Conagra Brands (CAG) Q2 2023 Earnings Call Transcript

Conagra Brands (CAG -0.10%)
Q2 2023 Earnings Call
Jan 05, 2023, 9:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the ConAgra Brands' second quarter and first-half fiscal 2023 earnings conference call. [Operator instructions] And please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Melissa Napier, senior vice president of investor relations. Ma'am, please go ahead.

Melissa Napier -- Senior Vice President, Investor Relations

Good morning. Thanks for joining us today for the ConAgra Brands' second-quarter and first-half 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'll 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.

Sean Connolly -- President and Chief Executive Officer

Thanks, Melissa. Good morning, everyone. I hope you all are off to a happy and healthy start to the new year. Thank you for joining our second-quarter fiscal '23 earnings call.

I'd like to start by covering some key points for the quarter on Slide 5. Like our most recent wave of inflation-justified pricing, consumer demand for our products in the second quarter was strong as elasticities remained muted and well below historical norms. The ongoing durability of demand is a testament to the strength of our portfolio and demonstrates how the ConAgra Way playbook has positioned our brands to continue to resonate with consumers even in an inflationary environment. The successful execution of our playbook is clear in our second-quarter results.

We drove a significant increase in our top line. We continued to have solid share performance across the portfolio, especially in our key frozen and snacks domains. And we made excellent progress, recovering both gross and operating margins. Operationally, we made good headway on our supply chain and productivity initiatives.

While we're pleased with what we've accomplished to date, our supply chain is not yet fully normalized. That will improve. And overall, we see a long runway of opportunity ahead. We also continue to prioritize strengthening our balance sheet while making strategic investments in our business and returning capital to shareholders.

In short, ConAgra had a strong quarter across the board. Given our positive results during the first half of fiscal '23, we have increased our expectations for the year, raising our full-year guidance across all metrics, including organic net sales growth, adjusted operating margin, and adjusted earnings per share. With that overview, let's dive into the results on Slide 6. As you can see, we delivered organic net sales of more than 3.3 billion, representing an 8.6% increase over the prior-year period.

Our adjusted gross margin of 28.2% represents a 310-basis-point increase over the second quarter of last year. And our adjusted operating margin of 17% represents a 237-basis-point increase over that same period. Adjusted EPS rose 26.6% from last year to $0.81 per share. Slide 7 goes into more detail on our sales results on a one- and three-year basis.

Given the timing, when the pandemic and inflation began to impact our industry, we believe that the three-year comparison provides important context to highlight the underlying strength of our performance. At the total ConAgra level, we grew retail sales more than 10% on a one-year basis and more than 26% on a three-year basis. We're pleased with our solid share performance, including how our strong brands allowed us to largely maintain total company market share while taking several inflation-justified pricing actions, particularly during the past year. Notably, we've continued to drive robust share gains in key frozen and snacks strategic domains on both a one- and three-year basis.

I want to spend a minute putting our sales growth in context. Slide 8 shows our performance over the past three years compared to our near-in peer group, including Campbell's, General Mills, Kellogg's, Kraft, Heinz, and Smucker's. We have a great deal of respect for our peers, all of which have been navigating the same macro demand and inflation dynamics over the past three years. Among this group, ConAgra ranked second in dollar sales growth and first in unit sales performance.

It's important to keep in mind that all of these peers have taken pricing actions to help offset inflation, and ConAgra is in the middle of the peer set in terms of the price-per-unit increases in this time period. It's clear that consumers continue to appreciate the quality, convenience, and superior relative value that our strong brands have to offer, which has enabled ConAgra to perform extremely well on both an absolute and relative basis. Let's take a closer look at our top-line performance during the second quarter by retail domain, starting with frozen on Slide 9. We maintained our momentum, delivering strong retail sales growth on both a one- and three-year basis, improving 9% and 26%, respectively.

This growth was driven by a number of our key categories, including breakfast sausages and single-serve meals, which both experienced double-digit retail sales growth compared to last year. Turning to snacks on Slide 10, you can see a similar story. We drove a 14% increase in retail sales compared to the second quarter of fiscal '22 and a 41% increase over the second quarter of fiscal '20. The continued momentum of our snacks business is broad based across a number of categories.

