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

No, it was really around the price elasticity. Just what gives you the confidence that the EPS numbers can come around so nicely in Q2? Is it mainly -- or it's really just around the pricing?

Yes. Pricing is a big part of it. I think on the elasticity question, John mentioned, we've been very prudent in the assumptions that we put into the plan. I think for frozen, it's recognizing the current consumer environment. We've been a bit more -- we've leaned in a bit higher on the elasticities, maybe relative to historical standards, whereas grocery and snacks, I would say, is more on that 1:1 level. So I think from an elasticity standpoint, we feel good about what we put in the plan. It's clearly going to be one of the items we're paying very close attention to as we go throughout the year. But that's just one piece of it. I think productivity at above 4% really reflects continued effort across our organization to find cost savings. We mentioned some of the in-sourcing initiatives that we have that give us better control of our supply chain while also removing costs. So I think it's a number of factors that kind of come together to make the year. But from a phasing perspective, I think the pricing is not insignificant. So that's when you'll see it is largely in Q2 and beyond.

And our next question today comes from Max Gumport with BNP Paribas.

So you're clearly prioritizing investments, but your prepared remarks suggest a bit of a pivot from the focus on stabilizing volumes to stabilizing margins. You discussed how past margin compression was partially driven by an emphasis on driving volume at the expense of margin, most notably in frozen. And we can clearly see that impact that's had on the business. Your operating margins have fallen from 16% just a few years ago to your guidance now calling for 10% to 10.5%. However, at the same time, organic volumes are now expected to decline 6 fiscal years in a row. I understand you can't have margins keep falling -- outside of tobacco, I can't think of many CPG businesses that have thrived for consistent volume declines, particularly given high fixed costs. So why is this pivot the right approach? And how many more years of volume declines do you believe the business has the capacity to suffer through?

Yes. Again, I think this is -- this continues to be about balance, right? And we're managing both the impact on the consumer with our volume assumptions. But again, we have to have the right structural margins to fuel the future investments. I think we've been very, very thoughtful and deliberate about our pricing strategy. What I can tell you is we're going to continue to be agile in our pricing to make sure that we find the right balance between the right structural margins and being competitive on the shelf in a time where we know the consumer is being very value conscious. I think one of the things that gives me a great confidence is the portfolio and the power of the portfolio using frozen as an example. We've got a portfolio that really plays across the full value spectrum. And I think that also gives us some insulation as you think about these pricing moves. We've got places for the consumer to go within our portfolio no matter what the value challenges might be that they're facing.

And Max, I would just add. I think this environment that we've experienced in the past several years is not necessarily normal in terms of the level of inflation that we've seen in our business. So the past several quarters, we've talked about the need to be agile. And if inflation is going to be persistent and elevated again, then pricing may be on the table. So I think the plan that you're seeing today reflects that while also balancing other investment needs in the business, including A&P, including CapEx. So I think, to John's point, balance is probably the key word there.

And our next question today comes from Chris Carey at Wells Fargo.

I wanted to go back to the complexity reduction part of your key priorities, John. So you said the portfolio has been too large and too complex for too long, but also that like SKU rationalization or portfolio cleanup will be more of a medium-term endeavor. Nevertheless, can you give us a sense of where you see this complexity? Is it in SKUs that have become too plentiful? Is that in the structure of the portfolio at large? Does a dividend reduction allow you to consider larger transactions for bigger pieces of your business? Are there implications for your supply chain, which is already dealing with a bit of capacity issues? I just -- I realized it's still early days but I think investors would agree with the complexity observation and just a bit more detail on where you see that from product or portfolio segmentation or even your reporting segments? I'd love any additional color if you have it.

