Conagra Brands Inc (CAG) — Q3 2023 Earnings Call Transcript

Good morning. Thanks for joining us for the Conagra Brands' third quarter and first nine months of fiscal 2023 earnings call. I'm here with Sean Connolly, our CEO; and Dave Marberger, our CFO, who will discuss our business performance. We'll take your questions when our prepared remarks conclude. On today's call, we will be making some forward-looking statements. And while we are making these statements in good faith, we do not have any guarantees about the results we will achieve. Descriptions of our risk factors are included in the documents we filed with the SEC. We will also be discussing some non-GAAP financial measures. These non-GAAP and adjusted numbers refer to measures that exclude items management believes impact the comparability for the period referenced. Please see the earnings release for additional information on our comparability items. The GAAP to non-GAAP reconciliations can be found in the earnings press release and the slides that we'll be reviewing on today's call, both of which can be found in the Investor Relations section of our website. And I'll now turn the call over to Sean.

Thanks, Melissa. Good morning, everyone, and thank you for joining our third quarter fiscal '23 earnings call. Slide 5 outlines what we'd like you to take away from today's call. Our top priority coming into fiscal year 2023 was margin recovery following the unprecedented environment of the last two years with COVID and the inflation super cycle. To facilitate that margin recovery, our focus has been on inflation-justified pricing, supply chain improvements and the pruning of low-margin volume, a strategy we have successfully deployed before and refer to as value over volume. And three of the way into the year, our plan is working. In Q3, we delivered our second consecutive quarter of strong gross margin recovery, our pricing execution continued to be excellent while elasticities remain muted and consistent. Our volume performance again led our near-end peers versus our pre-pandemic baseline and our supply chain continued to improve with service levels exceeding 90%. This improvement allowed us to rebuild inventories to appropriate levels and support most of the strong demand from our customers, but there were exceptions as we experienced temporary manufacturing disruptions in certain categories that prevented us from being in stock. Despite this, we had strong results in the quarter overall, and we are updating our guidance for the year, including increasing our expectations for adjusted EPS growth and tightening the ranges for net sales growth and operating margins. With that overview, let's dive into the results on Slide 6. We delivered organic net sales of approximately $3.1 billion representing a 6.1% increase over the prior year period. Our adjusted gross margin of 28.1% represents a 409 basis point increase over the third quarter of last year, and our adjusted operating margin of 16.9% represents a 321 basis point increase over that same period. Adjusted EPS rose 31% from last year to $0.76 per share. The year-to-date results underscore the strength of our performance with growth across all four metrics including 8.1% organic net sales growth compared to the prior year period and the robust margin improvements we set out to achieve at the beginning of the year. Slide 7 shows the sustained recovery of our gross profit margin for a second consecutive quarter. Again, this margin recovery was our top priority for the year. Why? Because our gross margins fund our innovation program, and that innovation has been the centerpiece of our playbook and our success in driving sustained category growth in our two strategic focus areas frozen and snacks. This recovery, therefore, means you should continue to expect a relentless stream of provocative innovation and brand-building support as we go forward. In fact, looking at Slide 8, you can see that Conagra is one of the only companies in our peer set whose gross margins are essentially on par with pre-pandemic levels. Importantly, our brand strength and innovation pipeline position us well to maintain solid growth and healthy gross margin going forward. As I mentioned at the beginning of the call, our sales growth was primarily driven by inflation justified price increases coupled with ongoing muted elasticities. Slide 9 shows the relationship between elasticities and price increases. As you can see, elasticities have remained remarkably consistent and benign over the last eight quarters, even as we increased the price per unit of our products to help offset ongoing COGS inflation. And Slide 10 shows our elasticities are among the best in the industry. The modest elasticities, which are well below historic norms and have remained consistent in the face of our inflation justified price increases are a testament to the strength of our brands, the execution of our pricing strategy and the limited impact of private label competition. Turning to Slide 11. As you can see, at the total Conagra level, retail sales grew by 5.5% compared to the third quarter of last year and by 24.7% compared to three years ago. To put some context around the 5.5% number, three points. First, there was a fair amount of noise in the year-over-year comps for the peer set in Q3. Some companies had a very weak year ago period due to supply chain challenges while we had pockets of real strength in the year ago period due to Omicron and strong customer support for products that had recently come off allocation. Second, we continue to prune low-margin volume, most notably resuming our opportunistic value over volume strategy on select brands. This included eliminating 