Compared to last year, microwave popcorn was up 21%, seeds was up 18%, and meat snacks and hot cocoa both rose more than 14%. We also accelerated growth in our highly relevant staples portfolio, increasing retail sales 10% this quarter compared to the second quarter of last year, and 22% compared to the same period three years ago. This growth was led by pickles and whipped toppings, which grew more than 11% and 10%, respectively, on a year-over-year basis. As I've mentioned, our strong top-line performance was primarily driven by inflation-justified price increases coupled with ongoing muted elasticities.

Slide 12 details the relationship between pricing and volume over time. As you would expect, increased pricing does have an impact on volume, both for ConAgra and the total industry. However, you can see how elasticities have remained steady even as we have continued to increase the price per unit of our products to help offset ongoing cost inflation. And as we detailed a few minutes ago, ConAgra's three-year CAGR on unit sales performance leads its near-in peer group.

The relatively modest elasticities, both compared to historic norms and our peers, are a testament to the strength of our brand. Now that we've unpacked the relationship between price and volume and the resulting net sales, I'd like to spend a few minutes on the relationship between net sales and COGS and the resulting impact on our margin performance on Slide 13. Generally speaking, when a business has strong brands, strong processes, and strong people, as ConAgra does, it is able to navigate inflationary cycles in discrete, predictable phases. As we have detailed for some time, when unprecedented inflation increased our cost of goods, we took strategic pricing actions to help offset the rising costs.

However, there was an inherent lag between when we implemented pricing actions and when we realized the benefits of those actions in our top-line results. This pricing lag resulted in temporary margin compression. Furthermore, continued inflation extended this period of margin compression as new inflation-justified pricing actions led to additional lag effects. That is the dynamic we have experienced over the last several quarters as we continued to play catch-up by increasing price incrementally to account for the extraordinary extended rise in inflation.

End of the first quarter, we reached a significant inflection point in the relationship between net sales and COGS, marking the end of the temporary margin compression phase and the beginning of the margin recovery phase. As you can see in the chart, inflation has begun to moderate in certain areas, enabling our inflation-justified pricing actions to catch up to the rising costs. Slide 14 shows the impact this inflection has had on our gross margin results. As continuously rising inflation weighed on our COGS throughout fiscal '22 and into the first quarter of fiscal '23, our margins were compressed.

Now, predictably, as pricing has finally caught up to COGS inflation, you can see the recovery of our gross margin to be more in-line with pre-pandemic levels. While our gross margin can vary quarter to quarter due to a range of internal and external factors, the strategic pricing actions we have successfully executed, combined with moderating inflation and our strong brands, position us well to recover and maintain a healthy gross margin going forward. Of course, inflation remains elevated in many areas, and we continue to closely monitor our cost just as we have in the past. We will continue to take appropriate inflation,-justified pricing actions as needed.

Another key driver of our margin recovery is our supply chain performance shown on Slide 15. This is due to a combination of macro factors, as well as the strategic initiatives we are executing to improve our operations. We made good progress on our supply chain during the second quarter, which benefited from improvements in the service we provided to our customers, continued headway on our ongoing productivity initiatives which remain on track to achieve the targets we outlined at our most recent Investor Day, more moderate increases in commodity prices, and improved inventory levels due to an increase in the availability of materials. The takeaway here is that we're pleased with the progress we're making, but industrywide challenges do persist.

There's more room for improvement as we advance our productivity initiatives and the macro environment continues to normalize. As a result of our strong performance this quarter and the first half of fiscal year 2023, we are raising our full-year guidance for all metrics detailed here on Slide 16. We now expect organic net sales to grow between 7% and 8% compared to fiscal '22; adjusted operating margin to be between 15.3% and 15.6%; and full-year adjusted EPS growth of 10% to 14%, or $2.60 to $2.70 per share. Dave will provide more detail on the underlying assumptions behind these expectations.

Before I turn the mic over, I want to summarize what I've covered today. Our strong performance during the first half of fiscal '23 was primarily driven by a combination of inflation-justified pricing actions and muted elasticities, reflecting the strength of our brands. Consumers continued to recognize the value our brands provide despite the higher prices, allowing us to gain share in key domains such as frozen and snacks. Our top-line growth was coupled with encouraging progress in a number of different areas of our supply chain that enabled us to operate more efficiently.

