Good morning, and welcome to the Conagra Brands First Quarter Full Year 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Melissa Napier. Please go ahead.

Good morning. Thanks for joining us for the Conagra Brands first quarter 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 guarantee 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. I'll now turn the call over to Sean.

Thanks, Melissa. Good morning, everyone, and thank you for joining our first quarter fiscal ‘23 earnings call. Let's jump right in with what we want you to take away from our presentation shown here on Slide 5. Overall, Conagra delivered strong first quarter results. We had robust net sales growth across our portfolio, mainly due to the impact of our inflation driven pricing actions coupled with ongoing limited elasticities. We continued to gain market share at the total portfolio level, particularly within our strategic frozen and snacks domains and drove solid profit improvement during the quarter. We also saw another strong performance from Ardent Mills, as effective management enabled the joint venture to continue capitalizing on volatility in the wheat markets. Our supply chain productivity continued to improve. However, we experienced some internal and external operational challenges during the quarter like many of our peers. These challenges led to both increased costs and inefficiencies, which more than offset the benefits from improved productivity and impacted our business in the quarter. I'll unpack this later in the presentation. We also continue to strengthen our balance sheet improving our leverage ratio during the quarter, while investing in our business and returning cash to shareholders. Finally, our solid start to the year reaffirms our confidence in the fiscal ‘23 guidance we announced last quarter. With that backdrop, let's dive into the results shown on Slide 6. As you can see, in the quarter, we delivered organic net sales of just over $2.9 billion, representing a 9.7% increase over the year ago period; adjusted operating margin of 13.7%, which is down slightly compared to last year as a result of the supply chain inefficiencies I mentioned a moment ago; and adjusted earnings per share of $0.57, 14% higher than what we generated last year. Slide 7 breaks down our strong sales performance during the quarter. At the total Conagra level, retail sales grew by almost 9% compared to the first quarter of last year and just over 24% compared to three years ago. Our momentum continued as we gain share in the marketplace demonstrating the valuable connection our brands have with consumers. These share gains are most pronounced in our frozen and snacks domains, which increased share 0.8 percentage points and 1.5 percentage points on a one and three year basis respectively. Diving further into our top line performance by retail domain, you can see on Slide 8 that frozen generated a significant acceleration of quarterly sales growth on a one and three year basis of 8% and 27% respectively. Clearly, our focus on catering to consumer preferences for convenience, quality and great taste continue to resonate. Similar to prior quarters, this growth was led by key categories such as plant-based protein and single serve meals which along with breakfast sausages increased sales by double-digits compared to the first quarter of fiscal '22 while gaining market share from our competitors. Our snacks domain also continued to deliver strong sales growth on a one and three year basis shown here on Slide 9. Compared to the first quarter last year, snacks retail sales increased 13%. And as you can see, we have delivered sustained growth versus the period three years ago, including 36% in the most recent quarter. In particular, we saw significant growth in sales of microwave popcorn, which increased more than 20% compared to the prior year. Our highly relevant staples domain also accelerated sales growth increasing 8% compared to the prior year and 15% versus three years ago. This was driven by strong performance in single serve dinners and entrees, with toppings, pickles and canned tomatoes. Slide 11 highlights the relationship between price and volume over time. As I mentioned on last quarter's earnings call, we continue to take strategic pricing actions during the first quarter to help offset ongoing COGS inflation. As you would expect, pricing has driven some volume elasticities both for Conagra and the overall industry. This tends to be most acute in the immediate aftermath of new pricing and wanes over time as consumers adjust. As you can see at the bottom of this slide, our net elasticities have remained nearly flat over the past few quarters. These relatively modest elasticities both compared to historic norms and our peers are a testament to the strength of our brands. As we monitor the impact of our pricing actions on volume, we also look at the relative impact between branded foods and private label. As you can see on Slide 12, private label has increased its dollar share of certain categories on average since 2019, including a jump in share gains at the beginning of this calendar year. However, it's worth noting that those share gains are much more modest in the categories in which we compete. We're confident that the continued investments in our brands as part of the Conagra Way will ensure they continue to resonate with consumers. These important efforts combined with our limited exposure to private label will help us retain the market share we've gained during the pandemic. Before I turn the call over to Dave, I want to talk about Conagra's supply chain and both the improvements and inefficiencies I referenced earlier. As I said, our supply chain continues to make progress. Pricing actions we implemented in the quarter and over the last year were largely able to offset continued inflation and our service metrics continued to improve in Q1. While we're pleased with what we've accomplished to date, our supply chain is not yet fully normalized. We've continued to see some discrete inefficiencies pop up that resulted in higher costs in Q1. I'll give you two examples to illustrate this. 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 chili and beans businesses, where late in Q1, we found cans that were off spec. No product was recalled. And while production is now backing -- back up and running properly, the lost inventory effect will linger into Q2 impacting volumes and margins. The point is, these types of challenges can result in downtime needed to determine and solve the root cause of the issue as well as proper testing to ramp production back up, that lost time can result in higher costs and less production. Looking ahead, we're not expecting these discrete supply chain interruptions to disappear overnight as the external environment remains dynamic. But despite these transitory disruptions, we are making good progress in the supply chain with core productivity continuing to improve. Accordingly, we remain committed to our operating margin target for the year and to the productivity targets we announced at our Investor Day in July. In summary, we're off to a strong start in fiscal ‘23, fueled by robust top line growth as a result of inflation driven pricing increases and muted elasticities. Operationally, we continue to make progress in our specific areas of focus. For the balance of the year, we're planning for the operating environment to remain dynamic. While we expect consumer response to our brands to stay strong, we are planning for this quarter's volumes to be impacted by the supply chain disruptions, I just outlined and from our most recent wave of inflation driven pricing introduced to the market in early Q2. However, as I covered earlier, we expect this elasticity to wane over time. And while inflation remains persistent, we are starting to see moderation in certain areas and anticipate relief for commodities as the year unfolds. Overall, we're off to a great start, but one quarter doesn't make a year and we remain focused on delivering for our customers and consumers. We continue to see a clear path to achieving the guidance we issued for fiscal ’23 behind the strength of our brands and ongoing productivity initiatives leading us to reaffirm those targets. With that, I'll pass it over to Dave.

