As Q3 unfolded we began to experience higher-than-anticipated inflation on protein and higher costs in the temperature-controlled transportation network, both of which are harder to offset in the short term,Yesterday’s third quarter earnings call saw Conagra CEO and executive vice president Dave Marberger speak to investors.
He said that this, along with higher dairy and other transportation prices, including increases in fuel and loads per temperature-controlled truck truck, led to an increase in total market inflation of 15.4% in the third trimester compared to a year ago.
Marberger stated that Conagra expects inflation will rise another 16% in fourth quarter. This is a significant increase over the 11% previously projected. It also brings inflation up to 26% on a 2-year stack, which amounts to an additional $100 million in Q4 cost.
I’ve been working in food for a while and have never seen anything like it. There is nothing normal about the world right now. Marberger added.
CEO Sean Connolly stated that the company was quick to adopt additional pricing when it saw this inflation wave coming. As we have done throughout the year,The new policy will be in effect in Q1 2023 and will focus on protein snacks and harder-to-find frozen food.
Unit demand remains strong despite higher prices
Connolly is confident that the next round in price increases will not adversely impact business. This is based on Conagra’s response to price hikes previously made by Conagra. Connolly also believes there is an unexpected benefit to other players also raising prices. It has as much to do Conagra taking steps for its brands to be on shelves and meeting evolving consumer needs.
We were surprised at how favorable elasticities have been to historical patterns in response to inflation-driven pricing. As consumers continue to see the superior value of our portfolio, unit demand remains strong.Connoly stated.
Conagra increased prices in all three core units in the third quarter. Prices in frozen and snacks rose 9.9% each, and staples 7%. This brought Conagra’s total price per unit up 9.4% over the previous year and 13.8% on a 2-year stack.
Despite this increase in unit sales, it has increased 3.1% compared to two years ago. This is a slight slowdown from the approximately 5% year-overyear increase in unit sale in Q3 21 compared with 20, according to the company.
This dynamic is a testimony to the fact that, despite the wide-based inflationary environment we are operating in, the targeted nature our inflation-driven pricing actions as well as the superior relative value our products continue to resonate and be appreciated by our customers and consumers.Connolly stated.
He pointed out the success of Banquet frozen foods brand, which he described to be a mainstay in American households. The brand has undergone extensive modernization to ensure it delivers on its promises of delicious flavors, great portions, and great value.He said.
The price per volume of Banquet increased by 14.7% in the third trimester compared to the previous year, but volume grew 1.2%. This is more than the 1.1% volume increase it saw in the prior year, when prices rose 13.9%.
Conagra’s snack business also saw this trend, growing 11% year-overyear with strong gains in popcorn and meat snacks, as well as hot cocoa.
Lower margins, higher sales and lower earnings mean tighter margins
Conagra continues to invest to ensure it can provide the products customers desire in the quantities and at the prices it expects.
Connolly believes this is the best decision for the long-term. However, it puts pressure on the margins and the company decided to lower its margin expectations for the year from 15.5% to 14.5%.
It is also lowering its adjusted earnings per stock to $2.35, compared to the $2.50 guidance.
It has increased its guidance for organic net growth to 4% from the 3% it had previously for fiscal 2022. This is a positive sign of the company’s belief in elasticities despite rising prices and consumer loyalty. It also reflects strong Q3 sales, which grew 5.1% and organic net revenues grew by 6%.