10 for 10 promotions on both value tier vegetables and canned products such as Chef Boyardee and Hunt's Tomatoes. Third, we experienced manufacturing disruptions in certain categories that led to out of stocks in the quarter. Most notably impacted were our canned meals and sides businesses, specifically canned pasta, canned beans, canned chili and canned meat, all part of our grocery portfolio. In Frozen, we had one noteworthy disruption as our fish business was on allocation, which led to out of stocks during the peak Lenten season. This was due to a fire on our fish frying line as reported in our second quarter 10-Q. While these discrete issues suppressed our volume in Q3, the root causes have been largely resolved, and we expect volumes to rebound sequentially from here. Importantly, when you take the noise out of the short-term view and compare our growth versus the stable baseline of three years ago, you see our performance has been strong on both the top and bottom lines. Dampening the results versus this time period normalizes for the volatility across demand, inflation and supply chain throughout the pandemic and demonstrates that Conagra is a top performer among our peer set. Slide 12 details our top line performance on a three-year basis as measured over the prior 52 weeks and compared to our near-end peer group who are footnoted in alphabetical order at the bottom of the slide. Among this group, Conagra continued to rank second in dollar sales growth and first in unit sales performance just as we did in Q2. This remains true when you look at the same chart isolating the third quarter. And post-Q3, the syndicated scanner data has shown our unit sales trends improving. In fact, in the four-week period ending 3/25, our units ranked in the middle of our near-end peer group on a two-year CAGR basis. Our continued top-tier pricing execution and volume performance is made possible by the strength of our brands and the superior relative value that our products provide to the consumer. Let's take a look at our top line performance during the third quarter by retail domain, starting with Frozen on Slide 14. We maintained our momentum, delivering strong retail sales growth on both a one- and three-year basis, improving 4% and 23%, respectively. This growth was driven by a number of our key categories, including breakfast sausages and single-serve meals. It's worth noting that this performance comes on top of very strong performance for our frozen domain in the year ago period when the Omicron outbreak influenced consumers' in-home eating behavior. For example, single-serve deals grew 12% last year, creating a two-year stack of 18% in that category. Turning to Snacks on Slide 15. You can see a similar story. We drove a 7% increase in retail sales compared to the third quarter of fiscal '22 and a 39% increase over the third quarter of fiscal '20. The continued momentum in this domain is broad-based across a number of categories. Compared to last year, seeds were up over 22% and baking mixes and microwave popcorn both rose more than 10%. Meat snacks grew 6% year-over-year, building on top of the 22% growth in the year ago quarter, a period when meat snacks were coming off allocation and our customers were eager to fulfill demand for our leading products in this category. We also continued to drive growth in our highly relevant staples portfolio despite the discrete supply chain challenges in some of our canned meals and sides businesses that I noted earlier. Our staples portfolio increased retail sales 7% compared to the third quarter of last year and 20% compared to the same period three years ago. Turning to Slide 17. While we experienced transitory supply chain friction, we also continue to make progress on our supply chain initiatives during the third quarter, which benefited from continued headway on our ongoing productivity initiatives, which remain on track to achieve the targets we outlined at our most recent Investor Day, and more moderate increases in COGS as anticipated. These improvements to our supply chain led to improvements in the service we provide our customers. While we're making good progress in supply chain, it's not back to normal and industry-wide challenges persist. However, we're recovering as expected, and we see more room for improvement as we advance our productivity initiatives, and the macro environment continues to normalize. Overall, we're confident we will deliver on our top line and margin guidance for the year, and we're raising our bottom line estimates. With that in mind, we are updating our guidance to reflect that we now expect organic net sales growth of 7% to 7.5%. We expect adjusted operating margin of 15.5% to 15.6%, and we're increasing our expectations for adjusted EPS growth to range from $2.70 to $2.75. Before I hand the call over to Dave, I want to reiterate our confidence in the path ahead. We have successfully executed pricing actions in response to inflation, that inflation is moderating, and elasticities remain remarkably consistent and benign. We're moving past discrete supply chain disruptions and continue to make progress on our margin expansion initiatives such as productivity and value over volume, all within an environment that is normalizing. And as we look at more recent scanner data, we are already seeing improvements in sales trends and we expect that momentum to accelerate through the end of the fiscal year. Overall, Conagra continues to benefit from strong brands, strong processes and strong people, which are all working together to drive sustainable growth and margin expansion. With that, I'll pass the call over to Dave to cover the financials from the quarter in more detail.