Thanks, Sean, and good morning, everyone. I'll begin by discussing a few highlights from the quarter as shown on Slide 16. Overall, we are pleased with our start to fiscal ’23 and remain confident in our ability to achieve our full year guidance targets. We delivered strong organic net sales growth of 9.7% in Q1, reflecting the continued relevancy of our portfolio to consumers. Adjusted gross margin came in at 24.9% in line with expectations. Adjusted gross profit dollar growth was up 7.1% benefiting from higher organic net sales and continued progress on supply chain productivity initiatives, although supply gain operational challenges did impact our business as Sean referenced. The Ardent Mills joint venture continues to operate as an effective inflation hedge as favorable market conditions and effective management drove another strong quarterly performance reflected in the equity earnings line and contributing to adjusted EBITDA growth of 9.1%. Turning to Slide 17. The 9.7% increase in organic net sales was driven by a 14.3% improvement in price mix, a result of continued inflation driven pricing actions. This was partially offset by a 4.6% decrease in volume, primarily due to the elasticity impact from those increases. The small headwind from the impact of foreign exchange was the final contributor to net sales during the quarter. Slide 18 shows the top line performance for each segment in Q1. As mentioned, we are pleased with the robust net sales growth and continued share gains across our entire portfolio, particularly within our domestic retail businesses. Our Grocery and Snacks and Refrigerated and Frozen segments achieved net sales growth of 10.5% and 9.6% respectively. The unfavorable impact of foreign exchange was reflected in the net sales decrease for our International segment. I'd now like to spend some time discussing our Q1 adjusted margin bridge found on Slide 19. We drove a 10.5% benefit from improved price mix during the quarter, reflecting previously communicated pricing actions. We also realized a 1.2% benefit from continued progress on our supply chain productivity initiatives, which is net of operational inefficiencies Sean discussed. These price and productivity benefits were muted by continued inflationary pressure with 15% gross market inflation impacting our operating margins by nearly 11%. Market-based sourcing had a negative margin impact of 1.6%. As commodity prices rose quickly last year, we benefited from locking in contracted costs that were lower than the market and have rolled off this quarter. As a reminder, even when commodity inflation eases, we will not immediately realize a benefit as our costs may remain higher than the spot market due to timing of contracts. This is transitory and a product of a dynamic operating environment. Slide 20 breaks down our adjusted operating profit and margin by segment. We were pleased that higher organic net sales and supply chain productivity drove increased adjusted operating profit growth across three of our four segments in Q1. The strength of our Grocery and Snacks segment stands out on this slide, with adjusted operating margin in the segment increasing by 90 basis points compared to a year ago. Although Refrigerated and Frozen operating margin was down 21 basis points in Q1, this segment's gross margins were better than Q4 gross margins, demonstrating gross margin inflection that we expect to continue year to go. Inflation, supply chain pressures and elevated operating cost headwinds offset higher sales and realized productivity in our Refrigerated and Frozen, Foodservice and International segments. Before unpacking adjusted EPS on Slide 21, I'd like to provide some context on the goodwill and brand impairment charges that impacted our reported numbers. During the quarter, we made the decision to reorganize the reporting structure for certain brands in our Refrigerated and Frozen segment. In connection with these changes and in accordance with GAAP, we conducted an evaluation of goodwill for impairment. 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 $386 million for the quarter in reported SG&A expenses. The charges are not shown on the slide because they do not impact our adjusted numbers, but all reconciliations can be found in the tables at the back of this presentation. Our Q1 adjusted EPS increased $0.07 or 14%. Higher sales and gross profit, Ardent Mill's strong performance and a slight benefit from adjusted taxes were the primary positive contributors to our adjusted EPS performance in the quarter. These positives were offset by higher adjusted SG&A from the comparison to lower incentive compensation in the prior year's first quarter, as well as lower pension and postretirement income and higher interest expense. You can see how we are continuing to strengthen our balance sheet on Slide 22. At the end of the quarter, our net leverage ratio was 3.9 times, down from 4 times at the end of fiscal ‘22. We expect to end fiscal ’23 with a net leverage ratio of roughly 3.7 times. Keep in mind that historically Q2 is a heavier use of cash quarter from a working capital perspective. So we expect progress on our net leverage reduction to be greater in the back half of the fiscal year. CapEx decreased by $30 million year-over-year to $125 million during the quarter, while free cash flow increased $138 million from negative $15 million in Q1 ‘22, partially due to the accelerated receipt of outstanding receivables as we capitalized on certain customer payment terms. We paid $150 million in dividends in Q1 fiscal ’23 an increase of $18 million compared to Q1 a year ago, highlighting our commitment to returning capital to shareholders. And we repurchased $50 million worth of shares in the first quarter, in line with our stated objective of offsetting dilution from our share based incentive compensation plans. We will continue to evaluate the highest and best use of capital to optimize shareholder value as we progress through the fiscal year. Once again, we are reaffirming our fiscal ’23 guidance across all metrics given our strong quarter and expectations for solid performance for the balance of the year. Before opening up the call for questions, I want to walk through the considerations and assumptions behind our guidance. 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 of the fiscal year. We also expect previously communicated pricing actions in light of these costs to become effective early in the second quarter, likely causing volume to decline. We recently communicated some additional pricing that will be effective in Q3. However, the magnitude will be smaller and more targeted than previous pricing actions. As always, we will continue to monitor inflation levels and price as needed to manage future volatility. We expect CapEx spend of approximately $500 million in fiscal '23 as we make investments to support our growth and productivity priorities, with a focus on capacity expansion and automation. Finally, we anticipate interest expense to be roughly $410 million and pension and postretirement income to be approximately $25 million for the year, driven by the higher interest rate environment. Our full year tax rate estimate is approximately 24%. To reiterate, we are pleased with our strong start to the year and remain confident in our outlook for fiscal ‘23. Our ability to deliver solid results amidst such a dynamic environment is a testament to the hard work and skills of our team, the strength of our brands and our execution of the Conagra Way playbook. Thank you for listening. That concludes our prepared remarks for today's call. I'll now pass it back to the operator to open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrew Lazar from Barclays. Please go ahead.

