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

Hi. Thanks for joining us today. I'm Tom Palmer. I cover the food space here at JPMorgan and thrilled today to have with us Sean Connolly, CEO of Conagra Brands; and Dave Marberger, the CFO. Conagra Brands is a U.S. packaged foods company that sells a wide range of frozen, refrigerated and shelf-stable products. Its biggest categories include frozen entrees, frozen vegetables, meat snacks and popcorn. Sean has been CEO of Conagra since 2015 and Dave CFO since 2016.

Sean, it's been an unusually challenging period for volume growth for large packaged food companies. Among other considerations, we've seen the rise of GLP-1 drugs, a growing awareness, I think, of smaller brands, more scratch cooking, more price-sensitive consumer following a period of elevated inflation. You've seen a lot in your career. To what extent do you think there's been a structural change in demand for packaged food versus perhaps more transitory impacts?

Sure. Well, thanks for having us, Tom, and good to see everybody. And for those online, thanks for tuning in. I don't think this is really as complicated in hindsight as it might seem. If you look at the group in our industry over the last, call it, 5-plus years, you've seen somewhere in the neighborhood of 40% to 45% cost of goods inflation, which then triggered matching pricing actions for the vast majority of that 5- to 6-year period. So cumulatively, what we've got is a consumer who is strained and when the consumer is strained, it tends to show up in the volume line. Now if you look at the scanner data that was released yesterday, I think for the past 4 weeks, our volumes were 1.5 points. So it's not as if we're a country mile off of our -- the midpoint of our long-term algorithm, but we're off and we're off because consumers are making some of these behavior shifts in response to that massive amount of cumulative inflation. Now as to the money question that I know many investors are asking right now, which is this cyclical or is it structural? It'd be nice if we could give a simple answer that speaks to everything and say the answer is one or the other. It's not. I would say the answer varies by category, and therefore, your analysis needs to be done by category. If you're looking at a category where the behavior shift that you're studying is tied to value-seeking behavior response to consumer searching for more value. My experience would say that is it likely to be a transitory behavior shift. Why? Because that is not a behavior shift that the consumer left to their own devices would choose to make. They would rather not make that shift. They are making that shift because they are trying to live within their budget and they're making a switch to something that they would rather not do, but feel like they're compelled to do. After a period of time, usually not long, fatigue in terms of that purchase behavior sets in and they revert to their previous behaviors. So that's typically what we would see. It's not terribly different from Yo-yo dieting. People aren't happy with where they stand in terms of health and wellness. They might go on a diet, they don't really like the choices that they're switching to fatigue sets in and then they switch back. We see similar types of behaviors when consumers make purchase behavior shifts that are compelled by the march toward value. On the other hand, if you're looking at a category where the behavior shift is tied to a fundamental change in consumer preference, that's one I think that manufacturers have to study more closely. I look at what's going on right now with less alcohol consumption, less sugar consumption, less carb consumption. There seems to be just more of an overall focus on health and wellness, particularly among younger consumers, that could prove to be a stickier behavior. So fortunately, we don't compete in a lot of those categories. But when I do see something like that, it makes me think of manufacturers needing to change their innovation priorities and tailor them to what consumers are looking for today, which after all, frankly, is what we do in the consumer packaged goods business anyway. We're constantly responding to changing consumer desires and tastes. So I don't think it's a simple answer as to whether or not it's structural or cyclical, but I would say the vast majority of the behavior shifts we've seen have been in response to this significant run-up in cost of goods, which then triggered pricing, which then triggered value-seeking behavior, and that tends to be transitory in nature.

And I think that does explain a lot of the private label share gains that we have seen in certain categories. But recently, we have also seen a bit more from larger brands -- sorry, from larger brands losing share to smaller, maybe perceived better-for-you brands. What are your thoughts on how large food companies and maybe how you are currently responding to that environment and maybe what's to come?

