Conagra Brands, Inc. (CAG) Q2 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Conagra Brands' Second Quarter Fiscal Year 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Kearney, Investor Relations. Please go ahead.

Good morning, everyone. Thanks for joining us. I’ll remind you that we will be making some forward-looking statements during today’s call. While we are making those statements in good faith, we do not have any guarantee about the results that we will achieve. Descriptions of the risks factors are included in the documents we filed with the SEC. Also, we will be discussing some non-GAAP financial measures. References to adjusted items including organic net sales refer to measures that exclude items management believes impact the comparability for the periods referenced. Please see the earnings release for additional information on our comparability items. The reconciliations of those adjusted measures to the most directly comparable GAAP measures can be found in either the earnings press release or in the earnings slides, both of which can be found in the Investor Relations section of our website, conagrabrands.com. Finally, we will be making some references to Total Conagra Brands as well as Legacy Conagra Brands. References to Legacy Conagra Brands refer to measures that exclude any income or expenses associated with the acquired Pinnacle Foods business. With that, I’ll turn it over to Sean.

Thanks, Brian. Good morning, everyone, and thank you for joining our second quarter fiscal 2020 earnings call. During the second quarter, we made solid progress across our business. We delivered organic net sales growth in each of our reporting segments as we continue to implement the Conagra Way to profitable growth. All of our key initiatives remained on track through Q2. We maintained strong momentum in our leading frozen and snacks businesses, and grocery benefited from improvement in Hunt's Tomatoes and Chef Boyardee. We continued implementing the Conagra Way playbook against the Pinnacle portfolio in the quarter and our focus on execution is working. Our integration and deleveraging programs remained on target through the second quarter, and our synergy capture, which Dave will detail for your today, continued to exceed expectations. Overall, we’re pleased with our performance through two quarters. And looking ahead, we remain confident in our expectations for the second half and our ability to deliver our fiscal 2020 guidance which has been updated primarily to account for the impact of recent portfolio changes. Our agenda this morning is to provide an update on our work on the entire Conagra business and then provide more detail by segment, starting with Total Conagra. I’ll let Dave cover this in more detail, but I want to highlight that our 1.6% organic net sales growth came on the back of 1% volume growth and good price mix performance. Slide 9 demonstrates how the Conagra playbook is taking hold on the top line across our entire portfolio. As a reminder, we completed our acquisition of Pinnacle on October 26, 2018 part way through Q2 of fiscal 2019. So for the first time, Pinnacle’s results are represented albeit for less than a full quarter in our organic results. We delivered organic net sales growth of 1.6% during the quarter, which brings our year-to-date growth to 0.1%. As we’ve talked about previously, we expect fiscal 2020 to be back-half weighted based on the cadence of the actions we're taking, including our innovation launch schedule. We remain confident that we're on track to meet our fiscal 2020 guidance range of plus 1% to plus 1.5% organic net sales growth. Slide 10 is part of the reason for our confidence in our full-year sales outlook. Innovation takes time to build awareness, trial and repeat purchases. As you can see on the left, the products introduced in fiscal year 2019 are performing even better in the first half of fiscal 2010 as consumers continue to respond well to our on-trend innovation slate. And building on this success, the chart on the right shows that the new products we launched in the first half of this year are already outperforming fiscal 2019’s new innovation through two quarters. So while we still have exciting innovation to come this year, the ensuring of our recent launches will likely do much of the heavy lifting to drive second half growth. In addition to driving top-line growth, we remain committed to expanding our margins. As you can see on slide 11, the execution of our playbook has allowed us to expand our adjusted operating margin by 21 basis points in the first half of this year as compared to the same period last year. As I noted at the outset, we're making good progress across all of our integration, synergy and deleveraging initiatives as highlighted on slide 12. We're very pleased with the execution on our integration efforts which these are included exiting legacy Pinnacle corporate facilities and continuing to convert newly acquired plants to SAP. We also captured an incremental $42 million of cost synergies during the second quarter bringing total cost synergy realization to $112 million since the closing of our acquisition. As Dave will detail during his remarks, our significant progress has allowed us to increase our synergy target. In addition, we continue to make progress reducing our net debt, and we remain on track with our planned deleveraging. Let's turn to the segments. Before we go deeper on the individual businesses, I'm pleased to report that all four of our segments had positive organic net sales growth in the quarter. Now let's take a look at Frozen. As indicated on slide 15, the total Conagra frozen portfolio returned to growth in Q2, even as we continued to execute our value-over-volume playbook in the legacy Pinnacle business. On the right side of this page, we see that the legacy Conagra frozen portfolio continued to lead our results. The groundwork on the legacy Conagra frozen brands is now consistently delivering growth on top of growth, as our share performance – and our share performance gives us additional confidence in the ongoing success of our frozen business. Looking at frozen meals on slide 16, you can see that we've been securing an increased share of shelf in recent quarters. As a result, we're winning in market and benefiting from an increased share of sales, as shown in the chart on the right. We've been gaining this share by actively partnering with our retail customers to drive profitable growth. These gains have come from introducing