Conagra Brands Inc
NYSE:CAG
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
26.48
32.83
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Conagra Brands Inc
Earnings Call Analysis
Q1-2025 Analysis
Conagra Brands Inc
In the first quarter of fiscal 2025, Conagra Brands demonstrated notable resilience despite facing several operational headwinds, notably a significant 47% drop in revenue from their Hebrew National product line due to a temporary manufacturing disruption. This manufactured challenge was part of a larger landscape where the company managed to achieve organizational goals, highlighting steady improvements in their domestic retail business and focusing on share growth across key segments like frozen foods and snacks.
Conagra's domestic retail business saw year-over-year volume improvement, particularly in frozen and snack domains, indicating a robust recovery strategy. The company acknowledged that while they encountered disruptions in production, their strategic investments and practices have led to overall share gains during the quarter, with 71% of the portfolio managing to either hold or gain market share.
Total organic net sales for the quarter displayed a decline of 3.5%, influenced by the manufacturing disruptions and a slight decrease in price/mix dynamics. Notably, adjusted operating margin decreased to 14.2%, down 244 basis points from the prior year, primarily due to inflation pressures in essential input costs and increased investments in merchandising. However, the company maintains confidence in achieving margin improvements in the upcoming quarters.
Looking ahead, Conagra reaffirmed its fiscal 2025 guidance, anticipating sequential volume recovery throughout the year and expecting an adjusted operating margin improvement in the second half. The company is projecting a full-year inflation rate of approximately 3.2% for total cost of goods sold, slightly revised upwards from an earlier estimate of 3%. Moreover, a significant commitment to merchandising investments is expected, with Q2 slated to demonstrate higher levels of support for their product lines.
In terms of cash flow, Conagra reported $269 million in net cash flows from operating activities, influenced by lower operating profit and seasonal working capital changes. Their focus remains on reducing net leverage, targeting around 3.2x by year-end. Additionally, strategic portfolio reshaping initiatives, including the acquisition of FATTY Smoked Meat Sticks, are designed to capture growth within the high-margin meat snacks category, while the divestiture of less profitable segments underscores their commitment to streamline operations.
Overall, Conagra's robust actions amidst challenges reflect a strategic direction aimed at enhancing growth while maintaining operational efficiency. The reaffirmation of guidance and proactive measures in cash flow management and strategic acquisitions resonate positively for long-term investors, suggesting sustained share gains and resilience in a competitive market environment.
You don't have any saved screeners yet
Good morning. Thank you for listening to our prepared remarks for Conagra Brand's first quarter earnings. At 9:30 Eastern Time 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.
I'm joined this morning by Sean Connolly, our CEO; and David Marberger, our CFO. We will be making some forward-looking statements today. And while we are making these statements in good faith based on current information, we do not have any guarantee about the results we will achieve. Descriptions of our risk factors are included in our filings with the SEC.
We will also be discussing some non-GAAP financial measures. Please see the earnings release and the slides for GAAP to non-GAAP reconciliations and information on our comparability items, which can be found in the Investor Relations section of our website.
I'll now turn the call over to Sean.
Thanks, Melissa, and thank you all for joining our first quarter fiscal '25 earnings call. Before we begin, I'd like to extend our sympathies to everyone affected by Hurricane Helene. We are supporting World Kitchen, American Red Cross and Feeding America, and we'll continue to monitor the situation to determine how we can further help those in need.
Now let's get started on Slide 4. Q1 marked another quarter of progress in many areas, and I'm proud of the way our team executed within a dynamic environment. We took the actions we told you we would take, and by and large we got the results we expected to get. We told you last quarter that Q1 would have plenty of noise in it, and it did. Beyond the anomalies we planned for, we have one out-of-plan dynamic to contend with. Today, we will endeavor to unpack the quarter and provide a clear understanding of the underlying state of our business, which is encouraging. In fact, the most important thing for you to take away from our call today is that we remain on track to achieve our fiscal '25 goals.
