Good morning, everyone, and welcome to the Conagra Brands Q1 Fiscal Year 2025 Q&A Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Melissa Napier. Ma'am, please go ahead.

Thanks, Jamie. Good morning, everyone. Thanks 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 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. Jamie, please introduce the first question.

And our first question today comes from Ken Goldman from JPMorgan.

I wanted to ask 2 questions. First, your commentary or your tone on snacking is certainly better than what we're seeing and hearing from a lot of other snack makers, really almost all other snack makers out there right now. What are you seeing? Obviously, you have a little more of a protein bent in your snacking business. But even your Popcorn business, the tone was positive on, and most Popcorn brands that we see are not doing great. So just trying to get a sense of sort of is it execution, is it the portfolio. What are you seeing out there that's giving you that advantage right now?

Ken, it's Sean. Yes, our snack business is larger than, I think, people realize, and it's also quite a bit different from other snack businesses in a couple of ways. Number one, it's extremely focused on permissible snacks of protein and fiber-rich snacks. And number two, it's a non-DSD snack business, so we kind of stay out of the chip space. And we've been kind of building scale in the permissible snack space for years now. We have a substantial business. So what we're seeing is, more broadly in snacks, there's a clear pivot toward healthier, permissible snacks. In particular, anything that's rich in protein or rich in fiber seems to be among the top priorities in those people who are consuming snacks. Obviously, snacking is a huge space. We're very excited to add the FATTY to our mix because that kind of gives us an even more premium meat stick product. But meat sticks, as you can see in the prepared remarks, is the fastest-growing snack subspace of all snacks, and that's where the bulk of our business is.

Okay. And then quickly on frozen food. There's a lot of comments being made in the industry about scratch cooking and how that's picking up because -- partly because of the cost of eating away from home. I understand that. But what are your data showing about frozen food? It would seem to me that scratch cooking costs more than a frozen dinner. So do your data show a pickup or a significant pickup in consumers really shifting from restaurants over the last few months? Is that an accelerating trend? I know, Sean, you thought it would happen. I just don't know quite how much you're actually seeing it in the data.

Well, I think it's a really interesting question because our demand science team is constantly giving us this data, and what we're seeing is interesting. A year or so ago, we did see some behavior shifts toward more scratch cooking, and I'm talking very affordable stuff: a bag of rice, a pound of ground beef, things like that. Our products like canned tomatoes would do well in that environment. But from what we're seeing in the data now, the scratch cooking behavior shift we saw a year ago seems to be running its course. And specifically, what we're seeing now is there's a pivot back to more convenient items. Even the -- some of the strength you guys point out in the perimeter of the store tends to be things that can be prepared in less than 5 minutes. So consumers have pivoted back to convenience, which we're capitalizing on in our frozen space. I pointed out that frozen has been a growth engine for over 40 years, in large part because of the convenience and affordability. We see that consumer pivot happening. We are more active as we should be as the leaders in frozen than just about anybody else in the space, and we're gaining as a result. So we invested to kind of nudge consumers back to this practice. But we had tremendous confidence that, of all the consumer benefit areas we've tracked in the last 50 years, the single most unshakable one is the need for convenience, and that's what we offer with our frozen business.

Our next question comes from Andrew Lazar from Barclays.

Sean, so it's clear Conagra has made obviously very good progress on large parts of the portfolio, right, most notably frozen and snack domains, but this progress is maybe too often been clouded by sort of various other parts of the portfolio, like maybe a little bit of a leaky bucket at times. And in some of those businesses, I think it would seem to be, at least, appear to be less core, at least from the outside. And I understand each business plays a different role within your portfolio. But maybe in light of your much more, it sounded to me, pointed remarks in today's prepared commentary around getting back to portfolio reshaping, I guess I'm curious if we should take this to mean maybe now there's a greater appreciation to the benefits of portfolio reshaping, like even if it comes with maybe some near-term earnings dilution, but longer-term growth and sort of value creation. Because if I'm not mistaken, you definitely made it more of a direct point, I thought, in today's prepared remarks than I've seen in the past.

