Conagra Brands, Inc. (CAG) Q1 2026 Earnings Call Prepared Remarks Transcript
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Overview
Despite some positive elements like debt reduction and service levels, the overall sentiment is negative due to declining sales, margins, and EPS. Inflation, weak consumer sentiment, and higher tariff costs are significant concerns. The Q&A section did not provide clarity, adding uncertainty. The expectation of declining sales in Q2 and lower operating margins further contribute to the negative outlook. The impact of divestitures and foreign exchange headwinds exacerbates the situation, leading to a likely negative stock price movement in the short term.
Key Financial Performance
Organic Net Sales $2.6 billion, a 0.6% decline year-over-year. The decline was driven by a 1.2% decrease in volumes, partially offset by a 0.6% increase in price/mix. Foreign exchange was a 10 basis point headwind, and divestitures had a 510 basis point impact.
Adjusted Gross Margin 24.4%, down 244 basis points year-over-year. This was due to elevated inflation (approximately 7%), unfavorable product mix, and lower internal production volumes.
Adjusted Operating Margin 11.8%, down 244 basis points year-over-year. The decline was driven by unfavorable product mix, inflation, and lower internal production volumes, partially offset by productivity gains and tariff mitigation.
Adjusted Earnings Per Share (EPS) $0.39, down $0.14 year-over-year. The decline was due to lower adjusted operating profit, a higher adjusted tax rate, and reduced profit from divested businesses, partially offset by higher pension income and lower interest expense.
Net Debt Reduction Reduced by over $400 million in Q1, driven by proceeds from divestitures. Compared to the year-ago period, net debt was reduced by nearly $1.1 billion.
Service Levels Achieved 98% service levels, ensuring product availability. This was a key success story for the supply chain in Q1.
Productivity Gains Exceeded 5% of cost of goods sold, driven by core productivity programs and tariff mitigation.
Capital Expenditures $147 million in Q1, in line with the prior year.
Dividends Paid $167 million in Q1, in line with the prior year.
Free Cash Flow Impacted by seasonal working capital build and inventory rebuilding from recent supply constraints.
Operating Highlights
Frozen Portfolio: Volumes improved 3.2 points in Q1 compared to Q4 fiscal '25, with share gains in frozen vegetables, meals, and prepared chicken.
Snacks Business: Meat snacks grew by 4% and seeds by 2%. However, Angie’s BOOMCHICKAPOP declined 19% due to promotional timing shifts, and Duncan Hines saw an 8% decline due to pricing elasticity.
Staples Portfolio: Hebrew National recovered from prior out-of-stocks, and volume share gains were noted in chili, tomatoes, and whipped toppings.
Divestitures: Completed divestitures of Chef Boyardee, Van de Kamp's, and Mrs. Paul's, using proceeds to reduce net debt by over $400 million.
International Segment: Organic net sales declined 3.5% due to elasticity-related volume declines despite price increases.
Supply Chain Performance: Achieved 98% service levels and delivered productivity gains exceeding 5% of cost of goods sold.
Debt Reduction: Reduced net debt by $1.1 billion year-over-year, with net leverage at 3.55x.
Capital Allocation: Investing $450 million in CapEx for fiscal '26 and maintaining a $1.40 annual dividend rate.
Pricing Strategy: Targeted pricing actions in canned products and select Sweet Treats to address sustained cocoa inflation.
Risk or Challenges
Inflationary Pressure: Persistent inflation, particularly in animal proteins (beef, pork, turkey), steel, aluminum, and tariffs, has increased costs beyond initial expectations, impacting margins and financial performance.
Weak Consumer Sentiment: Ongoing weak consumer sentiment and value-seeking behavior are affecting demand and pricing elasticity, particularly in categories like Sweet Treats and staples.
Tariff Costs: Higher-than-expected tariff costs, especially related to steel, aluminum, and China, are adding to cost pressures, with mitigation efforts only partially offsetting the impact.
Supply Chain Modernization: Modernization projects, such as the baked chicken facility, are causing transitory sourcing and absorption headwinds, impacting operating margins in the short term.