Together, these factors, as well as improvement in the inflationary environment, helped us recover our margins to near pre-pandemic levels. As a result of our strong performance, we're raising our full-year fiscal '23 guidance for organic net sales, adjusted operating margin, and adjusted EPS. Finally, we're looking forward to seeing everyone who can make it to CAGNY this year. We plan to host our annual kickoff dinner on February 20th and are scheduled to present the following morning.

We will follow up with more details on the event as we get closer. With that, I'll pass the call over to Dave to cover the financials from the quarter in more detail. 

Dave Marberger -- Chief Financial Officer

Thanks, John, and good morning, everyone. I'll begin by discussing a few highlights from the quarter as shown on Slide 19. We are very pleased with our second-quarter results which reflect the ongoing strength of our business and successful execution of the ConAgra Way playbook. For the quarter, we delivered organic net sales growth of 8.6%, primarily driven by inflation-justified pricing and muted elasticities.

Adjusted gross margin increased to 28.2%, and adjusted gross profit dollars growth was up 21.7%, benefiting from higher organic net sales and productivity initiatives. The increase in adjusted gross profit, combined with another strong performance from our Ardent Mills joint venture, contributed to adjusted EBITDA growth of 21.5%. Slide 20 provides a breakdown of our net sales. As you can see, the 8.6% increase in organic net sales was driven by a 17% improvement in price mix, which was a result of inflation-justified pricing actions that were reflected in the marketplace throughout the quarter.

This was partially offset by an 8.4% decrease in volume, primarily due to the elasticity impact of those pricing actions. However, the impact was favorable to both expectations and historical levels. Slide 21 shows the top-line performance for each segment in Q2. We are pleased with the robust net sales growth across our entire portfolio.

Net sales growth in our domestic retail portfolio remains strong with our grocery and snacks segment, and refrigerated and frozen segment, achieving net sales growth of 6.8% and 10.5%, respectively. The difference between the organic and reported net sales performance in our international segment reflects the unfavorable impact of foreign exchange. I'll now discuss our Q2 adjusted margin bridge found on Slide 22. We drove a 12.2% benefit from improved price mix during the quarter, driven by the previously discussed inflation-justified pricing actions.

We also realized a 1.3% benefit from continued progress on our supply chain productivity initiatives. These pricing and productivity benefits were partially offset by continued inflationary pressure, with 11% gross market inflation negatively impacting our operating margins by 7.5% and a negative margin impact of 2.9% from market-based sourcing. As a reminder, as commodity prices rose quickly last year, we benefited from locking in contracted costs that were lower than the market. Even though we see commodity inflation moderating, we will not immediately realize a benefit to the P&L as our costs may remain higher than the spot market due to the timing of our contracts and when they roll off.

Slide 23 breaks down our adjusted operating profit and margin by segment. As Sean detailed, our decisive inflation-justified pricing actions, coupled with improved service levels and productivity, allowed us to successfully navigate ongoing inflationary pressures and industrywide supply chain challenges and deliver adjusted operating margin expansion in each segment during the quarter. We were also pleased that higher sales and productivity once again offset headwinds from inflation and elevated supply chain operating costs across all four segments in Q2. As a result of this continued strong performance, total adjusted operating profit increased 25.9% to 563 million during the quarter, despite an increase in adjusted corporate expense during the period primarily due to increased incentive compensation.

Slide 24 shows our adjusted EPS bridge for the quarter. Q2 adjusted EPS increased $0.17, or 26.6%, compared to the prior year. This significant increase was primarily driven by higher sales and gross profit, as well as a small benefit from a continued strong performance from Ardent Mills. Slightly offsetting these positives were higher A&P and adjusted SG&A compared to the prior-year period, as well as lower pension and post-retirement income, higher interest expense, and the impact of adjusted taxes.

Slide 25 reflects the continued progress we made on our commitment to strengthening our balance sheet. Our net leverage ratio remained at 3.9 times at the end of Q2, down from 4.3 times at the end of Q2 in the prior-year period. As we have previously communicated, Q2 is historically 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 year.