Thanks, Sean, and good morning, everyone. I'll begin by discussing a few highlights as shown on Slide 20. We delivered another quarter of strong results, reflecting the ongoing strength of our brands and successful execution of the Conagra Way playbook. In the quarter, organic net sales increased 6.1% due to inflation-justified pricing and continued muted elasticities, as Sean discussed. Adjusted gross margin increased 409 basis points to 28.1%, and adjusted gross profit dollar growth was up 23.9% for Q3 and 17.8% year-to-date benefiting from higher organic net sales and productivity initiatives, reflecting our focus on margin recovery. This increase in adjusted gross profit contributed to strong adjusted EBITDA growth of 21.1% in the quarter. Let me break down the drivers of our 6.1% organic net sales growth here on Slide 21. We delivered 15.1% improvement in price/mix from our inflation-justified pricing actions. This price improvement was partially offset by a 9% decrease in volume. If you simply apply Conagra's current and historically favorable 0.54 elasticity factor to the 15.1% price/mix, you will see that elasticity explains approximately eight of the nine percentage points of the volume decline. The remaining one percentage point volume decline is mostly from the supply chain disruptions we've discussed. And given our elasticities have been running at these favorable levels for some time now, this level of volume decline has been planned in our fiscal '23 sales and gross margin projections. Slide 22 shows the top line performance for each segment in Q3. We are pleased with the continued net sales growth across all four reporting segments. Our domestic retail portfolio continues to perform well, with net sales in our Grocery & Snacks and Refrigerated & Frozen segments, up a combined 4.7%. Our International segment saw solid growth in the quarter with organic net sales up 9.5%. International reported net sales were up 7.7%, reflecting the unfavorable impact of foreign exchange. Finally, we continued to see strong recovery in our Foodservice segment, which grew 17.3% in the quarter. I'd now like to discuss our Q3 adjusted margin bridge found on Slide 23. As Sean discussed, we are pleased to have delivered a second consecutive quarter of strong margin recovery. We drove a 10.9% margin benefit from improved price/mix during the quarter and realized a 1.8% benefit from continued progress on our supply chain productivity initiatives. These pricing and productivity benefits were partially offset by continued inflationary pressure with 8% gross market inflation impacting our operating margins by 5.9% and a negative impact of 2.8% from market-based sourcing. Finally, higher investment in advertising & promotion and adjusted SG&A during the quarter reduced margins by 0.4% and 0.5%, respectively. Slide 24 breaks down our adjusted operating profit and margin by segment. While some supply chain challenges continued during the quarter, execution of pricing and improvements in our productivity and service levels allowed us to deliver adjusted operating margin expansion in each segment. Total adjusted operating profit increased 30.8% to $522 million during the quarter despite an increase in adjusted corporate expense primarily due to increased incentive compensation. It is worth noting that we delivered 321 basis points of adjusted operating margin improvement in Q3 versus a year ago, while incurring incremental transitory costs in our Grocery & Snacks segment due to the supply chain challenges we've discussed. Turning to Slide 25. Our Q3 adjusted EPS increased by 31% or $0.18 per share compared to a year ago primarily driven by higher sales and gross profit as well as from a small benefit in taxes. Our Ardent Mills joint venture performance continued to be strong and has wrapped strong results from a year ago. These positives were partially offset by higher adjusted advertising & promotion and SG&A as well as lower pension and post-retirement income and higher interest expense versus a year ago. You can see on Slide 26 how we are continuing to strengthen our balance sheet metrics. At the end of the third quarter, our net leverage ratio was 3.65x, down from 4.2x at the prior year period. Our net cash flow from operating activities reflects investment to rebuild our inventory levels. Improvement in our inventories has enabled us to improve service levels above 90%, and we are well positioned going forward in most categories to support sustained demand. Year-to-date CapEx was $267 million at the end of the quarter, down from $364 million in the prior year period, while year-to-date free cash flow increased to $436 million. We remain committed to returning capital to shareholders as evidenced by the year-to-date increase in our dividend payments and share repurchases. For the balance of fiscal '23, we will continue to evaluate the highest and best use of capital to strengthen our balance sheet and optimize shareholder value. As Sean mentioned, in response to our continued business momentum and ongoing operating dynamics, we are raising our fiscal '23 EPS guidance and narrowing our ranges for organic net sales growth and adjusted operating margin with only one quarter remaining in fiscal '23. Turning to Slide 28. I'd like to briefly discuss the considerations and assumptions behind our guidance. We continue to expect total gross inflation of approximately 10% for fiscal '23 and expect gross inflation to continue for the full calendar year 2023. We will update you at our Q4 earnings call in July with our inflation expectations for full year fiscal '24. We expect our net leverage ratio at year-end to remain approximately 3.65x and anticipate CapEx spend of approximately $370 million for fiscal '23. This number is below our original expectations due to the timing of certain projects. We remain committed to making capital investments to support our growth and productivity priorities with a focus on capacity expansion and automation. Lastly, we expect interest expense to be approximately $410 million and pension and post-retirement income to be approximately $25 million for the year, driven by the higher interest rate environment. Our full year tax rate estimate remains approximately 24%. To sum things up, we are proud that we delivered another strong quarter in fiscal '23 especially considering a supply chain environment that continued to present some challenges. Our service levels have improved and our margins continue to recover to pre-COVID levels, and we remain committed to executing on our strategic priorities to generate value for our shareholders. That concludes our prepared remarks for today's call. Thank you for listening. I'll now pass it back to the operator to open the line for questions.