Sure. Well, it's a really interesting dynamic because historically, when we've seen a run-up or growth in smaller boutique brands, 1 of 2 things or both have to be in place. The first is just a fundamental lack of innovation from the major manufacturers. I don't really think that's happening right now. That was happening, what I'll call in the height of the 3G era when everybody was focused on SG&A reduction and not focused on innovating that created vacuum. The smaller brands filled that vacuum created a bit of a cottage industry, the Expo West industry, as I call it, was born. I don't really see that going on right now. The second one, though, has been happening which is, again, back tied to the runaway inflation over the last 5 years and consumers in the pursuit of value, that has led to channel shifting in shopping behavior. And so the second dynamic that we've seen historically is when you see shoppers switching channels in the pursuit of value and the channels they are shifting to happen to be retailers that purposefully feature more smaller brands and less larger brands, take the club channel as an example because they want to create a treasure hunt environment, you might -- and by the way, when that happens at the same time at other channels are weak like c-store over the last few years, you can see a mix shift across channels, and that mix shift also is connected to a shift in the kinds of brands that are merchandised. So we've seen that in a couple of our categories. We actually saw it in meat sticks. And we say, all right, we've got to have a response to this. And our response in that case, was an acquisition, and we made the acquisition of FATTY Smoked Meat Sticks because we believe that FATTY Smoked Meat Sticks can compete with any smaller boutique brand on the planet when it comes to meat sticks because it offers the exact same health and wellness benefits, but a measurably superior taste benefit. So we've done that. We've been thrilled with the performance of the business in the year we've owned it. We've significantly increased the size of the business. And frankly, we're just getting warmed up. So at the end of the day, a big company like ours is going to have a combination of large brands that compete primarily in well-developed large channels, but also a mix of some smaller boutique brands that play in alternate channels because that's what those merchants want to carry in terms of their mix. So we've got a bunch of stuff going on there. Some of it, by the way, is acquired. Some of it is built and we've built some things from scratch. We have a new snack [ bit ] business right now that we built organically that basically operates like a boutique brand right now, and it's called Vlasic Pickle Balls. And it was pretty simple logic. The fastest-growing sport in America the last 3 years has been Pickleball. We happen to be the leading pickle producer in the United States. Vlasic, Pickleballs, you put it together, and we've got a winner that happens to work in some of these alternate channels the way I just described.

Right. Switching over to frozen entrees, I mean that has been one area where maybe you've had heightened investments here ongoing. You've got the baked chicken line, I think, coming online here soon and then later this year, fried chicken or I guess, later this fiscal year. Maybe we could cover just what drove the need for this expansion, get an update on kind of where we stand in progress. And what are the benefits maybe that we might see through the P&L as we think about these facilities coming online in coming periods?

Sure. Let's take it from the top, frozen and then talk about chicken -- the importance of chicken within frozen. We are the largest frozen manufacturer in North America. We're probably the largest manufacturer in frozen food in the world. And so it is a major strategic priority for us. And frozen is great because it's just a temperature state. If you -- I'd like to say, if you can dream it, we can freeze it. It is fresh food that it can be incredibly healthy for you incredibly clean label, loaded with protein, loaded with vegetable nutrition. And then we flash freeze it at the peak of freshness. So strategically, one of our priorities is continuing to preach the benefits of frozen because it's in your freezer. It's on call ready when you are. It's not going to spoil. We've got to preach it so that the world kind of understands that frozen food is just a temperature state, and it's perfect for your busy lifestyle. And so that's what we want to do. We want to continue to drive household penetration into frozen year in, year out. Last year, we had an interruption in our service. We were growing our frozen and refrigerated business. I think by the end of Q2, we were north of 3% volumetrically, which is a good number. We had 7 straight quarters of volume pickup as we kind of started seeing the consumer getting ready to get back to a convenience behavior and get back out of scratch cooking. And this year, our focus has been covering our service after the interruption we had in February, and we've been doing that. So we've got our service levels now back north of 98%, which is very encouraging. If you double-click layer down and you say, what's growing the most within frozen, one of the things that is hard to miss is chicken-based. Protein in general, I think you all have heard the news, is on fire right now. That shows up in snacks. It shows up across all different types of protein from plant-based to animal-based. But within the animal-based protein world, chicken is absolutely on fire. Historically, most of our capabilities in chicken are in what I would call baked/roasted. So we had tremendous capability there. We had a major capital project queued up for this summer to modernize that facility given the incredible strain we had on that facility strong demand. We didn't quite make it to the finish line on that. We ran into some quality and consistency issues just a couple of months before we were to start that. But now that's up and running and it's very far along. Last year, we also saw that fried chicken absolutely exploded. And it shouldn't be a tremendous surprise to everybody because if you look at the world of QSRs and the success of Chick-fil-A and Raising Cane's, all of that type of stuff, fried chicken is one of the most beloved forms of food in America that should carry over to the grocery store. We created a product called Banquet Mega Filets last year, which basically mimics what you could get at some of those QSR names I just called out. And we had absolutely awesome results. Our velocities were way in excess of what we predicted. And frankly, we ran out of capacity. So historically, we had much more capability internally and baked and roasted a little bit in fried. The growth of demand in fried has led us to have to reconsider everything from what we've got internally to the partners we have on the outside network is underway as well.

