Good day, and welcome to the Conagra Brands Third Quarter Fiscal Year 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Brian Kearney with 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 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 the 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 in either the earnings press release or the earnings slides, both of which can be found in the Investor Relations section of our website, conagrabrands.com. With that, I'll turn it over to Sean.

Thanks, Brian. Good morning, everyone, and thank you for joining our third quarter fiscal 2021 earnings call. Today, Dave and I will discuss our strong third quarter results, our perspective on how Conagra is succeeding in the current environment, and how we are well positioned to drive future growth from behavioral tailwinds. So let’s get started. Our business continued to perform well, both in the absolute and relative to competition during the third quarter. Our ability to deliver for stakeholders during this pandemic is not only a testament to our team’s ability to adapt to the current environment, but a reflection of the work we’ve done to transform our business over the past five-plus years. Our ongoing execution of the Conagra Way playbook perpetually reshaping our portfolio and capabilities for better growth and better margins has enabled us to rise to the occasion during the COVID-19 pandemic and has positioned the business to excel in the future. During the third quarter, we continued to build on our momentum and invested across the company to further strengthen the business. This included ongoing investments in physical availability to ensure our products are accessible online and in-stores, and mental availability to ensure we are making the right connections with our consumers. As I’ve said previously, the COVID-19 pandemic has presented an incredible consumer trialing opportunity. Our innovation and marketing approach has enabled us to secure not only strong trial, but also strong repeat rates and market share gains. Based on the evidence we are seeing, which I will summarize today, we expect to emerge from the pandemic with structurally higher volumes and share, driven by the stickiness of the COVID-driven demand. But to be clear, we are not relying on these benefits to achieve our fiscal 2022 organic net sales guidance. Given our…

Thanks, Sean, and good morning, everyone. I’ll start my remarks by calling out a few third quarter performance highlights which are captured on Slide 37. As we have detailed this morning, the business continued to perform very well throughout the third quarter. Strong execution from the supply chain and outstanding performance by our teams across the company enabled us to exceed expectations for net sales during the third quarter while meeting margin and earnings targets, as we continue to strategically invest in the business while managing inflation. Overall, reported and organic net sales for the quarter increased 8.5% and 9.7% respectively compared to the same period a year ago. Adjusted gross margin increased 12 basis points to 27.5% and adjusted operating margin increased 31 basis points to 16% in the quarter. Adjusted EBITDA increased 9.9% to $566 million in the quarter, while adjusted diluted EPS grew to $0.59, up 25.5%. Slide 38 illustrates the drivers of our 8.5% net sales growth versus the same period a year ago. The 9.7% increase in organic net sales was driven by a 6.1% increase in volume connected to the continued increase in at-home food consumption as a result of the COVID-19 pandemic. A favorable price mix impact contributed a 3.6% increase to our organic sales growth. As Sean mentioned, our organic sales growth was impacted a bit from the February winter storms that impacted our ability to deliver products for a short time during the quarter. Our strong organic net sales growth was partially offset by the impact of a 1.2% decrease associated with the divestitures of the Lender’s, H.K. Anderson and Peter Pan businesses as well as the exit of the private label peanut butter business. As a reminder, we completed the divestiture of our Peter Pan business on January 25, which…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Andrew Lazar with Barclays. Please go ahead.

Great. Thanks very much for the question. Sean, in conversations with investors more recently, there appears to be this sort of lingering concern that Conagra will take whatever actions necessary to deal with rising inflation in fiscal 2022 even if such actions might have sort of negative implications beyond 2022. So in other words, Conagra can hit its fiscal 2022 goals, but do so in a way that is somehow deemed, less sustainable or lower quality. And I guess in light of rising inflation seen in today’s results on margins and sort of the margin commentary for next quarter, I’d expect these concerns to only grow from here. So I guess I’d love your take on this and maybe to address this sort of very specific investor concern, if you could.