new innovations, as well as increasing phasings and velocities on core items. The result has been stronger growth and market share. Within Frozen, our single-serve meals continue to lead the category through Q2. As shown on slide 17, we've again delivered sustained growth on top of growth. As you would expect, the large brands in our legacy Conagra frozen portfolio such as Healthy Choice, Marie Callender’s and Banquet are further along in their growth trajectories. We're excited about what's ahead for these brands. We're also excited about the opportunities for the legacy Pinnacle brand including EVOL, Udi's and Hungry-Man where we're getting started implementing the Conagra way to profitable growth. One of the legacy Pinnacle brands that we've prioritized over the last 12 months is Birds Eye, and slide 18 is a great example of value for volume in action. As expected, sales and distribution on Birds Eye declined as we removed lower performing SKUs from the market. Now, the brand’s distribution trend is starting to bend behind new innovation launches. Our work has also led to share gains versus the branded competition. As shown on slide 19, you can see that Birds Eye gained 20 basis points of share between the first half of fiscal 2019 and the first half of fiscal 2020 versus branded competitors and gained 50 basis points of share over the last quarter a year ago. This is additional evidence that our early efforts are clearly paying off. Another legacy Pinnacle brand we've been focused on is Gardein. We've started to expand distribution for Gardein’s broad range of offerings. And as a reminder, we've made significant investments in Gardein’s manufacturing and production processes to increase capacity. Our new capacity allows us to better meet the demand for on-trend plant-based protein including in our foodservice business where Gardein saw strong growth in the second quarter. We continue to see great opportunity for this brand going forward. Throughout the balance of fiscal 2020, we'll build upon our category of leading position in frozen with strong innovation. The innovation we launched in the first half of fiscal 2020 is just starting to pick up momentum and we expected to continue to perform well on the second half of the year, and we’re not going to slow down our Birds Eye. We’re focusing on expanding the brand’s presence with on-trend, value-added products including the vegetable based carb replacements as well as new forms like roasted and shredded vegetables which we launched in the first half of the year. This innovation is expected to have a larger impact in the second half as we continue to build distribution and invest behind consumer trial and repeat. Launching later this year will be another on-trend form, spiralized vegetables. Admittedly, Birds Eye was late to the party here, but we’re excited about what a proven product like spiralized can do beginning in the second half of the year. Now, I would like to turn to our Grocery & Snacks segment and start with our leading snacks portfolio. Snacks had another terrific quarter maintaining its momentum. Slide 23 shows the continued success of this portfolio. Total Legacy Conagra Snacks were up 5.2% during the quarter delivering 10.4% growth on a two-year basis. Our results were led by meat snacks and sweet treats businesses which delivered growth of 7.8% and 7.3% respectively. We launched a number of on-trend innovative snacking products within our $2 billion plus portfolio at NACS in October. We’ve had great customer reactions to these exceptional new innovations, and we expect them to support our continued momentum in the second half. You’ll have a chance to try many of these great new products at CAGNY in February. We’re also making great progress on our wok to reframe Duncan Hines as a sweet treat to unlock significant growing demand spaces. Our strategy includes refreshed packaging, fund and novel flavors and new shelf-stable and frozen snacking platforms. And as you can see on slide 25, our earliest work, focused on the core shelf-stable baking mixes, has begun to result in share gains as the holiday baking season kicked off. We're building on this momentum by introducing more innovation in the second half, including on-trend keto-friendly cakes and co-branded Oreo cake cups. Turning to our grocery portfolio, we're pleased with the improved trends on our key Chef Boyardee and Hunt’s tomato businesses. Both have a leadership role in their respective categories and are of critical importance to consumers. Slide 26 shows the traction these businesses are beginning to see from continued investment and smart promotional support. After responding to marketplace dynamics, both Hunt’s and Chef Boyardee made sequential improvements in the quarter. Wishbone is also improving. As we've noted, Wishbone was challenged by several issues; service, quality, and a label change execution issue. As we lap the closing of the Pinnacle transaction and have almost a year of implementing the Conagra Way playbook against the brand, we've stabilized Wishbone, and year-over-year sales growth has moved into positive territory. Slide 28 shows another part of our playbook in action. We're excited to participate in the salad dressings category and believe it's right for disruptive innovation. Healthy Choice power dressing is a new line of vegetable-based dressings. This exciting new product extension builds on the success of our Power Bowl frozen meals by bringing modern attributes that are relevant to consumers to a large category. We expect these terrific new products to bring the kind of new news that shoppers will welcome. I'll conclude with a few quick remarks about our International and Foodservice segments. In international, the second quarter brought continued strong performance in Canada as well as distribution gains in Mexico. In Foodservice, recall that in Q1, we made the strategic decision to opt out of a particularly low-margin contract consistent with our value-over-volume strategy. This past quarter, we've seen strong sales as we’ve predicted in our snacks business as well as in the Gardein and Udi's brands. In addition, operating margins improved year-over-year. Overall, we see good progress through the first half of the year. We've had success with our innovation slate and expect that to continue in the second half. We remain on track with our plan and confident in our ability to accelerate growth in the second half and deliver our fiscal 2020 guidance. With that, I'll turn it over to Dave.

