Conagra Brands is seeing some “green shoots” in commodity pricing as the US snacks and frozen-foods maker expects input-cost inflation to moderate.
Nevertheless, inflation is not going to evaporate overnight, with finance chief Dave Marberger pointing to a “low-teens” rate in the cost of goods sold in fiscal 2023 as he discussed first-quarter results for that year to 28 August.
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“We continue to expect the inflationary environment to persist, but moderate through calendar year ‘23, which will result in a low-teens inflation rate for our fiscal year ’23, weighted towards the first half,” Marberger explained as Conagra anticipates further pricing to come but with limited elasticity.
The Healthy Choice brand owner raised prices in the reported quarter and again “early” in the second, with more anticipated in quarter three. However, the green shoots optimism proffered by president and CEO Sean Connolly is backed by the latest data from the United Nation’s Food and Agriculture Organization showing food commodity prices dropped for a sixth straight month in September.
“We’re seeing some green shoots obviously in some commodities and I think that does bode well,” Connolly said during the Q&A session. “While inflation remains persistent, we are starting to see moderation in certain areas and anticipate relief for commodities as the year unfolds.”
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Compared to historic norms, Connolly added “net elasticities have remained nearly flat over the past few quarters”, although he conceded pricing actions will have an impact on volumes in the current second quarter. However, price increases in the third quarter will be “smaller and more targeted”, he said.
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By GlobalDataConagra posted organic growth of 9.7% to take sales to US$2.9bn in the three months to 28 August, with volumes down 4.6%. “Price and productivity benefits were muted by continued inflationary pressure with 15% gross market inflation”, Marberger said, noting the impact on the operating margin of almost 11%.
The CFO added, with some “conservatism” built into the outlook: “The inflation estimate for the full year is still low-teens. So that’s a double-digit number off two years of very high inflation. So it’s not like we’re in a deflationary environment.”
Nonetheless, supply-chain pressures continue to present headwinds. Connolly explained: “Our supply chain is not yet fully normalised. We’ve continued to see some discrete inefficiencies pop up that resulted in higher costs in Q1.
“In our foodservice business, we identified an off-spec finished good issue while producing product for a customer. We disposed of the product and lost manufacturing time during our diagnostic. This pulled sales and gross margin below where they should have been.
“My second example is in our canned chilli and beans businesses, where late in Q1 we found cans that were off-spec. No product was recalled. And while production is now back up and running properly, the lost inventory effect will linger into Q2, impacting volumes and margins.”
Conagra also took some goodwill and brand impairment charges around reorganising “the reporting structure for certain brands in our refrigerated and frozen segment”, Marberger said.
He added: “Given the increases in the current interest-rate environment, which has further increased from the rates we recently used in our standard Q4 impairment testing, a higher discount rate primarily drove the non-cash goodwill and brand impairment charges of $386m for the quarter in reported SG&A expenses.”
Of the $386m, $244m was associated with the Bird’s Eye frozen-food brand, Conagra noted in its commentary to accompany the first-quarter results.
The goodwill and impairment charges hit the bottom line, with a loss of $78m, compared to a $235m profit a year earlier. Adjusted, net income was up 14.2% at $275m. Adjusted EBITDA rose 9.1% to $547m.
