Conagra Brands, Inc. (NYSE:CAG) Q3 2024 Earnings Call Transcript

Conagra Brands, Inc. (NYSE:CAG) Q3 2024 Earnings Call Transcript April 4, 2024

Conagra Brands, Inc. beats earnings expectations. Reported EPS is $0.69, expectations were $0.65. CAG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Conagra Brands Third Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] Note, this event is being recorded. I would now like to turn the conference over to Melissa Napier, SVP, Investor Relations. Please go ahead.

Melissa Napier: Good morning. Thank you for joining us today for our live question-and-answer session on today’s results. Once again, I’m joined this morning by Sean Connolly, our CEO; and Dave Marberger, our CFO. We may be making some forward-looking statements and discussing non-GAAP financial measures during this session. Please see our earnings release, prepared remarks, presentation materials and filings with the SEC which can all be found in the Investor Relations section of our website for more information, including descriptions of our risk factors, GAAP to non-GAAP reconciliations and information on our comparability items. Operator, please introduce the first question.

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Q&A Session

Operator: The first question today comes from Andrew Lazar with Barclays.

Andrew Lazar: I guess, Sean, based on scanner data, most expected, I think, some upside in grocery and snacks and maybe a bit more weakness in refrigerated and frozen — this dynamic was certainly more extreme, I think, in the quarter than I think many had modeled. So I guess in Grocery & Snacks, Conagra had about a 4% benefit from price mix and that was well ahead of what we thought. So curious kind of what drove that. And then in Refrigerated & Frozen, you talk about success in single-serve meals but trying to corroborate how we sort of marry that with the 8% organic sales decline in that segment and maybe that’s more of a function of refrigerated versus frozen in some way. So those 2 aspects would be really helpful.

Sean Connolly: Yes. Let me unpack all of that for you, Andrew. As I said in the prepared remarks, things unfolded very much in line with what we expected. And as you heard us say, our investments in frozen have driven a nearly 7-point swing in our scanner volume from Q1 to the most recent 4 weeks where volume came in down a fairly modest 1.2%. So very strong progress in frozen overall which is important because that’s been the focus of our investment. What you’re seeing and the reason for the optics being a bit confusing is the reason the R&F segment in total numbers don’t show the same magnitude of inflection is noise in the refrigerated part of the business which was, by the way, also consistent with what we anticipated. Recall, our refrigerated businesses are predominantly pass-through categories and one of the rare areas in our portfolio where we’ve actually experienced deflation and rolled back prices accordingly as pass-through categories do.

And while that creates some short-term volatility in dollars until it’s in the base as deflation passes through. Importantly, margins are preserved due to the lower COGS. The other dynamic that I’ll point out there in RNF is, in addition to that piece, our table spreads business benefited in Q3 a year ago due to a large competitor having a particularly weak quarter due to supply chain challenges. So that’s kind of some color on R&F and why the divergence between frozen and refrigerated. With respect to Grocery & Snacks segment, we also expected a solid quarter in the GMS segment and we got it. And there were several factors there from pricing in tomatoes to bounce back in canned meat like Chile, Vienna sausage, where you remember we had a recall in the year ago period but also strong innovation like our new Wendy’s Chili, where we’ve grown significant market share.

So overall, our grocery brands are great consumer options for people who are seeking to make convenient meals at a great value. It’s also a good mix for us. But I think the big picture is one of the benefits of a scale, diversified portfolio is that, as they say, there are horses for courses. So you’re inherently hedged when the macro environment is less stable than normal. Big picture for us. I like the volume momentum we saw in Q3. I like what I’ve seen so far in Q4 and I expect further progress from here.

Andrew Lazar: Got it. Got it. And then I guess just lastly, obviously, volumes in the quarter were still down but a sequential improvement and that’s obviously what the expected step-up in investment spend. So I guess you kind of talked to this a little bit but how would you characterize like the current volume momentum? And would you expect volume trends to inflect positively by the time we get to the start of FY ’25? Or are dynamics still such in the broader industry that’s a little bit hard to peg right now?

Sean Connolly: Well, it’s one of the reasons why we’re looking at this so closely. It’s one of the reasons why I referenced the most recent 4-week scanner data in frozen being down a mirror of 1.2. We obviously are seeing and expect to continue to see further progress. We’re not going to draw the line in the sand and say, this is the month, this is the day where it’s going to — it’s going to cross over. Next quarter, obviously, when we give ’25 guidance and have our annual operating plans fully rolled up, we’ll give you that color. But it’s moving in the right direction; that’s the bottom line. I mean this is a food thing; everybody wants to see volumes go in the right direction. I think companies and investors are willing to see investment in order to do that.

But what I think people want to see overall is, can you hold your gross margins while you’re making those investments and getting the volume results that you want to see. And that’s what was particularly encouraging to me in the quarter is we pretty much got — we made the investments we intended to make — we got the volume improvements that we wanted to see, we’ve got continued volume progress into Q4; and we’ve done all this while maintaining even expanding gross margins that we work very hard to kind of claw back after the initial compression from all the huge inflation we experienced a couple of years ago. So that, I think, is a positive and I think it foreshadows just continued momentum from here.

Operator: The next question comes from Ken Goldman with JPMorgan.

Ken Goldman: Just wanted to ask a quick question about 4Q. Your implied guidance might suggest around minus 2% in organic sales growth. It’s pretty similar to what you posted in 3Q. Some might say it’s a little prudent though. Just given — you do have an easier comparison, both on 1-, 2-, 3- and 4-year basis, just looking that through, you have the lapping of the Americold issue. So I’m just curious if it’s right to think that’s a little bit prudent? Or are there may be some offsets to that, maybe a little bit of less of a help from mix perhaps just throwing that out there? Just trying to get a bit of color on those building blocks as you think about that.