Good day and welcome to the Conagra Brands fourth quarter fiscal year 2020 earnings conference call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Brian Kearney. Please go ahead.

Good morning, everyone. Thanks for joining us. I’ll remind you that we will be making some forward-looking statements today. While we are making those statements in good faith, we do not have any guarantee about the results we will achieve. Descriptions of the risk 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 comparability for the period referenced. Please see the earnings release for additional information on our comparability items. The GAAP to non-GAAP reconciliations can be found either in the earnings press release or the earning 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 the Legacy Conagra Brands. References to Legacy Conagra Brands refer 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 fourth quarter fiscal 2020 earnings call. On behalf of Conagra Brands I want to start by expressing my heartfelt hope that you and your families are continuing to stay safe and healthy. On today's call, we’re going to address our fourth quarter and fiscal 2020 results, our expectations for fiscal 2021, and our perspective on why Conagra is uniquely positioned to succeed in this new environment. But first, I want to provide some context around what has brought us to this point. Over the past five years, we have been purposefully architecting one of the largest transformations in the food industry. When we embarked on this process, we made major strategic decisions on where to compete and how to win. After decades as a food conglomerate, we transformed into a pure play branded food company with a portfolio focused on competing in three domains; Frozen, Snacks, and Staples. We committed to perpetually reshaping our portfolio for better growth and better margins, and established a disciplined approach rooted in a playbook that we call the Conagra Way. This relentlessly principle-based playbook is filled with repeatable and scalable processes that focus on modernizing our iconic brands through superior food, contemporary packaging, and strong, consistent marketing investment. The Conagra Way is not just a way to build brands, but an operating model that has helped cultivate our agile, motivated, and highly energized culture. As I'll describe in more detail in a moment, fiscal 2020 saw unprecedented performance as we built upon the extraordinary progress we have made over the past five years. We further strengthened our business, including getting legacy Pinnacle back on track and delivered strong financial results. During the fourth quarter, in particular, our transformation was put to the test,…

Thanks, Sean. And good morning, everyone. Before I discuss the details of the quarter, I want to take a moment to wish you all well. I hope you and your families are continuing to stay healthy and safe. I'll kick off this portion of the call by pointing out a few highlights for the quarter and the full fiscal year, which are captured on Slide 34. Overall, we're very pleased with our performance for Q4 and the fiscal year. As Sean discussed earlier, in the fourth quarter, the COVID-19 pandemic led to unprecedented demand in our retail businesses, which more than offset the softer food service demand. This increased retail demand, combined with our strong execution, enabled us to exceed the most recent full year fiscal '20 guidance for total company sales, profit and free cash flow metrics. The key takeaways for Q4 and fiscal '20 are: organic net sales increased 21.5% in the fourth quarter and 5.6% for the full year; adjusted operating margin increased almost 400 basis points for the fourth quarter and over 100 basis points for the full year; adjusted EPS more than doubled in the fourth quarter and grew 13% for the full year; and adjusted EBITDA increased 21.6% for the full year to just under $2.3 billion, helping to reduce the leverage ratio to 4.0 times at the end of fiscal '20. Let's start with the net sales bridge on Slide 35. As you can see, our 21.5% organic net sales growth in the fourth quarter was driven by 21% volume growth with price mix contributing half a percentage point. Divestitures were a 310 basis points headwind in the quarter. This headwind will diminish sequentially as we continue to anniversary the divestiture closing dates going forward. Foreign exchange was a 70 basis point headwind…

Before we open up for Q&A, I'd like to say a few words about diversity and inclusion at Conagra. We are deeply saddened by the recent events we've seen unfold across our nation. It's heartbreaking and unacceptable that racism and racial injustices continue to exist around the world. Our goal at Conagra is to work together in a constructive manner where everyone has a voice and has the opportunity to be heard. D&I is not only part of our value system at Conagra, it's a business imperative. We serve a wide cross section of the population and therefore it makes clear sense our organization represents the consumers we serve. D&I has always been a focus for Conagra Brands. But like many others we can and will up our game. We are working with an external diversity and inclusion consultancy to help us identify specific opportunities that will have the most impact. We're also hosting listening sessions with employees throughout the organization. Overall, we are determined to be part of the solution and we look forward to continuing to share reports of our progress along the way. Thank you. Now let's open it up to Q&A.