I want to start with the positive. We have got some real gems in this portfolio. So I think a big part of this simplification and prioritization is allow us to disproportionately focus our resources and our investments on the brands that we believe can really drive profitable growth for the portfolio. So I really look at this as allowing more focus and attention on the brands and the segments where we have a right to win, and we believe we can win. And so I think to hit your question directly, I really think we're -- the right approach is to attack this from both a bottoms-up and a top-down perspective. And again, as I think about bottoms up, this really is taking a bit of a zero-based approach to our SKUs. We need to ensure that all of the SKUs in our portfolio are playing a key role in delighting our consumers and our customers, but they're also creating value for the enterprise. And again, I think looking at making each SKU, each item kind of earn their keep is going to be important. So we'll be doing a very robust kind of bottoms-up look at all of the items, all of our 5,500 SKUs across the portfolio to ensure they're doing that. I think at the same time on a parallel path, we're going to take a very prudent top-down approach, and you heard me talk about we're going to be thoughtful and strategic here, but really starting with what do we want this portfolio to look like 5 years from now and how we're going to get there? And I think that's going to take some time. That's probably the piece that I would call more of a mid- to long-term perspective. I think we'll have a lot more to share on that strategic direction of the portfolio when we are at Investor Day and early 2027.

And our next question today comes from Matt Smith at Stifel.

John, I wanted to come back to the part of your plan around increasing investment in the supply chain. You called out improving resiliency and some investment to unlock savings. The guidance this year includes a step-up in CapEx. I think it's above 5% of sales at this point. When we think about the level of spending this year, is there a unique amount related to some capacity projects? Would you expect CapEx investment in the supply chain to kind of ratchet down in future years? Or you think it could remain elevated as you pursue this resiliency and productivity savings?

Yes, Matt, I can take that one. So I think for CapEx, our long-term guidance is between 4% and 5% of net sales. This year is obviously towards the upper end of that. And part of that, some of the bigger in-sourcing projects that we have planned this year. But we've talked about fried chicken in the past and more broadly, just our belief in protein. So that's a big project. I would say roughly $100 million of the year-over-year step-up in CapEx is related to that. But as we go forward, I think resiliency is going to be one of the things that we continue to prioritize. So that 4% to 5% net sales range probably feels right going forward. But rest assured, our supply team is hard at work evaluating projects, ensuring we have a really strong foundation in our supply chain, while also tackling some of these more modern manufacturing initiatives around technology, around AI and really trying to simplify the way we work even within our manufacturing facilities.

And our next question today comes from Scott Marks at Jefferies.

Just wanted to follow up a bit on that supply chain resiliency. I guess how should we be thinking about maybe just benchmarks along the way as you go through this investment phase? When should we be expecting certain milestones to be hit or what milestones are you looking for to kind of signal to the investment community that you guys are making real progress and you feel comfortable with where you are and how things are going?

Yes. The things that we'll continue to look at really is things like our service levels, right? And we want to continue to operate in that 98.5% kind of service levels. That's probably the cleanest indicator, are we delivering the product in the right specifications at the right time for our customers, that's probably the strongest indicator. And then I think it's trying to minimize any of those business interruptions that come from a supply challenge. And so our goal is 0, right? We don't want any supply disruptions to kind of get in the way of delighting our consumers and our customers. So I think those are some of the key markers that we'll look at. But Matthew, anything to build here?

I think the last piece I would just highlight is inventory and working capital management, which for us has been a huge priority these past couple of years. In FY '26, again, we took out a significant amount of inventories in terms of days and dollars which, as you think about our other priorities, really helps from a cash flow perspective, from a leverage perspective. So I think that's just one of those other areas of the supply chain that as we look to become more efficient and effective, our inventory balance and days of inventory will be another marker that we'll keep an eye on.

And our next question today comes from Steve Powers at Deutsche Bank.

Maybe stepping back a little bit, I guess, over these first 6 weeks, you've emphasized the importance of listening to external stakeholders, including retail customers and investors. Maybe reflecting on those conversations, was there a particular feedback that stood out or surprised you most? And where maybe did the feedback you received externally challenge assumptions that the organization may have held previously that leads to the plan you outlined today? And I guess, as an extension, what's been the buy-in on the plan you've outlined today as you've begun to present it internally?

