per store per week. Laws of growth would say, in order to win in the branded industry, you need to drive household penetration. And the optimum way to drive household penetration is to take modern attributes and design them into well-known iconic brands, and you will get velocities that are many times that of the boutique brands with the exact same attributes. So where does that leave smaller boutique brands? Well, there's a role for them. There is a place in traditional retail for a number of facings to access certain households that will only buy brands with those attributes, which is not a huge piece of households, but it's a piece. But the bigger piece is channel management. So there are some channels, natural channel is the 1 that comes to mind that really don't like to carry big brands because they differentiate themselves from traditional retailers by carrying more unique, more boutique-y brands. And so their whole DNA, their whole branding strategy for their business is to carry these brands. And so we have to have some of these smaller brands to service our natural channel partners because it's incremental ROIC, it's incremental sales, and we want that incrementality.

Can we talk about the biggest avenues for growth for the company by product category, maybe within each of the segments?

Clearly, with 70% of our portfolio today being deliberately curated to be about frozen and snacks. In 5 years' time, that will be a bigger number. and because there's tremendous growth opportunity in both frozen and snacks. So the consumer domains that you will see us continue to focus first and foremost on our frozen and snacks. If you take frozen Alexia, you know that in the last 5, 6 years, we have really built a juggernaut of a single-serve meal business. And by the way, frozen in the United States is a phenomenal business. If you look at the frozen industry around the world, the best market by far to be in frozen is in the United States, and we are the #1 player there. And what we've learned is you got to have scale to be successful in frozen and to be profitable in frozen. We've got that. So we focused first on the big space of single-serve meals within frozen and obviously got a huge benefit during COVID because all these people are eating lunch at home, and there's nothing better than a frozen single-serve meal when you're having lunch at home. And now we're moving our attention into adjacencies. So multi-serve meals in frozen, think family-sized meals has been a big priority for us in the last year. Our business is growing robustly. If you look at our Birds Eye business, which is 1 of our largest brands, we've been focused on multi-serve building out Birds Eye Voila, and we are seeing tremendous growth, and we're gaining share. So we'll continue to do that with our PF Chang business, our Bertolli business and a whole exciting innovation slate. Beyond that within frozen, there's appetizers and snacks. People love snacks, but frozen is also a great destination for snacks. So you'll see us be more aggressive in that adjacency. And then even novelties and desserts, we're -- you're never going to see us get into like gallons of ice cream, but the novelty business is a great business. We sell fudge bars, 1 of our highest velocity items in our portfolio, and that's a kind of a permissible way for consumers to eat dessert, and it's also more profitable and more insulated from private label than some of the bulk ice cream that you see. So the way I think about frozen in total is you have a ton of invested capital from the retailers in the frozen section of the store, they need to get a return on that invested capital. There are a lot of glass doors but modernization has not taken place behind all of those glass doors. It happened first in breakfast, my old company, Hillshire and Jimmy Dean then Conagra got after single-serve meals. And now we're just methodically tackling all of these glass doors. So we, in our mind, have 10 years of runway of continuing to bring the same kinds of modernization that have driven our business into other ZIP codes in frozen. And if you look at total frozen in the United States in the last several years, Conagra categories in Frozen have driven 70% of all the growth in the entire frozen section. And so it shows you the impact of this modernizing innovation and the way you can get people to realize that frozen is just a temperature state. And they used to think frozen equals bad food. Well, now they realize, if you can dream it, we can freeze it. If you want high-quality food that's frozen on call ready when you are, we can build that for you. And that's what we're going to continue to do.

Can I go down a little bit below the line here and ask you about Ardent Mills. The profits have been pretty elevated over the last couple of years, presumably because of the weak cost volatility. Are they expected to normalize as those wheat costs normalize over time?

Yes. When you think of the Ardent Mills joint venture, we have -- we own 44%, Cargill owns 44% and CHS, a co-op owns the remaining piece. There are really 2 pieces to that business. There's the milling piece, which has kind of seen a nice baseline increase over time. It's a young business as the business has seasoned. And then there's the trading piece, and the trading piece tends to outperform in times of volatility. So we've had times of volatility. That piece of the business has performed. That's not the way that, that piece of the business is always going to perform. So you will see some movement of that back toward historical norms. Exactly where that comes out, we will share more perspective with you on that when we give guidance on our July 13 call.