Sean, maybe to start off with something a little bit broader. I think we're all aware of what the more sort of negative narrative on the overall food group is at this stage, which is as food companies lap the pricing and organic sales will slow, companies will raise promotions to drive volume, and that will somehow compete away the margin recovery. And I guess I was hoping that in light of Conagra's results today and sort of the implicit fourth quarter EPS that looks to be a bit below the current street view. I guess I'm curious, how would you characterize your results sort of in the context of the group-wide narrative that I sort of just laid out?

As I've said on these calls many times before, navigating these inflation cycles is pretty mechanical. You get hit with inflation, you take price, you don't reflect it right away, and therefore, you experience a lag, which compresses margins, but then pricing catches up and margins recover as you saw us start to do really materially in Q2. Then when you wrap these actions, dollar growth comes down and unit performance improves, both because elasticities wane and because you wrap the unit impact. So that stuff is all mechanical, and it's all predictable. I think what you're getting at is the big question then becomes what comes next. And the goal is obviously sustained growth. And the debate that you're poking at here is, well, what will the tactic be? And to me, that answer is crystal clear, especially for us, simply by looking at how we have pursued growth since I have been with Conagra. The answer in a word is innovation. Just look at our frozen performance — it was 100% about innovation, premiumization, but ironically, also value over volume philosophy around actually eliminating low-quality promotion. So the question then becomes, why would Conagra suddenly or anybody else for that matter, suddenly believe that the opposite approach is now a smart growth strategy? That doesn't make a lot of sense to me. As far as Q4 goes, first, listen, as I said in my opening remarks, I feel very good about where we sit and our plan is working. Our margin recovery is in place, our elasticities remain benign and consistent, supply chain is improving, innovation is hitting the market, top line trends are improving. So in terms of the implied Q4 guide, we think it's prudent. Supply chain is improving but it's not all the way back, and our position all year has been to plan conservatively in this regard. And as far as unit volume goes, I think we gave you a lot of color on that already. But for those that are more inclined to focus on short-term trends, our eight-year unit CAGR in the most recent four-week period scanner data, which is ending 3/25 was right smack in the middle of our peer set and at levels that are entirely predictable as our muted elasticities kind of show you. So to be above that, either elasticities would have to be nonexistent or you would have to be shipping ahead of consumption. And the former is unrealistic, and the latter is not part of our playbook.