Sure. Thanks, Andrew. Good to hear from you. Hope all is well. Well, the short answer is that that concern is totally unwarranted. But let’s copter up for a second, just look at the big picture here. Over the past six years, we have totally transformed our company and our culture and the magnitude of the portfolio modernization we’ve delivered is arguably best-in-class. And that incredible work by our Conagra team put us in a position to capitalize on the unique and unprecedented trialing opportunity that COVID presented. We knew that our modernized products would perform and that our repeat purchases would be excellent. So what did we do? We invested during the pandemic to maximize trial and try to capture the lifetime value of these new mostly younger consumers, look, no further than our aggressive stance on transportation solutions and e-commerce in Q3. So if you flash forward to fiscal 2022, our conviction around getting our products – our modernized products into consumer’s mouths won’t change. We play the long game and we do not burn the furniture to create better margin percent optics short-term. This is my – I think is my ninth-year as a public company CEO, and I’ve never taken that route. So I don’t think that concern is warranted.

Great. Thanks for that. And then a quick follow-up. I didn’t hear and I may have missed it, the synergy capture in the quarter. I don’t think it was in the slide deck and it’s been in there over the last couple of quarters. So maybe, Dave, if you could just comment on how that came in in the quarter?

Andrew, we’re right on target with synergy. There was $24 million of incremental synergy in the quarter. That brings us to $270 million cumulative and we’re still on track to hit our target of $305 million by the end of next year.

Thanks very much.

And our next question today comes from Ken Goldman at JPMorgan. Please go ahead.

[Indiscernible] apologize if not.

We can hear you now, Ken. We missed the beginning.

We missed the beginning.

Okay. We’ll try it anyway and just cut me off if you can’t hear me. But Sean, as you know, just to kind of piggyback a little bit on what Andrew was saying. One of the bigger investor questions is whether you can hit that 18% minimum margin number next year, right? I’m sure you hear that more than we do. You obviously maintain that range today, but the 3Q margin came in lighter than you expected, 4Q’s will as well. And then you have an acceleration of inflation into next year. So despite your reiteration, and even though pricing and savings are going to accelerate, there is an argument to be made that your current numbers are saying these tailwinds won’t be quite enough to offset costs. So I guess my question is this, just how confident are you in that 18% to 19% range, and why isn’t it somewhat at risk at least more than it was three months ago given net cost inflation that we’re seeing?

Well, we’ve reiterated 2022 and we feel good about the 2022 algorithm overall Ken. And the precise permutation of how things unfold is not yet clear because things are moving around still quite a bit. But here’s how I think about 2022 in general versus what we were originally envisioning. The topline clearly looks stronger, margins look more challenged short-term due to inflation and the lags that usually follow price increases. And so given we’re still in the midst of finalizing our annual operating plan and our pricing plans, it is premature to communicate the precise permutation of how things will unfold. But in our eyes, we expect things to unfold in such a way that we deliver the guidance overall.

Great. I'll let it go there. Thank you.

And our next question today comes from Chris Growe with Stifel. Please go ahead.

Hi. Good morning.

Good morning.

I just had some – a couple of questions here. So the first one just would be that as we think about the levers you have to offset inflation going forward. There is multiple levers, obviously pricing and promotional spending those sorts of things. I’m curious in terms of like your cost savings and you have a little bit of residual synergies, but should we think of that as the first line of defense and how much in the way of say like productivity savings do you have to help offset inflation before you guys jump into actual pricing and other levers yet to pull that makes sense?