Yes. Let me unpack that for you. First, I will say that having a Hebrew National issue in grilling season is kind of like getting a flat tire on the way to your wedding. It's unfortunate timing. But just like the flat, it's a minor issue, and you have to deal with it and you keep moving. With respect to the portfolio reshaping, as I've said many times, our true north, long term, has been perpetually reshaping our portfolio for better growth and better margins, and we do that three ways. Number one, we invest in the businesses we own, especially innovation, as you all know. Number two, we seek to acquire faster-growing businesses in snacks or in frozen. And number three, we divest slower-growth assets. So as I mentioned in our prepared remarks, our strong cash flow and our balance sheet progress have put us in a position to put more focus on this. But as I said, all while continuing to make progress getting to our leverage target of 3.0x. So that means that when it comes to acquisitions, we're really not talking more than bolt-ons, and you saw that with FATTY in this quarter. And as for divestitures, if it's a slower-growth asset or not a strategic fit, it's a candidate to go if an exit would generate a number at or above intrinsic value. So we've done quite a bit of this over the years, and we're very disciplined to ensure that if we do it, we're going to create value and not destroy value. And now that we've got the cash flow and the balance sheet in place, we think we can be more active reshaping and continue to make progress on our balance sheet and hitting the debt target.

And then a quick follow-up. Obviously, even if we take out the Hebrew National disruption, organic for the quarter maybe came in, I guess, a little bit -- I mean, it was sequentially improved as you thought it would be, but still maybe not quite where maybe you'd hope it had been or where Street estimates were. It sounds like 2Q also, right, is some gradual sequential improvement, but still a greater amount of reinvestment. So it just seems like more of the pressure than even maybe you might've thought at the start of the year is going to be in the second half. I guess what gives you the confidence or the visibility that the sort of the full year reiteration is sort of the right approach, given it seems more second half-weighted, but maybe I'm seeing that not in the right way?

Yes. And no question, there was a lot of noise in the quarter. It's why we're trying to unpack it today. In terms of the organic dollar sales miss versus consensus, Andrew, it's 2 places, and Dave will unpack this in just a second after I make another point, one is mix and the other is Foodservice, what you guys are expecting in Foodservice. But the bottom line from my vantage point is that after Q1, we are largely where we expected to be. While we didn't expect the Hebrew National disruption, to me, that is not as noteworthy as the fact that our investments are working quite well, our scanned volume was positive in frozen and snacks and our share performance was outstanding. So it's not lost on me. There's a lot of noise in the quarter. That's why we're endeavoring unpack it in detail, so we can enable clarity on the core fundamentals. So back over to Dave to kind of talk about this -- the other 2 factors I just mentioned.

Yes. So Andrew, there's -- when we originally gave guidance, and we gave some color on Q1, we were trying to give some perspective on we didn't expect Q1 to be strong. It was going to be our lowest sales quarter. It was going to be our lowest margin quarter. We had some wraps on SG&A. So we try to put that out there. But as you know, we don't give specific guidance on Q2. So other than the Hebrew National situation, we were in line or better than our internal plans for Q1. It was just different than consensus. And so we'll manage that. As we look going forward, I gave some color on the call in terms of Q2 and then full year. I did make the comment that Q2 would be our highest trade merchandising quarter of the year. It's also our highest sales quarter of the year by a good amount. So that's part of it. We do expect some of the key variables going forward. We do expect our absorption to start to moderate and get positive. That's really important because absorption was a headwind in Q1. That tamped down our gross margins because volumes have been down. But as volumes inflect and get positive, we'll start to see that as more of a tailwind than a headwind. So that's a big part of our forecast. We talked about sales mix in Q1 being unfavorable. We expect that to normalize as we move forward as well. Our productivity, we're very pleased with that in Q1, and we expect that to continue to accelerate as we move forward. So it's pretty much, right now, playing out like we thought. The 2 big differences are, one, the Hebrew impact, the lost sales of $27 million and then the lost -- the overall additional cost and lost profit of $11 million that hit in Q1, and then secondly, we took up our forecast for inflation 20 basis points. So those 2 things, given the momentum we see in productivity, given our expectation that absorption will start to flip and what we're seeing so far with the strong ROI on our merchandising and our expectation that volumes are going to continue to improve each quarter, we feel like we have a line of sight to offset the 2 headwinds with Hebrew and inflation, and that's why we're holding guidance. So there's a lot there, but it's pretty consistent with the way we originally built the plan for the year.

