Good day, and welcome to the Conagra Brands Fourth Quarter Fiscal Year 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Brian Kearney. 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 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 fourth quarter fiscal 2021 earnings call. Today, Dave and I will discuss our strong fourth quarter and fiscal 2021 results, our expectations for fiscal 2022 and our perspective on how the Conagra Way playbook positions us for continued success in this dynamic environment. Slide 5 lays out the key points we're going to cover today. As you saw in our release, we reported very strong results for fiscal 2021, and we could not have done so without our people executing the Conagra Way with excellence. Their dedication enabled us to capitalize on an unprecedented time of consumer demand. Over the last year, we acquired and retained multiple years' worth of new consumers, and we grew share across categories, all while continuing to invest in the future. This translated into strong growth across the portfolio. We saw continued strength in frozen and snacks as well as increased relevancy for our large staples business. The work we've done modernizing and premiumizing our portfolio continues to pay off. We believe our brands are healthier than ever and well positioned to manage through the current inflationary challenges. Dave and I will both share more about our approach to managing rising input costs later in the presentation. But I can tell you now that we're taking aggressive actions on a number of fronts. It's also important to note that our plans provide for continued brand-building investments to drive consumer demand and further enhance brand health. Our business remains very strong, but we are revising our fiscal '22 guidance to reflect the lag effect associated with the aggressive mitigating actions we are taking. Essentially, we see fiscal '22 as a tale of two halves, with the lag effect concentrated in the first half and particularly…

Thanks, Sean, and good morning, everyone. I'll start with some highlights from the quarter and full year fiscal '21, which are shown on Slide 30. Before we get into the details, a reminder that our year-over-year results for the fourth quarter reflect the lapping of the onset of the pandemic in March, April and May of fiscal '20 and the unprecedented surge in consumer demand during that time. Additionally, our Q4 fiscal '20 included a 53rd week, which also impacts comparisons to the year ago period. Overall, we are pleased with our performance as our results for the quarter were in line with our expectations. We delivered strong growth for the full fiscal year, including a 5.1% increase in organic net sales; adjusted operating profit of nearly $2 billion, up 7.4% versus fiscal '20; and operating margin of 17.5% for the year, an increase of more than 100 basis points versus fiscal '20; an adjusted EBITDA increase of 6.5%; and adjusted EPS growth of 15.8% for the year. Turning to Slide 31, you can see the net sales bridge for the fourth quarter and the full year. Our 10.1% decrease in organic net sales during the quarter was driven by a 12.8% decline in volume due to the comparison to last year's demand surge. The impact of the volume decline was partially offset by a 2.7% benefit from favorable mix and the initial pricing actions we took in response to the elevated inflationary environment, which I will describe in further detail shortly. Divestitures drove a 150-basis point decline to net sales for the quarter, and we faced an additional headwind of 560 basis points from the lapping of last year's 53rd week. Finally, we experienced a 50-basis point benefit from foreign exchange during the quarter. Combined, these factors drove a…

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.

Good morning. Thanks for the question.

Good morning.

Good morning.

Good morning. I'd like to start off with your commentary around the timing lag, obviously, of pricing to inflation. Would it be your expectation that the EBIT margin exiting fiscal '22, would be within your initial 18% to 19% forecast range, suggesting, let's say, no structural impediments? And if not, I would be curious as to why that would be?

Yes, Andrew, the absolute earnings power of the business as we exit the year is expected in dollars to be right where we thought it was previously. So our focus there as we take through these transition windows and take price is on protecting pricing dollars. And then our outlook beyond '22, we'll lay out in more detail when we do our investor meeting. But suffice it to say, we continue to see margin runway in the business as we move ahead, and we'll get into details on that later. Dave, do you want to add some more color to that?

Yes, just to build on that. So Andrew, our run rate earnings, as Sean said, for the second half, is the same as it was in our previous guidance. And that should really be the base as we think about fiscal '23 earnings. Regarding margins, the pricing we're taking is to offset inflation dollars, which compresses our operating margin in the short-term. But we expect our operating margins are going to improve in the second half versus the first half as the pricing fully hits the market, and we feel good about the runway for expanding margins as we get into fiscal '23. So we're going to give more specifics on our updated long-term algorithm in our spring investor meeting, but we feel good about how we'll exit '22 and the runway for margin going into '23.

Got it. And then if organic sales, let's say, slows more than expected in fiscal '22, which I think some investors are clearly concerned about, just given the challenging comps and such, trying to get a sense of how much risk that puts to your $2.50 EPS guidance or really, in other words, how much flexibility perhaps you've been able to build in to deal with some variability that could come in organic sales growth.