Thanks very much. Good morning, everybody.

Hey, Andrew.

Good morning.

Hi. I've got two questions. I guess first off, have you seen any change in sort of volume trends elasticity or retailer reaction since the new pricing has come into play in 2Q or since announcing the more targeted pricing for 3Q? And again, are you just sort of being, I guess, more prudent in the way you're forecasting your sort of volume and elasticity going forward? Just trying to get a sense if anything has changed that you see that we don't see like let's say in the data yet?

Sure. Andrew, here's how I think about elasticities, do we had this materials and they are benign and they are stable. And we kind of shared this concept of stable net elasticities. And the way to think about that is, that is basically the combination of waning earlier pricing elasticities being offset by elasticities associated with more recent pricing, but the net effect is flat and benign elasticities this far into an inflation and pricing cycle, I view that as very, very positive news. As we mentioned at our Investor Day, our elasticities have consistently been better. And by that, I mean, more benign than our peers and that reflects the strength of our brands and the important work we've done to modernize our portfolio. Now as you look ahead and this may be nuanced, but it's an important nuance, at this point, given how stable our elasticities have been, I expect continued strong elasticity coefficient, but we are pricing more of the portfolio. So those coefficients apply to a larger volume based which is why we've planned for some incremental volume weakness. It's not that the elasticity coefficient has changed it's that that benign elasticity is now being applied to a broader piece of the portfolio. So that's why as you look at in the industry, as you look at competitors that have pricing and dollar sales that go from plus 7% to plus 14% to plus 20% you're going to see volumes move directionally along with that. But what you've seen in our company and more broadly is that the volume effect is quite modest compared to anything that we've seen historically. And I think most important, it's been very stable from an elasticity coefficient standpoint.