Our next question comes from Alexia Howard from Bernstein.

So 2 questions. The first one is just about where price/mix goes from here now that we're lapping the tomato product price increase, especially as I think you commented that the trade spend investments are going to be higher next quarter. And then I have a follow-up.

Yes. So as we mentioned, Alexia, we expect our overall sales to continue to improve going forward. So we expect volume improvement each quarter. So a year-to-go, we expect volumes to be positive. We do expect for the full year that price/mix will be negative, but that rate of sort of decline that we saw and year-on-year decline that we saw in Q1 should start to moderate going forward. So yes, we have higher merchandising in Q2, but it is a higher sales quarter as well. And it's going into -- it's the holiday -- beginning of the holiday season, so there's some more seasonal promotion there. So I don't want that to be taken out of context that it's above what we planned. It's just the way it flows, Q2, we have more spend, given the sales and the seasonal dynamics.

Got it. And then as a follow-up, more of a sort of taking a step back question. For a number of years, you've been focusing less on advertising and promotion within the SG&A line and maybe a little bit more on promotional, though I recognize that today you laid out that promotional spending is still pretty rational. I think in fiscal '24, your advertising spend was at about 2.5% of sales, 2.4%, which seems lower than the peer average. Is there -- the share trends are looking good. But is the category growth being affected by some of that pullback, particularly in light of the fairly significant pullback that you saw this quarter?

Yes. Sure, Alexia. The investment we make in brand building, which is how I'll frame it as opposed to what's in the A&P line below the line, is in multiple places in the P&L. The place where we put probably significantly more emphasis than some of our peers in terms of investing in brand building actually goes into COGS, and it shows up in higher quality product innovations, more innovation and higher quality packaging innovation. So we are probably more relentless and we have greater scope in terms of the magnitude of the innovation we do on an annual basis, and that has been the key to us driving category health over time. Look at frozen, as an example. Almost 10 years ago now, we said we're going to turn the frozen category -- Frozen Meals category from a decliner to a grower. That has happened on the back of kind of unmatched innovation as opposed to unmatched A&P. Now within the A&P line, what we've done over the years is we've taken the rate from 4-ish to 2.5%, largely by eliminating nonworking dollars and eliminating low ROI investments, like traditional in-line TV. Instead, we focus our A&P investments largely in the digital social realm, in particular, in the last number of years as you've seen, TikTok, Insta, working with influencers because our brand resonance and our innovation success has been terrific.

Our next question comes from Leah Jordan from Goldman Sachs.

It's Leah. I just wanted to follow up on the snacking discussion. Great to see the share gains you called out in that category broadly. But meat sticks is a notable one missing, and you noted it's a high-growth category. Maybe you could comment on how you see the competitive environment there, the positioning of Slim Jim today and any potential outlook for more distribution opportunities and more color on how the new FATTY addition plays into all of that.

Yes. Great question. Here's what's happening in meat snacks and meat sticks specifically, and it's super interesting. The category is really poised for material growth because you've got an $80 billion-ish overall snack space, and there's a lot of potential shifting that we're beginning to see here from more carb or sugar-laden snacks into protein snacks specifically -- protein snacks broadly and meat sticks specifically. When categories experience explosive growth like that, one of the first things you'll see is the addition of more variety. So if you think of a large category like cookies or, back in the old days, cereal, you would see a lot of varieties emerge as categories grow. That's a normal thing, and that's what we've seen in the meat sticks world. And one of the new additions to the meat stick space was FATTY Smoked Meat Sticks, and so we've been tracking that business kind of since its inception. It's additive to what we do with Slim Jim because Slim Jim skews to a younger demographic. FATTY is a more sophisticated product, more premium product that skews to an older demographic. So it's incremental, and we thought it was a terrific fit to our portfolio with Slim Jim and Duke's. And as I said, now we've got the trifecta smokehouse, which we're already the market leader in the fastest-growing snacking space and meat sticks, and now we've got another arrow in our quiver.