Thank you, Sean. Good morning, everyone. Today, I'll walk through the details of our second quarter fiscal 20 performance as well as the updates to our guidance. We'll then move to Q&A. As Sean noted, October 26 marked the first anniversary of the Pinnacle acquisition. As a result, about one month of legacy Pinnacle performance is included in our organic results for the second quarter which ended on November 24, 2019. I’ll start by calling out a few highlights from our performance for the quarter which you can find on slide 32. Reported net sales for the second quarter were up 18.3% versus the same period a year ago, primarily reflecting the continued impact of the Pinnacle Foods acquisition. Organic net sales increased 1.6%, driven by 1% volume growth and 0.6% price/mix favorability. As Sean mentioned, every segment delivered organic net sales growth this quarter. For the second quarter, adjusted gross profit increased 14.1% to $804 million primarily driven by the net impact of the addition of Pinnacle's gross profit, as well as cost synergies. Price mix and supply chain productivity also benefited the quarter. These benefits were partially offset by input cost inflation, increased brand building investments with retailers and a reduction in profit from the divestitures of the Wesson Oil, Gelit and DSD Snacks businesses over the last year. Adjusted SG&A came in at 9.2% of net sales for Q2, as we continue to recognize SG&A synergies from the Pinnacle acquisition. Adjusted net income increased 8.3% as the improvement in operating profit and cost synergies more than offset the impact of higher interest expense associated with the Pinnacle transaction and the reduction of profit from recent divestitures. It's also worth noting that adjusted EBITDA which includes equity method, investment earnings and pension and post-retirement non-service income increased 17.2% to $610 million in the quarter. As I’ll describe in more detail in a moment, our adjusted diluted EPS decreased 6% to $0.63 for the quarter. Slide 33 outlines the drivers of second quarter net sales growth of 18.3% versus the same period a year ago. We delivered year-over-year volume growth for the quarter. And as you can see, we continue to drive an increase in price mix despite the additional retailer investments to support brand building that we highlighted last quarter. Total retailer investments reduced the net sales growth rate by 150 basis points which was a bit favorable to our expectations. Our slotting-0related expense which is closely tied to new innovation launches increased as planned, but we also delivered better-than-expected efficiencies in other trade programs. The increase in net sales associated with acquisitions includes 61 days of Pinnacle before it entered the organic base which added approximately 20% to net sales and was offset by a 2.9% net sales decrease from the divestitures of the Wesson oil, Gelit and DSD snacks businesses. Moving to slide 34, you can see our sales summary by segment. As Sean discussed, we made very good progress across the portfolio and delivered organic net sales growth in all four segments during the second quarter. Grocery & Snacks net sales increased 14.2% in Q2 with the acquisition of Pinnacle adding 16.9% and the divestiture of the Wesson oil and DSD snacks businesses subtracting 3.6%. Organic net sales for this segment increased 0.9%, reflecting continued strong in-market performance and innovation successes across many of our snacking brands. Turning to Refrigerated & Frozen, quarterly net sales and organic net sales for the segment increased 28.8% and 2.4%, respectively. Once again, this segment benefited from a robust slate of innovation across multiple brands including Birds Eye, Healthy Choice, Marie Callender’s and P.F. Chang’s. Our International segment continued to benefit from growth in the Snacks & Frozen businesses in the second quarter. International net sales increased 7.3%, primarily due to the acquisition of Pinnacle. Organic net sales increased 1.8% driven by an increase in volume. Net sales for the Foodservice segment increased 6.8% in Q2, with an organic net sales increase of 0.8%. The organic net sales increase was mostly driven by a 3.6% improvement in price mix, partially offset by volume declines of 2.8% as a result of the segment’s continued execution of value over volume, which drove additional operating margin improvement. Slide 35 outlines the adjusted operating margin bridge for the quarter versus the prior year. Inflation in Q2 was roughly in line with our expectations. At the same time, our gross margin expansion levers such as realized productivity, pricing, mix, and synergies more than offset inflation in the quarter. We're just beginning to lap the anniversary of the steel inflation headwind we began to experience during the same period last year. But we do estimate increased inflation related to proteins moving forward. We continue to estimate full-year fiscal 2020 inflation of approximately 2.8%. With respect to A&P, we continue to focus on driving the right level of spend on the highest ROI opportunities, and this quarter our working A&P – that is, A&P investments that reach the consumer directly – increased year-over-year. The overall decrease in A&P shown on slide 35 was driven by lower spending on non-working expenses such as research costs, along with A&P synergies associated with the Pinnacle deal. Slide 36 outlines our significant progress to-date on overall Pinnacle synergy capture. We realized $42 million of cost synergies this quarter, bringing total cost synergy realization to $112 million from the close of the acquisition through the second quarter. Just to clarify, this $42 million is the incremental synergy benefit versus a year ago as we captured $1 million of synergies in Q2 last year. Our synergy target, when we first announced the Pinnacle acquisition, was $250 million. As we dug in with the benefit of more information after the acquisition closing, we found additional synergy opportunities. Accordingly at our Investor Day in April, we announced an increase to our total Pinnacle-related cost synergy target to approximately $285 million through fiscal 2022. From a cadence standpoint, we announced that 55% of that total or approximately $160 million was expected to come by the end of fiscal 2020. I'm pleased to say that we continue to improve on our synergy delivery and are tracking above target. Today, we are increasing our synergy capture expectation for fiscal 2020 from approximately $160 million to approximately $180 million, and we are updating our total synergy target from approximately $285 million to approximately $305 million through fiscal 2022. The $20 million of additional synergy is primarily driven by favorable SG&A, A&P and trade efficiency. We take the strategic decision to reinvest the additional $20 million back into the business this fiscal year. We have a long list of sales-driving investment opportunities available to us, improved product quality and packaging, further retailer and distribution investments to support the long-term growth of our brands and consumer-facing advertising. We’re proud of the team's progress in capturing these incremental synergies and the creation of additional fuel for growth. Slide 37 outlines Conagra’s adjusted operating profit and operating margin summary for the second quarter. Our adjusted operating profit increased 15.7% in Q2 and our adjusted operating margin came in at 17.1%. We're pleased with the performance across segments with three of the four seeing expanded margins. Turning to slide 38, we've outlined the drivers of our Q2 adjusted diluted EPS from continuing operations versus the same period a year ago. As you can see, our adjusted EPS of $0.63 decreased by $0.04 this quarter compared to the same period last year. The increase in adjusted operating profit and the benefit from Ardent Mills were more than offset by increases in interest expense and shares outstanding. Given the anniversary of the Pinnacle acquisition during the quarter, we expect share count interest expense to have less of an impact on adjusted EPS comparisons going forward. Slide 39 summarizes net debt and cash flow information. I'm pleased with the work being done across the organization to achieve our de-leveraging and free cash flow targets. We have continued to make strong sequential improvement in reducing debt and improving the overall financial health of the business. We expect our deleveraging to accelerate in the second half of fiscal 2020 due to the seasonality of our cash flows. Since the close of the acquisition and through the end of the second quarter, we've reduced total gross debt by $1.1 billion and net debt by over $800 million. We remain committed to a solid investment grade credit rating and achieving our fiscal 2021 target of a net debt to trailing 12-month adjusted EBITDA ratio of 3.6 times to 3.5 times. At the end of the second quarter, our average debt maturity was approximately 8.7 years and our weighted average coupon was approximately 4.7%. At the end of the second quarter, fixed rate debt was approximately 87% of our total debt. We are reaffirming our fiscal 2020 guidance given our progress year-to-date and expectations for a solid performance for the balance of the year. As announced in our release, we are updating a few components of our fiscal 2020 guidance primarily as a result of recent transactions. Overall, we expect second half results to show stronger organic net sales growth than in the first half due to the timing of the impacts of new innovation in the Frozen & Snacks business, improved trends in key grocery brands as well as the impact of easier comparisons. With respect to operating margins, we expect year-over-year growth during the second half of fiscal 2020 as we reaffirm our full-year operating margin guidance range. Also, in the second half, we will have anniversary the higher levels of interest expense and share count allowing for easier EPS comparisons as we move through the remainder of the fiscal year. We are updating our reported net sales growth, adjusted diluted EPS range and free cash flow estimate to primarily reflect the divestiture of our DSD snacks business and our planned exit of the manufacture and sale of private label peanut butter. In addition, as outlined in our earnings release, after the end of the quarter, Conagra entered into a definitive agreement to divest the Lender's bagels business. The transaction is expected to close during the third quarter of fiscal 2020 and the expected annualized impact of the divestiture is a reduction of approximately $50 million of net sales and $0.01 of adjusted EPS. Finally, we look forward to presenting at CAGNY in February where we will provide another update on our progress in executing that Conagra way playbook. For those of you attending, make sure to bring your appetite. We'll be sharing many of our most exciting innovations at the events kickoff reception. Thank you for listening. That concludes my remarks. I'll now pass it back to the operator as Sean, Tom McGough, Darren Serrao and I are happy to take your questions.

