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Text: 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.
Today, Dave and I will discuss our results for the quarter, our updated outlook for the remainder of the year and why we believe that Conagra continues to be well positioned for the future.
I'd like to start by giving you some context for the quarter.
First, as you all know, the external environment has continued to be highly dynamic.
But our team remained extremely agile in the quarter and executed the Conagra Way playbook.
We navigated the ongoing complexity and delivered strong net sales growth anchored in elevated consumer demand that continued to exceed our ability to supply, inflation-driven pricing actions and lower-than-expected elasticities.
While our net sales exceeded our expectations, margin pressure in the second quarter was also higher than expected driven by three key factors.
First, while we anticipated elevated inflation during the second quarter, it was higher than our forecast.
Second, we experienced some additional transitory supply chain costs related to the current environment.
And third, in the face of elevated consumer demand that continue to outpace our ability to supply, we elected to make investments to service orders and maximize product availability for our consumers.
We expect margins to improve in the second half of the fiscal year as a result of the levers we pulled and continue to pull to manage the impact of inflation.
We'll always look to our cost savings programs to offset input cost inflation.
However, given the magnitude of the cost increases, our actions also include additional inflation-driven pricing.
We communicated pricing to customers again in December.
For the year, we're once again reaffirming our adjusted earnings per share outlook, but our path to achieve that guidance has evolved.
We're increasing our organic net sales guidance based on stronger-than-expected consumer demand and lower-than-anticipated elasticities.
We're also updating our margin guidance given the increase in our gross inflation expectations for the year and the timing of the related pricing actions.
Taken together, we continue to believe that elevated consumer demand, coupled with additional pricing and cost savings actions, will enable us to deliver adjusted diluted earnings per share of about $2.50.
So with that as the backdrop, let's jump into the agenda for today's call.
We'll start with an overview of the quarter before going into more detail on our outlook for the second half of the fiscal year.
I'll also share some of our thoughts on the structural changes we're seeing in consumer behavior, particularly with younger consumers.
We believe these changes are further evidenced in the long-term potential of Conagra Brands.
Let's dig into the quarter.
As you can see on Slide 7, our team delivered solid Q2 results.
On a two-year CAGR basis, organic net sales for the second quarter increased by more than 5% and adjusted earnings per share grew by nearly 1%.
As I noted earlier, we delivered these results in the face of a highly dynamic and challenging operating environment.
Input cost inflation came in higher than expected in the quarter.
In addition, we made some strategic decisions to service the heightened consumer demand we continue to experience.
As the entire industry incurred transitory costs associated with labor shortages, supply issues on material and transportation costs and congestion challenges during our Q2, we chose to invest in our supply chain and service orders.
This deliberate decision ensured we could deliver food to our customers and consumers especially during the holiday season.
Maintaining physical availability is an important part of building trust with customers and maintaining consumer loyalty.
The bottom line is that amid the supply disruption seen across the industry, we remain focused on building for the long term.
While the net result of these factors was a negative impact on our margins during the quarter, we're confident that our purposeful approach better positions our portfolio for the future.
They've been resilient in navigating this environment, allowing us to remain agile and deliver for our customers and consumers.
I continue to be impressed by our team's commitment and I'm grateful for their ongoing dedication.
Looking at Slide 10.
You can see that our strong performance in the second quarter was broad based.
Total Conagra retail sales were up 14.8% on a two-year basis in the quarter, with double-digit growth in each of our domestic retail domains frozen, snacks and staples.
Household penetration was also up this quarter, building upon the significant number of new consumers we've acquired over the past two years.
Total Conagra household penetration was up 59 basis points on a two-year basis and our category share increased 41 basis points.
In addition to increasing household penetration and acquiring new consumers, we are retaining our existing consumers, as demonstrated by our repeat rates.
Shoppers continue to discover our incredible products and their tremendous value proposition.
As the chart on the right of Slide 11 shows, our consumers keep coming back for more.
As we execute our Conagra Way playbook, innovation remained a key to our success across the portfolio in Q2.
Slide 12 highlights the impact of our disciplined approach to delivering new product and modernizing our portfolio.
During the second quarter, our innovation outperformed the strong results we delivered in the year ago period.
We continue to invest in new product quality and it's supporting our innovation launches with deeper, more meaningful consumer connections.
Once again, our innovation rose to the top of the pack in several key categories, including snacks, sweet treats, sauces and marinades and frozen vegetables.