Yes, Andrew, Sean here. As I've said many times, some years, you get to your sales number on the back of volume. Some years, you get there on the back of price. And obviously, this is a year of inflation, which means a year of price. And what I can tell you is, overall, we think our sales outlook is a prudent guide based on prudent assumptions, particularly around stickiness and elasticities. We did plan for some stickiness, but as Dave said in his prepared remarks, we also plan for some erosion to creep back in as we get closer to fall. On elasticities, our early elasticities do look good versus our estimates. And in my mind, they're likely to be aided by the ubiquity of the price increases in the grocery store. I think you call it strength in numbers. But in addition to that, even more so by higher prices in away-from-home food, which could further help stickiness. On top of those factors, we expect improved supply, which is going to help our service. We have an excellent '22 innovation slate. Our '21 innovation slate still has a lot more trial yet to happen, and we will be adding back some very select and prudent promotion dollars because we have confidence that the sales they'll generate will be incremental versus not adding them back. So overall, we like where we sit at the top line.

Thanks very much.

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

Hi, two for me, if I can. First, I think industry standard in this industry is for pricing, especially list pricing really to be on a 60- to 90-day lag after it's announced. Is there any delay or lag in that timeline from what you're seeing? Just thinking about the timing of inflation versus when your pricing comes in? Or is it really within a range that you think is pretty typical for this industry?

Yes. Sure, Ken. Let me unpack that for you. First of all, we have ample tools to navigate inflation and the lag to pricing is no longer than normal. On pricing, the way it works is pretty straightforward. First, you don't generally get a customer to accept inflation-justified pricing until they're confident it's not transitory inflation. So it's not the day it shows up. It's after it's clearly established. Once that happens, it's around 90 days before you see the impact in the P&L. And then if inflation keeps moving, and this is what we've been dealing with, you take additional waves of action and the clock starts over. So if you look at where we were after our Q3 call, when inflation had run up to 6%, we were still finalizing our '22 AOP and we still saw a path to our previous EPS range. But since that time, inflation accelerated further by over $250 million, and that prompted us to develop additional plans to offset the additional inflation, and we've been hustling to implement those plans. But mechanically, there is a real lag effect. And when you have multiple waves of actions, at some point, you can't offset the increasing inflation in short-term windows, at least not without doing things that would ultimately destroy shareholder value like cutting investments in the business or investments in our people. So overall, we feel really good about our company. Our business has been very strong across the board. We continue to lead in innovation. We've delevered as planned. We continue to raise our dividend, and our people remain highly engaged. Now we've got inflation. It happens. You deal with it, and we are. The team is taking, my judgment, all the right actions. And the portfolio, importantly, is better positioned to navigate this dynamic than it was previously in the years gone by. So the net of all of this is a temporary window of profit pressure followed by a strong rebound. And that's how these cycles work when they're managed well, and that's how it will unfold from here. And specifically, as Dave just said, as we exit the year, the run rate earnings power of the business is expected to be exactly where we thought it would be before.

Okay. That's very clear. Thank you. And then for a follow-up, you did talk about a few levers to manage inflation besides just pricing. One of them is optimizing fixed cost leverage. I wanted to ask about that because you'll probably have negative sales growth this year, including the divestiture of Egg Beaters, so I'm not quite sure where that sales leverage or that fixed cost leverage comes from. You also talked about customer charges. I wasn't sure what that meant. You talked about acquisitions and divestitures just as an item in there. I wasn't sure where you were going with that. So any help with those three sort of levers to offset inflation would be helpful. Thanks.

Yes, Ken, let me take a shot at this. Let me approach it by talking about operating margins. So we finished fiscal '21 around 17.5%. So our guidance of approximately 16% is 150 basis points reduction. So if you kind of look at the key drivers, it obviously starts with inflation, which is approximately 9%. This is the estimated market inflation before coverage. So that creates about a 650-basis point headwind to operating margin. Our total realized productivity, which is our core productivity, our sourcing coverage, Pinnacle synergies and then the reduction of the COVID costs are over 5% of last year's COGS. So this is a tailwind to operating margin of about 400 basis points. The net impact of all of our pricing actions, mix actions is a tailwind of about 150 basis points. And this includes our pricing for the year, which is somewhere between 3% to 4%, and that's not an annualized number because of the lag, partially offset by a bit of certain increased merchandising programs and then the mix with Foodservice. So there's a lot in there. There's a lot of puts and takes. But in terms of our core productivity, when you include the reduction of COVID and the sourcing benefits, we're over 5% of cost of goods sold against that 9% inflation. So those are the key drivers.

All right. Thanks, Dave.

And our next question today comes from Bryan Spillane with Bank of America.