We will now begin the question-and-answer session. [Operator Instructions] First question comes from Andrew Lazar of Barclays. Please go ahead.

Good morning, everybody. Happy holidays. Hey. So, two for me if I could. First, Sean, I was hoping you could put a bit of context around Pinnacle sales in the quarter. I asked this because we've certainly received some questions around – this morning around the timing of shipments for Pinnacle, because as you mentioned sales in the final month of the quarter were included in organic sales. I guess is this timing aspect something worth calling out when thinking of overall organic sales growth for the company or not so much? And then I've just got a follow-up.

Yeah, not so much. On the Pinnacle brands, we delivered a normal shipping pattern in this quarter versus the prior year when the business was getting ready to change. And so in other words, the volume came in when it should have. And at a company level, overall consumption and the P&L were almost in total lock step on the first half. And then, of course, with respect to customers, our goal is on-time and in-full shipments and a simple reason for that is because if we don’t do that, we can be out of stock or fined. So we fulfill orders when we get them.

Great. Thanks for that clarity. And then second, on the last call, you talked a bit about the impact that click and collect and e-comm was having on the frozen category as a whole in terms of some sort of near-term shelf space dynamics. Some of the slides in the deck this morning speak to the fiscal 2020 innovation being more successful than 2019 and also Conagra gaining some share of shelf distribution currently with some of the new innovation. I guess now that you’ve launched some of this innovation, are there any further learnings on this that you’ve gotten now that we’re a quarter removed from that? And basically, I’m trying to assess why wouldn’t Conagra necessarily be a net beneficiary in this new environment versus peers, just given the magnitude of innovation that you’re actually bringing versus, let’s say, competitors at the moment? Thank you.

