Conagra Brands Inc (CAG) — Q1 2019 Earnings Call Transcript

Good morning, everyone. Thanks for joining us. I will remind you that we will be making some forward-looking statements. While we are making these statements in good faith, we do not have any guarantee about the results that 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 during the call today. References to adjusted items refer to measures that exclude items impacting comparability. Please see the earnings press release for additional information on our comparability items. The reconciliation of those adjusted measures to the most directly comparable GAAP measures can be found in either the earnings press release or in the earnings slides, both of which can be found in the Investor Relations section of our website, conagrabrands.com. Now, I'll turn it over to Sean.

Thanks, Brian. Good morning everyone and thank you for joining our first quarter fiscal 2019 earnings conference call. Fiscal 2019 is off to a good start with performance in the first quarter largely in line with our expectations. We sustained our solid topline performance delivering net sales growth in each of the four operating segments behind strong underlying fundamentals. Our operating margin came in slightly above our expectations, despite a continued challenging inflationary environment. We continued to optimize our marketing investments to deliver a stronger ROI. This included shifting some low ROI investments from A&P marketing to above-the-line retailer investments. This shift enabled us to drive brand saliency, enhance distribution, and consumer trial in stores. Given our solid start to the year, we are reaffirming our fiscal 2019 guidance for the standalone ConAgra Brands business. As we announced earlier this month, subject to the completion of all conditions, our acquisition of Pinnacle Foods is expected to close by the end of October, ahead of our original schedule. Our focus on brand building and innovation is paying off as we continue to bend the trend on the topline. Excluding sales from the Trenton, Missouri production facility, which we sold at the beginning of fiscal 2019, organic net sales increased 1.2% with all four operating segments delivering year-over-year growth in the quarter. Volume was essentially flat with growth in our Refrigerated & Frozen, Grocery & Snacks, and International segments, offset by expected volume declines in our Foodservice segment as we continue to implement our value-over-volume actions. Our deliberate actions to drive topline growth have delivered consistent improvement. We are particularly pleased with our momentum, given our performance versus the competition. We are outperforming the industry in the categories in which we compete and we continue to gain share, more signs that our iconic brands are resonating with consumers and that our innovation is working. Our fundamentals remain strong. The growth in total sales is based on the strength of our brands, not on deep discounts or promotions. Our base velocities remain strong and base dollar sales continue to grow, reflecting the higher quality portfolio that we have built over the last few years. The improved portfolio has earned increased distribution reflected in the improved total points of distribution (TPDs). As we continue to earn more TPDs, we expect to build upon our momentum and fuel continued topline growth. As we've discussed in the past, we remain focused on supporting our brands with robust programs, including increased focus on high-quality retailer investments. By partnering with retail customers, we're able to better drive brand saliency, distribution, and consumer trial versus continuing to invest in the tail of our A&P programs that historically carried a lower ROI. We will continue to evaluate the best marketing approach for each of our brands and products and remain nimble in terms of where and how we're putting our marketing dollars to work. We're focused on investing to engage the consumer with our brands, whether through traditional TV and print ads, distribution investments, merchandising, sampling, digital marketing, or customer loyalty programs. The objective is to drive both physical and mental availability and enhance brand affinity. What this does not mean is a return to deep price discounting—our scanner data demonstrates that we're serious. Our average unit price change has been positive every quarter for more than two years, and the percentage of products sold on promotion has decreased in all but one quarter during that same time period. We'll stay true to our value-over-volume strategy and focus on making disciplined investments in building brand equity, not low-quality promotions. Turning to our Refrigerated & Frozen segment, we continue to drive organic net sales growth in the quarter. Though some may perceive growth as slowing, a closer look reveals that we are showing growth on top of growth. Our efforts in Frozen are accelerating, with good consumption growth. We believe we still have room to grow in Frozen and our distribution performance continues to improve, which we expect will lead to dollar sales growth. We expect our innovation slate to be broader this fiscal year, with a range of new offerings that are resonating with consumers. We have made substantial progress in our Frozen portfolio, and we are confident in our ability to further grow TPDs. We are excited about our pending acquisition of Pinnacle Foods and their strong lineup of Frozen brands. In our Grocery & Snacks segment, we have returned to positive organic net sales growth, largely driven by our Snacks business. We are focused on innovating our reliable contributor brands to ensure consistent cash flow. We recently launched Chef Boyardee Throwback recipes, which have been well-received and highlight our ability to innovate within iconic brands. Our nearly $2 billion Snacks and Sweet Treats business presents tremendous growth opportunity as we focus on speed, agility, and innovation. We are gaining share and our dollar sales growth in Snacks has significantly outperformed the categories over the last year. With our new approach to Snacks, we look forward to debuting our innovations at the upcoming National Association of Convenience Stores Show. In conclusion, we will continue to rollout innovation to drive topline momentum, focus on margin drivers to fuel growth, and remain disciplined in our strategic investments to drive brand saliency, distribution, and consumer trials. During Q2, our year-over-year comparisons will be challenged by last year's hurricanes; however, we are confident our fundamentals remain strong and that we will continue to build upon the momentum we've developed through our innovation and brand-building efforts. We look forward to the addition of Pinnacle Foods to further enhance our portfolio of leading brands.