Slide 13 demonstrates how our ongoing investments in e-commerce continued to yield strong results.
We again delivered strong quarterly growth in our $1 billion e-commerce business and e-commerce accounted for a larger percentage of our overall retail sales than our peers.
We outpaced the entire total edible category in terms of e-commerce retail sales growth during the second quarter, just as we did in the first quarter of 2022 and throughout fiscal 2021.
As we mentioned earlier, our strong net sales growth was driven by elevated consumer demand, favorable elasticities and inflation-driven pricing actions.
On Slide 14, you can see the extent of our pricing actions in the first half of the fiscal year.
During this period, our on-shelf prices rose across all three domestic retail domains.
And, as Dave will discuss shortly, the pricing flowed through the P&L.
As you can see on Slide 15, price elasticity has been fairly low.
It's been favorable to our expectations.
Consumers continued to see the tremendous value of our products relative to other food options, a concept I will elaborate on in a few minutes.
Now, let's turn to the path ahead.
You can see on Slide 17 we currently expect gross inflation to be approximately 14% for fiscal 2022 compared to the approximately 11% we anticipated at the time of our first quarter call.
This is a large increase and we're taking actions to offset the increase while still investing in the long-term health of our business.
To help manage our increasing inflation, we're taking incremental pricing actions, including list price increases and modified merchandising plans.
Many of these actions have already been announced to our customers.
As a reminder, there is a lag in timing between the impact of inflation and our ability to execute pricing adjustments based on that inflation.
As a result, the incremental price increases will go into effect in the second half of the year with the most significant impact during the fourth quarter.
While it's easy to get caught up in the quarter-to-quarter impact of inflation and pricing, it's important to keep focused on the big picture.
The long-term success of our business is driven by how consumers, particularly younger consumers, respond to our products.
And when you take a step back to evaluate the broader environment and how our portfolio delivers against the needs of the modern consumer, we believe that Conagra is uniquely positioned for the future.
As we've detailed many times before, Conagra's on-trend portfolio filled with modern food attributes is winning with younger consumers.
And our confidence is underpinned by the many changes we're seeing in consumer behavior that are proving to be structural, especially given that these changes are driven by younger consumers that represent the most significant opportunity for long-term value creation.
Younger consumers represent a large and growing part of the U.S. population and they want to optimize the value that they get for the money they spend on food.
A large part of optimizing their food spending includes shifting more dollars from eating away from home to eating at home.
As they make that trade, they're choosing national brands.
And we believe Conagra is ideally positioned to experience an outsized benefit from these behaviors given the relationship our brands are forming with younger consumers.
Overall, Conagra is delivering superior relative value to consumers compared to both away-from-home options and store brands.
Let's take a closer look at these trends, starting with the population changes.
Millennial and Gen Z consumers are a large and growing cohort.
These consumers are starting to settle down, buy homes and start families.
As we presented in the past, when people enter the family formation phase, they increase the amount of food they eat at home with an outsized increase in the consumption of frozen foods.
And what we find particularly important about reaching Millennial and Gen Z consumers is that we believe they will remain more value focused than their predecessors.
First, let's talk about the near term.
As you can see in the chart on the left, Millennial and Gen Z consumers are earlier in their careers and earning less than the older generations of working-age people.
This is natural, but it bodes well for food-at-home trends in the shorter term.
We believe that even as foodservice bounces back, younger consumers will be value conscious in their food choices.
Fewer younger consumers are expected to achieve the financial success of the generations before them.
The data on the right suggests that Millennials are more likely to earn less than their parents.
We believe this means that these savvy consumers will look to stretch their food dollars further even as they age.
The data also shows that younger consumers are already eating more at home.
Compared to the population as a whole, Gen Z and Millennials have decreased restaurant visits more and sourced a larger percentage of their meals at home.
As these younger consumers have made the shift to at-home eating, the data shows that they're finding comfort in the quality, reliability and familiarity that national brands provide.
We believe this makes a lot of sense.
National brands provide value while replicating many of the on-trend flavors and modern food attributes that consumers are used to experiencing in away-from-home dining.
When consumers make trades like away-from-home to in-home eating, trust is paramount.
In short, national brands, particularly modernized brands like those in our portfolio, deliver on this trust imperative and that's because they offer superior relative value versus other food options.
As consumers seek to stretch their household balance sheets in the face of broad-based inflation, one of the single largest levers available to them is the reduction in spending on food away from home as food-away-from-home prices are typically over three and a half times more expensive than food-at-home prices.