Great. Very helpful color. And then, I guess, I want to go a little bit deeper on gross margin. It's improved sequentially, I think, for the past sort of five quarters. I think you had previously said that fiscal 1Q was really the quarter where Conagra would see the largest sort of mismatch, right, between pricing and cost of the year in ‘23. So I guess, could we see gross margins start to expand year-over-year starting in fiscal 2Q, as the Street still has lower gross margins year-over-year? And I guess if not, why would that be? I understand some of the operational issues, but you had some of those in 1Q, but margins still came in better than the Street was looking for. So any color on that I think would be helpful because again we're trying to get a read on for you and the industry sort of the timing around the potential for actual margin recovery as opposed to just covering the sort of the dollar cost, if you will?

Yeah. Let me tell you how I think about kind of margins overall, then Dave getting a little bit more of the detail here. But margins are heading in the right direction and we expect that to continue. But it's not necessarily a straight line because obviously the external environment remains dynamic. If you think about last quarter, we saw year-on-year margin expansion in Grocery and Snacks and Foodservice. This quarter, we gave a little of that back in Foodservice due to the transitory operational issue I discussed a few minutes ago, but we made good progress in Frozen and Refrigerated. And plus core productivity is in a good place. So you take all of that and couple it with strong brands, broad-based pricing and benign and stable elasticities that I just mentioned. And overall, I'd say it bodes well. Dave, do you want to build on that?

Yeah. Sure. So, Andrew, we don't give specific quarterly guidance, but we do expect sequential improvement in gross margin and operating margins moving forward based on the assumptions we have now. We expect the highest percentage of inflation for the fiscal year in the Q1 we just delivered. So we expect the percentage will moderate moving forward. We're seeing the full magnitude of pricing from fiscal ’22 in the quarter, but we also took pricing during Q1 and we've taken additional pricing at the beginning of Q2. So we will see the full impact of that starting in Q2. And we also expect to see some gradual improvement in our net productivity as the supply chain and service levels continue to normalize. So all those things give us confidence that we'll improve our margin sequentially moving forward.

Thanks very much.

The next question comes from Ken Goldman from JPMorgan. Please go ahead.

Hi. Thank you. You reiterated your outlook for low-teens COGS inflation this year. I don't think it was expected that you’d alter this outlook. But, Sean, you said you're seeing some maybe initial relief in some areas and we can surely see that chicken and pork prices have dropped and those are two areas that were -- maybe troublesome for you in the past. So I guess I'm curious as we think about some of the COGS tailwinds, are there any other key drivers that have become more difficult, I guess, recently that would offset that. I guess I'm asking in a nutshell, are you more optimistic or pessimistic about cost inflation in general for the year than you were a quarter ago? Thank you.

Ken, I'll make a brief comment and turn it over to Dave. We're seeing some green shoots obviously in some commodities and I think that does bode well. We are obviously much longer into an inflation cycle than anybody hoped we would be. This thing is persisted longer than ever. But I do see positive things shaping up. But as you can imagine, when you contract in some of these commodities, those contracts don't necessarily drop off. At the very minute, you start seeing positive news on the forward curve. So that negative sourcing factor is -- it's just a reality of being at the end of one of these cycles. And the good news is, I feel good about how our purchasing team has managed this because when you're coming to the end of an inflation cycle, you don't want to be overly long, right? And I think the team has done a very good job of that. Dave, do you want to add any more color?

Yeah, for sure. So regarding inflation, Ken, Q1 came in largely in line with the art market estimate that we had, which that's the first time that's happened in several quarters, right? The market has just continued to be very volatile. So we like to believe that that's a proxy for a little bit less volatility moving forward. The inflation estimate for the full year is still low teens. So that's a double-digit number off of two years of very high inflation. So it's not like we're in a deflationary environment. But we feel like that we use our market indicators, we feel like that we've adequately estimated and planned and built some conservatism into our forecast for this. So, listen, the last year and a half has told us that things can change very quickly. But based on Q1 coming in where we thought based on our forecast, based on procurement that Sean just talked about with a very strong team. As we sit here today, we feel good about our estimates and how it will affect each quarter going forward.

Thank you. And then a quick follow-up. One of the -- I'm sure you hear this all the time, the more bearish cases on the industry is that your customers, as their consumers start weakening and maybe as vendor gross margins start to improve, but some of those retailers will start to demand a bit more from you and your peers, whether in the form of higher promotions or in store advertising. So we really haven't seen an indication of this taking place and I think your tone today would suggest you're not either, but I'm just curious if you're seeing or hearing any talk in the industry or any talk in your categories about your competitors getting more aggressive on price and promotion or your customers kind of pushing back a little bit as these list prices continue to rise. It doesn't seem like we're seeing it in the data, but as Andrew said before, sometimes the data don't tell the whole story. Thank you.

