Good morning, and welcome to the Conagra Brands Third Quarter Fiscal Year 2022 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. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bayle Ellis. 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 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, Bayle. Good morning, everyone, and thank you for joining our third quarter fiscal 2022 earnings call. Today, Dave and I will detail our results for the quarter and our updated outlook for the remainder of the year. We'll then open the line to your questions. I'd like to start with the key messages we want to share with you this morning. As we navigate a dynamic external environment, our team delivered a solid Q3 that was largely in line with our expectations on the top line and adjusted EPS. We remain laser-focused on successfully executing the Conagra Way playbook by creating superior products and ensuring physical and mental availability to create lasting connections between consumers and our brands. This enabled us to deliver a robust plus 6% organic net sales growth for the third quarter, in line with what we expected. The strength of our top line can be measured both in the absolute and relative to peers as we gained share in key categories on a 1- and 2-year basis. And it's important to note that in response to inflation-driven pricing that has been executed in the market to date, elasticities have been favorable to historical patterns, even more so than what we expected. Unit demand remains strong as consumers continue to recognize the superior relative value that our portfolio provides. As worldwide events contributed to an already challenging environment, our teams remain agile and nimble to respond effectively and continue to serve our customers. Our third quarter results reflect strong contributions from our latest innovations, and we have another exciting innovations slate planned for fiscal 2023. But we also experienced higher-than-anticipated inflation as the third quarter unfolded. In the face of these heightened costs, we again made the deliberate decision to continue to invest to service orders…

Thank you, Sean, and good morning, everyone. I'll start by reviewing our quarterly results at a summary level, as shown here on Slide 28. As Sean discussed, we delivered strong organic net sales of plus 6% in Q3, reflecting the continued relevancy of our portfolio to consumers. We experienced better-than-anticipated elasticities on volume in the face of our inflation-driven price increases. Inflation pressures accelerated as Q3 unfolded as reflected in our Q3 operating margins. At the same time, our Ardent Mills joint venture, reflected in the equity earnings line, had a strong quarter driven by favorable market conditions. Q3 adjusted EPS of $0.58 was largely in line with our expectations, down 1.7% versus prior year and up 11.1% on a 2-year compounded growth basis. Overall, a very solid Q3 financial performance given the volatile operating environment. We show a breakdown of our Q3 net sales bridge on Slide 29. Our 6% organic net sales growth was driven by a strong price mix increase of 8.6%, reflecting the inflation-driven pricing actions we have taken in every segment of our business over the last year. Volume declined 2.6%, primarily due to the elasticity impacts of the price increases, along with supply constraints on certain refrigerated and frozen products. Looking at reported net sales drivers, the divestitures of our peanut butter and Egg Beaters businesses drove an 80 basis point decline, and foreign exchange was an additional 10 basis point headwind. Together, these factors contributed to 5.1% growth in total Conagra net sales for the quarter versus a year ago. Slide 30 shows our Q3 net sales summary by reporting segment on a 1- and 2-year basis. We delivered organic net sales growth across each of our segments this quarter due to inflation-driven pricing and continued strong consumer demand. Growth was particularly strong…

[Operator Instructions] And the first question will be from Andrew Lazar with Barclays.

I guess, Sean, to start off, I know it's obviously early to detail fiscal '23 expectations and things are still fluid, but perhaps you can at least give us a bit more color on how Conagra maybe sort of hedged on some key inputs as we go into fiscal '23, more so we have a sense of your level of visibility to the cost profile, and therefore, maybe the time that you have to try and better match inflation with pricing as you move forward. I guess what I'm getting at is, should we expect this sort of a lag to continue to maybe impact results to start the new fiscal year? Or do you think by that time, given where costs are today, you will have more effectively caught up? And then I've just got a follow-up.

Well, Andrew, what I'll ask is let's Dave give you some comments on kind of how we're hedged for next year and then let me give you some of my thoughts on this lag dynamic.