Yes. All right. So let me start, Chris, with the big picture here and then we’ll go over to Dave with more granular detail. Here’s how I think about this whole inflation/lever/pricing kind of concept. Principally, when we’re experiencing inflation as we are currently, we will be very aggressive to offset it using multiple levers like our cost programs which you cited are pricing, trade and mix. Now with regard to inflation justified pricing, it’s really there not a question of, if we will move. It’s a question of how closely the pricing actions impact on the P&L lines up with inflations impact on the P&L. And here not all businesses are equal. The lag is typically shorter, as you know, in foodservice and in those retail categories with simpler [indiscernible], but our expectation is to fully offset inflation over time and through all of these levers and we are working very aggressively to do that. And as I pointed out before, there is something else to keep in mind too is that the priority for both Conagra and our customers is to sustain growth. Now doing that means we got to keep our proven innovation machine running and doing that means we have to offset inflation. So in other words, our customers understand this more often than not because they’ve seen and they now count on the tremendous vitality that our innovation programs have driven into important categories like frozen and snacks. And last thing before I turn over to Dave is, by the way, I am very happy that we’ve been so aggressive in modernizing our portfolio for the past six years because you can see it in the numbers, the dedication that these consumers now have to our products will be another factor that helps us navigate this inflationary period. Dave, do you want to talk anymore about the cost savings levers or anything?

Yes. Sure. So Sean hit the pricing. As it relates to realized productivity, first of all, we have a very experienced supply chain organization with really strong processes across the entire network. So if you look historically, we’ve approximated 3% of cost of goods sold realized productivity savings, if you go back historically. Efficiency in the plants, network opportunity, sourcing, there’s just a series of different areas and we continue to execute projects to drive the cost savings opportunity. So obviously, this isn’t changing as we look forward. There is other levers though. As Andrew had asked previously, we are on track with our Pinnacle synergies to go from our $270 million where we are year-to-date this year to $305 million by the end of next fiscal year, less COVID-related costs in fiscal 2022. As people become vaccinated, the entire end-to-end supply chain is going to benefit from less supply disruption and that will enable us to reduce excess cost being incurred in fiscal 2021 to support demand. The Q3 incremental transportation investment that I discussed in my remarks, that’s one example. That was $15 million of investment just in this quarter. Another area is supplementing volume with [co-mans] [ph], both the incremental cost of the co-man and the incremental distribution cost to get it from the co-man to the customer. And so that’s another important lever. We’re over $100 million year-to-date in those COVID-related costs that as we looked at 2022 should really be an opportunity for us to get that out of the base. We will have some headwinds with fixed overhead absorption and overall segment mix, but we think product mix is an opportunity for us. And then as we always talk about margin accretive innovation, our innovation continues to be strong and we are really bullish on making sure that it’s margin accretive. So, yes, there’s a lot of things, a lot of dynamic that’s driving this right now, but based on the analysis we’ve done in the different scenarios, we think we have various ways that we can reach our 2022 profitability numbers.

Okay. Great. That was helpful. I have just one quick follow-on. In relation to the transportation investments you made, is there another $15 million in the fourth quarter, is that the way to think about it? And is that basically helping you rebuild inventories more quickly, is that also a way to think about that investment?

Yes. So I’m not going to give you the specific. We do expect additional investment in Q4. I’m not going to say that it’s exactly $15 million. It’s a little fluid. The overall objective is to optimize getting product to customers as quickly and efficiently as possible. So for certain categories in staples and snacking where inventory has been tight, we made the decision to bypass our normal DC distribution system network and ship directly from plant or directly from one selected DC. So that gives us better inventory and it allows us to meet customer demand more efficiently and it improves product availability. But it comes at an incremental cost, inefficient shipping lanes and sporadic frequency of distribution route. So there is a lot of dynamics there that’s going to continue into Q4 and we’ll manage that number the best we can.

Okay. Thank you very much for all the color.

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

Thanks. Just to follow-up on some of those questions with regard to fiscal 2022. You mentioned pricing actions and you mentioned increasing inflation over the next few quarters. Do you anticipate that the gross margin trends and perhaps earnings growth will be more of a back-weighted – will make fiscal 2022 more of a back-weighted year given the timing of inflation versus pricing? And I have a quick follow-up.

Yes. David, we’re not going to get into specifics on fiscal 2022 right now. As said in my comments, we expect the inflation rate to accelerate into Q4 and into early fiscal 2022. But we’ll give more color in July when we give our Q4 earnings.