Great. And then for my follow-up, also in the prepared remarks, you said you expect the consumer to remain challenged. Have you seen any shifts in behavior across your brands, given the wide portfolio? And then just given this assumption that they remain challenged, I guess, why should promotional activity not revert back further to historical norms, given they're still below kind of 2019 levels? Are they responding to promotional activity differently any way in the current environment?

Sure. Well, what's happening in the world of promotions is kind of predictable in my eyes because promotions were suppressed because there were supply chain issues. They've moved back toward pre-pandemic levels, but I think the key thing for me to see is that it kind of remains rational. Our promotional activity has been very specific. Number one, it's been targeted in frozen, and number two, it's been about quality merchandising frequency and not depth. It's really kind of a reminder effect that it has in the shopping experience. But one of the things that we've seen when we mentioned the consumer is challenged is there is still value-seeking behavior happening. And we have a broad and diverse portfolio, and we have some products that offer exceptional value. Some of those products are the products that we have promoted and we put on display. And what we've seen when we've done that is incredibly high lifts versus what we might have historically seen. That's one of the things that is creating a mix effect on a dollar per unit basis that Dave talked about. But that's perfectly fine in our mind because those products, while they might be a negative mix at dollar sales, the gross margins tend to be equivalent. So what we're really doing is offering a value-seeking consumer a tremendous value through the form of promotion and getting really good lifts, which is great because we bring households back to our portfolio, and that's ultimately what we're trying to do for the long-term cash flows of the business, is keep that relationship strong with our households.

Our next question comes from Nik Modi from RBC.

Sean, wondering if you could just kind of opine on all the noise between the out-of-home and in-home, right? You have -- obviously, restaurant traffic has been weak. We've seen a lot of the foodservice businesses that many consumer companies have struggled over the past few months and quarters, but then you also have these very sharp price points at some of the QSRs and value meals. And I have to assume that there's some interplay. So I would just love your observations on kind of what you guys are seeing from that standpoint, from a consumer behavior perspective.

Well, I think in the simplest sense, as people seek value, you do see trade-downs. And one of the obvious trade-downs you see is within away-from-home eating and the types of restaurants people eat at, more toward value types of restaurants, and then from away-from-home into the grocery store. And so we've seen that. Our focus in Foodservice, as you've heard in our remarks today, in this kind of unusual environment has been to protect the margin that we worked so hard to claw back after COVID and after the pricing super cycle, and we've managed to do that. One of the ways we've managed to do that is by exiting some unprofitable business, which obviously pressures the top line, but we think it's the right thing to do for the long term. But the Foodservice dynamic you're poking at is really just -- it goes under the banner of continued value-seeking behavior. It's happening from away-from-home into the store, and then it's happening within the stores. But ultimately, what people will pivot to are the benefit areas that are most necessary for them to live their lives, and as I mentioned, convenience is pretty much at the top of the list.

And maybe if I can ask Dave a question. Just on the input costs and anything that you would highlight in terms of things that are moving in the right or wrong direction, just to kind of give us a state of the union there would be helpful.

Sure, Nik. So to take it from the top, we had originally estimated our overall inflation, and that's everything. That's materials and our manufacturing and our transportation, warehousing. We had estimated that as a 3% increase for the year. We're now estimating it 3.2%. The biggest change is in some of the material areas, and really, for us, it's coming down to just a few things. We spend a lot on beef in our inputs, and we're seeing double-digit inflation even higher than we originally estimated. And it's just -- it's a supply issue, just the lack of herd expansion, lower cattle weights from the heat. We're just seeing the impacts of this on our forecast for beef, and it's a big spend for us. Another one is sweeteners. There's just some tighter supply conditions, driven mostly by the drought. So double-digit inflation in these -- what are big input categories for us. We're seeing some other more moderate inflation areas, like chicken. We're seeing inflation in milk, but that's a smaller spend for us. So it's really coming down to a handful of categories that we watch closely, and we manage everything we can do. Beef, if we can take positions and try to manage that the best we can, we do. But that's our latest call on kind of where we see the overall inflation.