[Operator Instructions]. Our first question comes from Andrew Lazar with Barclays. Please go ahead.

I wanted to start off if I could with the company's reaffirmation of its fiscal ‘22 targets. Specifically, while I understand certainly the rationale for perhaps not yet providing full fiscal year ‘21 guidance, the fact that you're comfortable reiterating fiscal ‘22 EPS means at least to me that there should be some good progress in ‘21 versus ‘20 to be able to achieve ‘22 guidance in a reasonable way where I guess not all of the EPS growth needs to come-in in ‘22 versus ‘21, if you see what I'm saying. So, any perspective you can add around that, whether I'm thinking about that in the right way even though I understand not providing specific guidance for this fiscal year?

Yes, sure. Andrew. Here's how I think about this. Clearly, since nobody can accurately predict what will happen with COVID and the range of outcomes is very wide, calling ‘21 with any accuracy is virtually impossible. But when you step back and you look at where we landed in ‘20, if you look at the momentum of the business, the continued elevated demand, the new triers, the very strong repeat, and synergies remaining on track, our view is that it would be hard to argue that we're not on a path to the ‘22 targets. And the real question for us is just kind of, you think about our prepared remarks today on trial and repeat is whether these dynamics that we're seeing currently offer incremental long-term upside beyond our ‘22 algorithm. Obviously, we're not going to comment on the longer-term algorithm, but certainly, these are positive markers, and we have elected to invest behind that option for lack of a better phrase.

That's helpful and that's a good segue into my follow up, which is, certainly appreciate all of the data and the metrics on trial, household penetration, repeat rates and the like. And of course, none of us have a crystal ball regarding where consumption and growth rates for many of your key categories ultimately settle out. But in light I guess of the metrics you have discussed, I mean, would it be your expectation that for some of your key categories Conagra should see an elevated rate of growth versus let's say pre-COVID for a more prolonged period of time? The investments that you discussed on the call with respect to incremental capacity and such would seem to support that thought process, but again wanted to hear it from you and get some clarity.

Yes. I think the phrase I used earlier was, we see this as a unique window. Something is happening that is above and beyond what our normal marketing programs would do. COVID has introduced this dynamic where, as you saw on the slides earlier, consumers are legitimately rediscovering certain things in their house whether it's their kitchens, their freezers, being together and they like it. They're also discovering that some of the things that they thought existed actually have changed quite a bit. So, for example, the quality of frozen food. And as you know, we've spent the last five years dramatically transforming our products. So, you put both of those things together, and there is clearly an element of pleasant surprise that consumers have when it comes to cooking at home. And given the tremendous value proposition of cooking at home and that we are in a recessionary environment, it's entirely plausible that these dynamics persist for some time, especially with the news changing hourly on COVID and what's happening with positive cases. And we believe that once people try our products, this data supports that we stand a very good chance they'll come back again and again and again. So, we are investing today in order to maximize long-term value creation potential of this portfolio and really seize any option that there is further upside beyond our current algorithm.

Our next question comes from Ken Goldman with JP Morgan. Please go ahead.

I think I need to check what was in my smoothie this morning, because on Slide 31, I thought I saw a unicorn llama wearing sunglasses on a box of Act II, that I must be hallucinating.

You did not, llamas are hot.

I didn't know that.

As is Act II Ken, you probably may not have known that either. Act II is on fire.

I didn't know that until I saw your slide. So, I appreciate that. A couple of questions from me if I can. And Dave, you may have answered this when you talked about not being clear on the timing of the inventory rebuild. But in your first quarter organic sales guidance, is there any benefit baked in there from an inventory load by retailers or is that sort of what you expect consumption to be as well roughly?