So Andrew, where we are right now, if you look at for Q4, within the quarter, we're over 80% hedged on all our materials for Q4. As you look to fiscal '23, at this point, we're about 40% hedged overall. That obviously varies by different areas. So certain ingredients and packaging, we would be above that. But certain areas like the meat-based proteins, which we've talked about a lot today, less than that. So it really does vary. So we will obviously continue to update that as we move closer to the end of the fiscal year. But that's where we are now. And that's pretty much in line with where we would normally be this time of the year for next fiscal year.

Yes. And I would just add that the bottom line is that, but for the lag effects, our business has performed remarkably well this year and is proving to be quite resilient. That said, lag effects come with the territory. And when manufacturers like us get hit with these waves of inflation, plural, you need 2 things to navigate. You need strong brands and perseverance, and we've got both. It's really not a matter of getting the pricing to line up better with when the inflation hits because mechanically, the way this works is pretty straightforward. First, we experienced a rise in our cost base. That triggers a price increase from us to our retail customers. And then at about the 90-day mark, we begin to see the benefit of that pricing in our P&L, and that's pretty standard. And if we experience multiple waves of inflation as we have this year, we repeat that process over again, and we start recovering the immediate profit squeeze in each wave after that 90-day lag passes. I think the most critical thing is as that process unfolds is watching what happens with volumes. And for us, that assessment has shown the tremendous strength of our brands because we're experiencing fairly modest elasticity demand across each of our 3 consumer domains of frozen snacks and staples. And that's due in large part to the success of the innovation we've got in the marketplace. So we're growing. We're gaining share. And in fact, 3 of our largest brands, Healthy Choice, Birds Eye Voila and Slim Jim, have posted double-digit growth for the past quarter in the scanner data with positive volumes despite price increases that are pretty meaningful. And I think that shows you that the consumers are concluding that these brands are, in fact, offering superior relative value versus things like other in-store alternatives or eating out.

Got it. And then just a quick follow-up is just on some of those brands where maybe you've broken through some, what have been sort of key maybe historic pricing thresholds. Have you seen more elasticity in those items specifically, which -- or not, which maybe gives you a bit more of a forward look on how broader elasticity may play out for the company as more pricing flows through?

Yes. As I mentioned, Andrew, in my prepared remarks, we do scrutinize elasticities very carefully across all the domains. And what we continue to see in each of our 3 domains is very favorable patterns versus historical norms. And that's even after multiple waves of inflation and the follow-on pricing. Now if we were to experience additional waves of inflation, we absolutely would price again. But I would expect elasticities to remain favorable versus historical norms. And I think you got to think about the work that we've undertaken to modernize this portfolio over the last 7 years. It's a pretty massive transformation, a pretty incredible modernization. And it's working for consumers, and that's -- you see it in our share gains even as prices increases. And so that's kind of how we see things. Now the one other nuance that I will point out with respect to elasticities that I think gets overlooked a lot, and that is that elasticity effects in our portfolio anyway tend to wane as time goes on because consumers are adapting. So in light of the fact that we had waves of pricing, in any given window going forward, we might have older pricing where elasticities are waning, which can offset newer pricing that's been put in place where elasticities are first appearing. So there's a bit of an inherent hedge built in as time passes when you've got a broad portfolio and you've got multiple waves of pricing.

And the next question will come from Ken Goldman with JPMorgan.

Dave, again, with the understanding that the situation is fluid, you're not ready to really talk about fiscal '23 yet. I just want to get a sense, just to build on your commentary about where you are hedged best guess, as things stand today, where might we expect your cost inflation to be at its worst in terms of general time of the year? And when might you anticipate pricing being at its peak? I know we can't be overly precise here. I just really want to get an idea of rough timing for these factors if you have that general sense for us.