This trade will likely become even more important for consumers as food-away-from-home prices have already increased faster than at-home prices in calendar 2021 and they are expected to increase at nearly twice the rate as at-home prices in calendar year 2022.
Our aggressive modernization of the Conagra portfolio over the past several years has put us in a strong position to capitalize on these structural shifts.
Our portfolio has shown its competitive advantage with excellent trial, depth of repeat and share gain performance.
Overall, we believe Conagra is well positioned to leverage these shifts to create meaningful value for shareholders.
And Slide 25 shows you the data to support our claim.
Conagra is attracting more younger consumers than our peers and getting them to repeat at more attractive rates.
By appealing to younger consumers now, we're building superior consumer lifetime value.
Importantly, the data shows that these new, younger buyers are stickier across our portfolio.
We believe this comes back to the investments we've made and continue to make in our products and our brands.
The Conagra Way has positioned us to win.
As I discussed earlier, we're reaffirming our adjusted earnings per share guidance of approximately $2.50 for the full year with a few updates on how we expect to get there.
We're increasing our organic net sales guidance to be approximately plus 3%, up from approximately 1%.
We're slightly adjusting our adjusted operating margin guidance to approximately 15 and a half percent, down from approximately 16%.
And we're updating our gross inflation guidance to about 14%, up from approximately 11%.
I'll start by going over some highlights from the quarter shown on Slide 28.
As Sean mentioned earlier, there were a number of factors that influenced our results this quarter.
First, we were encouraged to see that consumer demand for our products remain strong.
And second, elasticities were better than anticipated.
However, we also continued to see inflation rise across a number of key inputs and the dynamic macro environment created challenging conditions for the supply chain.
The team remained agile in response to these dynamics, including the decision to make additional investments during the quarter to meet the elevated demand and maximize the food supply to our consumers.
Overall, our actions favorably impacted our top line during the quarter with organic net sales up 2.6% compared to the year ago period.
An important part of the top line success we've realized throughout the pandemic is our ongoing commitment to the Conagra Way.
We've remained focused on building and maintaining strong brands across the portfolio.
We continued these efforts in the second quarter with continued product innovation and by further increasing our spending on advertising and promotion, primarily focusing on e-commerce investments.
We show a breakdown of our net sales on Slide 29.
The 4.2% decline in volume was primarily due to the lapping of the prior-year surge in demand during an earlier stage in the COVID-19 pandemic as volume increased approximately 1% on a two-year CAGR.
The second quarter volume decline was more than offset by the very favorable impact of brand mix and inflation-driven pricing actions we realized this quarter, driving an overall organic net sales growth of 2.6%.
On last quarter's call, we noted that the domestic retail pricing actions were just starting to be reflected on shelves at the end of the first quarter.
Those increases were reflected in our P&L this quarter, driving the 6.8% increase in price mix.
The divestitures of our H.K. Anderson business, the Peter Pan peanut butter business and the Egg Beaters business resulted in a 70-basis-point decline and foreign exchange drove a 20-basis-point benefit.
Together, all these factors contributed to a 2.1% increase in total Conagra net sales for the quarter compared to a year ago.
Slide 30 shows our net sales summary by segment both on a year-over-year and on a two-year compounded basis.
As you can see, we continue to deliver strong two-year compounded net sales growth in each of our three retail segments, which resulted in a two-year compounded organic net sales growth of 5.3% for the total company.
You can see the puts and takes of our operating margin on Slide 31.
We drove a 6.2 percentage point benefit from improved price mix, supply chain-realized productivity, cost synergies associated with the Pinnacle Foods acquisition and lower pandemic-related expenses.
Netted within the 6.2% are the additional investments we made to service orders and maximize product availability.
These investments reflect the dynamic environment and actions we've taken to respond to it.
This includes decisions to utilize more third-party transportation and warehousing vendors for some of our frozen products, incurring incremental cost to move product around our distribution network to better align with customer order patterns and delaying a plant consolidation productivity program to maximize current production.
The 6.2% also includes transitory supply chain costs such as higher inventory write-offs and increased overtime to support operations.
The 6.2 percentage point benefit was more than offset by an inflation headwind of 11 percentage points.
The second quarter gross inflation rate of 16.4% of cost of goods sold was approximately 100 basis points or $20 million higher than expected, driven by higher-than-anticipated increases in proteins and transportation, which are both difficult to hedge.