Yeah. Let me try to clarify what exactly I was referring to last quarter with respect to the new environment. There are a small handful of customers who are much farther along on their click and collect. And as a result, they need to create more holding power on the highest velocity items in the category, items like the brands we sell in frozen, particularly in single-serve meals. The balance of the retail universe, it’s kind of business as usual and they’re less developed in terms of click and collect and they take as many new items as we can basically make. So in both of those instances, our business is performing well. And the first part, we’re performing well because we are picking up pacings on high-velocity items where we may have previously had out of stock along with getting some of our new innovation into the marketplace. With the other customers, we are getting a ton of new TPDs behind this very vast innovation slate we’ve got out there. So in terms of share of shelf and overall dollar sales growth versus the prior year, we are pairing quite well in frozen single-serve meals across both of these types of customers.

Got it. Thanks so much for the clarity and have a good holiday.

Our next question comes from Ken Goldman of JPMorgan. Please go ahead.

My first question was, you talked about this a little bit, but I wanted to get a little bit of better clarity on the cadence of the third quarter versus the fourth quarter. I know these things are very hard to forecast, but are there any timing issues in terms of your shipments that we should be thinking about as we model these two quarters ahead?

Well I think overall, we expect a strong second half. Dave you can chime in here, but we've got that innovation is going to be a significant driver in terms of the back half pick up along with the fact that we've got easier comps, Ken. And as you think about the easier comps, perhaps most noteworthy in my mind is Q4 on the legacy Conagra business where we ran into some of these transitory issues last year where we saw some non-economic promotional behavior by some of our competitors. We don't expect that to repeat. So that should be a fairly significant factor in Q4. Dave you want to add some color here?

Yeah. Just to add one thing, Ken. As we said last quarter, we expect sequential improvement in organic net sales each quarter in fiscal 2020. So we saw that Q1 to Q2 and we expect to see that continue Q3 and Q4.

Great. Thank you for that. And then, as my follow up, the extra $20 million in synergies that you're reinvesting, I wanted to get a little bit of a better sense of why there is no benefit to the bottom line there. Are you putting it all into advertising that you expect to really not do anything other than sort of improve the brand equity something that maybe doesn't really benefit you until 2021 maybe? I'm just trying to get an idea of why there's nothing that sort of whether directly or indirectly kind of flows to the bottom line there for us.

Yeah. Ken, I think the way I think about it is our judgment at this juncture is that taking the $285 million to the bottom line over the course of the next several years is enough for now. And that if we find favor ability above that, a better return will be to invest in the business so we can sustain the strong performance we expect over the next couple of years. In other words, this is a long game for us. We're trying to build this portfolio to be perpetually strong and getting stronger in each and every strategic planning horizon. So as we find opportunity over and above a very rich $285 million which keep in mind was well above what we originally planned, if we can see a line of sight to strengthening our business that could be at the plants, it could be in marketing, it could be in any number, it could be with customers, then we'll see the opportunity to continue to build our brands, because you got to – as we all know from the last several years in this industry, it's got to be a balance of strong financial performance and strong investment in innovation and the consumer.

Our next question comes from Steve Strycula of UBS. Please go ahead.

So, Sean, first question I had would be a little bit of texture behind the organic sales growth we anticipated in the back half and why it accelerates. Can you walk through a few of the different subcomponents what's happening in dry grocery? How do we think about the continuation of the bill from what you launch in the first half and what folds in the second half, and then I have a follow-up.

Well, I think big picture, it's the sustained strength in Frozen and Snacks, as well as the passage of transitory challenges we saw previously Hunt’s and Chef and even Marie Callender's frozen in Q4 of last year, as well as the Pinnacle businesses wrapping some of their weaker comps and finally getting back in the game in terms of the kind of quality innovation that frankly should have been there all along, those are really a lot of the key drivers of what's going to deliver the second half performance.

Okay. And then should we think of -- given the amount of innovation that's come in half and – coming through in the back half of the year, is the second fiscal quarter still the peak level of retail trade spend, or should that start to moderate as we move into the back half? And, Sean, could you unpack a little bit more what you're reinvesting the $20 million in to drive the top line for the longer term? Thanks.

Yeah. Steve, let me take the trade spend, the investment, and retail spend. As we had said, the first half, we expect that investment to be higher than the second half, and that's still our forecast. So the second half will be a bit lower than the percentages in the first half, although we'll still be investing for sure. So we came in at 1.7% in Q1 and 1.5% in Q2, so it’ll be a bit lower in the second half.

In terms of investing in the business, Steve, really everything is on the table here in terms of investing in our infrastructure at our plants so we can run higher quality and run more efficiently, investing in our brands. As you heard in his comments, our working A&P was up this quarter. We continued to do a lot with our customers at the point of purchase particularly because that matters a lot when you’re launching new innovation into the marketplace that people haven’t seen before. The precursor to trial if of course awareness. So that’s a part of our playbook that we've been doing pretty consistently activating with customers over the last couple of years, we’ll continue to do.

Next question comes from Chris Growe of Stifel. Please go ahead.

I’d like to add my happy holiday wish to you as well. I had a question for you in relation to, as we think about sort of the Conagra way, if I can use that term. But as you're taking products off the shelf, you’re doing some rationalization of SKUs to make room for a lot of the new products. Does that activity continue in Q2? Does it continue in the second half of the year or have we seen a lot of that already coming through the results?