With that in mind, we continue to expect to end the fiscal year with a net leverage ratio of roughly 3.7 times. Year-to-date capex of 188 million decreased by 69 million compared to the prior-year period, while free cash flow increased by 104 million year over year. We remain committed to returning capital to shareholders, as evidenced by our payment of 159 million in dividends in Q2 fiscal '23, and 309 million year to date. The first-half dividend increase of 27 million compared to the first half of fiscal '22 reflects the quarterly dividend rate $0.33 per share.

We also repurchased $100 million worth of shares in the second quarter, and $150 million worth of shares year to date, to offset most of the longer-term performance-based shares we estimate issuing. As we entered the second half of the fiscal year, we will continue to evaluate the highest and best use of capital to strengthen our balance sheet and optimize shareholder value. As Sean mentioned, we are raising our fiscal '23 guidance for net sales growth, adjusted operating margin, and adjusted diluted earnings per share, given our strong performance in the first half of fiscal '23 and expectations for a solid performance for the balance of the year. Turning to Slide 27, I'd like to take a minute to walk through the considerations and assumptions behind our guidance.

We expect gross inflation to continue but moderate through the remainder of the fiscal year, resulting in an inflation rate of approximately 10% for fiscal '23. Additional inflation-justified pricing actions that have previously been communicated and accepted will go into market in Q3. However, the magnitude of these pricing actions 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 anticipate capex spend of approximately 425 million in fiscal '23 as we make investments to support our growth and productivity priorities with a focus on capacity expansion and automation. Approximately 200 million of the 425 million was spent in the first half of fiscal '23. Lastly, we expect interest expense to approximate 405 million, and pension and post-retirement income to approximate 25 million for the year, driven by the higher interest rate environment. Our full-year tax rate estimate remains approximately 24%.

To sum things up, we are extremely pleased with our strong performance in the first half of fiscal '23, especially the recovery of Q2 adjusted gross margins to near pre-COVID levels. This, along with our expected continued positive business momentum, led to raising our full fiscal year '23 guidance. Our strong performance amid such a dynamic environment would not be possible without the hard work of our entire team and reflects the ongoing strength of our brands and successful execution of the ConAgra Way playbook. Looking forward, we remain committed to executing on our strategic business priorities and generating value for our shareholders.

That concludes our prepared remarks for today's call. Thank you for listening. I'll now pass it back to the operator to open the line for questions.

Questions & Answers:

Operator

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator instructions] Our first question today comes from Andrew Lazar from Barclays. Please go ahead with your question.

Andrew Lazar -- Barclays -- Analyst

Great. Thanks very much. Happy New Year, everybody.

Sean Connolly -- President and Chief Executive Officer

Morning. 

Andrew Lazar -- Barclays -- Analyst

Morning. Sean, you know, obviously, you had expected and talked about sequential gross margin improvement as you move through the year. The 310-basis-point jump certainly in gross margins is certainly far greater than -- than investors were expecting. And I have to imagine greater than -- than maybe you were expecting internally.

So, I guess what was it that came in, you know, that much better in the quarter than you anticipated? And, you know, I asked this with a view toward getting a better sense on really how sustainable these levels of gross margin are as we move through the year. Because as you've said previously, you expected sequential improvement as the year progresses. So, is this still the case from this new high level as we go through the back half of the year? Or are there any reasons to expect a step back? Thanks so much.

Sean Connolly -- President and Chief Executive Officer

Andrew, yeah, everything we're seeing is very consistent directionally with -- with what we've expected precisely. As things come in by month, by quarter, just a little bit of variability there. But, you know, I'd say, overall, I know these inflation supercycles are a complicated thing for our investors to unpack, which is why we always try to be instructive as to the predictable and mechanical way these cycles tend to unfold if you have three things in place: strong brands, strong processes, and great people. So, you know, in a nutshell, the mechanics -- mechanics of this situation is inflation hits, you announce price to customers, 90-day clock starts ticking, then the customer's 90-day clock expires, elasticities exist, but they're, in fact, benign relative to history and consistent overall, and margins recover.