Thanks for that. I think one of the extensions maybe of what we saw a year ago when, as you noted, the very strong volume performance was aided by merchandising and promotional activity. I know you've been asked a lot on your views on promotional activity over the years, but maybe an update on where we stand today in terms of ramping back up to promotional levels that you would like to target to drive that volume growth and the response you're seeing maybe across some different categories?

Sure. I shared a chart at the end of last quarter that you all can find online that showed us and the industry, and it's really uncanny. Everybody is in a very tight bandwidth in terms of percent volume sold on deal. And I basically call it pre-COVID levels. Everybody is pretty spot on to pre-COVID levels of percent volume sold on deal. And encouragingly, depth of discount has not been deeper than pre-COVID, meaning people aren't giving away the farm in order to try to stimulate volume. It looks pretty rational overall. So that's been the environment. As far as we're concerned, we're not quite there yet because we had the service interruption. And when you have a service interruption, it takes -- you have to rebuild confidence with your customer that you're going to be able to fulfill the amount of product that's needed for those events. So our goal was to get that trust back in place before we got to this holiday season. I feel good about where we stand right now, but we're kind of inching our way back. So we saw progress last quarter. We still have some room to go. I think the thing that you all read about every day is our lifts right now in response to promotion as strong as they've been historically. And the answer is not no. The answer is it varies by category. And so if you look at our Q1 as an example, we had precisely the same lift in our last quarter Q1 that we had in the year ago period. So we haven't seen any diminishment in terms of lifts for our particular categories. In fact, last year, before we had our service interruption, we had outsized lifts on a lot of our categories and frozen, in particular. And I attribute that to fatigue from the consumer doing scratch cooking for the previous year and basically saying I've had enough of all the prep and clean up and everything associated with scratch cooking, even if it's a better value. So I think lifts are specific to the category, and it kind of comes back to my first statement around is the state of the union in any given category, structural or cyclical, if it's tied to value-seeking behavior and there's fatigue setting in on that behavior shift, I think you have a chance of a very good lift in terms of your merchandising right now. I think you'll see that in our holiday business coming up. But if you are participating in a category where the behavior shift is tied to a change in consumer preference, it wouldn't surprise me that you would see a lower lift because they're buying something different. And snacking is a good example where there's been a massive behavior shift away from the high sugar, high carb, snacks and sweet treats to more protein snacks, and the beneficiary of that in our seeds business and in our meat sticks business.

Maybe switching over to the margin side. This year, excluding tariffs, main sources of inflation as it relates to protein. You've indicated, I think, that roughly 12% of your COGS basket would be protein exposed maybe within that basket, any update on trends that you're seeing and kind of what the key protein types and within it, maybe the key protein cuts that we should be thinking about?