I just have a quick question. I didn't hear any mention of the canned meat recall affecting this quarter. I thought there was supposed to be some impact, but I might be mistaken. I'll pass it on.

Yes, Andrew. As we said in CAGNY, we expected a 50 basis point impact on Q3, and that's exactly what it did. It impacted us 50 basis points on sales, lost sales. We also had additional impact of around $8 million in kind of fees and just cost to bring the product back. That actually hits net sales and gross margin. So it's really both of those pieces. That did hit in Q3. Just to finish that point, I did say that, that would fully recover in Q4. One thing that has changed is we're really ramping up the replenishment on the shelf. So we're not going to see that full replenishment of the 50 basis points we lost in Q3 come back in Q4. That's going to drift into the beginning of fiscal '24.

I just wanted to ask a little bit about the guidance for the top line, just trimmed at the top end very slightly, not a huge deal, but just trying to get a little bit deeper into the reasons behind that. Is it mainly just the manufacturing issues that you had? Or are there other factors that we should think about as we look at that?

Ken, I'll make a quick comment, and I'll turn it over to Dave. The manufacturing friction that we've run into, this is part of the reason why we've had a conservative outlook all year long is these things keep popping up. And for us, it happens to be fully isolated around cans. And whether it's Vienna Sausage or other things, it's a quality issue that we've had to deal with, getting cans where we need it to be, and frankly, you've seen those kind of issues pop up across the industry, in large part, tied to labor where you're dealing with a lot of inexperienced labor in companies and their suppliers that lead to these quality issues that sometimes you find before you produce the product, sometimes you find them after you produce the product. So that impacted Q3 and it will drift a little bit into Q4. The good news is we've gotten to the root cause of those things, and we've got them contained. So now we just got to get the remnant out of our system, so to speak. But again, that means the setup going forward as we do that, I think is a positive and should become a tailwind. Dave, do you want to add anything?

Yes. I mean, Sean hit it. Just to give you a little bit more specifics, as I just mentioned on the previous question, we do not expect now to see the bounce back from the Armour recall in Q4, that is going to drift into next year. That was 50 basis points that impacted Q3. And then category, Sean talked about, chilies, beans and then the impact of the frozen fish. These dynamics, we're working through that. It's improving, but we're still on allocation in some of those specific categories and actually SKUs. And so that is impacting Q4 as well on the top line. If you just think about it this way, if you look at the previous guidance, which was 7% to 8% for the full year, that implies a midpoint for Q4 of about 5.8%, with the revised guidance for the year, that implies a midpoint of about 4.8%. So, that's about a 100 basis points of a decline in the Armour and then these other allocation issues with the brands I just mentioned are pretty much why.

For my follow-up, you adjusted your CapEx outlook. You're not the only company making such changes lately. I believe I understand the reasons behind it. I'm interested in how delayed those projects are in general. Is it accurate to say that nothing disrupts your supply chain optimization plan? Or are there any delays in that area as well?