Makes sense. Can you talk about the priorities for the uses of cash? And in particular, I think you've got some debt coming due in fiscal '24. Should we expect some sort of refinancing that can push interest rate payments higher?

Well, the debt that's coming due, the interest rate, the last time I looked, it was pretty close to 0. So it's hard to beat that. So if we refinance that, that will be -- but in reality, 90% of our debt is fixed. In terms of our cash, our free cash flow conversion typically hovers around 90% when we're not doing unique things. In this last year, we've been doing unique things. We've been investing in working capital. So we can build inventories back to kind of pre-COVID levels, so we could have pre-COVID service levels. That's kind of a unique thing coming out of COVID that we would do that's typically not the way we would operate. But we've always had a balanced approach to using our cash. We invest in our business, invest in CapEx. We pay down -- obviously, debt reduction has been a major priority for us in the last few years, and that will continue to be the case. And then this past year, we built some inventories back.

Makes sense. Moving into the home stretch here. What do you see as the key priorities for the company over the next 3 to 5 years? And what are the biggest risks?

Well, the key priority is back to your initial question on focus. Our goal is to continue to reshape this portfolio for better growth and better margins. And we will do that by continuing to drive more and more of our portfolio on a percentage basis into frozen and snacks. And the way we do that is, first, we invest in the businesses we believe in. We might carve out businesses that don't make sense in there, and then you could bolt something on. So that's how we'll continue to think about reshaping the portfolio for better growth and better margins in the year ahead. But the priorities will be about frozen and snacks, and much of that will be organic in nature. And then in terms of risk, I think the risk is when you're successful as we've been in frozen and snacks, people always try to emulate you. And so the way we stay ahead of our competition is by continuing to be relentless in studying consumer trends, harnessing all the analytics coming out of demand science, and staying a step or 2 ahead in terms of what's next and innovation. And that's -- and partnering with our customers to get the kind of support for that innovation that leads us to year after year pick up, more and more TPDs, total points of distribution and having better velocity per TPD. That's the recipe for success with a focus on frozen and snacks.

Great. Can I sneak in a quick ESG question? How are you integrating ESG considerations into your approach to running the business?

Sure. Well, I'll hit this quick. So when I think about what we do in ESG, I'd always start with the overarching objective for our management team for our company is to create shareholder value. But then we bolt on our first company value, which is integrity. And in our mind, that just means doing the right things and doing things right and it recognizes that we have other stakeholders. We've got employees, we've got our community. We've got the planet. So we want to do the right thing. We want to create shareholder value, and we want to do things the right way. So if you go to our recent sustainability report, you can see a full download of all the work we do. We basically -- everything we do in our sustainability efforts is around 4 pillars. Good food, responsible sourcing, a better planet and healthy communities and stronger communities. And so if I just give you 1 example there, we have a frozen meal line. We started with Frontera and Healthy Choice, where we redesigned the historically black plastic bowls that were in that to use plant-based kind of fiber-based bowls that come from sugarcane. It's compostable. It's great for the planet. And by the way, it works for consumers. The consumers, especially Gen Z and millennial love this package. So we've rolled it out across more and more of our portfolio. So it just goes to show you when we pick our spots on our ESG priorities, it's not about doing the right thing or making profit and having stronger sales, it's about doing both, and that's exactly the way we approach it.

Great. And finally, if we as investors were sitting out in 2033 and looking back at everything that Conagra had accomplished over the past decade, what would you say was the 1 big thing that we had no idea was coming back in 2023 that made a huge difference to the trajectory of the company?

So our focus, again, frozen and snacks. I don't think it will be a surprise to anybody that snacks will continue to thrive between now and did you say 2033? So that's not going to surprise anybody. But if we were to drop into the grocery store in 2033 and look at the frozen section, you're going to see more people. You're going to see more glass doors that have incredibly provocative food behind it. And everybody will be of the mindset that frozen is the optimum temperature state for today's consumers because you can build great food across breakfast, lunch, dinner, snacking, and dessert that's on call, ready for consumers, that offers the best value. And I think by the time we get to 2033, you'll see a much broader-based appreciation for exactly how well frozen works for today's consumers.

Great. Thank you so much for your time today. We really appreciate the conversation. Thanks for being here.

All right. Thank you.