Yes. So, Ken, you saw in Q4 we shifted consumption everywhere except Refrigerated & Frozen, that was really driven by Birds Eye. In this environment, it is difficult to predict exactly when retailers are going to build inventories. And so, as we put our Q1 guidance together, clearly it started with the [indiscernible]. We try to make some assumptions on will there be additional shipments to build inventory, particularly in Frozen. But again it's -- in this environment, it's difficult to predict just given the significant demand that's still there.

Just to comment on that, Ken, just more broadly. Retailers are at some point going to rebuild inventories I would imagine in all their categories. And if you think of in the last several years, the focus on on-time and full was the focus we've talked about recently with retailers putting more facings against high velocities, retailers paid out of stocks. So, that is not going to change. And at some point, I would imagine that inventory levels would revert to kind of historical norms. The question of course, is when will that happen? Because, the way that happens is one of two things or both have to happen. Either demand has to slow or capacity has to increase. We've seen demand slow recently, but it's still at very, very high levels. You also heard me talk about how we are making investments to increase capacities but there's an upper control limit to how we can do that. So, for the foreseeable future, in the near term, we are running flat out and much of what we make and leaves our plant is going straight through to the consumer. When that slows down and the inventory levels build back is one of the wildcards that’s virtually impossible to predict. And while, I've got you, since you raised Act II, I want to link your question on Act II, back to Andrew's question which is, will any of what we're seeing now persist? Interestingly, one of the things that you're seeing now and you're reading about now is movie studios are going to direct release at-home, on-demand. And there's some questions around what's going to happen with movie theaters going forward. As that happens, people will be watching movies as a group at home at a level we probably have not seen before. We're already experiencing this. And the shift in our microwavable popcorn business has been dramatic, reflecting that new behavior. That could very well be a persistent thing, but it may depend in part on what the movie studios ultimately choose to do, but those are the kinds of things that seem to be logically tracking in our favor, but we need to see how long they persist.

Okay, that's helpful. Thank you for that. And then for my follow up quickly, we are hearing some rumblings in the trade that maybe retailers are considering getting a little more aggressive on pricing in the back half of calendar '20 just because of the -- obviously the economic environment. And maybe they'll ask some vendors to help out with that. But we're not seeing any hard evidence of this yet. I just wanted to know from your perspective, are you hearing about any increment -- any -- I could say, incremental pressure from your customers on that pricing front?

Not really, Ken, at this point. And I would say it's probably a function of two things. Number one, our portfolio as you know has a very strong value segment to it. Brands like Banquet and other already offer extremely favorable value that is -- and historically have proven very resilient in a recessionary environment. The other piece of it too is that in many of the categories, you can think -- you continue to see out of stocks because the throughput is flat out and demand still exceeds that production availability, and therefore you only exacerbate that problem when you price promote in that type of a category. So I think it will be category specific. I will point out though that in our Q4, we did honor most of our promotional commitments and that's because those were longstanding commitments. We have a principle of not kind of backing out. But going forward, I would expect our average, Ken, prices may move north a little bit near term because we are likely to see less discounting price promotion activity. However, I wouldn't want you to take that as less retailer investment because it's more likely to be a shift in retailer investments really the profile of the retailer spend in the absolute level. So less discounting, more brand building, more new habit creation. To give you a specific example, a good example would be creating loyalty on our Frozen brands with millennials by making click and collect behaviors habitual, by increasing our e-comm spend with retailers. That's a positive constructive alternative in a supply constrained environment to more of a price promotional approach.

Our next question comes from David Palmer with Evercore. Please go ahead.

Thanks. Good morning. That fiscal ‘22 guidance, it's obviously closer than it's been before and it's also above consensus and it might be hopefully the first full year without this COVID issue. So related to that, what are the key one or two variables that you'll be watching and thinking about that would make the mid-to-high end of that guidance possible? And I have a follow-up.