Sure. So just to ground us in our guidance. We've guided to 7% overall inflation for this year, 4% core inflation, 3% tariff related. We're expect to mitigate about 5.5% of that. So within the core inflation, as you mentioned, the material -- our materials are about 60% of our total cost of goods sold. We're seeing double-digit in our overall protein basket, right? So that's beef, that's chicken, that's turkey, that's pork. So they're really the big drivers. We've been asked a lot recently, we're starting to see chicken prices come down, and that's true. We're seeing that, but we're also seeing beef prices go up, more port prices go up and turkey prices going up even further. And so there's a lot of puts and takes. And so our guidance is with kind of where we were in the beginning of the year. But these are -- a lot of these categories, particularly beef, are at historic highs. Herds are at lows that we haven't seen in supply since the '50s so this is just a supply-demand dynamic. And so we're continuing to manage it tightly. We take positions. We can freeze amounts of our proteins, which we do when it's advantageous for us. But generally, we're on the spot market with this by. And so we're managing through it. We talked about the chicken supply. We are paying a premium right now because we have to go to a co-man for the baked chicken as we make the investments in our plant, but we're pleased that's on track. And so the second half of our fiscal year, we should start to see the benefit of bringing more of that production in-house and not having to go to the third-party co-man for that.

On the tariff front, I think that's been another source of inflation you've called out. Maybe just an update on where we stand today? Are you seeing pockets of relief as we see early trade deals come across? And I know that the main exposure is China where maybe less likely to see near-term relief, but just an update, I guess, on where we stand here.

Yes. And so as I said, 3% roughly was our estimate for tariffs for this year, gross before mitigation. More than 50% of that is related to tin plate and steel for our can good. We have a lot of canned good businesses with Hunt's our Chili business. We don't see those tariffs coming off. At least there's nothing now that indicates that that's the case. And then we have different impacts based on some of the other tariffs and different but that's spread out kind of across several different countries, different supplies that we bring in. And so again, there hasn't been a material change in our current estimates. We're hopeful that, one, we can continue to mitigate the gross tariffs and maybe have some opportunity there. We're working every day on that. And then every day, there are changes that are taking place, so we just monitor it closely. But no material change to our guidance as we sit here today.

So the -- I guess, the extension of all this would be the pricing actions and maybe offsetting pricing actions down the line as potentially some of this inflation eases. So what is your view on, one, pricing for these inflationary items over the last year or so? And two, your view on whether there might be some give back or some maybe incremental promotion to stimulate demand if we do see a more favorable cost environment?

Sure. I think to answer that, you got to kind of consider the last 5 years, and how the inflation environment and pricing environment has played out for our company. So we're in the fifth or sixth year of outsized inflation I would say we -- on principle, we priced to offset that inflation for the first, call it, 4.5 of the 6 years. And then as investors know about a year or so ago, A lot of the feedback from investors was, hey, it's time to get volumes moving. You cannot shrink your way to prosperity as a CPG, let's get the volume line moving. And so we were one of the first companies to say, we agree with that. We think that long-term cash flows will be best served by our brands, having a strong relationship with consumers and volumes being strong. So we began investing in strategic parts of our business in order to move volume, specifically in frozen and in snacks. And we saw 7 straight quarters of linear responsiveness to that resulting in volume growth by the time we exited Q2 of last year. That's when we ran into the service interruption in frozen. So we've been working our way back from that right now. But we went into this fiscal year with a plan of prioritizing volume in our frozen and snacks business so we could see consistent recovery there and prioritizing margin protection and dollar sales in our certain parts of our grocery business, where we were experiencing the most acute inflation, namely our can business, where we have these major tariffs impacting our COGS line. So that was kind of the plan. So I'd call it a horses for courses year, meaning our strategic businesses need to continue to demonstrate strength volumetrically. And our cash flow businesses need to do just that. They need to maximize cash, which means we will price there to offset inflation. And we are doing that, particularly in our canned food business, which starts at the end of Q2 and mostly in the back half of the year. In terms of potential deflation the horizon on commodities like meats, would that result in a rollback of prices because it's a pass-through category. For us, the answer is primarily no. because we didn't roll them up to begin with. In the last year or so, we've continued to experience inflation in things like chicken and meats -- other meats, as Dave has discussed. But we've not increased the price of our frozen business, on average, because we've been prioritizing volume. So our retailers know that. They know that we didn't price to offset that. We basically invested margin in those businesses in the service of volume. And therefore, if we get relief, which we expect we will, we've always got it. And historically, on the other side, you would not expect a commensurate rollback in pricing. If anything, what it's really going to mean to us is significant margin help.