Yes, Ken, the one opening comment I would make is there's nothing normal about the current environment. So if you just look at how [certainly](ph) we've had a 26% 2-year inflation stack in Q4. I've been in food for a long time, and I've never seen anything like that. So there's nothing normal right now. But having said that, we put out there, we attempted to try to quantify what we think the impact of the pricing lag on fiscal '22 is if we could price when we got hit with the inflation. And we walked through that, that's $0.30 to get us to $2.65. That is not guidance for next year, okay? What it is, is it's more of a pro forma kind of assessment of where our underlying profit is or our earnings power. When we look to '23, there are a lot of different items that we have to work through before we finalize our estimates. So what are those things? Well, obviously, we've taken a lot of pricing this year that we're going to wrap on. So we're going to have a big benefit next year because we're going to get a full year benefit of pricing. We're also going to have the full year wrap of inflation because inflation has been going up during the year, too. So we have to work through all those details. We have to update what our demand is going to look like based on elasticity estimates. Sean just articulated very well how we're seeing things now, and we have to continue to monitor that. The big thing is, and this is your question, what is our updated assessment of fiscal '23 inflation and any related pricing that may be necessary from that. So we're in the process of looking at all the markets. I answered the previous question that we're about 40% covered for '23 right now, but we're still working through that and assessing the markets. And the last piece that affects next year is updating our productivity estimates as the supply chain rebounds from all the operational challenges that we're dealing with in fiscal '22. So as you can appreciate, that -- there are a lot of big factors that are going to impact fiscal '23, so I can't really give you any specific numbers at this point. Hopefully, that gives you a little bit of color of how we're thinking about it.

Yes. Ken, I'll just add a couple of thoughts here. I just want to point out, we have not been and we will not be overly optimistic in terms of our inflation outlook. If you look back to what we were calling for at our last quarter in Q4, we called for 11% inflation, and that was on top of big inflation in Q4 last year. So specifically, we called for about a 20.5% 2-year stack on inflation in Q4 and that’s a big number. And had it come in, we would have landed full year EPS this year at $2.50. So that's kind of been our posture. There was no way we could have called the 26% 2-year stack and the 16% Q4 inflation versus 11%. But we obviously -- now we've experienced it, and it will cause us to continue to be balanced in our outlook. And understandably, we've spent a lot of time talking inflation today, but I think an equally important topic is, in fact, the broad-based strength we're seeing in the portfolio. It is undoubtedly the by-product of 7 years of heavy lifting to modernize this business, and it matters a lot because it's given us the ability to take meaningful inflation-driven pricing, and it enabled us to maintain consumer loyalty even after taking price as evidenced by the modest elasticities we've experienced. So yes, we've experienced a lot of inflation, but we've also been aggressive in taking the justified actions to offset it. And I just looked at the scanner data for the week ending March 27 for 10 companies, us and 9 competitors, and what it shows is that versus 2 years ago in the most recent 4-week period, Conagra's price per unit change versus prior year ranked #1; and for the most recent 13-week period, we ranked #3; and for the most recent 52-week period, we ranked #4. So the actions we've taken are clear in the data. The consumer has also seen it, but their conclusion based on their purchase patterns remains the same, and that is that our portfolio is giving them superior relative value even after raising prices.

All of that makes great sense, and I really do appreciate the color. Dave, if I can just ask a quick follow-up just to something that you said. You talked about, I think, lapping some of the challenges you've had in terms of inefficiencies in fiscal '22. Is it reasonable to expect that beyond just the lapping, we should anticipate some incremental cost savings that are more long term in nature that you'll implement in 2023 and beyond, whether it's automation, anything along those lines that we could look forward to, perhaps, again, not quantifying just trying to get a qualitative sense.

Yes. Ken, we're going to actually talk about that quite a bit at our Investor Day on July 28. Ale joined us after a long illustrious career at Unilever. He is off to a fantastic start. Modernization of the supply chain in the food industry, I think, is a real opportunity going forward. So we've got exciting plans there, and we'll be sharing kind of how we see things here when we see you all at the Stock Exchange on July 28.

The next question is from Bryan Spillane from Bank of America.

Maybe just a follow-up to just Ken's question just now. Dave, I think it was in the slides. It was Slide 32, where you've got the operating margin bridge and there's productivity net of operational offsets. Can you just kind of drill into that a little bit? How much of that -- does that at all include the benefit from lapping some of the inefficiencies from last year that Ken mentioned or the COVID-related costs? Just trying to understand what the pieces are inside that.