No, Ken. We're still on track with the commitments we made at our Investor Day regarding the $1 billion investment over three years. A lot of this has to do with normal timing. In this environment, we're working through delays, particularly when it comes to ordering certain materials needed for these CapEx projects, which are taking a bit longer than expected. However, this doesn't change the opportunities we see or the projects we plan to target.

So just a question on the Q4 guidance. So at the midpoint, your updated full-year guidance for operating margins implies Q4 operating margins decline year-over-year, but you've seen about 180 basis points of operating margin expansion year-to-date. So what's driving that more cautious Q4 margin outlook?

Yes, Pam. That’s a good question. Sean mentioned that our guidance approach for this fiscal year has been cautious due to the volatile environment caused by supply chain challenges and historic inflation. We are maintaining this cautious approach for Q4. While we still expect an improvement in our gross margins, we are incorporating a healthy level of contingency for supply chain friction costs in our cost of goods sold. Additionally, SG&A will increase in Q4 compared to the prior year and will be higher than Q3 in absolute dollar terms. SG&A is expected to align more closely with what we experienced in Q2. We anticipate finishing the year at approximately 9% of net sales, which is a timing consideration. Regarding EPS, we usually project a more conservative estimate for Ardent Mills, which will be lower compared to what we achieved in Q3. Those are the key factors; we are simply taking a prudent approach to our guidance.

Got it. And then just on gross margins, you've had very strong gross margin expansion year-to-date. How should we think about gross margins in Q4 and then into next year? Can gross margins continue to move above this 28% level? And how are you thinking about the contribution from your productivity investments?

Yes, I'd say as we were deliberate in stating off the fact that our top priority this year was on gross margin recovery. And it kind of comes back to Andrew's point, why is that so important? Because gross margins fund our innovation program and our innovation program is how we drive high-quality sustained growth that can be margin accretive over time. This all hangs together. It's a simple concept. So if you think about what we try to do around here as a company and our playbook, it's all about perpetually improving our growth rates and improving our margins. And we do that in a variety of ways from the mix of our portfolio to our value over volume strategy to our relentless approach to innovation. That's what it's all about. So, we're not giving long-term gross margin guidance from here, but I would just say what we've always said, which is philosophically, our game plan is to drive a northward trajectory on sales and gross margins into the future.

I wanted to ask you about your multiyear sales trends or how you're maybe thinking about that. This quarter, the sales trends were stable on a four-year basis. And your guidance implies roughly stable for your organic sales trends with that 5% or so organic growth in fiscal 4Q? I wonder if you see reasons for reacceleration in the multiyear trend into the first half of this upcoming year? You mentioned the supply chain maybe a point or so. And the reason I'm asking this is because stable four-year trends will get you to maybe flat to up 2% organic revenue by the first quarter, which I'm sure is not great news. So, I'm wondering about reasons for reacceleration beyond maybe that supply chain hiccup you mentioned?

We aren't going to discuss next year's guidance today. However, as we move into the first, second, and third quarters of next year, we expect to see changes in pricing, which will lead to revenue declines, although unit declines related to different pricing strategies should start to recover. This transition will be experienced by every company, and it will vary for each of them depending on their pricing strategies. It's important for everyone to plan for this shift because, once it's over, we anticipate returning to our long-term growth expectations, which for us, translates to low single-digit sales growth. We will work towards this goal primarily through innovation. Dave, do you have anything else to add?

Yes. But David, what you're poking at is true, right? So if you think about Armour, for example, where we had a recall, we pulled everything and now we're replenishing and some of that will drift into the beginning of fiscal '24. So when you have that, that's obviously going to be a tailwind, right, for the quarter. But that's what's made these last couple of years so difficult because every quarter, there's different dynamics in terms of when different companies are on allocation and then when they get off allocation and what does that do to shipments versus consumption. And so it's hard to put a really big point on it, plus we're not going to get into detail on guidance until July. But conceptually, that's correct. When you're on allocation or you're out of stock and then you replenish, you are going to see a bounce back from that.

I wanted to ask one more question regarding inflation. You mentioned expecting inflation in low single digits for all of 2023, which could indicate a flat second half of 2023, translating to your first half of fiscal 2024. I'm curious about your expectations for inflation as you move into fiscal 2024.