Thanks for that. We started off our discussion a little bit recap over the last couple of years and maybe some volume trends broadly and the root causes. Today, I think we're in a bit of an evolving environment. So when we think about the current quarter and what we're seeing October into November, maybe an update on consumer behaviors that you're seeing just with some of the timing of SNAP, the hurricane laps and kind of how you see that playing out as we look towards the conclusion of your second quarter?

Yes, I would say it's probably a little bit lumpy in the first part of the quarter because you got the hurricane in the year ago. You've got cessation of SNAP payments for a short period of time this year. We'll see how in weeks how that plays out. But as I mentioned in our last quarterly call, our outlook for the second quarter was that the persistent consumer weakness, specifically value-seeking behavior, particularly among the lower-income households, which frankly translates to younger people mostly, would persist into Q2 and beyond. And so we've continued to see that and you hear about it every day. when you put on Squawk Box in the morning, whether it's a food service operator, it's a manufacturer, it's CPG beyond food. It's the exact same thing, which is you've got lower income households whose real wages have not kept up with the cost of the stuff they're buying. And so they're compelled to continue to struggle to make these trade-offs to operate within their budget. And that has continued, but we also expected a lot of that. What's unique to us in the quarter is that we pushed some of our major merchandising events later in the quarter this year than we did last year because we've been rebuilding supply we also had a big beginning of Q2 last year when we had hurricane hit at the exact same time, we had major merchandising events, which drove outsized lifts. So we didn't have that this year. Now we've got SNAP cessation for a period of time, which I think it's real cash. I think what it will show is just a deferral of purchases until once those get paid, but I don't anticipate any net-net changes in that overall. So it's a challenging environment. It needs to improve, but ultimately for it to improve the consumer has got to get some relief somehow. They've got to get some relief either in terms of their real wages and their cash flows or they've got to get some relief in terms of the cost of goods. In terms of the implications to manufacturers should this consumer pursuit of value persist, I think the first place it affects us is we think about the innovation pipeline. If you look at the innovation pipeline, among major CPGs in the last 10 years, a lot of what's been most impressive and innovated, I would say, is on the higher-end scale. It's a lot of clean label, a lot of organic, very sophisticated ethnic meals, things like that. If value becomes a priority, I think you'll see some of those benefits continue to resonate with consumers, but it will have to show up within a price pack architecture that prioritize value. So I think the way we think about it is we have to track this, we have to see how sticky some of these behavior shifts are, and then we have to be agile. And if it means we've got to shift some of our innovation pipe building from being more premium products to more value-oriented products, we can do that all day long. So that's what we do as manufacturers and we've got to respond to what the market signals are telling us in terms of consumer desire.

In the back half of this fiscal year, there is embedded a bit of an improvement in terms of some underlying volume trends. And I think specific to Conagra, A portion of that is the lapse from a year ago and some of the pullback in merchandising and then a portion of it maybe is taking a bit of a view on how the consumer environment progresses. So one, maybe get a kind of overview of how you're seeing those 2 items. And as we think about the back half, the main swing items that might put you more to the high end or low end of your outlook?

Yes. I break it for us into kind of 3 parts. Frozen, snacks and then grocery. Frozen, we're going to have easy comps in the back half of the year because we had supply interruption last year. So that is clear. We're going to have merchandising back in. That should be strong performance. On snacks, I think the most noteworthy thing versus a year ago is C-store is performing well again. And our Slim Jim business is really doing well again. FATTY is growing at something close to 100%. So that's positive. Popcorn remains -- we're having Angie's. We moved our timing on our major event. And that went from a negative comp because we didn't do it in the last quarter positive this quarter. And things like our seeds business is very strong. So I think you'll see continued very strong performance out of our protein snack business. Within grocery, it's a bit of a different strategy. That's where our canned foods reside. Those we will price. We will -- we understand that, that will have an elasticity effect, probably close to a minus 1, and that's baked into our plan as well. So there, it's more about dollars and margin recovery than it is about volume.