Well, I think the way I bring it up earlier is, we have momentum on the business and we are investing to maintain that momentum. And as we maintain that momentum, we have a very good chance of continuing to bring more households into our portfolio and then converting them to multiple time repeat purchasers. That's really the logic flow as to how you get right in the heart of that, that long-term top-line profile

I would just add to that, just obviously the synergy number that we have, making sure that, that stays on track, we feel good about it, we're on track. We affirmed it again. But making sure we deliver that managing all our other core productivity programs to be able to offset inflation.

That recall was got us a long way there on the bottom line side of the long-term algorithm. That alongside the additional volume and any operating leverage associated with, it's obviously a good thing for our portfolio.

And then just to follow up. The free cash flow conversion of earnings, obviously that relationship of CapEx to D&A, but how do you see that in ‘22 free cash flow versus that earnings target?

I mean we had guided to greater than 95%, I think was our guidance. And that again shouldn't change. I did comment that as it relates to fiscal ‘21, because we finished fiscal ‘20, with very strong free cash flow and some of that was timing, right? So it was about $350 million of benefit that we received in Q4, due to basically inventory working capital benefits and some timing on tax payments that's going to flip into fiscal ‘21. So when you look at ‘20 versus ‘21, you're going to see a super high conversion in ‘20 that's going to come out in ‘21 for the $350 million, but ‘22 we should be back in balance.

Our next question comes from Nik Modi with RBC, please go ahead.

Just two quick questions from me. When you think about the guidance that you provided for the estimated quarter, I am just curious if you could provide some perspective on how you're thinking about the demand? And I asked this only because obviously in recent weeks -- recent days, the case surge is really massive in very populous states, which I reckon would probably reaccelerate some of the at-home food consumption as the reopening slows. So I just want to get perspective on that? And then Sean maybe you could just provide some kind of perspective around innovation timing and how things are shaping up with retail in terms of the next weeks and just kind of how you're thinking about your innovation flow over the next six months or so? Thanks.

Sure. On the first piece, if you go back to the beginning of this thing, Nik, what happened was we had this massive initial surge, right, with pantry stocking and alike, and that went a long way toward kind of depleting our inventories and really starting to deplete customer inventories. Since then, while we haven't been at the level of that initial surge, demand has been extremely high. So, we've got categories where we've hit the ceiling where we're just flat out, we've got categories where we've made some early progress and starting to kind of catch up. But with another surge, that's just going to put more strain on it. So we are focused. It's interesting that we're typically focused on optimizing demand. And now we're in this environment where we are really heavily focused on optimizing supply because we're really up against it. And that has been the case in the early days of our Q1 look and if you look at the scanner data, it’s been pretty strong. And that's all previous news of these upticks. So we've got to monitor it. We're doing everything in our power to add additional capacity so that we can protect the upside to the best of our ability, but it is going to be strained near term. And we are investing to make sure that, that happens. Did you have anything else to add on that point, Dave?

Yes. Just briefly, for organic net sales, we do expect strong growth from the domestic retail businesses. So as Sean said, and you see in consumption, just to get a little color on the other segments, International is going to be relatively flat. We had a really strong Q4. We don't expect to see the organic net sales growth in Q1 to that level and then continued declines in Foodservice like we saw in Q4.

Now with respect to innovation, let me before I comment on forward-looking innovation, you can see the whole perspective on Q4, because recall at CAGNY we had talked about how some of our customer base had moved up their shelf resets in Frozen, and I'm sure many of you are curious what happened with that with respect to COVID hitting? Well, you may be surprised to learn that the vast majority of our customers proceeded as planned in Q4 with their earlier Frozen resets. And that's good news. We see our exciting fiscal ‘21 innovations on the shelf and they look great and we are hustling to try to keep them in stock because they're obviously getting good trial. And also with respect to Q4 innovation in total, which includes the innovations we launched earlier in the year, Q4 innovation was up over 25% versus the prior Q4. And it definitely had some benefit in it versus the prior Q4 shipments of the following year's innovation coming a little bit earlier and that's because of those Frozen shelf resets that we talked about. But the reality is, despite what you've heard about us do reduction to maximize throughput, and things like that, we have continued to have strong favorable reaction from our retailers on our new innovation. And we continue to feel super strong about the slate we've got out there and expect it to perform well this year. As you've seen in the last few years, every year's innovation has outperformed the prior year’s for the last several years. And there's no reason to expect this year wouldn't continue albeit we have a few more wildcards that we are dealing with than in previous years