Yeah. To some degree, Chris, that is kind of an ongoing thing because if you think about innovation being such a centerpiece of the Conagra way. There’s not a company in consumer packaged goods that has 100% of its innovation work. It just – it doesn't happen. Innovation is a bit of a numbers game. So you're going to launch a suite of things each cycle, you will see some of them outperform expectations. You'll see others don't perform the way you expect it. So there is almost inherently a ongoing weed and feed type of approach that you will have if you are a perpetual innovator. And that's the way we think we are. In terms of the other kind of value over volume of stuff that's truly antiquated that probably shouldn't come out of the market long ago, either because of the topline weakness or margin weakness, we're pretty far along in that piece of our equation. Right? We've been doing that for a while particularly on legacy CAG. Obviously, there's more for us to do there on the business and we've done a fair amount of that so far this calendar year. We still have some to go, but again, the purpose of that is to get to a foundation that is really stable that you can then build on as you tether the new innovation into the marketplace. So on that piece of the business, we're not as far along as on legacy CAG. But to some degree, there will be an element that is ongoing as some of the innovation outperforms expectation and some of it falls short.

Okay. Thank you for that. And then just a quick follow up, if I could, on cost inflation and pricing. I put aside sort of the slotting fees, the sort of investments you’re making there, you had some price realization occur in the quarter. And I just want to understand, as we look ahead to the second half of the year, just the pacing of the cost inflation, does that effectively still go down in the second half of the year? And then if there's any incremental pricing actions you've announced. I know you can’t talk about forward-looking actions, but anything you’ve announced of late that would reflect any further inflation in the business?

Yeah. Chris, first half inflation actually came in below 2.8%. The second quarter inflation was around 2.1%, 2.2% as the metal and the resin packaging and oil’s inflation started to moderate. As I said in my comments, we expect second half inflation actually to bump up because we expect higher inflation on pork and beef and protein. So second half, that actually will bump up over 3%. So we still estimate total fiscal year 2020 inflation of approximately 2.8% where it was a little bit favorable Q2 and then it’s going to bump back up second half. So that’s all in our 2.8%.

Our next question comes from Jason English of Goldman Sachs. Please go ahead.

Hey. Good morning, folks. Thanks for slotting me in. A couple of questions, first, I'd love to come back to Andrew Lazar’s question. I heard the answer of, hey, the cadence through the quarter was exactly spun on as it should be. But you also made reference to last year perhaps being a bit unusual ahead of the [indiscernible] prepare for sale. Can you elaborate on that?

Well, I think, first of all, with respect to the top line and in the first half of the year and for the balance of the year, we always expect and we consistently communicated that we would see strength as we move through the year. And so when you – look, given where we are right now, you really need to look at the totality of the first half for the company because when you do that, you will see dollar sales in the P&L modestly trails consumption for the total company. And the reason for that is really the above underlying marketing investments that we've made with retailers, but historically, we tend to shift to consumption over time, and we expect that to continue. In terms of Pinnacle flow, really what I said is really the key point. Our volume came in on Pinnacle through the core, the way it should have. It was lumpier in the year ago period, because the company actually had two different owners in the year ago period. So, there’s two different folks running the business. This year, it came in the way it should have and came in the way customers ordered it, and that’s the way it flowed.

Got it. Okay. And then switching gears and building again on another question on your investment in the brands ahead of this big innovation push, can you contextualize, give us some examples of where the money is going in terms of the consumer-facing branded stuff because we're having a hard time finding including if we look at the track media spend at it, not a lot of your money is showing up in, and at least what we can see in the Kantar databases for measured media, which begs the question of where is that media pressure going? Just love some context around that. Thank you.

Well, I’m not exactly sure what the value of the metrics that you – or the tools that you got, tracking tools you guys use in terms of does it capture everything. But keep in mind, when we said we were investing in Q2, it was always we’re investing in Q2 to tee up the back half. And so their investment is Q2 and then in the back half itself. A lot of our early investment is investment in slotting to get the product on the shelf, investment with customer to get the right physical availability of the product because that’s the precursor to creating mental availability for the product. As we move into the second half of the year, that’s when you see more of the more visible things hit like our social digital programs, our mainstream media programs. That usually doesn’t get turned on until after the products are in fairly substantially ACV, and that’s really as we get into the back half of the year. A lot of the balance of it is incentives – early trial incentives for things that hit the shelf early and getting the products in the right spot on the right shelf.

Our next question comes from Bryan Spillane of Bank of America. Please go ahead.

So I guess two – the first one for me is just, Sean, there’s been a lot of discussion about the inflection in the back half of the year and I think people concerned a little bit about just getting there. Can you give us a sense at this point of how much visibility you have in terms of having the innovation actually sold in and on the shelves? And now that we’re kind of at the middle of the year, are we more at the point where it’s got to move off the shelf but you’re pretty well locked in, in terms of having stuff sold in?

Oh, yeah. I mean, it’s – we've got a pretty robust slate that went out in the first half, and we've got a robust slate going out in the second half. And if you just look as kind of a proxy, some of the data that we showed in our prepared slides. Go back to last year. Last year's innovation continues to crank this year. This year's innovation that we've launched thus far is doing even better than last year's innovation, so we expect that to build in the second half. We already know obviously where those – that innovation is and of the items that are going to ship in the second half, we know who has accepted them and when they're expected to go. And based on the success of last year's innovation and this year's innovation so far, I see no logical reason why those wouldn’t perform in a similar manner.