The combination of the favorable margin levers, our choiceful supply chain investments and inflation headwinds resulted in adjusted gross margin declining by 483 basis points.
Our operating margin was further impacted by 20 basis points due to our increased A&P investment during the quarter, as I mentioned earlier.
You can see how these elevated costs impacted each of our reporting segments on Slide 32.
While each segment was impacted, our Refrigerated & Frozen segment was impacted the most with adjusted operating margin down 707 basis points primarily due to outsized materials inflation and the additional investment incurred to service orders and get food delivered to consumers.
We are confident that we will improve overall operating margins in the second half as we execute our additional pricing actions to offset the higher inflation rates.
As you can see on Slide 33, our second quarter adjusted earnings per share of $0.64 was heavily impacted by the input cost inflation across our portfolio.
Even though the benefits of our first quarter pricing flowed through the P&L this quarter, the incremental inflation we incurred in the second quarter created an additional headwind.
In response, we announced additional pricing to customers in early Q3 during December.
Although we have yet another lag before this pricing benefits the P&L, we expect to realize benefits from these pricing actions in late Q3 with most of the impact in Q4.
Also, our Ardent Mills joint venture had another good quarter and delivered earnings per share benefit versus the prior year.
We realized lower net interest expense and a slightly lower average diluted share count due to our share repurchases in prior quarters.
Turning to Slide 34.
I want to unpack how Q2 adjusted earnings per share landed versus our expectations.
Our second quarter adjusted earnings per share came in lower than we originally had anticipated due to two main factors.
First, as previously mentioned, inflation came in higher by approximately 100 basis points of cost of goods sold or approximately $0.02 to $0.03 of EPS.
While we have announced additional pricing actions for the second half to offset the incremental inflation, the timing of these benefits is naturally lagging behind the higher inflation.
Second, the cost we elected to incur to service orders, coupled with the additional transitory supply chain costs I described earlier, led to another $0.02 to $0.03 impact on our adjusted EPS.
We are forecasting these service and transitory cost dynamics to improve as the second half progresses.
Looking at Slide 35, we ended the quarter with a net debt-to-EBITDA ratio of 4.3x, which is in line with the seasonal increase in leverage expected for the second quarter.
We expect to generate strong free cash flow in the second half of the fiscal year and expect to end the year with a net leverage ratio of approximately 3.7 to 3.8 times.
We remain committed to a longer-term net leverage target of approximately 3.5 times and to maintaining an investment-grade credit rating.
I'll start by saying that we remain confident in our ability to achieve approximately $2.50 in adjusted earnings per share for the full fiscal year.
As the macro environment continues to be very dynamic, our expectations for the path to achieve that target have shifted.
We are increasing our organic net sales growth guidance to approximately 3% to reflect our stronger-than-expected performance year-to-date as well as our incremental pricing actions in the second half.
We are lowering our adjusted operating margin guidance to approximately 15 and a half percent.
We expect the incremental sales and pricing actions in the second half to offset the dollar impact of the incremental net inflation and other supply chain costs.
We have increased our gross inflation expectations to approximately 14%, largely driven by higher estimated costs versus the previous estimate for proteins, transportation, dairy and resin.
We will continue to monitor these input costs closely and will be quick to respond using all available margin levers.
As Sean detailed, price elasticity has been favorable to our expectations so far.
As we have explained previously, there is a lag in timing between when we experience inflation, take actions, including pricing, to offset the dollar impact of the inflation and when we see those actions flow through our financial results.
With respect to the additional pricing actions we have announced for the second half of fiscal '22, we expect to realize a small amount late in the third quarter and the full benefits from these price increases in the fourth quarter.
We therefore expect our third quarter margins to be roughly in line with second quarter margins with an increase in operating margins in Q4 as the pricing catches up with inflation and the impact of the lag is reduced.
Our guidance also assumes that the end-to-end supply chain will continue to operate effectively as the COVID-19 pandemic continues to evolve.
Before turning it over to the operator for Q&A, I would like to reiterate that confidence in our ability to reach our earnings goal is based on the strength of our business at its core to manufacture and deliver foods that people enjoy.

user
q2 adjusted earnings per share $0.64.
reaffirms adjusted earnings per share guidance.
increases organic net sales guidance.
2022 organic net sales growth is expected to be approximately +3% versus prior guidance of approximately +1%.

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