We had clear priorities for Q1 and delivered on all of them. We've continued to drive meaningful volume improvement in our domestic retail business, including year-over-year growth in our strategic frozen and snack domains. Our share improvement stands out, not just in the absolute, but among peers as we drove strong share performance across the majority of the portfolio.
Continuing to drive our value-over-volume strategy in Foodservice helped us sustain our margins at pre-COVID levels, despite channel softness. We continue to advance our supply chain productivity initiatives, which remain on track to deliver $1 billion of cost savings by the end of fiscal '25.
And finally, we were excited to resume our portfolio reshaping initiatives with the acquisition of FATTY Smoked Meat Sticks, which expanded our leading position in the high-growth, high-margin meat sticks product category as well as the divestiture of our Indian joint venture, ATFL.
Our team delivered on these priorities despite an out-of-plan dynamic that pressured performance during the quarter, namely a manufacturing disruption that required us to pause production at our Hebrew National hot dog plant in the middle of grilling season.
While we were able to fully resume plant operations, the temporary manufacturing pause resulted in lost sales. Revenue for the Hebrew National brand was down 47% in Q1. We estimate that this equated to a 60-basis-point reduction in total volume and a 90-basis-point reduction in total organic net sales during the first quarter. The loss was particularly apparent within Refrigerated & Frozen, where we estimated that it accounted for a 150-basis-point reduction in volume, and a 210-basis-point reduction in organic net sales for the segment. We estimate that the majority of the impact of this disruption will be isolated to the first quarter.
Taking all of this into account, our results for the quarter were in-line or above our internal plan for most metrics, except organic net sales, which was impacted by the temporary manufacturing disruption I just discussed. I'm pleased with our team's continued execution against our key priorities, which has strengthened the underlying momentum of our business. As a result, we remain on track to deliver our fiscal '25 guidance.
Let's take a closer look at each of our priorities, beginning with our volume progress on Slide 5. As you can see, our proven playbook and strategic investments have generated continuous volume recovery in our domestic retail business over the past year. In fact, domestic retail volume performance in Q1 exceeded our expectations, and our volume recovery would have been higher, but for the temporary impact of Hebrew National.
Importantly, as you can see on Slide 6, we delivered year-over-year volume growth across both of our strategic domains, frozen and snacks. We focused our investments to maximize consumer engagement within these domains, and their return to growth demonstrates that our plan is working.
Slide 7 shows the volume trends in our Staples domain. Excluding the temporary disruption in hot dogs, the rest of our Staples domain also delivered sequential volume improvement during the quarter. And don't forget, Q1 Staples volume was impacted by the elasticity effect of last year's price increase on our tomatoes platform. Since we wrapped those pricing actions as we exited Q1, this impact will wane going forward. And to give you a sense of the magnitude, Staples consumption in Q1, ex-tomatoes and hot dogs would also have been positive. So overall, while we anticipate the consumer environment will remain a challenge in fiscal '25, our proven ability to navigate through it gives us confidence that we will continue to drive volume across our business.
Even more impressive than the strength of our volume improvement is our share performance, seen here on Slide 8. Achieving four consecutive quarters of share progress is a solid achievement in any period, but to do so amid today's challenging consumer environment underscores the strength of our strategy and the resiliency of our portfolio. In Q1, approximately 71% of our portfolio held or gained volume share, and the vast majority of that was share gains.
And as you can see on Slide 9, our share performance is far ahead of our near-in peer set. Only one of our closest peers has more than half of their portfolio holding or gaining share, and we are outperforming them by a solid margin.
If you zoom in on our strategic frozen and snack domains shown here on Slide 10, the share performance is even stronger. 93% of our frozen and snack brands held or gained volume share during the quarter. This slide demonstrates the continual improvement of our share performance over the past year, highlighting the effectiveness of our enhanced investments to drive consumer engagement. Importantly, we continue to deliver volume progress and strong share gains while achieving the expected ROI.