Okay. Look, I know it's early. But I will ask on very early thoughts, I guess, on fiscal '27. I think one thing you've laid out here today is the potential for some outsized earnings growth should inflationary really ease and you get a swing the other direction. As we think about kind of the progress you expect to see in the '26, what carries over into 2027? And what can you kind of build on as we move into '27 above and beyond what we expect to see in the back half of '26?

Well, the first thing that will carry over is strong innovation performance. We had very strong innovation performance last year. Our innovation performance so far this year is outperforming that, which is super encouraging. And we've got a lot of it has the programming really yet to hit. We also have some recovery in some of our key categories, not the least of which is meat snacks, where we're the largest player in the world. So that's important. And we've got meaningful recovery on the horizon in frozen, where we had major momentum through the second quarter of last year, and we're clawing our way back, and we're starting to see that momentum build again. So those are all positive. We also have new capabilities going forward in chicken, which feeds a major part of our frozen portfolio that we haven't had before, and that will be helpful not only with the service element but it will be helpful with the margin element as well because we've had to go out of our normal playbook with higher cost solutions to serve a lot of -- to create a lot of the products that we've been serving over the last 6 months. And so that will abate over time as well. And then I think the wildcard is what happens on the cost of goods line. And if we get meaningful relief, any kind of relief on the cost of good line, that will help us claw back a lot of the margin that we've invested in the name of volume stability this year. Anything I missed, Dave?

Just we will be wrapping on some pricing that we're taking, particularly with the cans in the second half and some of the sweet -- kind of the cocoa and sweeteners that we've priced on. And then a thing that has impacted us the last 2 to 3 years has been fixed overhead absorption as volumes have been down, that impacts us, particularly in our frozen business. So the throughput just aren't like you have in a grocery business. And so as volumes start to come back and ramp up, there's the flip of that, you get some real tailwinds from that. So again, that depends on timing and inventory. But that should be a tailwind for us if the volumes come back in '27.

Yes. And the only other thing that I mentioned before that I think is a dynamic that we'll all have to continue to watch is there's been just an unusual amount of channel switching from shoppers all the way back to the start of COVID. At the beginning of COVID, you saw a lot of shoppers shift from the big box retailers to local mom-and-pops because they thought it would be safer and they can avoid COVID, if they shop at a small grocery instead of a giant supercenter. More recently, as people are pursuing value, you've seen the opposite happen. You see people go back to the larger places because they think they're going to get a better value there or maybe they'll go to club channel or maybe will go to hard discounters. So that's been a very dynamic environment. And it's hard for your innovation to keep up with that dynamic because we build our innovation so that we can talk to retailers about it, show them what we've got, and they slot it in to go into the planogram sometimes a year later. And well, what happens if there's changes within the year and their channel needs, and that channel is more important today. So agility, there's a premium on agility for innovators like us. And I think we've now had an opportunity to say, okay, if some of these channel shifts going to be sticking with us, let's build some winning solutions for some of these customers that in the past, maybe were not beneficiaries of a lot of innovation. And so I think that's going to be an interesting dynamic to see as well because we're kind of agnostic to who we build it for. It might look a little differently because different merchants have different priorities in terms of the design of the stuff they want to put on their shelves. But we can -- we have -- I can assure you, we have all kinds of stuff within our portfolio from really cool boutique brands to marine calendar and something that will service major grocers. So we can tailor our mix based on where the poll is.

Okay. Shifting over a bit to capital allocation. Your net-debt to EBITDA running a bit higher than your long-term target. Your dividend payout, and I know free cash flow is probably going to be meaningfully higher than EPS this year. But the dividend payout is running higher than you've seen in the past and I think probably higher than you would target over time. How do you balance targeted debt reduction with the desire to maintain the dividend? Because it seems like, at least for this year, the decision leads to maybe a little bit less debt reduction. Is this largely contingent on seeing some earnings recovery in coming years? Just any update there?

You want to take that?