Okay. Great. And then, Dave, just a follow-up. You talked a little bit about, I think in your prepared remarks, that you have about 87% of your debt is fixed at 4.7% coupon. Given where rates have gone, is there any appetite to potentially try to take advantage of lower rates?

Yeah. We’re always evaluating those opportunities, so we’re looking at that all the time. So, yeah, when we think there's a good opportunity, we’ll execute against it.

Okay. Great. Thanks and now a happy holidays everyone.

Our next question comes from Robert Moskow of Credit Suisse. Please go ahead.

Hi. Thanks. Hey, the results are certainly a lot better than I expected. One of the slides though shows that Birds Eye’s consumption rates does remain in negative territory although you are, I think, now lapping the distribution declines from last year. And I noticed you also said that you're gaining share versus brand but you didn’t mention private label. So, are these distribution gains strong enough to get Birds Eye back into positive territory in the back half? Do you think we'll start to see that in the retail consumption data as a metric of how you're performing? Thanks.

Rob, we are really excited about the Birds Eye brand and owning that brand and what we can do with it. Overall, our goal with Birds Eye is to democratize vegetable goodness and we do that three ways. One, we modernize and we premiumize vegetables. Two, we optimize veggie-based meals. And three, we extend Birds Eye’s vegetable credentials into new categories. And we are just getting warmed up in terms of these three things and you can see some of the very early stuff in our slides today. So, as you can see, our focus is on what I'll call value-added innovation. And as we deliver these into the marketplace, we expect Birds Eye with its extremely strong and leading market share to be highly competitive versus all players, branded and private label alike. When Birds Eye slowed its innovation cadence in 2018, others were opportunistic. But now that we are applying our playbook to Birds Eye, we expect strong results to be the outcome and we expect to see a very nice second half.

Our next question comes from Jonathan Feeney of Consumer Edge. Please go ahead.

Good morning. Happy Holidays. Just one question. I want to understand the gross margin mix factors here. It seems that like, realized inputs were up a little bit. It’s actually second half of the year. But I would expect between operating leverage and some of the pricing here pretty – maybe a little bit better performance. So if you could eliminate what role mix is playing in adjusted gross margin progression, and maybe what that means going forward. Appreciate it.

Jon, as I mentioned in my comments, we're looking at all the levers for gross margin and mixes, one of those, especially margin accretive [indiscernible] mix and benefit there. So that's factored into our guidance for this year. Our gross margins in the second quarter came in a little bit favorable to our estimates. One was because of some of the trade productivity that we're starting to realize, which flows through and obviously benefits the gross margin. So we're on track, we're managing all the levers mix and the others. We are going to have a spike in inflation relative to the first half in the second half because of proteins. So we'll be over 2.8% in the second half. So we have to manage that as part of gross margin. But we feel good in our overall guidance for operating margin and the impact the gross margin has on that for full-year fiscal 2020.

And if I could follow up, just [indiscernible] on the grocery and snacks business particularly. That has to be carrying your gross margin that's maybe a little bit lower than some peers in the business. Do you see any reason why that gross margin can't be more in line with your peers just in that business specifically?

Yeah. I – that may be true. I don’t know if that’s true on that piece of the business, Jon. But I’ve been doing this a long time around grocery. And what I can tell you is a lot of what tends to drive the super outsized gross margin you see in some of the peer companies is a single dominant category that has a call it, 50-plus gross margin or high-40s gross margin that elevates the average for that whole group. We don’t have one of those. So we’ve got very nice accretive margins versus others, but we don’t have one of those large enormous through the roof type of gross margin businesses. And maybe that’s not a bad thing because a lot of the businesses that have those kinds of margins tend to be at least where we’ve seen a secular decline. We don’t have that either, and that’s a good thing.

Our next question comes from Alexia Howard of Bernstein. Please go ahead.

Thanks for the question. So, just in terms of the sales growth and this question about shipments and selling. You've said a few times that you shipped to consumer takeaway this quarter. There may have been some disruption last year as Pinnacle changed hands, although we don't know the magnitude of that, but this quarter you have talked about the big step-up in innovation and launches a new product. Was there any benefit from the sell-in, the pace of sell-in of new products year-over-year?

Yeah. If that kind of gets at, did we pull any of the second half volume into the first half to fill the pipeline. The answer to that is no. The first half sales number in the P&L again was a tad behind assumption. So the bottom line is, we expect a good second half. The H1 innovation should continue to gain traction. The 82 invasion hits the marketplace and comps become pretty favorable again, especially an Legacy CAG in Q4. So that's really kind of how we view the next six months as we sit here today.

Okay. Thank you. And as a follow-up, where are you as of the moment with the percentage of sales for new products? I think you measure it as launched over the last three years. I'm just wondering how that has improved over the last few years? And is it now at a level where you think that's kind of the level that you should hold it at, or do you expect it to continue to step up?

It’s actually really strong. I'll keep our powder dry on kind of how we're – our rolling progress looks probably until CAGNY, but it's very strong, Alexia. And just for everybody else who’s listening, remember this is a company that – we call this metric renewal rate. It’s the percentage of annual net sales that comes from stuff we've launched in the last three years. Our historic track record was around 9-ish percent. Best-in-class tends to be about 15%. We pushed it kind of into that 12% area about a year ago, and we've made significant progress even from there. So that's – that remains kind of – our true north is to get and stay in that ballpark over time in that 13% and 15% range. We think that's about the right spot.