Thank you, Sean and good morning everyone. Slide 26 outlines our performance for the quarter. As Sean mentioned, the quarter came in largely in line with our expectations. Net sales for the first quarter were up 1.7% compared to a year ago and organic net sales excluding the impact of the sale of our Trenton, Missouri facility grew 1.2% as all reporting segments delivered growth. Adjusted gross profit decreased 0.6% to $524 million, and adjusted gross margin declined 65 basis points to 28.6%. A&P expense decreased to $43 million, or 2.3% of net sales as we continued to shift low ROI A&P investments to higher ROI retailer investments. Adjusted SG&A for the quarter was up 9.7% compared to the prior year and was 11.7% of net sales, driven by higher stock-based compensation expense and planned investments in IT projects. Adjusted operating profit declined 3.5% for the quarter and adjusted operating margin was 14.6%, slightly above our guidance range. Adjusted diluted EPS was $0.47 for the quarter, up 2.2% from the prior year quarter and in line with our guidance. Slide 27 outlines the drivers of our net sales change versus a year ago. During the quarter, organic net sales growth ex-Trenton was 1.2%, driven by a 1.2% increase in price/mix. Our total net sales were 1.7%, which translates to approximately $5 million in net sales below the bottom end of our first quarter net sales guidance range. This can be explained by a larger shift from A&P to retailer investments than we planned for in the quarter.

Good morning, everybody.

Hey Andrew. Good morning.

I think on the -- if I'm not mistaken on the fiscal 4Q call, I think you had said that fiscal 1Q organic topline growth should be roughly in line or with the level seen in 4Q, which was about 2%. And I know fiscal 1Q came in a bit below that. So, I was trying to get a sense of what you see has had changed maybe during the course of the quarter? Has it unfolded? And as part of that, volume specifically in the Grocery and Frozen segment was up a bit, despite some of the distribution gains that you've talked about in Frozen. So, again, I'm trying to get a sense of why that was perhaps not greater, especially since the scanner and Frozen would have suggested it would be? Thank you.

All right, Andrew, it's Sean. Here's how I think about our sales in Q1. We guided to 2% to 2.5% growth and we delivered a 1.7% growth. The three tenths of a point miss versus the bottom end of our range equates to about $5 million, which can be fully accounted for by the higher-than-planned, above-the-line marketing spend. So, that puts us squarely at the bottom of the sales guidance range we gave for Q1. The simple answer to that—it's shipment timing, which is one of the reasons why we don't typically like to provide sales guidance quarterly. An example is on our largest brand, Marie Callender's, where we experienced a shipment slowdown near the quarter end as retailers were resetting the shelf in advance of the new Marie innovation slate. But we reaffirmed full year guidance, delivered excellent consumption trends, gained market share, and are performing organically at the level of our 2020 growth targets in 2018. Altogether, I'd describe it as we are performing largely in line with our expectations and very strong versus our peers.

Hey good morning, everyone.

Hey Bryan.

I guess the question is, we kind of think about the full year and the implied improvement in margins that we'd expect in the back half of the year. I guess, Dave, could you just walk us through how much of that becomes the inflation as maybe more skewed to the first half or more savings coming through? Just trying to get an understanding of how we bridge just sort of margin improvement sequentially in the back half of the year given sort of what we've seen—the dynamics we've seen in the first half?

Yes, Bryan, I'll take that. Our first quarter operating margins came in at 14.6%, driven by higher SG&A and the continued shift in retailer investment. Q1 is our lowest net sales dollar quarter, so margins are a bit lower than the other quarters. For Q2, we guided to operating margins that are similar to Q1, 14.4% to 14.7%. There will be higher net sales dollars in Q2. But we'll have a higher level of marketing investment in the second quarter on the A&P line relative to the first quarter, although SG&A will be lower in the second quarter as well. This is a significant investment quarter, which sets up the innovation for the second half. We expect to see benefits from that sales growth and margin accretive nature of those sales in the second half, which supports our full-year guidance of 15% to 15.3%.