Yes. So just breaking it out, if you look at sourcing and productivity, that's about 400 basis points of tailwind, a positive. So our kind of supply chain inefficiencies. So with our output being down higher-than-expected absorption, fixed costs there and just labor disruptions and premiums we have to pay to kind of keep the manufacturing plants running and meeting demand and just everything that went through that, all those inefficiencies are netted in there. So that's about 250 basis points of a headwind to get to the 1.5%.

So Dave, is the way to think about that because the prior year base would have had inefficiency -- I'm assuming, right, the prior year base had the -- I think you had called out last year, like inefficiencies related to COVID shutdowns. So like the gross to net here on productivity, as some of these things go away, will you actually capture more of the productivity intended or the gross productivity going forward without having to do anything else additionally?

Yes. So a lot of the productivity that we see, right, they're sourcing -- we capture 2 sort of elements of productivity, right? There's the sourcing, which is because we always quote inflation gross and then we're able to hedge and do other things to reduce some of that market cost. So that's an error. And then we have our core productivity programs. And what's happening is those programs, so driving favorable yields and all the different things that happen to drive productivity, people do those things, and there's projects that manage those things. Well, when you're short labor and it's all hands on deck to produce, you do -- that does disrupt your core productivity programs, right? So it almost can become a double whammy because you're not driving the savings and you have to pay additional costs just to get the right staff to be able to produce what you need. So it's hard to quote a number conceptually, I would say yes. But we also have to have stability with labor, right? We didn't know a quarter ago what the extent of Omicron was going to be. So there's just so many things that have happened that we haven't been able to predict. So assuming we don't have more of those things that we can get stability, we'll be able to get back to some of our core programs.

And the next question comes from David Palmer with Evercore ISI.

Just a follow-up on gross margins. It looks like fiscal '22 gross margins might be 300 basis points lower than that of fiscal '19. And your comments about the $0.30 of lag between price and inflation would imply something like 200 basis points of margin recovery if that lag would too narrow. And so I'm wondering, thinking about -- trying to think about the sort of the stacked performance of price versus inflation and how we could have that be that, perhaps that gross margin might narrow to as little as 100 basis points when you've had so much inflation. 26%, you said stacked inflation. You've had 10% price stacked currently, some more to come, but it's hard to believe that you get all the way up into the mid-20s. So I'm wondering, could you help us think about how you might be able to bridge to only 100 basis points of gross margin pressure if that lag narrows in '23.

Yes, David, that's -- it's tough right now for me to kind of get into that. I think -- we -- a lot of it comes down to what the additional inflation is going to be and what the additional pricing is going to be that we need. So as of now, we're taking significant pricing that will hit in Q1 from the inflation that we just saw. It's mostly in our frozen and snack business, and so that will be a significant benefit in Q1. If we get inflation rates that can get back to more moderate levels, then it's going to be able for us to expand our gross margin. And then as I mentioned previously, our productivity, how quickly can we bounce back to get more stabilized labor and get our productivity programs up to where they are historically. So there's just so many factors that we're still working through that I can't give you a precision right now on '23 margins.

Maybe just a follow-up. If you were to say identifying maybe 1 or 2 top factors or risks that you're thinking about as you're thinking about getting that margin recovery from the price versus inflation lag, maybe risks to that margin recovery, and it might not just be the price elasticity of demand, it might be some other things, what were some of the top risks that you see there?

I think it would be another year of excessive inflation on top of this year, which is 16%. That would be one because, as Sean mentioned earlier, once we get above a certain level, we price and there's a lag there, right, which impacts gross margin. The productivity programs that we have, can we get stability in our operations so that we can get back to driving more cost savings and be more efficient, get rid of some of the absorption on favorability that we've had, but it really depends on the stability of labor. So I feel like I'm talking about the same things that are impacting this year. What we feel good about, David, is the pricing, the fact that the pricing we've taken this year, we're getting into market, the elasticities are favorable, and that's a really good sign. Like if you go back to the beginning of the year, you just look at our guidance to start the year, we had guided for organic net sales of flat, and we had said we think pricing -- we estimated pricing to be 3% to 4% and volume to be down 3% to 4% on that flat base. If you look at where we are now, with our guidance, we're looking at pricing for the year that's going to be about 7% and volume that's going to be down around 3%. So the volume estimate didn't change, and we've gotten twice the amount of pricing that we thought we were going to get. So that is obviously really important for this company as we move into '23 because we are able to price for inflation, and that's going to help us drive our margins. So it's all of those factors that I just mentioned are going to impact margins for next year.

