Conagra Brands, Inc. 2027 Q1 Earnings Call

Good morning. Thank you for listening to our prepared remarks for the Conagra Brands first quarter fiscal 2027 earnings. At 9:30 A.M. Eastern this morning, we will hold a separate live question and answer session on today's results, which you can access via webcast on our investor relations website. Our press release, presentation materials, and a transcript of these prepared remarks are also available there. In our presentation this morning, John Brase, our CEO, and David Marberger, our CFO, will be making some forward-looking statements. While we're making those statements in good faith based on current information, we don't have any guarantee about the results we'll achieve. Descriptions of our risk factors are included in our filings with the SEC. We'll also be discussing some non-GAAP financial measures.

GAAP to non-GAAP reconciliations and information on our comparability items are in our earnings release and presentation materials in the investor relations section of our website. I'll now turn the call over to John.

Good morning, everyone, and thank you for joining us. When we last spoke in July, I outlined the priorities that I believe will strengthen Conagra and position the business for sustainable growth. After spending the quarter working closely with our teams and engaging across the organization, I'm even more confident that we're focused on the right opportunities and taking the right actions. There are three points I'd like you to take away from today. First, we delivered a solid start to the fiscal year despite a challenging operating environment. Dave and I will get into the details here shortly, but overall, we feel good about our execution thus far. Second, we're making tangible progress against the priorities we laid out last quarter. It's still early, but we're moving from words to action, and we're already seeing encouraging proof points.

Finally, based on our first quarter performance and our outlook for the balance of the year, we are reaffirming our fiscal 2027 guidance. Turning to our first quarter results on slide 5. Organic net sales declined 1.1%, consistent with our expectations. Adjusted gross margin was 23.8%. Adjusted operating margin was 11.5%, and adjusted EPS was $0.41, all ahead of our expectations. Overall, I'm pleased to say that we executed well in Q1. We knew coming into fiscal 2027 that the environment would remain challenging. Consumers continue to be thoughtful about where they spend their dollars, and we're managing through a volatile input cost environment. Against that backdrop, our team stayed focused on execution and delivered a first quarter that gives us confidence in our full-year plan. Turning to consumption on slide 6.

Total Conagra Brands dollar consumption declined approximately 0.6% during the quarter, roughly one point better than our domestic shipment performance. Within frozen, dollar consumption declined 0.7%, while volume performed slightly better at down 0.5%. Birds Eye vegetables and Healthy Choice single-serve meals delivered particularly strong results, growing 7% and 8% respectively. These brands bring together nutrition, great taste, and portion control at a compelling value. This performance was more than offset by softness in brands like Marie Callender's and P.F. Chang's. In addition, we took actions to improve profitability on brands like Sandwich Bros., where we opted not to repeat certain merchandising events, which resulted in top-line headwinds but improved profitability. In snacks, dollar consumption was approximately flat despite a 3.9% decline in volume. Meat snacks delivered growth, more than offsetting pressure in the convenience store channel, reinforcing our confidence in our capabilities and portfolio of brands in this category.

While we're pleased with our strong growth on FATTY, we know we have more work to do on Slim Jim, and you'll see this as a near-term focus area for increased investment in both merchandising and marketing. Slim Jim is an iconic brand with strong consumer relevance, and we're working aggressively to restore growth. Popcorn remained pressured by broader category softness. We continue to believe strongly in the category's long-term potential as we have leading brands, broad consumer appeal, and attractive consumption occasions. Both categories represent areas where we're focusing our increased marketing dollars on strengthening engagement and improving performance over time, which I'll touch on more shortly. Within staples, consumption trends improved sequentially as we move beyond most of the impact from last year's strategic pricing actions and the related elasticities.

We saw growth in tomatoes, chili, and pickles, which is more than offset by declines in whipped toppings and salad dressings. We'll continue managing these businesses with discipline and a focus on cash generation while ensuring they provide strong value for consumers. Taken together, these results highlight both the strength of our portfolio and the opportunity in front of us. We have brands consumers know and trust. Our job is to support them with the right investment, innovation, value, and execution. Our portfolio has meaningful strengths, but we also have clear opportunities to improve our execution and strengthen our performance. That is exactly what the four priorities we introduced in July are designed to do. We remain focused on our priorities to restore margins, increase investments in our brands and supply chain, reduce complexity, and rebalance capital allocation.