And sometimes, if it's multiple waves of inflation, you rinse and repeat that whole process. And everything we are seeing, saleswise and marginwise, is consistent overall with these textbook mechanics and, therefore, entirely good news and not some negative surprise. So, you know, to come full circle, you know, we don't see the margins that we're looking at right now as a peak. We see them as the successful execution of our playbook.

Dave, you want to comment on that? 

Dave Marberger -- Chief Financial Officer

Yeah, no, I think that's a great explanation of the mechanics of this, Andrew. I think as you look at H2, we would expect that the gross margin change in the second half to be pretty consistent with what we saw in Q2 around that 300 basis points. And what I'll point you to is -- excuse me -- you really need to look at the relationship of price mix that we deliver each quarter versus the market inflation each quarter going back to the fourth quarter of '21. ConAgra got hit with inflation earlier and to a much higher level than most food companies.

And so, we came out of the gate, and it impacted our margins significantly very quickly. So, if you just look at fiscal '22, we had inflation every quarter that was 16% to 17%, and we never got to that level of pricing even in the fourth quarter. In fact, our pricing Q1 of last year was only 1.6%. So, our pricing ramped up, but hit it not quite up to that significant inflation.

Q1 of this year, our pricing was at 14%, inflation was 15. So, we were getting close this quarter, pricing 17%, market inflation is 11. So, it's the first quarter where we've actually seen the flip. And now that that flips there, Sean had a chart in his deck, that's when you see the margin recover.

So, we saw it in Q2. And that delta is we expect it to continue as we go forward each quarter. Now, I will call out, Q2 for ConAgra is our highest sales quarter. So, the absolute gross margin of 28.2 is usually our highest.

But in terms of looking forward, look at the delta that we delivered in Q2 as being a proxy for going forward.

Andrew Lazar -- Barclays -- Analyst

It's really helpful. Thanks so much.

Operator

Our next question comes from Cody Ross from UBS. Please go ahead with your question. 

Cody Ross -- UBS -- Analyst

Good morning. Thank you for taking our question. Two questions here. First one, you put up a slide showing how your unit sales on a three-year CAGR basis are performing much better than your peers.

What do you attribute that to? 

Sean Connolly -- President and Chief Executive Officer

Well, as you know, Cody, we -- going into COVID -- at the beginning of COVID, we performed extremely well in the peer set. And I made the point then that that was not entirely a function of just people being forced to eat in their home. It was in part due to the fact that we've taken one of the largest portfolios of food in North America and completely overhauled it in terms of modernization and makeover during -- prior to COVID hit, so that when COVID hit, we had many, many new households that were finding all these new innovations for the first time. And as I pointed out repeatedly over the last couple of years, our repeat performance, in-depth of repeat with those new households that we've gathered, has been remarkably strong.

So, you put all that together, along with the fact that a lot of these younger consumers that spent so much time eating away from home pre-pandemic are still eating in home now because prices are so high away from home, that has conspired to lead to benign elasticities overall for our industry. And as we pointed out before, our elasticities not only remain low versus historical norms, but they're consistent and they are among the lowest, if not the lowest, in the entire peer group. So, it's always a function of your -- your brand strength. And the other thing I would add is, recall, we spent a lot of time in the last few years exiting businesses that are more commoditized, where that were more susceptible to trade down and people consumers shifting to private label.

So, cooking oil, peanut butter, liquid eggs, I could go on, we've done that. So, we've -- we've done a lot of reshaping of the portfolio to be more resilient for a cycle like this. And we're seeing it in the data. 

Cody Ross -- UBS -- Analyst

Great. Thank you. And then, I just want to follow up on gross margin here. You revised your inflation outlook down to about 10% from low teens, implying approximately 8% inflation in the second half.

What gives you the confidence to lower your inflation outlook? Where are you seeing the most easing? Thank you. 

Dave Marberger -- Chief Financial Officer

Yeah. Cody, if you really look at this, you have to go back to the base, right? So, when inflation started for us, so similar to what I just said, inflation started hitting us in the fourth quarter of our fiscal '21. And then every quarter of fiscal '22, we were in the 16% to 17% range. So, as we -- as you look this year, and we're estimating 10% for the year, that may appear a little bit lower than maybe some others, but that's off of a much higher base than others.