Our next question comes from Peter Galbo from Bank of America.

Dave, thanks for the detail on the beef cycle. Always a fun topic. I maybe just wanted to make a clarification on Hebrew National. Just given the seasonality in that business and then, Sean, I think in your comment, it shouldn't be that we expect really a meaningful rebound now that it's kind of behind you in the rest of the year. It's kind of we have to wait more until grilling season of next year. And I think you had a similar issue with fish sticks a few years ago. So maybe you can just clarify that.

Hot dogs is a business that has a baseline. But on top of that baseline, between kind of Memorial Day and Labor Day, Pete, there is a seasonal spike. So if you miss out on a good chunk of that, you don't get it back to the following season. You're absolutely right.

Okay. And then maybe, Sean, you spent some time talking about snacking, and Slim Jim is obviously a pretty important product in the convenience store channel. There's been a lot of debate, I think, amongst investors, just around kind of the cyclical versus structural nature of convenience store kind of traffic declines. So just curious, anything you're hearing from the demand science team or just views there on how you're thinking about that channel specifically within snacking?

Sure. Well, it's obviously a huge channel in the snacking space. But as you all well know, there's been a fair amount of channel shifting, literally from the onset of COVID through today. At the beginning of COVID, it was because people were moving out of big stores into small stores because they thought it was safer. And then after COVID passed, then we had the pricing super cycle and then it was the pursuit of value. So you saw more volume moving through club stores and mass merch. And you also saw Foodservice at the peak of inflation cycles -- not Foodservice. Convenience can be challenged because people get their gas and they may not go into the store. Those tend to be kind of cyclical transitory dynamics. So we try to remain agile. I think what we're seeing right now is to the degree there's any temporary softness in convenience stores, you tend to see strength in mass merchant club, as an example. So it's just a -- we've got huge businesses with all of these customers. We've got to be agile and kind of meet the shopper where they are.

Our next question comes from Robert Moskow from TD Cowen.

Dave, I was wondering if you could help us in Refrigerated, Frozen, just how to think about price/mix going forward. Have you fully lapped the price rollbacks that you -- I think you had last year in frozen entrees and maybe some other categories, and therefore, does that kind of level off? And then also, was there more deflation pass-through in margarine, I guess? Do we -- are you still living with that for the next few quarters? And then a quick follow-up.

Yes. So Rob, so in terms of the cadence of price/mix for Refrigerated & Frozen, we'll still see some kind of reduction, negative price/mix in Q2. As we sort of go through Q2, we'll start to wrap. So the second half, we will be fully wrapped on that. So we shouldn't see kind of the down driver on that in terms of timing. But what was your second question?

Is there like a deflation pass-through, just on like commodity-related oils in this division, like for margarine, for example?

Yes. So we've seen deflation in our edible fats and oils, and so we have passed that through. And that was in my comments today. We've had pass-through price reductions on our spreads businesses, which are obviously prominently oils.

Okay. So that continues for the rest of -- that continues for the year unless there's a change in the underlying commodity...

Yes. After Q2, we're wrapping on that.

You're wrapping on that, too. Okay. Okay. And then a follow-up. There's a discrepancy, I think, between the IRI data and the Nielsen data on your Meat Snacks sales. Your presentation today says things look pretty strong. Nielsen's a little different. Like is this a -- do you think that this data -- is your Meat Snacks business up year-over-year in the quarter overall in retail and in your shipments?

Rob, I can't speak to the difference between the 2 data sources. We're just kind of showing you the strength we've got in the business overall. But we're very pleased with where we are, and we're very pleased to add FATTY to the mix. But as you can see from the data, the universe we compete in is significantly outpacing the broader snacks universe, and we are participating in that.