Yes, let me take that. So it all starts with capital allocation. Sean and I discussed this all the time. We discussed this with our Board at every meeting. And it's just something that it's a top priority for us. We always talk about a balanced approach to capital allocation. What does that mean? That means investing in the business, managing your debt, providing an attractive return to shareholders and if there's M&A opportunities that depending on the timing. That's what we balance. And we balance that, and we will continue to do that. So when I look at each one of those investment in the business, if you look at this fiscal year, we're increasing our CapEx 16% in our forecast. We're increasing our trade merchandising. We continue to invest in innovation. We expect our A&P to be up. We are making significant investments in the business. When you look at debt, our leverage ratio has gone up, and that's been solely because we rebased our earnings based on inflation, right? So the debt, we paid down $1 billion in debt the last 12 months ended last fiscal year, and we're forecasting to pay down another $700 million debt this year. So again, we're not at that leverage ratio target, but we continue to pay down debt. And we held our dividend flat, which is providing consistent returns and attractive returns to our shareholders. We're not doing any opportunistic share repurchase. That's the one give there in terms of the shareholder. But we felt like we are balancing the capital allocation approach. I understand the question that comes up because of the dividend yield. But the fact of the matter is, is that we're very balanced in our approach. And if you look at -- and our kind of estimates are that we will grow back into our payout ratio. We do expect our profits to go up going forward. Just to get everyone grounded with our guidance this year, we took our EPS down $0.25 versus last year just from net inflation. The inflation that we could not cover. That's $150 million of operating profit. And so that just hit us this year we called it out. We put it in our guidance, but we expect over time that we're going to call that back. And if we do get some benefit of lower than sort of historic inflation in the last few years, then that could accelerate. And so that's how we look at it. We feel very comfortable with that approach. We talked to our board about it all the time, Sean and I talk about it every day. Sean, I don't know if you want to...

Yes. We just had a long conversation around animal proteins, and animal proteins are particularly high right now, and we have elected to not take broad-based pricing in our frozen meals business because we're prioritizing a return to volume growth. So that's -- in the short term, that's going to pressure our margin is going to pressure our cash flow. But we don't think that's a structural dynamic at all. In fact, as we just discussed, animal proteins are cyclical. They go up, they come down. And because we have not taken price in response to them going up, we would not anticipate reducing price in response to animal proteins coming down. So that will be margin flow back when that happens, that will be an improvement in our cash flow as that occurs. But right now, on certain businesses, frozen and snacks, our priority remains on that very strong connection between our brand and our consumer and getting volumes north of the Mendoza line as I've been calling it.

Sticking to capital allocation for a moment. We have seen both opportunistic acquisitions in recent years, such as the FATTY acquisition, also tactically some divestitures in certain businesses like we saw with Chef Boyardee. As you look forward, how do you feel about the portfolio composition today? Are there categories where it might make sense to be more tactical with kind of adding brands to areas that you're maybe already strong, but could fill in from maybe a positioning standpoint?

Yes. Well, certainly, over time, we've done a lot of inbounds. We've done a lot of outbounds. So we're open to all of the above. I think right now, as Dave pointed out, our focus in terms of capital allocation is on paying a healthy dividend investing in the business and paying down debt. So we're really not in the market. We bought FATTY last year, but our primary focus is on what we've already discussed in our plans. Going forward, we sold Chef Boyardee. We sold fish recently. So that has -- that was part of the earnings rebase as we build that. I think going forward, what you should expect from our company is that every 5 years, a meaningfully larger chunk of our total portfolio sales will be focused in frozen and snacks, and that means that our grocery business will decline. And so we're open to additional actions. I know there's a lot of conversation these days around what's happening with 1 of our competitors and splitting the company into 2. I've got loads of experience liberating either specific businesses or splitting whole companies like when I was at Sara Lee. And what I would say is sometimes those types of actions can create value, 50% of the time, they destroy value. So you have to be very cognizant of what you're working with. If it's -- when it typically those types of transactions create value is when both parts end up getting acquired at a premium. When 1 part gets acquired at a premium and the other part has multiple weakness, you might be lucky to get back to breakeven. If neither get acquired, you can actually destroy value. So the data would suggest in those deals, about half of them work, half of them don't work, we're certainly open-minded to anything that creates value for shareholders, but we're also very thoughtful in our analysis because at the end of the day, we want to create value. We don't want to roll dice. And so we're open to all of the above in the pursuit of value creation, and we're very thoughtful about whether or not it's going to create value for our shareholders.