Slide 11 demonstrates how the industry merchandising environment remains rational. There are two key metrics to consider when evaluating the state of merchandising, the share of volumes sold on promotion and the average depth of promotion. In both key metrics, Conagra and our near-in peer set are promoting slightly less today than we did in the most comparable pre-pandemic period. Said differently, the overall promotional environment is roughly consistent with historic norms.
And when you double-click on each of these metrics, you'll find that Conagra is actually less promotional than our closest peers, both today and in the pre-pandemic period, Conagra sells a lower percentage of our volume on promotion. And when we do have targeted promotions, our average discount is also less.
The takeaway is clear. We continue to operate in a rational merchandising environment. Conagra remains less reliant on promotions to drive volume, and we continue to maintain a disciplined approach to prioritize the long term health of our brands.
Now let's dive into each of our domains. Starting with frozen on Slide 12. Our Q1 volume sales outpaced both edible and relevant frozen categories, led by our strong volume share performance in single-serve meals and share increases in vegetables and multi-serve meals.
Slide 13 takes a closer look at single-serve meals, our largest frozen category. Conagra now represents a majority of all industry volume in this $6.5 billion category, a tremendous achievement in this dynamic and competitive environment. Our investments have enabled us to drive steady share improvement in this category throughout fiscal '24, and we built upon that success during the first quarter of fiscal '25.
Frozen vegetables is another category that contributed to our improved share performance during the quarter. Recall that Birds Eye was the focus of our value-over-volume approach as we pulled back activity on the commodity veg space while building our business and innovation pipeline in the premium value-added space. As you can see on Slide 14, our efforts are paying off. Our frozen vegetables business remains stable and positive.
Moving to Snacks on Slide 15. We continue to considerably outpace the total snacking category, largely due to our advantaged portfolio. Our brands span on-trend permissible snacking sub-spaces like Meat Snacks, Popcorn and seeds as consumers opt for low-carb, protein and fiber-rich snacks offered by Slim Jim, Duke's, David, Angie's BOOMCHICKAPOP and more. Permissible snacking is growing much faster than the overall snacking category and our portfolio of well-known brands is benefiting.
During the first quarter, we took another step to build upon this strength by welcoming the FATTY to the Conagra family. Slide 16 highlights some of the key points that make this acquisition so attractive. Conagra is a leader in the meat snacks category with significant scale. But within meat snacks, Conagra is the leader in meat sticks, a high-margin business that is growing faster than all other snacking categories as demand for more convenient, healthy and affordable experiences continues to attract new buyers.
FATTY Smoked Meat Sticks joins consumer favorite Slim Jim and Duke's to form a trifecta smokehouse, which will allow us to capitalize on high-growth, protein-focused snacking behaviors. The addition of a premium brand like the FATTY furthers Conagra's position of strength as we focus on growing our snacking business across advantaged categories.
Turning to our Foodservice business on Slide 17. It's no secret that COVID posed an unprecedented challenge for the entire Foodservice industry and our Foodservice segment was no exception. Over the last 5 years, we've been laser-focused on building a better business and returning margins to pre-COVID levels. As a result of our efforts over the past few years, we grew organic net sales and adjusted operating profit. And this past year, we were able to restore Foodservice margins to their fiscal '19 levels. During Q1, we sustained that margin as we continue to execute our value-over-volume strategy.
Our margin recovery has also been supported by our efficient and effective supply chain, highlighted here on Slide 18. We expect to drive approximately $350 million in savings during fiscal '25 through multiple productivity initiatives. Further, Q1 service levels remained at the strong pre-COVID level of 97%. We also continued to deliver improvements in free cash flow, reducing our cash conversion cycle by 7 days relative to the prior period. As a result of these efforts, we remain on track to deliver $1 billion of cost savings by the end of fiscal '25. Our productivity initiatives remain a key tool in our strategic playbook, as the savings we realize help fuel our brand-building investments and portfolio reshaping efforts.