Yeah. Ken, I think the two most common words I've heard from customers in the last year plus is supply surety. That is the priority. Making sure that we can continue to get our service levels moving in the right direction so that they've got the products in stock. They don't want to go through out of stock. Especially now as we're about to enter the holidays, that's a particularly sensitive period. So if you think about it with the supply chain not yet fully normalized across the industry, I think the last thing anybody wants to do right now is drove fuel on the fire and exacerbate inventory issues out of stock issues, things like that. So I think the environment remains pretty rational right now and I have no reason to believe that's not going to continue for the foreseeable future.

Thanks so much.

Thank you.

The next question comes from Jason English from Goldman Sachs. Please go ahead.

Hey. Good morning, folks. Thanks for squeezing me in.

Good morning.

You mentioned service levels still subdued. Can you give us an update on where they stand and how that compares to where you were maybe last quarter?

Actually, Jason, service levels have improved pretty dramatically. It's quite positive. So moving in the right direction, getting north -- during the peak of COVID, you saw service levels in CPG even broader and food drop into some companies were down in 50s. And recently, you've seen companies back up over 90%. So that's -- it's category specific. So you can't kind of assume that, that's everywhere. We still have certain categories where our demand is just so strong. We'd like to be cranking out more volume and selling more like Slim Jim. But I'd say here's how to think about supply chain overall. There is clear progress happening in supply chain. It's at Conagra. It's across the industry, and it's improving. Service levels have materially improved, as I just said. Core productivity is tracking well. Clear progress. Is it flawless? No, it's not flawless, as you heard. Some things keep popping up, as we outlined. So the external environment remains dynamic, and that's why we think it's prudent. And you heard some of our comments on commentary on Q2, we just want to take a prudent stance forward looking to say, look, we are going to be taking some more pricing. That's broader on the portfolio. That'll have some even modest impact tied to it. And we've got -- we're going to assume that the supply chain dynamism continues for a bit longer. We just think that's the right way to handle it this close into the year. But overall, service levels, to your point, are making real progress.

And Sean, as you continue to improve, would you expect promotional activity to improve with it?

I think we're quite a ways from that. And to the degree it does, Jason, a couple of things to keep in mind about our company. If you look at our volume base, and you say what percentage of the total volume is promoted, it's one of the lowest levels of promotion in the industry. And as you know, that has been a deliberate part of our playbook, but we're not opposed to promotion. We do some promotion, and we do it on certain brands, and we do at certain times of the year because it drives incremental volume. A good example of that is the work we do around holidays and promotion because it's kind of binary. If you're not on promotion on holidays, you're going to miss some sales, and we'll take those sales because that's pure ROIC. So we're very -- we've become very focused on very selective pursuit of promotion and a high ROI focus on promotion and we're probably at record lows right now. At some point, that'll come up modestly, but I'm not anticipating any kind of material change.

Understood. Makes sense. Thanks for your time. I’ll pass it on.

The next question comes from Bryan Spillane from Bank of America. Please go ahead.

All right. Thanks, operator. Good morning, everyone. So two quick ones for me. The first one and it is maybe just getting back to the issues that, Sean, you called out with -- in Foodservice and in the can, chili and beans. Just can -- and maybe, Dave, you can do this, just can you give us some sense of just the magnitude, how much it impacted volume or revenue and the impact on margins? Just trying to tease out how much better things would have been if you didn't have these issues.

Yeah, Bryan. Why don't I take that? So if you see in our margin bridge that we had in the deck that the realized productivity in other COGS was plus 1.2%. So clearly, those two issues impacted that. I'm not going to give a specific amount, but our core productivity that's in that number -- as you know, we shoot for about 3% of cost of goods sold, which equates to, when you look at margin, about 2.2%. So 2.2% margin improvement would be what our core productivity is, and we came in at 1.2%. So that's about 1 percentage point of impact. Now that wasn't just the things Sean talked about. We also had some other things and absorption and different things that hit. But Sean just gave you a couple of examples that are in all of the things that gave us a headwind against that kind of core productivity number. So we're pleased about core productivity in the plants. We're making great progress. It's just some of these isolated things that we look at as transitory are kind of headwinds to that number.

Yeah. And Bryan, we know the markets you guys are looking for to say, are we making progress here and obviously, an important one for all of us is our margins. And last quarter, as I mentioned, we had filed a collection procedure (ph) a year ago on two of the four segments. At that time, we said we expect the other two segments to inflect positive. As we move through this year, we, of course, still do, but we gave up a little bit of ground in Foodservice in the quarter. And while -- it's one of the reasons we wanted to put a little color on some of these examples is Foodservice is not a big piece of the portfolio, but this issue in Foodservice that popped up impacted Foodservice. So it's why you see some of the directional volatility. There are specific root causes behind it that you don't anticipate in advance that we want to pop up, and we don't want that to be read as there's something more systemic happening in Foodservice, and we gave up ground for some broader reasons. That's not the case. It's tied to the -- in that segment the instance that we described in the prepared remarks.