Our next question comes from David Driscoll with DD Research. Please go ahead.

I wanted to start off with the Grocery & Snacks and the Frozen & Refrigerated, Slide 9, Sean, you got a nice metrics here. But what I want to get your impression of is the -- you've made a comment repeatedly for years that your expectation is that Frozen is going to be just a critical area of growth in the grocery store. When we just look at these 4Q results, obviously heavily affected by COVID, right, the Staples piece is growing much, much faster than Frozen. There's that initial stock up that's going on in there. What I was hoping you could do is just explain how you thought Frozen would grow relative to that of Staples on a go forward basis. Should Frozen be half as much as Staples as we see almost in this graph or should Frozen on a relative basis begin to be much stronger after we've kind of cleared through that first stock up that occurred in March, April?

Well, the Slide 9 that you referred to is actually pretty consistent with what I would expect having been in and around staples products for a lot of my career. Whenever you see any kind of crisis hit, people will load their dry goods pantry, which has a tremendous amount of holding power. And actually you tend to see more of a pantry load dynamic there, because of the holding power of the pantry relative to the holding power of a freezer. Most freezers are actually incredibly limited in space and that's one of the governors that you see on Frozen. Interestingly, one of the things we didn't put in the deck is the sales rate of standalone Frozen freezers, if you had gone to a Home Depot or a Best Buy in the last few months in search of a freezer, you would not have been able to find one. So clearly consumers are recognizing there's a limit to what they can fit in their freezer. I know in my household, we were frustrated, because we get to the -- you go to the store on a day of shipments came in, you want to buy stuff, but you had nowhere to put it because your freezer was full. So that's the governor you have there versus staples. That said while I might expect the two to converge, more going forward. Staples, what you see in the staples space is a super value proposition. So Chef Boyardee -- and this may be more of a function of what does the consumers’ household balance sheet look like going forward? How long does the recessionary environment persist? Items like Chef are a tremendous value proposition and that kind of environment should continue to perform well. Furthermore, if people are learning to cook again and cooking from scratch, a lot of the staples products we have like PAM cooking spray or our beans business or our tomato business ought to remain elevated. And these are the kinds of things you can use in multiple recipes throughout the week that are different recipes as opposed using the same thing again and again. So I'm not going to try to forecast how these will perform relative to one another. The key point we wanted to make today is that all three of our consumer domains have been elevated and are enjoying this notion of rediscovery and discovery that I talked about.

That's helpful. Dave, I just wanted to follow up on SG&A. In the fourth quarter as a percent of sales, if the SG&A was down significantly versus kind of what the churn rate that we had seen in the prior few quarters, what do you expect on a go forward basis? Can you get that SG&A as a percent of sales to continue to be reduced for the next bunch of quarters? Any color there? I mean I know you're not giving exclusive guidance but just any color on how you're thinking about SG&A as a percent of sales? Very helpful.

Sure, Dave. So at a high level, obviously a lot of the synergy that we're getting from Pinnacle is SG&A. In fact, more than half of the synergy to-date has been from SG&A. More will come in cost of goods sold moving forward. So that is starting to work its way in quarter by quarter into our actual results. So as I look to Q1, because we gave specific margin guidance in Q1, a big part of the operating margin improvement versus the prior year is actually because of the leverage on SG&A. So the 17% to 17.5%, a good amount of that improvement is the SG&A leverage. Gross margin, there is a lot of puts and takes with all the different costs, so there would be more moderate improvement there, but it's mostly SG&A. So we start seeing that leverage in a bigger way starting in Q1. And you'll continue to see leverage going forward. I'm not going to give you specific numbers but that's the color for Q1 for SG&A.