So Dave, just a first question from me is just on, it seems like the guide, the $2.50 guidance implies some benefit below the operating profit line. So I'm not sure if I missed it, but it seems like it's -- if you just take flat sales on a 16% margin, you get to around $2.30. So there seems to be a $0.20 gap between that. So is there -- can you just help us with below the operating profit line, maybe what some of the puts and takes are there?

Yes. I mean, we have 2 major things there with pension income and then our equity interest, which is primarily Ardent, and then our tax rate. We expect the tax rate to be 23% to 24%. So that will be in line. So it's really benefits that we're going to get from Ardent and pension.

Okay. And then second one, just related to cash flow. I know you've got your rapid deleveraging targets for the end of '21. And so just given the implied sort of drop in operating income in '22, would you expect to still be within your targets on leverage? Or might it drift up a little bit? And if you could also help us with the CapEx number for '22, that would be helpful.

Yes. Sure. So Bryan, we're still on our target of 3.5x. As we always have at Conagra, we have a seasonality, right? So we will build inventories really in the first half of the year. So you'll see a spike up in our working capital. So you always see kind of you'd see leverage kind of spike up seasonally and then it would come down, so by the end of the year, we're back in line where our target is. So you can expect that again this year. The one question is, from an inventory perspective, where we want to lean in a little bit more depending on where the business is and where demand is and build some more safety stock versus where do we plan it. But we'll manage that in the overall aggregate of kind of managing cash flow. So that's the plan, but there is a seasonality as we go through, and it clearly spikes up Q1, Q2 and then it comes down in the second half. And I'm sorry, what was your second question?

Just capital spending, if you could help us with the CapEx for this year, '22.

Yes, we're estimating $475 million in CapEx in fiscal '22. And big piece of that is our continued construction of our new Birds Eye plant, which we're very excited about.

The next question today comes from David Palmer of Evercore ISI.

Just eyeballing Slide #40, that bracket that you labeled the timing lag effect. It looks like something like $0.15 per share in earnings. And just putting that into an annual EBIT margin headwind, it would be something like 80 basis points or so or maybe double that if it all happens in the first half. So it would feel like based on the rough math that you're implying something like EBIT margins in the 14 in the first half, 17 in the second half. Does that seem about right? Is that the sort of cadence you're thinking about?

Yes, I think that's fair, David. I would say Q1, and I said this in my prepared remarks, we do expect that to be the lowest margin quarter of the year because we're going to get hit with the highest inflation rate and the pricing will not fully be in effect. So that's probably going to be more in line with where we came in for Q4 fiscal '21, but then you'll clearly see a ramp-up. So the way you're looking at it, I would say, is accurate.

And I don't want to be too greedy, but you did mention that some of the productivity initiatives would be perhaps even more back-weighted than the pricing. So thinking about -- and I know you're not going to give us guidance for fiscal '23, but I want to think about, realistically, if that 17 can build up even higher going forward, as you have some catch-up in some of the productivity that goes with this big spike, perhaps historic spike in input cost into next year. And then I just want to squeeze in one more and that is on growth spending. What sort of growth spending are you baking into fiscal '22? And I'll stop.

Well, just one quick comment on outlook beyond '22. We're not going to get into detail today, David. But our playbook around here is around perpetually reshaping the portfolio for better growth and better margins. And so there are a lot of things that we think we can continue to do over time to drive both growth and both margins. One of the things that we've been doing for the better part of 5 years now is premiumizing the portfolio. And that is -- we historically, as many of you know, have been around for a while, had a lot of our products that were very low priced $1 or below. We've worked hard to get those price points up. It's one of the interesting things about our company in this window we're in right now is we still think our products' price points have room to move north based on the quality that we offer and the modernization that we've put into our innovation. And sometimes you need a catalyst to continue to get those price points really in sync with the value proposition that we're offering. And so the optimist in us here is actually looking at some of what we're navigating here as a positive thing because it continues to fuel our premiumization and modernization strategy, which ultimately leads to better dollar realization per unit and better margins over time.

Yes, just on the spending side, our Q1 A&P is going to be up. It was down in Q1 of fiscal '21. That was partially COVID related. But if you look at kind of the run rate where we finished the last 2 quarters in fiscal '21 and kind of where we're going to be in first quarter of fiscal '22, that's a good kind of run rate for A&P as we think about the full year '22.

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

Congrats on a strong finish to the year. A couple of quick questions. First, I think you've mentioned that your back-half EPS guidance is unchanged from what you expected before. I don't recall what your back-half EPS guidance was. So can you remind us of what your expectations were and I guess where they still are?

Yes. Just -- this is a language thing, but we didn't say that the EPS guidance because we didn't give back-half EPS guidance for the 2 quarters. We gave guidance for the year. But the notion we're trying to get at here is that the earnings power of the business in the back half is exactly where we thought it would be at a dollar basis, what was embedded within our existing algorithm. Would you say that any differently, Dave?