Turning to Slide 19. We were excited to resume our historical practice of active portfolio reshaping with both inbound and outbound activities. Consumer tastes and habits are constantly changing, and we continuously evaluate opportunities to reshape our portfolio to position the company for further growth and margin expansion, whether that be through investments in innovation and brand modernization, M&A, or value accretive divestitures or spins.
Portfolio reshaping is in our DNA, and Conagra has taken substantial actions over the past decade to transform our portfolio. However, in recent years, we've been more single-mindedly focused on debt paydown. Now given the progress we've made on debt and cash flow as well as other market dynamics, we are in a strong position to resume active portfolio reshaping, and importantly, still meet our long-term 3x net leverage target through a combination of bolt-on acquisitions and divestitures of low-growth businesses.
In Q1, we advanced these efforts through the acquisition of the FATTY and the divestiture of our majority stake in Indian subsidiary, Agro Tech Foods Limited. Looking ahead, we will continue to assess opportunities to reshape our portfolio for faster growth and stronger margins.
As discussed at the top of the call, our execution across each of our priorities in Q1 has reinforced our confidence in the underlying strength of our brands, people and strategy. With that, I'm pleased to reaffirm our fiscal '25 guidance.
I'll now pass the call over to Dave to discuss our financials in more detail.
Thanks, Sean, and good morning, everyone. Slide 22 shows our financial results for key metrics in the quarter. Sean provided a good overview of how our business performed in Q1, highlighting our continued volume improvements in domestic retail, share gains and strong productivity. To most effectively unpack our Q1 results, I'll move to our segment performance on the next slide.
Slide 23 shows the composition of organic net sales by segment and also highlights the estimated impact of the Hebrew National manufacturing disruption on total company sales. Total organic net sales, excluding Hebrew, would have been down 2.6% or 90 basis points better than the minus 3.5% we delivered. In Grocery & Snacks, we delivered organic net sales of approximately $1.2 billion, a decline of 1.9% versus last year's first quarter, primarily from lower volumes. Price/mix decreased slightly, a result of investments in selected brands, partially offset by a price increase taken in the prior year on our tomato business.
Our Refrigerated & Frozen segment delivered approximately $1.1 billion in net sales, a decline of 5.7% from prior year. Volume and price/mix were both impacted by the temporary manufacturing disruption in Hebrew National. Excluding Hebrew, we estimate that Refrigerated & Frozen net sales in the quarter would have been down 3.6%. Volume for the quarter would have increased 1.6% and price/mix would have been down 5.2%. Refrigerated & Frozen price mix was impacted by pass-through pricing reductions in certain brands that were experiencing deflation, primarily in our spreads business, and increased trade merchandising investments, particularly in our frozen business. We also experienced a shift in the mix of products sold, which was a headwind to price/mix in the quarter.
Our International segment delivered an organic net sales increase of 3% over prior year, driven primarily by another strong double-digit quarter in our Global Exports business.
Finally, our Foodservice business performance continued to be impacted by the lower margin business we exited that was first called out in our Q3 fiscal '24 call, along with ongoing softness in restaurant traffic. As Sean discussed, our Foodservice business is larger and more profitable than it was at the start of the pandemic and remains an important contributor to the Conagra business portfolio.
Slide 24 shows our net sales bridge. I've already unpacked the quarter's volume and price/mix dynamics for you. The remaining elements are foreign exchange, which negatively impacted net sales by 40 basis points, largely driven by the U.S. dollar to Mexican peso exchange rates and 10 basis points of favorable impact from the acquisition of FATTY Smoked Meat Sticks.