David, it’s Sean. We’ve talked about how these acute inflationary periods work with respect to pricing many times over the years and this lag concept is an important one, right? When you see broad-based inflation across an industry, across the basket the way we’re seeing now, you tend to see the whole industry kind of acknowledge that they’ve got to contend with these things. They’ve got to deal with it. And not as I said a few minutes ago, not all businesses are created equal in terms of when the positive impact of pricing shows up in the P&L versus the negative impact of the inflation. There can be a lag, so over the course of a full-year, that’s kind of how you tend to see it go as you see more of a headwind in the short-term. And then you see recovery as pricing goes into the marketplace. And then oftentimes, there is the benefit the following year as you begin to wrap. So we’ll see how it plays out this year. What we can say at this point is we’re flat out on all of these integrated margin management levers that we go after in times like this.

And just a follow-up on, Dave, the topic of setting up fiscal 2023 after you hopefully achieve your targets in fiscal 2022. If you’re achieving – if the stickiness is above what your guidance implies and you mentioned that you’re not anticipating with this guidance that the COVID-related trial will relate – will end up with stickiness in that demand. But if you do have that you do have strong multiyear sales trends and you have room to reinvest, where do you anticipate those investments going from here? Where do you see the most opportunity? Thanks.

Well, David, it entirely depends upon what is the barrier to maximizing trial in any given window. So Q3 is very instructive example in this regard. You can look at our topline in Q3 and say, wow, we beat our guidance on the topline, was that because of the A&P increase? The answer to that is no. We planned for a double-digit increase in A&P and we still over delivered on our topline. So what was it exactly that drove the incremental lift on the topline? It was a deliberate and spontaneous choice by our management team to invest in transportation solutions that are atypical for us. They come at a higher cost and we chose to do that and make that investment. Why did we do that? Because we’ve got phenomenal repeat and depth of repeat data and so we’re very confident in the ROI of that investment because we’re very serious about investing in the business in the short-term during this trial period in order to capture this lifetime value. So we’ve been doing it. Also the decision to continue to lean hard on e-commerce where we tend to get the best ROIs, we tend to over index most with the younger consumers who are going to be the ones that deliver that lifetime value. This is very purposeful in our regard and we are absolutely – we don’t have any comments today on beyond 2022. But what we can say is, we’re playing the game hard to optimize what beyond 2022 looks like in terms of our consumer base because we’re having such good fortune generating loyalty.

Thank you.

And our next question today comes from Alexia Howard with Bernstein. Please go ahead.

Good morning, everyone.

Hi, Alexia.

Good morning.

Hi, I hope you can hear me okay. So my first question is, you’ve obviously made a number of divestments over the last several months and maybe longer than that. Now that we’re coming up to the expiration of the deferred tax asset, are we done with that or is it possible that there might be more of that to come?

Well, obviously, we have been active over the years in divestitures and our philosophy on that has really not changed. It’s been that if there is business that doesn’t fit strategically, if it’s a chronic drag on our sales or chronic drag on our margins or somebody else just really puts tremendous value on it. We’re open to divestitures should a legitimate offer come along that we see clearing the hurdle of the intrinsic value of the business and that’s kind of always been our case. And we’re fully aware of the timing of the capital loss carry-forward and we have divested assets leveraging that along the way. And frankly, we have been open to other things as well. But it’s not strategic for us, let me put it this way to pursue utilizing the capital loss carry-forward for the sake of utilizing the capital loss carry-forward, it would be strategic for us to divest an asset that didn’t fit or was something that wasn’t a priority for us as long as the valuation that was inbound clear the intrinsic value of that. And if that were to happen at any point in time, we would be open to it. When that’s in place, we’ve done deals.

Great. And then as a follow-up, your price mix is obviously, in the third quarter at least, nicely positive. I guess that’s partly because of the pandemic, and I guess maybe lower promotional activity or maybe it’s different. But I’m curious about the mix component there and what exactly is driving, if it is positive, the mix piece, and how you expect that to develop going forward? Thank you, and I’ll pass it on.