But the leverage does continue even if you don't give exact numbers. You're confident that the leverage continues in the following quarters.

Yes, obviously it depends on sales, right? But yes, we book the SG&A costs out and we're going to continue to see that benefit.

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

Actually a couple. I think, talking to investors, a lot of the controversy around Conagra does still revolve around this long-term EPS range because it is so much higher than your fiscal '20 results. And I was wondering in August, when your proxy gets published, do you think is that a peak at the three year cycles for fiscal '20 to fiscal '22 and the EPS target that's in there for executive compensation. Because I think that would give people a better sense of how management is being incentivized in relation to the target that you've given us. I think that'll be the first cycle that we'll get to see how executive comp is related to that range. Is that a fair assessment?

Yes. Rob, the way I'd respond to that is, big picture, our Board has a very strong pay for performance philosophy. As such, the targets in our incentive programs are anchored in our annual and long-term financial plans and consistent with the guidance that we provide to investors. So with respect to the 2020 proxy, we expect our disclosure to mirror that of past years. We will provide details on the fiscal '20 to '22 program overall, including the growth CAGRs that are in the program. And you'll see that management and shareholder interests are aligned with respect to the ‘22 numbers.

And a quick follow-up. I remember last year there was a lot of inventory deloading in the Frozen section related to the shelf resets. Given what you've said now about the resets being done, are there going to be any kind of inventory reload in first quarter and is that part of your guidance or is your guidance really related to consumption and consumption will reflect shipments?

I think, near term Rob, we're playing catch up. We're trying to keep up with demand, or have continued to come in and inventories have been depleted and it varies obviously by category. So as long as demand remains elevated, it's more of a flow-through to consumption in pantries I think than a rebuilding an inventory. Now that is going to vary by category because you don't see the same level of pull category by category. So you can almost model out categories with kind of more muted pull or probably rebuilding inventories categories were pull remains extremely strong. We're probably continuing to run flat out and scanning a lot of what we're producing.

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

Hi, good morning, everyone. So just two quick ones and I might've missed it, but Dave on capital spending for fiscal ‘21, given I guess what some of the commentary that's been made about investments, even if you can't give a pinpoint number directionally, would it be close to what it's been historically? Or is it going to be higher than normal this year?

Bryan, I did not mention it specifically, but as we look to fiscal ‘21 based on the investments that Sean outlined, particularly investments to shore up capacity and supply, we will be increasing our CapEx. Right now our estimate is that we'd be about a $100 million above where we landed fiscal ‘20 in terms of CapEx.

Okay, great. Thanks. And then maybe Sean, as a follow-up to Rob Moskow's question about incentive comp, just can -- have you made any adjustments in with maybe frontline employees or just organizationally to focus more on being in stock, keeping up with demand I think as you phrased it before versus having to previously really trying to stimulate demand. So I am just trying to understand, if you've had to kind of change the incentive mix a little bit to just ensure that you're going to be -- get the CapEx projects happening on time and really improving service levels?

Well, our short-term -- for our salary employees our short-term incentives is really a function of sales, profit, and cash flow. And employees are incentivized very clearly to maximize those. In the last quarter the real focus area for us has been in our facilities. It's been in ensuring the health and safety of our employees because we've got to keep our plants running and then also honoring those employees for being such heroes during this intense COVID period on the frontlines. And we have made investments behind our frontline employees to honor them accordingly. So that's really what's been in place. And as I mentioned earlier, I couldn't be more pleased with just this incredible refuse to lose attitude that we've seen, especially on the frontline.

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 anyone may want. So thank you for your interest in Conagra Brands.

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