Great. Thank you very much. I’ll pass it on.

Our next question comes from Bill Chappell of SunTrust Robinson Humphrey. Please go ahead.

Hey. First, just kind of a modeling question on the $20 million of incremental synergies. Is it kind of a one-for-one where you're finding it in gross margin and SG&A is going to be reinvested back, or would there be a greater lift in the back half to gross margin or SG&A one way or the other?

No, we're -- most of the reinvestment is going to be in the second half, as we've talked about. There's different areas that we're looking into in terms of the reinvestment. Some of it could be increased investment with retailers which affects above the line. Some could be more in package quality which goes right to cost of goods sold. Some could be an A&P which is the A&P line. So, the re-investment could hit different areas of the P&L. The bigger point is that most of that reinvestment will take place in the second half of fiscal 2020.

Got it. I just tried it. So it doesn't sound like change are kind of our estimates in terms of how we get there at this point. The second question just trying to understand about the step up of trade promotions. Is this a sign that there's – you need more pricing, you need to take more pricing, the category is getting more competitive? You're just trying to understand how much of this goes behind trying to gain some market share via price.

Well, let me make one comment and then turn over to Dave to add to this. Marketing spend in total shows up below the line and above the line. And historically, the bubble line marketing spend was called trade spend and it typically equated to the promotion merchandising, price discounting, things like that. That's not the case today. Certainly that exists, but there's a lot of brand building activity. As we've said many times, that happens in our spend that is accounting for as trade spend which we call retailer brand building investments. Some of that is in traditional merchandising. Other investments could be anything from data to loyalty card programs to sampling, sliding all of these types of brand building activities go in there. With respect to the kind of price promotion that you just referred to in your question, we have been surging goal on businesses where we have faced more intensified competition on the promotional front namely the Hunt’s Tomato business and on Chef Boyardee. And as we said last quarter, we would evaluate what our response to some of those, what we consider to be non-economic decisions would be. And we have been very much in adding very – and surgical in adding some promotion, and we’ve seen as we’ve always seen with these two market-leading brands kind of an outsized response. Dave, do you want to add to that?

Yeah and just to build on that, so when you used the term trade, there’s really two kind of ways to look at that. What we break out on our sales bridge is the increase in retail or investment, and these are brand-building investments with the retailers that enable us to get incremental shelf space, improve shelf placement and it drives consumer trial and repeat. There’s also a piece of trade which is just pure price promotion. That is not what we carve out increase and retail our investments on the sales bridge. That does not include just pure price promotion. So when you use rate, you got to understand there’s two components to that. And so things like Chef where we’re being competitive, we’ll have price promotion on that, for example. That hits the – more the price component of trade.

Got it. Thanks so much for the color.

Our next question will come from Nik Modi of RBC. Please go ahead.

Yes. Good morning, everyone. Thanks for the question. Just two quick ones from me. Sean, maybe you can help us understand kind of how you think about portfolio shaping in terms of some of the recent divestitures you’ve announced. Should we be thinking about Conagra thinking about slimming down their portfolio over the coming 12 to 18 months any further? And then the second question is just wanted to get clarity on – you talked about earlier in the call making some of your Promotional spending more efficient and maybe you can provide a little bit more specifics around exactly what that's all about just to give us some better clarity? Thank you.

Sure. On the first part, Nick, I've been saying for the better part of five years now that one way you can think about what we threw around here is we're perpetually reshaping our portfolio for better growth and better margins. And underneath that, we do it three ways. One, we invest in innovation to strengthen the brands we own. Two, we acquire new brands where our playbook can easily be applied that will be additive and complementary and incremental to what we already do. And three, we will divest stuff that either doesn't fit strategically or is a chronic drag on our margin or our sales rate or it’s just too resource intensive for us to consider to be a priority. We've been very aggressive in doing all three of these things for the last five years. And on that third piece, with respect – in terms of divestitures that help us better sculpt growth and margins, we remain very active there including just the new news today that we intend to – to sell lenders. So there's a lot of – there’s been a lot of activity there and I don't expect that to change obviously. The inbound stuff is going to change because we're in the mode of deleveraging right now and that will be the case for some time. But the divestiture side, we've been active in and we will continue to look at our portfolio. In terms of trade efficiency, and customer investment, this is a space that was very neanderthal 20 years ago and not very analytical to a space that has become much more analytical and much easier to evaluate, particular activities in terms of ROI and to enable some of that, we’ve made investments in technology so we can really get the data and leverage the analytical tools that are available to us now and that is resulting in better bang for our buck, and it actually is applied not only to trade, but we also apply to similar types of advanced analytics to our AMP investments. And the whole goal of this is to identify the proverbial 50% of your marketing that people always talk to but doesn't work, so we can cut it and redeploy it elsewhere to be more productive for us, and we've made strong and steady progress in terms of that efficiency and effectiveness in the last several years and it continues even as we go through this year.

Great. Thank you very much and happy holidays.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Kearney for any closing remarks.

Great. Thank you. So as a reminder, this call has been recorded and will be archived on the Web as detailed in our press release. The IR team is available for any follow-up discussions that may one – anyone may want. Thank you for your interest in Conagra Brands and happy holidays.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.