Hey, Alexia. Just roughly of the price mix benefit we saw in the quarter, it’s roughly 50-50 mix kind of price and promotion. I’ll kind of put it into those two buckets. As it comes to the mix part of it, a lot of that is really segment mix. So we are growing our domestic retail segments significantly which are strong in terms of sales mix relative to our foodservice business, which is down, but we’re also seeing favorable mix within the business. So it’s really a combination of segment and kind of brand product mix, if you will.

Yes. Alexia, Sean here. Just one other thing that I would encourage the investor to think about as they think about our topline long-term. You think about our business, you’ve got three consumer domains, you’ve got frozen, you’ve got snacks and you’ve got staples. And so what does a long-term investor have to believe to feel good about our topline going forward? I think they’ve got to believe that there is continued growth opportunity in frozen, I certainly do. They got to believe there is continued growth opportunity with this awesome snacks business we have, I certainly do. But what’s really interesting post-pandemic is the staples business and that’s a very strong margin business for us and it’s been performing phenomenally well and this whole dynamic with younger consumers learning how to cook, realizing the tremendous value proposition of cooking simple meals at home, beginning to form families and with this kind of at-home nesting, it’s a real phenomenon and that’s a good thing because it would lead a reasonable person to believe that that business is at least going to be staple. So if you think about the total mix of the portfolio, you’ve got a big profitable staple business and two growing domains. I like the way that shapes up for years to come.

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

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

Hey. Good morning, everyone.

Hey, Bryan.

So just quick ones for me. And maybe I might have missed this. But Dave, on the guidance, the 2022 reaffirmation, is that net of Peter Pan divestiture or is that – I guess that’s question, is it net of the divestiture or not?

Yes, it’s net of the divestiture, it’s out of there.

And then second question just – I guess, Sean, as we’re thinking about the possibility for the potential that some of this demand behavior sticks going forward, how does that affect or does it have an impact at all on manufacturing, manufacturing capacity and as you assess this, I guess over the next year or so, I guess I’m asking is there a potential that you might have to elevate capital spending for a while or make some acquisitions to expand capacity – build up manufacturing capacity to sort of support and – a base that would be elevated versus where it was in 2019?

Yes. Bryan, we’ve already been doing that across a number of our businesses and top line remains strong. We’ll continue to do that because if you look over time at the IRRs we get on numerous broad-based capital investments, the best IRRs are typically those associated with increasing capacity on our growing businesses like Slim Jim and others. So that’s a great return on all time and we’ll continue to look for opportunities to do that and we spread it out based on how we need it, but we’ve already been making those investments in added capacity both internally and with co-packers. Interestingly the way, as you all know, works with some of these co-packer investments is, those can be a headwind to margins in the short-term, but if you believe that the demand on the other end of the consumer there is sustainable. Typically when you repatriate that capacity back in-house, that’s expansive to margin at that point in time. So that concept remains intact as well and we’ll look for opportunities to do that going forward.

All right. Thanks guys.

And our next question today comes from Jason English at Goldman Sachs. Please go ahead.

Hey. Good morning, folks. Thank you for totting me in and congrats on another strong quarter. A couple of questions, first, reasonably tactical one and building off of Alexia Howard’s question, the price mix contribution, I think you said around half from lower promotions, with the pricing actions you put in place, is it reasonable to expect a decent chunk of that to be offset or mitigated by promotions coming back into the system, or do you think it’s reasonable that we could actually continue to operate at a much more subdued promotional level?

Well, if you just go back over the years, Jason, you’ve seen us pretty dramatically ratchet down our promotion reliance over the last six years, and I think probably on average, we probably reduced our reliance on promotion more than most food companies. And frankly COVID, again, illuminated some of the inefficiency that has emerged over the years in some of the traditional promotions, it’s just the lifts that the industry used to see on a lot of categories are a lot smaller today. So it’s – we are big believers in redeploying any inefficiency we can find in our total marketing spend and higher ROI ways that could be in trade as you’ve seen before, we’ve found tremendous inefficiency in some of the A&P lines and we’ve actually managed and reinvest some of that in-store with retailers but not against traditional kind of stack them high and watch them fly types of investments. So, that type of – that priority is always intact for us and we will continue to try to push our – over time our reliance on price-based promotion downward. Obviously last year was kind of an extreme base and so we’ll see how that unfolds over time. But principally, that’s how we think about it. Dave, you want to add to that?