Yes. And David, it's Sean, just to weigh in here. I'd like to think in terms of opportunities and risks, both sides of the coin because we are obviously always on the outlook for both. And on the opportunity side, I think -- the bottom line is the fundamentals of the business are incredibly strong. We've got strong organic growth. We've got very resonant innovation. We got great share gains. And importantly, we've got the ability, because of the work we've done in the portfolio to take these inflation-justified pricing actions, and the consumer is not responding negatively to that. So that is really on the opportunity side of the ledger. On the risk side of the ledger, as I try to explain today the mechanics of successive waves of inflation are such that, that means there are successive pricing actions and the corresponding lags that go with it. Those lags carry in window of time period risk. And then the other risk that we've talked about today as well that is on investors' minds as well is, "Hey, if you continue to have these waves of innovation, will elasticities at some point, go south and get worse?" And we don't see anything that is indicating that's the case. And in part, it's due to what I talked about on last quarter's call, which is the comparator set for these consumers as they're really assessing total value right now is not just an item versus what's to the left and the right of it on the shelf. It's the item versus what else they could buy. And when people are in the tough kind of negative outlook environment and they're looking to cut costs, they tend to switch out of the highest ticket items first. And that means we expect to continue to source a lot of our growth as we have been from people electing to eat in home instead of out-of-home. And that is one of the things that is favorably impacting our elasticities.

And the next question will be from Rob Dickerson from Jefferies.

Great. It might be kind of an overly basic question, but I'm curious. So the operating margin guide for Q4 relative to Q3 is a little bit higher, right? But at the same time, you're speaking to higher cost inflation relative to what you had expected. There's incremental pricing forthcoming, we have been told that's coming until mostly Q1. So I'm just curious if you could provide some color as to like what does improve? It seems like even though albeit slightly, like what does improve kind of in that Q4 relative to Q3? That's the first question.

Yes, Rob, you'll see we had additional pricing that we took that does come into effect kind of midway through Q4. So that's going to help our gross margin versus prior year and versus prior quarter. As well as our SG&A and A&P combined, we're going to see some favorability there relative to prior year-end and Q3 as well.

All right. Fair enough. And then I guess, just kind of broadly speaking, to step away from the consolation conversation is just portfolio positioning overall, right? So I mean, you continue to kind of speak to the stronger portfolio. You're investing in the brand, you need pricing power, would you say as you still kind of think on the go forward, let's say, the next 3 years that the role of your kind of staples part of the portfolio is still kind of viewed as positively today, maybe as it has been over the past 2 years, just kind of given all the benefits you saw with COVID? Or are there areas to kind of maybe increasingly focus the portfolio, just refrigerated frozen snacks, et cetera, kind of more on the growth side? And I would just leave it at that.

Yes. I'd say, Rob, over time, you've seen our portfolio has significantly increased in refrigerated and frozen and snacks relative to our staples business. That said, we've been very deliberate in being aggressive to reshape that staples business because there's a lot of good to get out of staples businesses overall. What we've done is we've identified the businesses within staples that are more commodity-like in nature, where we see more private label development and there's less pricing power, and we have divested those businesses. And what we're focused on in staples are think of staples as cooking ingredients and enhancers. And these can be incredibly high-margin businesses with very solid top line performance, if not growth potential. So we've got just gems in our staples business across that business like, PAM cooking spray and ROTEL and lots of other places where we've got extremely strong relative market share, extremely strong margins and a pretty nice top line. But we're just continuing to reshape that business because it does throw off a tremendous amount of cash that then becomes an engine for the growth and innovation that we've extracted out of frozen and refrigerated and out of snacks. So it plays an important role in the portfolio, not to mention to our customers, these are traffic builders, a lot of our staples products. So they're really important to our customers, and it helps us from a scale perspective, having some leverage when we're talking to these large retailers. So we'll continue to look at perpetually reshaping our portfolio for better growth and better margins. That's kind of what we do every day around here.