So, that's just the -- the percentages in the quarter. We saw inflation in packaging. So, our cans and some of the other packaging areas. Some of the commodity areas like dairy and sweeteners and then vegetables, we do see inflation moderating in the protein area.

You remember particularly poultry hit us hard. We are seeing that moderate. So, as we go forward, we can -- you know, we expect it to moderate, but it's still off a very high base. And that's our latest call based on the way we call inflation is market by market we go through -- and then, remember -- and you see this on our gross margin bridge, we have the sourcing component, right? So, we always quote inflation as gross inflation based on market and then based on how we lock it in with contracts, our -- our hedges, the actual cost that's out in that sourcing line.

So, right now, for the quarter, our sourcing was a little negative just because we're locked into some higher contracts in a couple of areas where the market has dropped.

Cody Ross -- UBS -- Analyst

Great. Thank you. I will pass it along.

Operator

Our next question comes from Ken Goldman from J.P. Morgan. Please go ahead with your question.

Ken Goldman -- JPMorgan Chase and Company -- Analyst

Hi. Thank you. Good morning. I wanted to dig in a little bit more toward the -- or on the operating margin guidance.

And thank you for the help in terms of how to think about the gross margin in the back half, Dave. It seems just, back of the envelope math, that to get to where your operating margin will be, you know, sort of that mid-15s for the year and given that you're talking, you know, roughly about a 300-basis-point increase continually in the gross margin, that you're going to have to have a step-up in SG&A as a percentage of sales. And I'm just -- a, is my back-of-the-envelope math correct there? And b, what would cause that step up as we think about going into the back half of the year? I assume, Sean, you're not going to advertise a lot more given your history. I'm just trying to get a sense of, you know -- of how to think about that. 

Dave Marberger -- Chief Financial Officer

Let me -- why don't I start, and -- and, Sean, you can fill in. So, Ken, from an SG&A perspective -- and we had forecasted and got the beginning of the year that we expected SG&A to be increasing higher than sales. And that's indeed what we're seeing. So, if you look at Q2 and the increase in SG&A, that's a -- you know, that's a that's a reasonable estimate to estimate our H2 second-half increase in SG&A.

And that's, you know, basically investments that we're making in automation and in our people. And there are some incentive compensation increase in there partially from this year but partially wrapping on last year. So, they're really the big drivers of SG&A. We are expecting A&P to ramp.

So, we came in higher this quarter at 2.4%, and we expect that to continue to ramp up in H2 as well. Sean, you have anything --

Sean Connolly -- President and Chief Executive Officer

Yeah, the only thing -- on that, I would say, you know, we do spend A&P again, and so, we don't do a lot of inline TV because we don't think it's particularly effective. But we do spend A&P and it does vary quarter to quarter depending upon the programs that we've got. As you know, it's a lot of influencer-type spend, digital spend, and things like that. And so, as we've got new innovations unfolding, we do back them based on the windows where we've got products coming to market.

So, there, you will see movements quarter to quarter in our A&P line which syncs up -- usually syncs up with the activity we've got planned in the marketplace. And frankly, you know, when we've got business momentum like this, we want -- and we've got really exciting new innovation coming out that we'll share at CAGNY. We do want to make sure we get those new products off to a good start with, you know, good awareness and good trial. 

Ken Goldman -- JPMorgan Chase and Company -- Analyst

Thank you. That's helpful. Just a very quick follow-up to Dave's comment about, you know, kind of extrapolating that 2Q SG&A out. Dave, are you talking about the absolute dollars that were spent int 2Q or the year-on-year change that we should kind of think about extrapolating?

Dave Marberger -- Chief Financial Officer

The year-on-year change, Ken.

Ken Goldman -- JPMorgan Chase and Company -- Analyst

Great. Thanks so much. 

Dave Marberger -- Chief Financial Officer

Yup.

Operator

Our next question comes from Alexia Howard from Bernstein. Please go ahead with your question.

Alexia Howard -- AllianceBernstein -- Analyst

Great. Good morning, everyone.

Sean Connolly -- President and Chief Executive Officer

Morning, Alexia.