Yes, David, we're going to give more detailed guidance on fiscal year '24 inflation on our July call. I think to do it now, I think, is a bit premature. What I can tell you is, as you've seen every quarter, our market inflation has been decelerating. Okay? So the rate of inflation has come down, and we expect that to continue into Q4. We guided to approximately 10%, which implies about a 5.5% market inflation rate in Q4. In terms of the 8% that we saw in Q3, it's still roughly about 10% is materials, which is 2/3 of our cost, right, ingredients and packaging. So we are still seeing market inflation at a high level there, although it is coming down, as I mentioned. And then when you get into the manufacturing side with labor, that's more kind of higher- to mid-single digits there. And then the transportation and warehousing has actually been kind of lower single digits. So that has been coming down stronger. So that's where we are now, but we're not going to give all that detail until we do it in the context of our full guidance for fiscal '24. I think that's the way we want to do it.

Just a question, Sean, on how you're thinking about the rolling off of the SNAP benefits and the impact obviously it has on just the overall packaged food space. Just curious, if you have any thoughts on states that rolled off last year and if you have any observations there? And then just tied to that, given how dynamic the promotional environment is and how savvy Conagra has been with digital, I'm just curious like how you think about measuring the ROI of some of that spend? Do you expect that kind of digital promotion side of the business to really start ramping in the back half of the year?

Sure, Nik. Let's discuss SNAP first. Out of the 50 states, 18 have already ended the emergency allotments, and 32 just recently phased them out. So what do we know at this point? The impact on our portfolio from the 18 states has been negligible, and we’ve been monitoring this for a while. I’ve mentioned this in previous calls, and we simply haven't observed any significant effects. One reason I believe this is the case for our portfolio is that we already offer great value within Conagra. If SNAP allotments are more limited, it seems logical that consumers would prioritize spending them on items that are harder to afford. Our products tend to be easier on the budget, which may explain the modest impact we've seen. As for the 32 states that have just transitioned off, it's new data. We will monitor this over an 8- to 10-week period to see if there are any changes, and that’s what we’ll do. However, based on the situation with the 18 states so far, I don’t see any reason to expect a different outcome. Regarding digital, I prefer to think of what we do as digital marketing rather than just promotion. We do engage in digital promotion with our customers who shop online and invest in search to ensure people can find our products. However, much of our brand buzz comes from partnering with real consumers who share their authentic experiences with our products. We refer to these individuals as irrefutable advocates. They are active on platforms like TikTok and Instagram, and we build relationships with them so they can tell our story, which is incredibly cost-effective. This is why our advertising and promotion expenses appear lower than those of companies relying on traditional marketing, which tends to be expensive and often ineffective. I saw some new initiatives from my team yesterday for a few of our brands that I am quite excited about. We will continue to evolve in our digital marketing approach and with our irrefutable advocates. We believe it works well for us, and we’re committed to pushing it forward.

Great. And just one quick question. How long do you think it will take to get back to fill rates that were in line with the pre-pandemic levels? I mean do you guys have any visibility or timeline on that?

We're currently performing well in some categories. While we shared that over 90% figure, it's important to note that our portfolio is quite extensive. This means that the 90% figure includes certain categories and brands that have already reached best-in-class levels. However, we've also faced manufacturing disruptions that we've discussed, and we are still working on replenishing stock on the shelves before it reflects in our scans. When you consider everything together, you see that low 90 service level. We're managing the temporary manufacturing issues and ramping up our efforts, so the average we mentioned today is expected to improve moving forward.

Yes, I just want to add that our inventory levels and days on hand, as well as our safety stocks, are finally back to pre-COVID levels where we want them. We're in really good shape with a few categories that we've discussed, though we're still working through some issues. Overall, I feel very positive about our current inventory levels.