Pricing Elasticity: Price increases in response to inflation, particularly in Sweet Treats and canned products, are leading to volume declines due to consumer sensitivity to pricing.
Divestitures Impact: The divestiture of businesses like Chef Boyardee and frozen seafood has reduced net sales and profit contributions, impacting overall financial performance.
Foreign Exchange Headwinds: Foreign exchange fluctuations have negatively impacted net sales, particularly in the International segment.
Operating Leverage: Lower internal production volumes have resulted in unfavorable operating leverage, further pressuring margins.
Guidance & Outlook
Fiscal 2026 Guidance: Reaffirmed fiscal '26 guidance with expectations for organic net sales growth of -1% to +1%, adjusted operating margin of approximately 11% to 11.5%, and adjusted EPS of $1.70 to $1.85.
Inflation and Tariffs: Core inflation is now expected to be slightly higher than the original 4% estimate, primarily due to increased costs in animal proteins. Total inflation is projected to be in the low 7% range, up from the previous estimate of approximately 7%. Tariff exposure remains at approximately 3% of cost of goods sold, with some country-specific tariff rates increasing.
Capital Expenditures: Planned capital expenditures for fiscal '26 remain at approximately $450 million, consistent with initial expectations.
Dividend and Shareholder Returns: The company expects to maintain its $1.40 annual dividend rate and continues to focus on balanced capital allocation.
Supply Chain Modernization: The baked chicken facility modernization project is expected to be completed in Q2, with benefits realized in the second half of fiscal '26.
Second Quarter Expectations: Organic net sales are expected to decline in the low single digits due to recent consumption trends and a shift in trade expense to Q2. Operating margin for Q2 is expected to be moderately below the full-year range due to higher net tariff costs and trade timing.
Full-Year Inflation and Productivity: Full-year inflation is expected to be in the low 7% range, slightly higher than the original projection. This increase is expected to be offset by higher productivity and tariff mitigation.
Cash Tax Payments: Fiscal '26 cash tax payments are expected to be favorable by approximately $75 million due to recently passed legislation.
Tax Rate and Interest Expense: The full-year tax rate is now expected to be approximately 24%, up from 23%. Interest expense is expected to be approximately $390 million, down from the prior estimate of $400 million.
Shareholder Return Plan
Annual Dividend Rate: $1.40 per share
Dividends Paid in Q1: $167 million
Share Repurchase in Q1: $15 million worth of shares repurchased to offset dilution from share-based incentive compensation plans
Key Q&A
Earnings Word Cloud
ADXN Transcript
The earnings call reflects a mixed outlook. The financial performance remains stable, but with increased liabilities and reliance on partnerships, there's uncertainty. The Q&A reveals concerns about competitive pressures and funding needs. Positive aspects include potential milestone payments and strategic repositioning of programs. However, the lack of specific guidance and increased liabilities weigh down sentiment, leading to a neutral stock price prediction.
Despite some positive elements like debt reduction and service levels, the overall sentiment is negative due to declining sales, margins, and EPS. Inflation, weak consumer sentiment, and higher tariff costs are significant concerns. The Q&A section did not provide clarity, adding uncertainty. The expectation of declining sales in Q2 and lower operating margins further contribute to the negative outlook. The impact of divestitures and foreign exchange headwinds exacerbates the situation, leading to a likely negative stock price movement in the short term.
The earnings call highlights financial and operational challenges, including a limited cash runway, dependency on partnerships, and increased liabilities. The need for additional financing and the company's reliance on external collaborations pose significant risks. Despite some positive developments in the neuropsychiatry space, the Q&A session revealed management's evasiveness on strategic details, further contributing to uncertainty. Overall, these factors suggest a negative sentiment and potential stock price decline.
The earnings call summary reveals several concerns: decreased income, reliance on partnerships, and lack of a clear shareholder return plan. While there are some positive aspects, such as decreased expenses and a small financial gain, the overall sentiment is negative due to the significant decrease in income and the risk factors highlighted in the Q&A section. The lack of strong positive catalysts or new partnerships, combined with the low market cap and dilution risk, suggests a negative stock price movement over the next two weeks.
ADXN Report
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