Yes, the only thing I would add to that is that Jason, that’s why I said price and promotion because we really look at them together. When you’re looking at the impact of price, obviously you have to look at not just the list price but how you promote what your strategy is to promote as well. So it all goes into the net realized price calculus. So just wanted to clarify that.

Yes, for sure. That makes lot of sense. Okay. And on that topic of allocation to maximize return, you talked a lot about your investment in e-com and A&P. I’m assuming that you’re referring to retail media. It sounds like Walmart is making a pretty big push to try to drive more with Connect in integrating with its joint business planning coverage as well. Is it reasonable to expect that investment to continue to climb next year, is part one of the questions. And part two is, if so where could you find it? Can this come out of trade or does it need to be incremental dollars into the P&L?

As I’ve mentioned many times, we’re agnostic to where we put brand building dollars as long as we get good impact and a good ROI. And so your example on media, I think a number of years ago, I said look a lot of people could have come to us and offered to deploy media, medias what we choose to run, and it’s a question of what’s the effectiveness and what’s the ROI on that. So we’re open minded to different kinds of investment. But by the way, that’s not all that we’ve invested in an e-commerce, as we talked before the importance of investments in search and other things so that we show up well in the digital shelf, so to speak, are very important, but we have been pretty good at keeping our overall level of total marketing investment rock solid over the years. We just tend to move it around from pocket to pocket based on what specific opportunity in any given window gives us the greatest impact and the greatest return on investment.

So, you can move it around then. It sounds like the answer is, if it has to grow, you can just help on [indiscernible].

Yes, that’s typically – and by the way if we just principally, if we were ever going to add incremental investment to what we would do, it would be because we see a return for that and that’s where – that’s where, you know what I mean by that is, it was incremental investments to me when you see opportunities where they’re not a tax on EBIT, but there actually an accelerant to EBIT because of what they do to the top line. That’s positive ROI. We’ve always been open to that kind of thing. That’s not something we’re forecasting, but it’s just principally how we think about those kinds of investments.

For sure. That makes sense. Thanks a lot. I’ll pass it on.

And our next question today comes from Robert Moskow with Credit Suisse. Please go ahead.

Hi, thank you for the question. I was wondering, in your forecast for the rest of the calendar year, have you baked in any assumptions for government stimulus programs running out SNAP benefits, which are elevated now dissipating. I would imagine that would affect your consumer base a little more than most packaged food companies. You tell me if you agree? And is it possible to disassociate that with the stickiness you expect from all the new trial you got from COVID? How have you made your macro overlay assumptions there?

Well, with respect to the stickiness, stimulus and other things aside, we obviously think it’s real and that our conviction there is growing even stronger day-by-day, but we don’t need that stickiness, as I said before, to get to our revenue algorithm. Hopefully as the database case for stickiness becomes more concrete, some of the reflexive cynicism in the market around stickiness will pivot to justified optimism and I think that’s obviously going to unfold, based on how the data continues to unfold. In terms of, you know things, regulatory changes, tax changes, stimulus changes, things like that, SNAP, we do our best to try to prognosticate exactly how that’s going to land and factoring it into our – into our forecasting processes and you should assume that we do that, we’ve got – I think you guys know, we’ve got a really impressive demand science team and they look at macro factors like that that could have an impact and we leverage them to get to the best forecast we can get to.

Okay. And then one quick follow-up. Are you expecting to increase A&P double-digit again in fourth quarter?

Yes. As part of the guidance, I did – that was in my prepared remarks. That’s correct.

Okay. Great. All right. Thanks.

And ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the conference back over to the management team for any final 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 anyone may have. Thank you for your interest in Conagra Brands.

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