Yes. Another way to think about it is a little under half of our annual EPS has historically come from the second half. So yes, if our prior guidance had an assumption that was pretty close to that split, so if you look at our prior guidance range and apply that math, you should be in the ballpark for H2 for this year.

That's really helpful. And I want to go similar to Mr. Goldman's questions on the puts and takes to offset the inflation. You've got trade optimization on there. And I think you're not the first company to sort of highlight it. But I guess my question is, in regards to the COVID duration, we seem to have gone through a period where there is tremendous trade optimization during COVID when promotions are pulled from the system. Are you implying that there's opportunity to pull back even further on trade? Because I think a lot of us and a lot of investors, in particular, are expecting just the opposite to happen. We'll lap the period where trade was subdued and promotions were subdued and they'll come back into the system and be a net price offset. You seem to be implying the opposite is true. And I'm just curious if that's indeed the case; and if so, why?

Yes. I think the thing you got to do here, Jason, is we've got to double-click down on what is trade, what's within trade. Trade is kind of a catch-all term. And within that catchall basket, there, historically in our experience, had been a lot of inefficiency. And as you've seen us do over the years, we've tried to purge a lot of that inefficiency out. And then there's some stuff that is under the heading of trade that works. So we see both opportunities to continue to get more efficient in some of the areas that have historically been inefficient in trade, and that could be fixed cost trade. It could be unhelpful promotions. So those are things where we can continue to get more efficient. By the same token, there are -- as I mentioned earlier, there are some opportunities to feather back in some trade to drive incremental volume. And the operative word there being incremental. And so we're -- this is the promotional investment part of trade spend. So the way I think about it is this, there's good promotional investments, meaning strong IRR. And those are the ones that drive incremental sales, sales that simply would not happen, but for the promotion. Then there's bad promotion investments. And those are the ones that do not drive incremental sales but merely cannibalize higher margin base sales. If you think about the height of the pandemic, we sold everything we could make as base sales. So promoted sales were inherently not incremental, which is why across the industry, you saw promotions fall. On the other side of the pandemic, base sales start to normalize, and that does leave room for good promotional investments to drive incremental sales, and those are sales that help overall sales and profitability. So the key to being good trade managers, trade spend managers are being able to identify those buckets where there's inefficiency continue to purge that out but not be blind to opportunities to drive incremental sales and profit, the good IRR investments. And that's why you got to get into the details on this giant catch-all bucket that we all call trade.

And our next question today comes from Chris Growe of Stifel.

I just had a question for you first and just to make sure I understand on the level of inflation. It's 9% on a market basis. What is it though for Conagra inclusive of, say, the hedging and sourcing benefits? What's the right percentage to -- even if it's back of the envelope to kind of figure out for the company overall?

Chris, we kind of talk about that in kind of the market inflation, which is the 9% and then all of the offsets, including the hedging. So that's over 5% of total cost of goods sold. So we don't break out the specific piece. So we kind of included in total productivity.

Okay. Got it. And then I'm just curious, can your second half margin be up versus the second half of fiscal '21? So rather than sequentially, can it be up versus the prior year because of the pricing that's coming through?

Yes. I'm not going to get into that level of detail, but it clearly is up versus the first half.

It's really -- our focus -- as you go into these acute inflationary periods, Chris, our focus becomes how do we recapture every profit dollar. And the math will affect in the short term the percentage, but we're focused on recapturing the profit dollars. And that's the earnings power that we expect to be spot on as we get to the back half.

Yes, Chris, let me -- we will be up versus second half of '21.

Okay. Yes. I didn't -- I appreciate that color. And just one final quick one would be that as you think about your pricing, and I'm looking ahead maybe it's second half, maybe fiscal '23, but do you expect that pricing would more than offset the dollar inflation coming through the business at some point in time when you achieve that full pricing? Can you achieve that level of pricing? A lot of companies are talking about that. We'll see if it happens. So I'm just curious if you're thinking of that the same way.

Well, we'll see how it plays out. I mean this is the way these pricing -- these acute inflationary periods work, Chris, is the -- you get -- the inflation is your foe in the early days, and it could be your friend as you lap it in the first quarter or 2 that you lap it because you got the pricing at that point baked in, and hopefully you've reached a new equilibrium in terms of cost and you start to see meaningful margin recovery. That's why on a kind of a rolling 12-month basis once we get through this first quarter, you're going to see -- you're going to -- at that point in time, you're going to see a very strong performance in the business overall. But this is why being fulsome in our approach to offset inflation, including broad-based pricing across our categories across the portfolio, is a huge piece of the game. And I'm very pleased to see that the team is executing it the way we want it.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for the 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. 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.