Great. Thank you very much. Just a question on Pinnacle. It's great that hopefully that will close by the end of October. I'm just curious, Sean, you've done a lot of work on Pinnacle so far. As you think forward once that deal closes, can you just give some color as kind of how you plan to attack it come October 24? Is there maybe a need to shift a bit more into trade relative to A&P at Pinnacle? Are there brands you may already have your eyes on, where there could be an upfront push like you did at ConAgra? Any opportunity you can layout upfront as to how you will attack it from day one? Thanks.

Yes, sure, a couple of points on Pinnacle. First of all, we are incredibly excited about the ConAgra-Pinnacle combination. Not only are there meaningful cost synergies, but we are energized about what we can do with the brands, particularly in Frozen. That said, I do want investors to keep in mind that we are still operating as separate public companies. We operate at arm's length, even as we plan for integration. As soon as we get this closed, there will be a groundswell of activity and we will be developing an action plan. Additionally, we'll begin doing the important prep work needed for an Investor Day next calendar year.

Yes, Rob, we're continuing to assess alternatives for the Wesson business. We have Wesson as an asset held for sale. If we do decide to divest Wesson, the proceeds will be used to pay down debt and will not impact the equity raise or divestiture proceeds we have discussed previously.

Thanks and good morning.

Hi good morning. Sean, quick question for you on the retailer investments. I realized there's been a little bit of an evolution here in terms of the A&P and above the trade line consideration. But can you walk us through what has evolved in your partnership with the retailers since your Analyst Day back a couple of years ago? What strategically has fed the narrative you've put up today?

Yes, I think strategically, the objective has never changed, which is if we spend $1 in marketing, we want it to work hard for us. What has changed is the efficacy of different marketing tools over the years. Traditional TV advertising and print ads have diminished materially in effectiveness. Therefore, we're spending A&P very differently now, focusing more on digital ways to build brand affinity. Additionally, over the past five years, there has been progressiveness in our marketing partnerships with customers. Customers now recognize the power of their data and partner with manufacturers to leverage that data effectively at the point of purchase. Retailers are simply more motivated to grow, and partnering with us on innovation and brand support is beneficial for both parties.

Good morning everyone.

Alexia, yes, that's the reason for the exclusion. The sales that we sold along with the Trenton facility are no longer in our base, similar to a divestiture.

Great. Thank you and good morning everyone. I just wanted to follow up on trade spending. So, gross and operating margins are down, Sean. The trade spend does reduce net price realization. Can you just provide some thoughts on whether this is a case of a win and a loss? You gain distribution on new products, but you’re not realizing enough pricing to hold your margins. How do you think about that?

We have been getting pricing into the marketplace ahead of our categories consistently over the last several years. We do this in a variety of ways, not just through list price increases, and we will continue to push on all our margin levers. While there may be some volatility quarter-to-quarter, margin expansion and pricing remain core to our operations.

Part of the adjustments in the margins can also be attributed to our investments in improving customer service that impacts cost of goods sold. Our investments in these areas are essential to meet on-time delivery requirements.

Thanks. Thanks for taking the question. I just wanted to get your perspective. The market is looking at some of these results, including yours, seeing a slowdown in sales growth, while margins are compressing. Can you provide examples of measured channel data that offer optimism for a turnaround in the back half of the year?

Yes, Akshay, you need to put this sales bit in perspective. As mentioned, our Q2 outlook is what we expected all along. The fundamental strength of our takeaway and market shares are strong. We already have momentum with new product introductions, and we're confident in the innovation slate continuing to flow into the marketplace. Last year, we looked at combined Q2 and Q3 to eliminate volatility. Our underlying fundamentals for ConAgra are strong.

Hi good morning.

Yes, Ardent Mills continues to improve its operations and efficiency. However, the nature of their business can create volatility in their quarter-to-quarter results. Our profit for the quarter was down due to unfavorable market conditions compared to the same quarter last year, but the expectations for the year are relatively flat.

Neither of these items (Ardent Mills and the tax rate) comment on the strength of our core business, which remains strong.

Thanks. Good morning.

Thank you. As a reminder, this conference has been recorded and will be archived on the web as detailed in our press release. Investor Relations is available for any follow-up discussions. Thank you for your interest in ConAgra Brands.