Okay. And then just one other follow-up is just given the recent Hurricane Ian in Florida and the impact there, anything that we should be thinking about with regard to, I guess, this quarter, either pull forward of sales or any impact on operations? Just anything we should be thinking about there?

Bryan, I don't think so. That's a really tough one to call because obviously, some people, unfortunately, are not in a position where they can shop right now or their stores might be closed. And so you can argue that there might be miss sales because of that. By the same token, maybe their pantry inventories were obliterated and have to be replenished in the future. So it's just too early to know exactly what that looks like. And in the scheme of the whole national business, I don't anticipate that, that would be a material disruption one way or another. Dave, do you want to add?

Yeah. And just the last part of that, there was no material impact on our operations as a result of the hurricane.

Okay. Thanks, guys.

Thank you.

Thank you.

The next question comes from Robert Moskow from Credit Suisse. Please go ahead.

Hi. Thanks for the question. Actually, a few small ones. Was there any benefit from reloading inventory in the quarter? I think you mentioned it as a headwind inventory de-loading and forth, so I want to know about that. Also, I took a peek at 2Q last year. It looks like there was a pretty sizable hedging benefit, maybe 200 basis points in 2Q last year. Do you think that will be a 200 basis point headwind this year as a result of the duration of hedges?

Why don't I start? Sean, you can jump in, add any color. On your first question, Rob, we continue to ship in line with consumption. So if you -- look, in Q1, we shipped a bit ahead of consumption, but when you look at the percentages, but if you look at Q1 a year ago, we shipped a little bit below. So when we look at our days of supply numbers with retailers and the retailer inventories, we are in line with where we've been in prior year and where we expect to be. So we don't see any significant kind of issue with retailer inventories right now. We're right where we want to be, and we're basically shipping to consumption. So there's no kind of loading or deloading dynamic right there. In terms of your second question, yeah, we -- as you saw in the first quarter results, we did have negative sourcing, right, because we come off favorable contracts. So that will continue to happen. That's all baked in our estimates that we give, right? So we estimate market inflation and kind of where we were locked in, when those contracts or hedges come off. So that's all part of the forecast that we gave. So I'm not going to give a very specific number that you asked. But generally, that's how we forecast and plan it for the full year.

Okay. Just a quick follow-up maybe for Sean. I think the plan is to increase A&P spending this year, but it was flat in the first quarter. Is anything getting shifted into the next three quarters?

Yeah. Let me start that, Rob, and then I'll flip it over to Dave here. I think the intent behind the question is, are we -- do we have a good plan in place to support our brand-building activities? And the answer to that question is clearly, yes. Just look at our results with dollar sales over the past 52 weeks versus three years ago, I think we're up over 19%, while volumes over that same period are roughly flat despite quite a bit of pricing. So the brand support that we've got out there is strong. And for those of you who are listening who did not watch our Investor Day presentation, I would direct you to the presentation from Darren Serrao on how we think about brand building broadly because A&P is a piece of it, but it's only a piece of it. And I think that was very instructive. With respect to where we sit on the year on A&P, Dave, you want to kind of describe how it's unfolded in Q1 and how it unfold from here?

Yeah. Sure. So we had given guidance that we expect A&P will grow above our organic net sales for the full year. So this is a timing thing. We expect A&P will ramp up year to go. If you just look at where we came in at Q4, if you look at A&P in Q1 versus Q4, we're up $16 million or over 30% just on a kind of sequential basis. So we expect A&P to ramp up year to go.

Thank you.

The next question comes from Cody Ross from UBS. Please go ahead.

Hey. Good morning. Thank you for taking our question. I just want to go back to your pricing actions that you noted to be effective in 3Q. Can you just describe how much is it, what parts of your portfolio it is in and then how much is locked in at this point?

Hey, Cody. It's Sean. We're not going to get into details on the specific ZIP codes of the pricing for, obviously, for competitive reasons, but these are very surgical pricing actions on parts of the portfolio. It's not a broad-based action across the whole portfolio. And so again, we've got meaningful pricing happening now in Q2 and then more surgical actions later. And we don't know what's going to unfold after that. If we need to, we'll take additional action, but that is the plan right now. The good news, as I pointed out earlier, is that the elasticity coefficients just haven't budged. I mean they are flat as a pancake, as I showed you in the presentation. And they're low overall. And that's encouraging given how many waves of pricing have already been experienced in the marketplace. That is -- those coefficients are a reflection of the consumer response to our brands. And the pricing -- and we're not seeing a move in sentiment. What you're seeing in the volume delta, again, as I mentioned a few minutes ago, is that the pricing is hitting more of the portfolio. And therefore, it will have some benign impact associated with it. But until the previous pricing elasticity wanes, it'll build. That's how this whole pricing and elasticity dynamic goes. It'll ebb and then it'll flow. And the fact that they're stable -- net elasticity coefficients are stable overall and benign, I think, is a very positive sign.