Maybe I'll follow up quickly on that last topic and ask a bit differently. How intertwined -- you have multiple temperature states in your business. How intertwined are the 2 sides of that business, the shelf stable versus the Refrigerated & Frozen from a supply chain standpoint?

When you're a single company operating within a single geography, there's a lot of entanglement not just in supply chain but in terms of how you go to market. Usually it's the same sales force. You've got the same people working on these businesses across the board. It's very different from when I was at Sara Lee as an example where we had a European coffee business, and we had a U.S. food business and the 2 were not entangled in any such way. So for a company like ours, there can be lack of entablement in a supply chain. You might have a frozen plant that's separate from a shelf-stable plant, but there are plenty entangled in terms of how you go to market. What that means is simply when you separate those assets, there are several things you have to consider. One is there are onetime costs associated with standing up a new organization. Two is there are dis-synergies associated with both parts that you then separate because you no longer have the procurement scale that you had when you were together. Three is costs move around. Some costs that previously had been allocated to 1 business by virtue of just allocation will actually move in an activity-based way and potentially flow to the other piece of business, which could change the margin structure on each of the parts. And then there's a wildcard as to what happens with multiple when you have these assets separated. So those are all things that you have to factor into your analysis as you consider whether or not it's going to turn out to be the 50% winning camp or the 50% value destruction camp.

Wanted to ask on Ardent Mills. It's a business where we have seen -- I think it doesn't necessarily fit in with the rest of what you do, but it also does generate a good bit of earnings for you and we've seen quite a bit of earnings improvement in recent years relative to where it might have been 5 or 6 years ago. How do you view the role of Ardent Mills within Conagra? What's kind of the future for that business? And as we think nearer term about its earnings profile, should we think about it as and I guess, consistent with guidance, it's more consistent with recent years versus still opportunity there for growth.

Sure. Dave, do you want to talk about that?

Yes, sure. So Ardent Mills is a little over a 10-year-old business now, joint venture with us in Cargo and CHS. Operationally, the business continues to do very well, right? They're the kind of share leader in the U.S. in terms of flower millers. They have great kind of geographic placement of their mills and their supply. Their customer service is outstanding. And so they really have a point of difference. But there's really 2 parts to that business. There are sort of the kind of the milling flower and selling it at the margin to customers. And then there's the commodity revenue where they can make money on all the arbitrage and trades and them understanding those markets. And that part of the business is all driven from volatility. It's all -- and that's correlated to wheat prices. So when we prices are low, not as much volatility when there's more spike in prices, that can drive more volatility for a lot of reasons. And that's opportunity for Ardent Mills. And so we always sort of look at the center line and because we can't estimate that sort of commodity part of it. So we just kind of go with what we think the center line of the estimate is in our guidance, and then there can be some volatility around that. And so that supports the guidance for this year. We've done a lot of work in working with them. We have a Board structure. So I'm one of the 3 Conagra members on that board. And I work closely with Sean. We have a great CEO that just went in over a year ago. And the free cash flow conversion on Ardent has improved significantly over the last 3 years. And so we're really aligned there, and that's. We've been pleased with that.

Yes. It's not lost on us that as investors look at our portfolio, you see a branded pure play company with this JV attached to it, that's a milling business that is different. It's a different animal. And listen, it's been a very nice hedge during the volatile time since COVID and it's performed extremely well. We're open-minded in the future as to that business, whether or not that remains part of us or not. The only thing I'll say is it is a joint venture. So don't assume that it's a snap of a finger to kind of exit a joint venture, and it's more complicated that. When joint ventures are built, they're often built so that they are going to be there for a lasting period of time. Otherwise, it can be hard to draw joint venture partners into it. So this is one that predates me joining the company. It has been a very good performer for us. We'll stay open-minded as to the role it plays going forward.

Sean, Dave, thanks so much for being with us today.

Thanks for having us.

Thank you.

And thanks, everyone, for joining.