These priorities are already shaping how we operate and where we focus our resources. As you'll see on the next slide, we've made tangible progress against each of them. On margins, we expect to start seeing results from our strategic inflation-justified pricing near the middle of the second quarter. Our productivity pipeline also remains on track to deliver more than 4% for the full year. On investment, we've increased our A&P and sharpened where those dollars are being spent. As you'll see shortly, that investment is already driving meaningful improvements in reach and engagement and doing so much more efficiently. We're also advancing several capital and network optimization initiatives across our supply chain, which will help improve our longer-term cost structure. On simplification, we've taken several concrete actions. We streamlined our leadership structure to establish clear ownership, reduce layers, and accelerate decision-making.

We've also launched a comprehensive review of our SKU portfolio. We're making bold decisions now to focus our resources on our strongest opportunities and reduce complexity across manufacturing and procurement. One early example is our decision to exit the Celeste frozen pizza business. While that action created a modest 15 basis point headwind to the first quarter net sales, it allows us to redirect our resources toward brands and categories where we have greater scale and stronger growth potential. Importantly, we expect the decision to be accretive to margins going forward. We are taking aggressive approach to reduce SKU complexity across our business. This work will require thoughtful execution and close coordination with our customers, including alignment with customer reset cycles and our internal supply chain operations. As a result, the benefits will build over time, with the majority expected to be realized over the next 12 to 18 months.

We're also advancing strategic options for certain non-core businesses. I'm not going to get ahead of that process or speculate about individual brands, but we are taking an aggressive look at where we have the strongest right to win, where our resources can generate the best returns, and whether we are the best owners of every business in our portfolio. Finally, on capital allocation, we reset the dividend in July, increasing the cash available for debt reduction and reinforcing our path toward our target leverage ratio of three times. These are tangible actions, not simply plans, and they demonstrate the urgency with which we are moving. Let me spend a moment on our marketing investments, where we're already seeing encouraging proof points. In Q1, we increased A&P investment by 15%, which led to more modern, relevant creative campaigns for key brands like Healthy Choice, Banquet, and Slim Jim.

That investment generated approximately four times the media impression compared to last year's first quarter, while media productivity improved 35%. We're investing more and getting more for every dollar we spend. We're building a capability here that I believe can become an important competitive advantage for Conagra. Ultimately, success will be measured by whether this work drives stronger trial, consumption, share, and sustainable growth, but I'm encouraged by the strong progress we have already made. Finally, turning to our full year outlook, we are reaffirming our fiscal 2027 guidance. We're pleased with our start to the year, particularly on profit. At the same time, we are only one quarter in, and areas of uncertainty remain, particularly around the impact of our planned pricing actions and the volatile input cost environment we're operating in.

We have accounted for these factors in our outlook and remain confident in our ability to deliver within our guidance ranges. Overall, I'm encouraged by our first quarter performance and the progress we're making against our priorities and the direction we're heading. With that, I'll turn it over to Dave.

Thanks, Jon, and good morning, everyone. Slide 12 shows our results for key financial metrics in the quarter. For the first quarter, we delivered organic net sales of approximately $2.6 billion, a 1.1% decline versus the prior year. Adjusted gross margin of 23.8% and adjusted operating margin of 11.5% were down versus the prior year, but ahead of expectations, which I'll unpack shortly. Adjusted earnings per share were $0.41, up $0.02 versus a year ago. Slide 13 shows our first quarter net sales bridge. Total Conagra Brands organic net sales declined 1.1% versus the prior year, with volumes down 2.1% and price mix up 1%. Foreign exchange was a 20 basis point tailwind to the quarter, driven by a stronger Mexican peso. The divestitures of Chef Boyardee and our frozen seafood businesses together represented a 50 basis point headwind, both of which have now been fully lapped.

Slide 14 shows the composition of net sales by segment for the first quarter. In grocery and snacks, we delivered net sales of approximately $1.1 billion, a 2% organic sales decline versus the prior year. Volumes were down 5.4%, while price mix was up 3.4%, reflecting inflation-justified pricing actions and the corresponding elasticity impacts. Refrigerated and frozen also delivered approximately $1.1 billion in net sales, with organic net sales down 1.6% versus the prior year. Volumes were roughly flat, driven by the factors Jon just mentioned. Price mix was negative, primarily reflecting unfavorable mix. In our international segment, organic net sales grew 0.9% versus prior year, driven by strong growth in global markets and roughly flat performance in Canada and Mexico. In food service, organic net sales increased 3.3%, marking the fifth consecutive quarter of organic growth.