Thank you for that. And then just one quick question on SG&A. SG&A ex-A&P was up 10% or so. It looks like incentive comp drove about 8% of that. Is that correct? I mean how should we think about SG&A and incentive comp for the remainder of the year? Thanks.

Yeah, Cody. Let me take that. So yeah, as we said at the beginning of the year with our guidance, we expect our SG&A to increase at a greater rate than our sales. So we were very clear on that. So yes, incentive compensation for fiscal '23 will be up versus fiscal '22. Now there was a component of timing for incentive comp that was in Q1. So that's part -- we were up 10.5% of just pure adjusted SG&A in Q1. Some of that is timing of incentive comp, and some of that is just absolute increase. But we were very clear that we expect SG&A to be up greater than our sales growth for the full fiscal year '23.

Great. Thanks. I’ll pass it on.

Thank you.

The next question comes from Chris Growe from Stifel. Please go ahead.

Hi. Good morning.

Good morning.

Good morning. A set of question for you, if I could, first on the pricing. You have some more price increases in 2Q and sounds like some smaller targeted increases in 3Q. Will it be at that point in time that your pricing will fully offset your inflation? Could that happen sooner based on, like, the wraparound effect of pricing? I just want to get a sense of how your -- how that's going to happen sequentially through the year.

Yeah. Let me take that. So, our -- we've been very clear that our principle around pricing is, it's inflation justified. So when we go and we put a price increase on the table, it's all grounded in the inflation that we're realizing and we've been very clear there's been a lag. So all these price increases, what we took in Q1, what we've taken at the beginning of Q2 and then the smaller more tactical increases that we've communicated for Q3 are all tied to that inflation. So yes, once -- at this point in time, given the inflation that we've recognized and estimate, we have offset that cumulatively. And the consumption numbers that I find really support that is, if you go back and look at volume and total dollar consumption for 52 weeks now versus three years ago, our dollar consumption is close to plus 20%, and our volumes are pretty much flat. So that shows you that, that's the kind of pricing that we're seeing in market and that ties to the cost inflation that we're seeing. So the consumption data supports that overall catch-up.

Okay. Thank you for that. I had one other question on some of those supply chain challenges -- operational challenges. It's happening, obviously, across the industry. I think what most companies have seen, though is -- and again, this could be different for you, but less of those this year than last year. Certainly, there's unique factors that can happen. I just want to get a sense of is the -- like, the challenges you called out this year, are those more than they were last year? And then, I guess, to get a sense of if you look at your gross margin today, like what are those operational challenges still? How much of those are really weighing on the gross margin today? Like, what could you get out over time as supply chain operations normalize?

Chris, it's Sean. I'll comment on the first piece, and I'll let Dave comment on kind of the impact of it. But this is one of these things where I think people in my seat are really -- they want to be careful not to jinx themselves because the thing about some of these whack-a-mole disruptions is that they're not foreseen in many cases, they pop up. So you go through these periods where the frequency appears to diminish, and it feels like, hey, this could be good, but then you'll have something pop up again. That's the nature of kind of this kind of friction that we see. So I being very deliberate in saying, I don't think these things are going to go away overnight. From a planning posture standpoint, our view is let's just assume that they'll continue to pop up. But yeah, you're absolutely correct, we watch very carefully to say, do we see these things kind of diminishing in frequency? And we don't want to jinx ourselves there and get out of our skis, but that's obviously what we're hoping for. Dave, do you want to add to that?

Yeah, Sean. So Chris, let me -- again, it's sort of a little bit what I said to Bryan's question. But if you look at our margin bridge, I think that's a good place to kind of start. So if you look, our realized productivity and other COGS for Q1 was plus 1.2%. If you just go back and say, okay, our target for realized productivity is 3% of cost of goods sold, right, that basically equates to 2.2% margin improvement, right? We -- because our targets are a percentage of COGS, which, when converted to margin, is 2.2%. We delivered 1.2%. So we are 100 basis points off of all of that realized productivity dropping to the bottom line. Now there are other investments in things that we make in a normal kind of course, but the examples of the things that Sean talked about are in that 100 basis points of headwind. So as we move forward, we do expect that, that will improve as we move forward and get more normalized. So that's how to think about it.

Okay. I should appreciate that. Thank you.

The next question comes from Nik Modi from RBC Capital Markets. Please go ahead.

Yeah. Thanks. Good morning, everyone. So Sean, I was hoping you can -- I mean I appreciate the fact that you guys have been able to get the pricing through. But when I look at some of the household (ph) penetration metrics, even going back to pre-COVID, it looks like some of your bigger brands are actually below those levels. So I was hoping you could just give us some context on how you're thinking about that, in terms of rebuilding house of penetration, especially in this inflationary environment. And then do you worry that the price gaps have narrowed between, let's call it, some of the frozen prepared meals and QSR because we've seen inflation obviously go higher in the off-premise than the on-premise.

