Conagra Brands, Inc. is a leading branded food company in North America, known for its diverse portfolio that adapts to changing consumer preferences. The company operates through four main segments: Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice, offering a wide range of food products . Conagra's product lines include iconic brands such as Birds Eye, Duncan Hines, Healthy Choice, Marie Callender's, Reddi-wip, Slim Jim, and Angie's BOOMCHICKAPOP, spanning categories like frozen foods, snacks, and shelf-stable meals . The company focuses on innovation and quality to drive growth and maintain market leadership, actively reshaping its portfolio through innovation, acquisitions, and divestitures .
- Grocery & Snacks - Offers branded, shelf-stable food products sold in various retail channels across the United States.
- Refrigerated & Frozen - Provides branded, temperature-controlled food products catering to consumer needs for freshness and convenience.
- Foodservice - Supplies branded and customized food products for restaurants and other establishments, supporting the foodservice industry.
- International - Delivers branded food products to markets outside the United States, expanding the company's global reach.
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What went well
- Return to volume and organic net sales growth in Q2 FY2025, with organic net sales of $3.2 billion, up 0.3% over the prior year, driven by volume growth in the domestic retail business.
- Strong performance in key business domains, including the Frozen segment, which has seen five consecutive quarters of volume sales improvement, and an increased volume share position by 3 percentage points in the single-serve meals category.
- Continued commitment to brand-building investments to drive top-line momentum, despite facing higher inflation and unfavorable foreign exchange rates, highlighting management's focus on long-term growth and shareholder value.
What went wrong
- Conagra Brands lowered its adjusted operating margin guidance to approximately 14.8%, down from previous expectations, due to higher-than-anticipated inflation, especially in animal protein and egg costs that are not moderating as projected. [2]
- The company reduced its adjusted EPS guidance to a range of $2.45 to $2.50, citing the impact of higher inflation on operating margins and an estimated $0.04 EPS headwind from unfavorable foreign exchange rates. [2]
- Conagra's net leverage ratio is now expected to be approximately 3.4x, up from the prior estimate of approximately 3.2x, indicating increased financial leverage due to lower adjusted earnings expectations. [2]
Q&A Summary
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Inflation Impact on Earnings
Q: Is it harder to raise prices to offset higher costs now?
A: Sean Connolly explained that the EPS guidance reduction is due to increased inflation in the back half plus FX, not due to increased investments. While there is inflation in cocoa and sweeteners, impacting a narrow part of the portfolio, the bigger driver is protein costs like meats and eggs. They anticipated lower inflation in the second half but now face higher costs. Instead of raising prices again and triggering elasticity effects, they chose to maintain top-line momentum, believing it's in the best interest of consumers and shareholders. -
Leverage and Free Cash Flow
Q: What is driving the increase in leverage targets, and how about free cash flow?
A: CFO David Marberger stated that the forecasted leverage ratio is now 3.4x, up from 3.2x, entirely due to reduced profit outlook. Free cash flow conversion is above 100% because net income is down, but free cash flow is on track. They are pleased with their progress in working capital and inventory management and expect to reach their long-term leverage target of 3x by fiscal '26. -
Operating Margin Outlook
Q: What's driving the expected margin inflection from Q3 to Q4?
A: David Marberger explained that Q3 operating margin will be the lowest of the year due to factors like increased innovation investment and higher inflation forecasted at close to 4% for the full year, higher in Q3 than Q4. Volumes are expected to improve sequentially, and A&P and SG&A will be in line with a year ago. -
Competitive Landscape in Frozen
Q: Have you seen increased competition in frozen, and how does it affect your growth?
A: Sean Connolly stated that while competitors are adding capacity in frozen, Conagra has been leading the frozen category for about 10 years. Their products and innovation are ahead of competition, evidenced by their strong market share. They plan to continue driving and leading the category and remain the leader globally and in the U.S.. -
Investments and EPS Impact
Q: Are incremental investments contributing to back-half EPS pressure?
A: Sean Connolly clarified that their decision to invest in driving top-line growth is not new and has been built into their plan for the fiscal year. The investments are working, with trend lines improving over the past 5 quarters, particularly in frozen and snack businesses. In Q2, actual spend was lower than planned; they redeployed those funds to Q3 rather than reducing support. -
Protein Snack Trends
Q: What's driving the trend toward high-protein snacks, and how long will it last?
A: Sean Connolly noted that protein and fiber are super on-trend right now, and they are highly concentrated in those benefit areas. They acquired the FATTY Smoked Meat business, adding to their portfolio alongside Slim Jim and Duke's, creating a trifecta smokehouse. He doesn't see these trends changing and believes being protein-centric and fiber-centric is advantageous. -
Healthy Choice GLP-1 Messaging
Q: What are your plans for the Healthy Choice GLP-1 On Track program?
A: Sean Connolly discussed adding a "On Track" wayfinder with "GLP-1 friendly" language on Healthy Choice packaging for consumers managing their diet, including those using GLP-1 drugs. Although the number of users is small and some are dropping off, Healthy Choice provides an excellent solution for those seeking to maintain progress after GLP-1 use. -
Advertising and Promotion Timing
Q: How is A&P spend shifting between Q2 and Q3?
A: David Marberger explained they spend the most on trade merchandising in Q2, but some spend shifted to Q3. They are ramping up A&P starting in Q3, aiming for A&P percentage to be in line with the prior year by year-end. There's a slight increase in innovation investment expected in Q3. -
Consumer Value Behaviors
Q: What best practices address consumer challenges and value-seeking behaviors?