The components of our Q1 adjusted operating margin bridge are shown on Slide 25. Adjusted operating margin declined 244 basis points over prior year to 14.2%. In addition to the price/mix and trade merchandising investments I've already discussed, we also saw year-over-year cost of goods sold inflation of 3.3%, primarily from proteins, sweeteners and warehousing costs. SG&A was higher due to wrapping lower incentive compensation a year ago and foreign exchange was a headwind. Productivity improvements, which approximated 3.6% of cost of goods sold, helped fund our trade investments in the quarter. This productivity was partially offset by the impact of the Hebrew National disruption. We don't expect these unfavorable costs to continue going forward.
Slide 26 details our adjusted operating profit and adjusted operating margin performance by segment for Q1. All segments reported a decline from prior year and adjusted operating profit and adjusted operating margin and all segments were impacted by the same dynamics, primarily lower organic net sales, which included increased merchandising investment, higher cost of goods sold inflation, and unfavorable operating leverage, partially offset by favorable productivity.
Additionally, Refrigerated & Frozen adjusted operating profit was impacted by approximately $10 million from the manufacturing disruptions in Hebrew National, and our International segment saw an outsized negative impact from unfavorable foreign exchange rates.
The adjusted EPS bridge for Q1 fiscal '25 is shown on Slide 27. Adjusted EPS was $0.53 in the current quarter compared to $0.66 a year ago due to a decline in adjusted operating profit, unfavorable FX rates and lower equity earnings from Ardent Mills. Pension and adjusted taxes contributed $0.01 of EPS in the quarter. Our Ardent Mills joint venture continued to perform well in its core flour business, but delivered lower commodity revenue in Q1 compared to last year due to lower market volatility.
Key balance sheet and cash flow metrics are shown on Slide 28. Conagra generated $269 million in net cash flows from operating activities in Q1. The decline from prior year was driven primarily by lower operating profit and changes in seasonal working capital that we expected. Capital expenditures were $133 million, dividends paid were $167 million, and we resumed share repurchases of $64 million to offset dilution from our share-based equity incentive compensation plans.
Our Q1 fiscal '25 ending net debt reduction from prior year reflects debt paydowns during fiscal '24, and includes funding the Q1 acquisitions of both the FATTY Smoked Meat Sticks business as well as the manufacturing operations of an existing co-manufacturer of our cooking spray products. Net leverage at the end of the quarter was 3.6x and was in line with our expectations, as we remain on track to finish the fiscal year around 3.2x.
In addition to the acquisitions in Q1, we also closed on the sale of our ATFL business in India. The net of those three transactions resulted in additional cash uses of approximately $154 million. We remain focused on reducing our net leverage and continuing to generate strong free cash flow.
As Sean said, we are reaffirming our full year fiscal '25 guidance as shown on Slide 29. I will provide some more color on the next slide.
As we stated last quarter, when initially providing our full year fiscal '25 guidance, we expect sequential volume recovery each quarter and we expect adjusted operating margin improvement to be greater in the second half. For Q2, we expect improvement in volume, top line and margin compared to Q1. We do expect our fiscal '25 merchandising investment to be at the highest level in Q2. Also, we are now forecasting full year fiscal '25 inflation of approximately 3.2% of total cost of goods sold. That is up from approximately 3% originally projected for the year.
We are seeing inflationary pressure, primarily in the areas of proteins and sweeteners. While we are seeing deflation in select areas such as edible fats and oils, the net impact is a 20-basis-point increase in the annual overall inflation estimate. We don't expect any material impact on fiscal '25 margin or adjusted EPS and from our first quarter M&A transactions, but we expect a decrease in overall reported net sales of approximately $30 million for the remainder of the fiscal year.
Our year-end net leverage target of approximately 3.2x assumes expected favorability in free cash flow, resulting from improved working capital, lower expected capital expenditures and lower estimated cash taxes from a favorable tax settlement. And finally, we expect full year adjusted gross margin to be relatively flat versus fiscal '24.
That concludes our prepared remarks for today's call. Thank you for your interest in Conagra Brands.