Yeah, Nik. First of all, on the second one, absolutely not. I don't worry about that. The relative pricing between away-from-home eating options and at-home eating options remain strongly in favor of at-home eating options. And we haven't even declared we're in a recession yet. So that's one of the reasons you clearly are seeing benign elasticities and stable elasticities, quite frankly. Multiple waves of pricing into this cycle is that the calculus of the consumer is such that they're saying, hey, it's a far better value proposition to eat at-home than it is to eat out of home. And then within some of our categories, there's just -- there is really no trade down option as you look about frozen single serve meals as an example. We span the good, better, best continuum there with the value options, the mainstream options and the premium options. So the business remains very strong. With respect to household penetration, I did see your research the other day, Nik, on household penetration. And what I would say to you is you've got to be very careful when you look at household penetration not to lose the impact of seasonality. Household penetration varies pretty materially by company, by category, by seasonality. So you have to make sure you're looking at apples-to-apples. Overall, what you should expect in a super cycle of pricing like we've seen right now is that there will be modest short-term impacts on household penetration as consumers defer purchases. And that's kind of -- you see it really show up in the shopping data when people -- their big trips become smaller trips, and they postpone purchases, and their buying rate will drop a bit. So nothing really, I would say, noteworthy about household penetration, certainly nothing concerning at all that we're seeing at this point.

Great. Thanks for that perspective.

The next question comes from Pamela Kaufman from Morgan Stanley. Please go ahead.

Hi. Good morning.

Good morning.

I just wanted to follow up on your pricing -- the additional pricing that you're taking in the coming quarters. Just to clarify if that was embedded in your initial guidance at the beginning of the year. And how has the composition of your outlook for org sales changed for this year relative to last quarter? So do you still expect low teens price mix or will it be higher now? And are you expecting softer volumes relative to your initial expectations?

Yeah, Pam. Just with respect to the pricing we're taking, you don't price until you clearly see the inflation wave materialize. It's got to be inflation justified pricing with customers. So what we're doing in the back half of the year was not locked and loaded at the beginning of the year when we gave guidance, right? But there are also positive things that have broken our way in the first quarter as well. So these -- and that'll, by the way, that'll continue. If we continue to see new waves of inflation come in, we'll take additional pricing, and then we'll give you guys the dates, and you have to bake in the lag, et cetera., et cetera. So that dynamic would continue. Dave, do you want to...

Yeah. Just to build on that. So the Q1 and Q2 was in our guidance and in our forecast Q3 no.

Got it. Okay. Thanks. And then just in terms of your guidance, Q1 results were ahead of consensus expectations, but curious if they were in line with your forecast and wondering why you maintained your full year guidance despite the upside in the quarter.

Yeah, Pam. Clearly, Q1 was a strong quarter, and that's good news, but it's still early. The environment remains dynamic and we just prefer to get a bit further into the year before we make any new declarations about how we expect to finish the year.

Okay. Thank you.

Thanks.

The next question comes from Carla Casella from JPMorgan. Please go ahead.

Hi. Thanks for taking the question. It looks like your leverage will still be kind of in the three -- high 3s range at year-end. I'm wondering if, on the M&A front, if you would look to wait until you get your leverage down to your target range or if the right acquisition comes up, if you would temporarily take your leverage higher and kind of how your thoughts are around M&A or if you have asset sales to offset something if you do find something that's appropriate.

Sure. This is Sean. I'll take the question. We've been, as everybody knows, very intensely focused on reducing our debt, deleveraging on schedule and we will continue to be focused on that, and I'm very confident in the commitments we've made. With respect to M&A, we don't have anything in our sights to give you right now, but -- and certainly, we're not in the mode rep right now where we're looking at anything bigger. We're focused on deleveraging, as I mentioned. But we always keep our eye on smaller bolt-on things because they could be beneficial to our business going forward. And there's also a defensive aspect to why we do that. We want to make sure that interesting assets out there that are always -- that could be helpful to our business don't end up in somebody else's hands. So we're always looking and -- but we're -- at the same time, we're intensely focused on deleveraging. That's how I would describe it.

Okay. Great. Thanks a lot. And have you said the time frame in terms of getting to your 3 times your target -- you give a target time frame for that?

No, we didn't give a specific -- it's a long-term target. We did say in the prepared remarks that we estimate leverage will be at approximately 3.7 times by the end of the fiscal year.

Okay. Great. Thank you.

Thank you.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Melissa Napier for any closing remarks.

Thank you very much to everyone for joining us this morning. Investor Relations is around if you have any follow-up questions.

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