Conagra Brands has painted a bright picture for cost inflation but not such a rosy outlook for the US frozen foods and snack producer’s organic growth.

“Our outlook for fiscal year 2024 reflects a transition toward a more normalised operating environment, as well as a continued commitment to our long-term financial algorithm,” CEO Sean Connolly told analysts yesterday (13 July) when presenting the company’s fiscal 2023 results.

Cost-of-goods-sold (COGS) inflation will ease to a 3% pace in the year that started at the end of May, Connolly said, as he noted Conagra Brands’ price increases “peaked” in the third quarter of the previous 12 months. Those increases accelerated through the year from 12.1% in the first three months to 16.8% in the last, with the CEO signalling only further “surgical” rises.

However, as Conagra Brands’ organic growth settled at 6.6% in the year to 28 May (6.4% on a reported basis), Connolly and his finance counterpart Dave Marberger have pointed to a 1% clip for the new year.

“Pricing peaked in Q3 but remains almost 17% above the prior year due to our actions to offset ongoing COGS inflation,” Connolly said. “During the fourth quarter, elasticities did soften a bit but remain fairly consistent, well below historical norms and in line or better than competitors.

“We anticipate net cost-of-goods-sold inflation of approximately 3% in fiscal ‘24 as we continue to emerge from the inflation super cycle, with targeted inflation-justified pricing actions that will become effective in the early second quarter of fiscal ‘24 to help offset elevated costs.”

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The transition, he said, will feature both tailwinds and headwinds, with the first benefit coming from “wrapping the various discrete supply chain disruptions that persisted throughout the year”.

Margins may recover with the pass-through effect of pricing. Conagra Brands’ operating margin dropped 291 basis points last year to 8.8% but on an adjusted basis rose 125 points to 15.6%. The gross margin climbed 198 points to 26.6% and was up 226 points at 27.1% adjusted.

Consumers “hunkering down”, Conagra Brands says

Volumes also fell, declining by an average 7.5%, with price and mix up 14.1%. Snacks volumes were down 8.5% and frozen food volumes were off by 7.3%.

“There is an inherent lag between the time when inflation hits and when we’re able to recover that cost through inflation-justified pricing. This lag effect results in temporarily compressed margins as we saw most notably throughout fiscal ‘22. We took great strides to recover our gross margin in fiscal ‘23 and Q4 was our third consecutive quarter of strong margin improvement,” Connolly explained.

He added that the cost-of-living crunch is causing a change in consumer purchasing habits, having some impact on volumes.

“Food companies are starting to wrap pricing in the year-ago period and dollar sales are coming down as expected, but the rate of improvement in volume recovery is lagging. That suggests new consumer behaviour shifts beyond the initial elasticity effects that occurred when pricing actions were initially taken.

“Where we see it, it is usually not a trade-down to lower-priced alternatives within the category. One behaviour shift we have heard about from consumers is just buying fewer items overall, more of a hunkering down than a trading down. Overall, we view this dynamic as likely a temporary behaviour shift for consumers to stretch their budgets, but we have captured it as a near-term headwind in our outlook.”

Connolly sees deflation as another headwind. “While very limited, we have seen a few single-ingredient brands become deflationary and we will make appropriate price adjustments to reflect that.”

Nevertheless, he added during the Q&A session: “We don’t see price rollbacks or price downward adjustments in a broad-based way across the category.”

Questioned about the potential for volume improvement, he said. “While we don’t guide on volumes, from a shape of the trend standpoint, we do expect trends to improve as the year unfolds.”

Marberger added the Angie’s Boomchickapop popcorn and Healthy Choice meals owner expects “a slower rebounding of volumes as pricing starts to wrap”, with an improvement in volumes as the year unfolds.

Conagra Brands booked $12.3bn in sales last year, representing growth of 6.4%. Net income, however, dropped 23% to $683.6m. Adjusted EPS rose 17.4% to $2.77 and is forecast at $2.70-2.75 for the new year. The adjusted operating margin is expected around 16-16.5%.

Connolly painted a positive outlook for the categories in which Conagra Brands operates, suggesting the frozen and snacks sectors have seen growth of 9% and 8% respectively, in the past four years.

He added: “Since fiscal 2014, the frozen categories in which Conagra competes have grown from $29 million to $54 billion, representing a 7% CAGR. And Conagra has increased our share by nearly 500 basis points to become the leader in frozen.”