Yes, thanks for the question because I think it's really important to reemphasize the first 45 days I've spent a lot more time listening and learning. Each of you have been incredibly helpful, but our internal team, customers, consumers, all of which have been really, really informative. I think a couple of things have really resonated. We've hit on these, but I think important to reinforce the importance of simplification and prioritization. I think that was a seem loud and clear that I've heard internally and externally the need to simplify and prioritize as we think about our portfolio, but also even how we get work done. And so I'm really excited about some of the portfolio that we're going to continue to embark on. But also Project Catalyst, which is going to help us to work more efficiently and effectively. I would say, get our folks more time building the business than managing and tracking the business, and catalysts will be a major enabler there. So I think that's the first one. I think the second one is really -- it's about my words matter, but our actions matter even more. And I think this notion of restoring credibility by delivering on our commitments. And so I think what you've -- what you'll hear today is a plan, then our job now is to go deliver that plan with no excuses. And I think you'll see high accountability from our team in delivering what we say we're going to do to the external world, I think is another critical one. I think the last one, and again, a theme that we've discussed throughout this session is the need to invest back in the business. And again, why we've created a plan that does create some of that flexibility, both in the balance sheet and in the P&L to invest back in ourselves. And I think that's really critical. So those are probably 3 of the top themes, and we've acted on all 3 of those in this fiscal year. But I would tell you, there's still a lot to learn. I'm going to continue to stay on the learning journey. And I think you'll see the full summation of what we've learned and how we're going to make our strategic pivots as we spend more time talking you through the strategic plan in early 2027.

And our next question comes from Priya Gupta with Barclays.

Great. As you talked to the rating agencies about some of the actions that you've taken around the dividend as well as your investment for next year, what are their thoughts around your current ratings and outlook? And how should we be thinking about the time line to get back to that 3x target that you have and whether that's sort of been baked into the current outlook from the agencies as well?

Yes. Thanks for the question. We have really good relationships with our rating agencies. And as you can imagine, they're up to speed on our latest thinking, right? Obviously, the dividend cut from a credit perspective is probably seen as a positive there. And I think it really does help accelerate our path to getting back to that 3x number. And if you just look at the next 3 years or so, the level of the dividend cut will free up roughly $1 billion of incremental cash flow. A good amount of which will help us delever continue to pay down debt. I think the other thing I would also highlight is just the focus on cash flow at this company is across the board. We delivered free cash flow conversion of 119% this year. That's the third year in a row of above 115%, which really just reflects the focus company-wide on driving cash at this company. And I can assure you that we're not going to stop. That's something that's going to continue into next year. But overall, I think with the rating agencies, I think they understand the plan, they understand the need for balance and they understand our commitment to the investment-grade credit rating.

And our next question today comes from Brian Callen at Bank of America.

Just a quick follow-up question to that maybe on a shorter-term basis. How are you planning to handle the October debt maturities? Are hybrids considered in the 4x leverage guide or any incremental debt repayment that's embedded in the, I guess, the interest expense guidance? Just kind of what's baked into that interest expense and the 4x number?

Yes, I think what you'll find in the interest expense number is a continued focus on debt paydown. So with the dividend reduction this year, we'll get 3/4 of the benefit into fiscal '27. A good amount of that cash will go to continuing to delever. And then part of the cash, as we laid out in terms of the A&P investments and the CapEx investments will go to that as well. So in terms of the refinancing, we do have some notes coming due here in October. I think right now, we're continuing to evaluate what our options are there. But I would say we have a number of options, whether that's commercial paper, whether that's term loans, whether that's public notes. So the teams are hard at work figuring out a plan to refinance either a portion of those or all of those, but I would say more to come there.

And that concludes our question-and-answer session. I'd like to turn the conference back over to Matthew Neisius for any closing remarks.

All right. Thank you so much, and thank you all for joining us today. Please reach out to Investor Relations if you guys have any additional follow-up questions.

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.