And just for [indiscernible], for Slim Jim from the IRI data. For the quarter, we're seeing volume increases kind of little below 1% volume increase in Slim Jim.

Okay. What about dollars though, Dave, does that up as well? Or is that down a little?

Dollars are down slightly.

Our next question comes from Tom Palmer from Citi.

You noted the higher lifts from items on promotion, and I guess, ultimately, a portion of the percentage of sales on promo are driven by consumer decisions and not just what's on shelf. I was wondering about the frequency of promotions on shelf. Relative to pre-pandemic levels, do you think that's kind of back to full levels? Or do you think maybe we'll see some changes there still to come?

Well, the quality promotion that we try to drive on, and particularly, it's been on our Frozen business and mostly within our biggest frozen business with single-serve meals, we try to drive quality display. So we try to -- in addition to just our normal shelf space in the frozen aisle, we try to get into the end caps because that is ultimately what drives the highest lift, as opposed to just a tag on the shelf that has a modest price decline. So it's quality display at the end of the frozen aisle is really what we're after to drive those maximum lifts.

And quick one on Ardent. It was a bit light at the implied run rate for the year. I know there can be fluctuations, but this was the lowest in almost 3 years. Just any kind of thoughts on when we might see the rebound in that business and if there was anything notable to think about in 1Q that maybe drove the slight downside?

No. And I mentioned on my comments, and we've talked about it before, Ardent's results can fluctuate based on volatility with the wheat market. So the core business of Ardent, in the milling and selling of flour products at a margin, is very strong. They do a great job servicing customers. The remaining business is this commodity revenue, and that's the more volatile part of the business. And it can be volatile where it's a bit down and then it can be -- it can go the other way and be positive. So we're holding our forecast for the year with Ardent. There is going to be some volatility. But we were a little bit softer than we wanted to be in Q1, but we're holding the year right now because the volatility can really swing both ways.

Our next question comes from Max Gumport from BNP Paribas.

With regard to the expectation for volumes to improve through the year, is that really a category dynamic? Or is it a market share expectation?

It's a mix, Max. We've got a fair -- a good percentage of our categories are growing, which is great to see. But the share, as you saw in our numbers, share strength is broad-based, particularly in the key domains of frozen snacks.

Great. Yes. And on that market share, you're right. I mean, it does look quite impressive. I think that was a highlight for the quarter. I'm curious what you think the key drivers are for the outperformance on a volume basis. And then do you think there's any help you're getting on volume market share because you perhaps invested in price first? It feels maybe similar to what you were talking about a couple of years ago, but also taking price first and lapping that price increase first. I just wonder if you're still ahead of your competitors in that cycle.

It's a good question. It's a different answer in each of the domains. So if you take the frozen space first, what we see happening in the frozen space is the category has returned to growth, driven by Conagra basically. We -- the category goes in frozen as we go. So what we've done there is not deep discounting. So I would not put under the heading of major price incentives. We saw the consumer desire to get back to convenience. We saw the fatigue on some of the scratch cooking. And so we nudge them along by giving them a shallow discount, but importantly, getting the product to -- in the end of the aisle in a display so we can remind them. And we've seen good responsiveness there. And that's typically -- is what happens. That drives strength in the category and outsized strength for our portfolio. In snacks, I think you're dealing with a little bit of a different dynamic because we've been -- we started later in terms of more merchandising support on snacks there. It's been about price pack architecture to help the value seekers. So in the case of Slim Jims, selling smaller sizes, things like that. But the big tailwind on our snacking business is when it comes to share and overall growth is just what we talked about earlier, which is the pivot toward permissible snacking, particularly high-protein, high-fiber choices.

And ladies and gentlemen, at this time, we'll be ending the question-and-answer session. I'll be turning the floor back over to Melissa for any closing remarks.

So once again, thank you all for joining us for our call this morning, and please reach out to Investor Relations with any additional questions.

And ladies and gentlemen, with that, we'll be concluding the question-and-answer session and presentation for today. We do thank you for joining. You may now disconnect your lines.