Sean, I just wanted to clarify one of your comments. I think in your prepared remarks and talking about more of the recent Nielsen data you said you expected an acceleration kind of going forward in that data. But then if we just look at the 4Q guidance, obviously, there's a decel in the sales growth rate. So maybe you can just clarify that for us quickly.

What I'm really getting at is in relation to Q3. As I mentioned in my prepared remarks, there was a lot of volatility in the year-on-year quarterly data for both us and our peers during Q3. We experienced some supply chain issues that affected us in that quarter. As we move past some of these unusual comparisons, we had strong performance in key businesses during Q3. Entering Q4, the nature of the comparisons for some of our major businesses changes, and we anticipate being back in stock for certain canned categories where we faced limited supply, which will help to showcase improving consumption trends. I referenced the four-week Nielsen data ending March 25. Our units and dollars showed improvements in that four-week period. The fact that the staggered four-week numbers released bi-weekly are improving indicates that the underlying weekly data is also improving consistently. That's the essence of what I was referring to.

Yes, reasonable. We're not going to guide specific revenue metrics for next year, but we expect to continue our sales growth and improved margins, that won't change.

First, Ardent Mills JV banner year this year on top of a great year last year. I know you're not giving guidance for next year, but maybe you can help level set us as we look to normalized year, what do you think the right level of earnings is to model for that business?

Jason, it's a difficult question to answer. Ardent Mills is a great business. It's a newer business. It's been growing, and it really has two key components of its business. It's core milling and blending business where it creates great flours that it sells to customers and then it has more of a trading type business. And so that core business has continued to grow, the margins have expanded. They have great mix. They have great strategies to really drive the margins on that business and the sales. And they've also benefited from this environment and the volatility on their trading side of the business. And so the question comes down to what's that trading piece? I think that the center line of performance for Ardent Mills will continue to go up. It's just quarter-to-quarter, there can be more volatility just given the nature of the business.

Yes. Okay. Well, in the first quarter '21, you told me it was about $70 million was a reasonable number on an annualized basis. If the core business is growing, it sounds like it's north of $70 million. But clearly, well south of the 180-ish or whatever you're going to deliver this year somewhere in that range, I care, but any guidance in terms of where we're closer to?

No, no, not at this point.

We experienced significant growth in the frozen refrigerated segment, partly due to our decisions regarding vegetable promotions. This highlights my recurring message to investors: it’s important to focus on the trajectory of gross margins rather than just the absolute numbers. Investors typically seek sustainable increases in gross margins. Compared to where we were a decade ago, we previously faced challenges like a lack of innovation and legacy pricing that held margins down. By addressing these issues and premiumizing our portfolio, we believe we can achieve upward movement in gross margins across all segments over time. This strategy is at the core of what we’re doing in the frozen segment and contributed to our growth this quarter. Additionally, I want to point out that achieving profitability in the frozen category requires scale. We have been intentionally building our scale in this area over the years, as it allows us to enhance profits and margins. With a strong innovation program that resonates with consumers, we believe we have a winning strategy in place.

To clarify, I understand you’re not providing guidance for the next fiscal year, but we all need to make assumptions in our models. Looking at the operating margin percentage in Q3, it seems there aren’t any one-off factors that could have artificially inflated that figure for the quarter, which suggests what you were managing towards could be somewhat sustainable.

Yes, Rob, this is David. I think that's fair. I think if you kind of step back and you just look at the last two quarters, and this applies to further apply to the entire domestic retail business. The gross margins have inflected why volume has been down 8.5% to 9%. So, we've been able to improve the margins with the volume decline because it gets back to the earlier point. We know, there's elasticities on pricing. So, we knew there was going to be volume declines and we planned for it, and it's all in the sort of the forecast for the margin. So, we don't see that materially changing. We're not going to give you a specific number, but I think those dynamics are right and that's why this value over volume approach is really important that we look category by category, and we understand the dynamics, and we focus on managing our margin as we manage the volume.

Thank you very much for joining us this morning. Investor Relations is around for any additional follow-up questions that you might have. We hope everyone has a wonderful day.