A: Sean Connolly emphasized that benefits like convenience are unshakable trends. They've nudged consumers back using investments in innovation, advertising, and high-quality trade, focusing on frozen and snacks where their brands are resonating. This strategy has been effective in driving growth. -
Impact of Thanksgiving and Hurricanes
Q: Was there any benefit from Thanksgiving timing or hurricane impacts?
A: Sean Connolly stated there was no Thanksgiving timing effect on their company, as shipments and consumption tracked closely. He also mentioned a very small benefit from the hurricane in the Grocery & Snacks segment, but not material to overall results.
- Given the increased promotional activity aimed at value-seeking consumers leading to a negative mix effect on dollar sales, how do you plan to maintain or improve gross margins in the face of rationalized promotions and deep lifts in frozen categories?
- With your focus on portfolio reshaping and potential divestitures of slower-growth assets, can you specify which segments are under consideration and how you will ensure these moves align with long-term shareholder value despite possible short-term earnings dilution?
- Considering the double-digit inflation in key inputs like beef and sweeteners exceeding your initial estimates, what specific cost management or pricing strategies are you employing to mitigate these pressures without compromising volume growth?
- In the increasingly competitive meat snacks category, particularly meat sticks, how will you leverage brands like Slim Jim and the recent FATTY acquisition to defend and grow your market share against both established and emerging competitors?
- Given the shifting consumer behaviors affecting convenience store traffic and the importance of this channel for your snacking portfolio, what targeted actions are you taking to offset softness in this channel and capitalize on growth opportunities in mass merchant and club stores?
Q1 2025 Earnings Call
- Issued Period: Q1 2025
- Guided Period: FY 2025
- Guidance:
- Net Leverage Target: Approximately 3.2x by the end of FY 2025.
- Inflation: Forecasted at 3.2% of total cost of goods sold.
- Adjusted Gross Margin: Expected to be relatively flat compared to FY 2024.
- Volume Recovery and Operating Margin: Anticipated sequential volume recovery each quarter with greater improvement in the second half.
- Merchandising Investment: Highest level expected in Q2.
- Net Sales Impact: Decrease of approximately $30 million due to M&A transactions .
Q4 2024 Earnings Call
- Issued Period: Q4 2024
- Guided Period: FY 2025
- Guidance:
- Organic Net Sales Growth: Flat to down 1.5%.
- Adjusted Operating Margin: Between 15.6% and 15.8%.
- Adjusted EPS: Between $2.60 and $2.65.
- Net Inflation: Approximately 3%.
- Capital Expenditures: $500 million.
- Gross Productivity Savings: Approximately $350 million.
- Free Cash Flow Conversion: Approximately 90%.
- Net Leverage Ratio: Reduced to approximately 3.2x.
- Dividend: Annualized rate of $1.40 per share .
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: FY 2024
- Guidance:
- Adjusted Operating Margin: Approximately 15.8%.
- Organic Net Sales: Expected towards the lower end of the range.
- Adjusted EPS: Expected towards the midpoint of the range.
- CapEx: $425 million.
- Interest Expense: $435 million.
- Net Leverage Ratio: 3.44x .
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: FY 2024
- Guidance:
- Organic Net Sales: Decrease between 1% and 2%.
- Adjusted Operating Margin: Approximately 15.6%.
- Adjusted EPS: Between $2.60 and $2.65.
- Net Inflation Rate: Approximately 3%.
- CapEx Spend: Approximately $450 million.
- Gross Productivity Savings: Approximately $300 million.
- Interest Expense: Approximately $440 million.
- Contribution from Ardent Mills: Approximately $170 million.
- Full Year Tax Rate: Approximately 24% .
Recent developments and announcements about CAG.
Financial Reporting
- Net Sales: Reported net sales decreased by 0.4% to $3.2 billion, while organic net sales increased by 0.3% .
- Operating Margin: The reported operating margin was 12.6%, a decrease of 138 basis points, while the adjusted operating margin was 15.3%, a decrease of 57 basis points .
- Earnings Per Share (EPS): Reported diluted EPS was $0.59, a decrease of 1.7%, and adjusted EPS was $0.70, a decrease of 1.4% .
- Gross Profit: Gross profit remained flat at $847 million, while adjusted gross profit decreased by 2.3% to $842 million. This was due to the negative impacts of cost of goods sold inflation and unfavorable operating leverage .
- SG&A Expenses: Selling, general, and administrative expenses increased by 11.6% to $444 million, primarily due to non-cash charges related to restructuring plans and brand impairments .
- Net Income: Net income attributable to Conagra Brands decreased by 0.6% to $285 million, or $0.59 per diluted share. Adjusted net income decreased by 1.3% to $337 million, or $0.70 per diluted share .
- EBITDA: Adjusted EBITDA decreased by 3.3% to $639 million, primarily driven by the decrease in adjusted operating profit .
Earnings Report
Conagra Brands, Inc. has released its second quarter results for fiscal year 2025, which ended on November 24, 2024. Here are the key highlights and trends from the earnings report:
CEO Perspective: Sean Connolly, CEO of Conagra Brands, noted that the business returned to growth despite a challenging consumer environment, driven by strong market share performance. However, the company expects to face headwinds from higher than expected inflation and unfavorable foreign exchange rates in the latter half of the fiscal year .
Guidance Update: Conagra updated its fiscal 2025 guidance, expecting organic net sales to be near the midpoint of a range from a 1.5% decrease to flat compared to fiscal 2024, an adjusted operating margin of approximately 14.8%, and adjusted EPS between $2.45 and $2.50 .
These results reflect Conagra's efforts to navigate a challenging market environment while maintaining a focus on growth and operational efficiency.