Our next question is from Chris Growe from Stifel.

I just had a quick question for you and a question, I think, for Sean, just around where you see the consumer today? We talked a lot about favorable levels of elasticity, there's some indication that private label is starting to pick up, for example, and maybe some trade down in certain categories. I just want to get a sense without going through every category certainly but from a high level, what you're seeing across your business in some of your key categories?

Yes. We -- first of all, Chris, overall, our portfolio under-indexes in terms of private label development versus food in general and a lot of our peers. In our 2 high-growth areas of frozen meals and snacks, we have very little private label development in some places not. So there's not a lot of interaction there. And what's important about that is a lot of the targeted pricing that we're taking in Q1 of next year to offset this Q4 inflation. It's very focused in frozen and refrigerated and in meat snacks. And so those are our very strongest businesses, very low private label development. So that, again, bodes very well. But in terms of private label overall, as I often tell you all, it's very category-specific. And what I look for or what I see when I see private label switching and interaction is, a, it tends to be a more commodity-oriented category. So think cooking oil, ibuprofen things like that, where the consumer is very smart. There are low switching costs. And if those spreads between the 2 brands get too wide, it's easy to switch. And so we don't have a lot of those categories. We did cooking oil, peanut butter liquid eggs. We've exited those businesses, and we don't -- we've got a couple, but we don't have a lot across the board. The other place where you see trading down and switching is when you have a very high ticket item, $15, $20 a purchase. We don't have a lot of those products in the portfolio. Actually, elsewhere in CPG, cleaning products, things like that, they can experience those trade-offs. Maybe the closest analogy for us is eating away from home. That's a high-ticket item. And that's where we've seen trading down, but instead of that trading down going to private label, we are the beneficiaries of that trading down and we'll take it.

And just to be clear then, are you building in -- do you build in like increasing levels of elasticity across your business going forward just to be conservative or based on historical experience?

Yes. Our -- what we've done from the beginning is we -- initially, we kind of started modeling elasticity based on historical elasticities. We are not experiencing anything close to historical elasticity. So -- but we do bake in elasticities and we've got pretty good models now that are calling them pretty accurately, and we attach elasticities to each successive wave of pricing that we had to take, and we don't really model in the waning of elasticities on the older pricing that we've got, but we actually can see that in the marketplace. And that's a dynamic I've been seeing as long as I've been doing this. People do adapt to higher prices if you look over the last 50 years. Price of pretty much anything you buy has changed many times over.

I had just one other quick question for Dave. On that chart where you show like the pro forma EPS and the $0.30 of -- from the impact of the pricing lag, I'm just trying to understand that number. Because the market inflation you cite on there is a $0.21 drag at the operating profit level. What's the difference between those 2? Is that -- were you unfavorably hedged? Is that the way to say it? Or I want to make sure I understand the difference between that $0.30 and maybe like the market inflation or even the profit there of negative $0.18.

Yes. So it's really 2 different things. The bridge -- the left part of that chart, Chris, is to get you from the $2.50 guidance to the $2.35 guidance. And that's everything we talked about. So it's the additional inflation that we've seen in proteins and transportation and then some upside relative to what we expected for Ardent. So that's just to give you a high-level bridge to the $2.35, which is our new call for the year. The $0.30 is just a pro forma concept to say, okay, in that $2.35, we were disadvantaged because we got hit with inflation in Q2, Q3, Q4, that we didn't get the benefit of pricing for. So what we did is we went -- when you looked at the pricing we actually took in each of those quarters and the pricing we expect in Q1 of next year. And we said, if we were able to do that 90 days sooner, net of the elasticity, so we do take out the volume decline, what would the pro forma EPS be on that, just to align that up. So it's just a timing thing of the pricing actions that we've taken in response to the inflation.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bayle Ellis for any closing remarks.

Great. Thank you. As a reminder, this call has been recorded as detailed in the press release issued today. The IR team is available for follow-up calls. So feel free to reach out. And thank you for your interest in Conagra Brands.

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