Alexia Howard -- AllianceBernstein -- Analyst

So, two questions. The first one is -- is a bit more of a take a step back. In my conversations with a lot of investors, people are commenting on the fact that you're not getting -- really getting a lot of valuation credit for your faster-growing snack business. And they also want you to get the leverage down, which I think you commented on in the prepared remarks.

Actually, one solution might be to dispose of some of your more mature categories. I'm just wondering how you're thinking about some of those slower-growth businesses, the nonsnack areas, and what you might think of that being a way into addressing some of those concerns more quickly. And then I have a follow-up.

Sean Connolly -- President and Chief Executive Officer

Yeah, great -- great question, Alexia. You know, we've said since -- since I got here that we are going to pursue the, you know, consistent improvement in our sales rate and consistent improvement in our margins. We'll do it three ways. We'll strengthen the businesses we own, we'll acquire new businesses that fit, and we'll divest stuff that is a drag on our sales and our margin.

And if you look at the sheer amount [Inaudible] over the last eight years, it's right up there near the top of the list in terms of activity. So, that's part of our playbook. It will continue to be part of our playbook. We always look at that.

And I always tell investors, "If you've got an idea as to how we might reshape in a way that unlocks shareholder value, you can probably safely assume that we priority thought about it and looked at it." Now, with respect to the specific concept that you put out there, the way we look at things like that, particularly when you're talking about more material divestitures, we've done a lot of kind of one-off. But when you package up big chunks of the business and you look at doing something, spinning them out or selling them, something like that, you have to look very carefully at what happens with stranded overheads, what happens with the fixed cost base in the company, and does it flow back to that which remains and, therefore, compress margins because you've got to be very sensitive to ensuring that these kinds of actions create value and don't actually end up destroying value. And so, you know, that's one of the things we look at. The other thing we look at is we're basically in the U.S., and we have tremendous scale and scope within the U.S.

And we think that scale and scope worked very well for us in terms of, you know, our relationship with our customers, the importance of our total portfolio with our customers, and the ability to leverage certain parts of our portfolio to do very strategic things in other parts of our portfolio, whether that leverage the cash flow or just leverage the fact that these are important items to shoppers. And so, we look at all of that stuff. We're open-minded to anything that truly creates value. And that's you know -- that's kind of our philosophy, and it's always been that way.

Alexia Howard -- AllianceBernstein -- Analyst

Great. Thank you very much. And just a quick follow-up, on promotional activity, are you seeing any shift in what retailers are expecting? Or is that also still very much business as usual at the moment, even though I think it's a lot lower than it was before the pandemic?

Sean Connolly -- President and Chief Executive Officer

Yeah, that's a hot topic these days. Let me give you kind of our perspective on it. First, let me say that from our vantage point, the competitive environment remains rational overall. And that's -- that's usually a good thing.

Second, until supply normalizes further, I just can't see retailers pushing for deals that exacerbate out of stocks. That's not good for retailers when their shoppers go to the store across the street to get the items that they couldn't find in their stores. And then, third, you know, we're not opposed to smart promotions. In fact, we're already doing high ROI promotions already.

That's kind of in line with our pre-pandemic levels from a frequency basis. At some point, we may be able to add a little bit more. But here, I'm talking about surgical -- really strategically valuable, high ROI, and, frankly, often seasonal promotions, often holidays, that are emotionally important to our consumers. And in those instances, we want our brand in those promotions.

But through COVID, some of those promotions were cut back on, given obvious supply challenges going forward. You know, that'll get better, and some of those quality opportunities will reemerge. But I think the big point is we're not talking about a surge of deep discount promotions here. That's not been our playbook for at least seven years now.

And I just don't see, you know, a lot of room for that.

Alexia Howard -- AllianceBernstein -- Analyst

Great. Thank you very much. I'll pass it on.

Operator

Our next question comes from David Palmer from Evercore ISI. Please go ahead with your question.

David Palmer -- Evercore ISI -- Analyst

Thanks. Thanks, guys. Slide -- Slide 12, the one where you showed the price lag phase being followed by the margin recovery phase, I'm wondering how you think about the shape and the length of this recovery phase. You know, it was five or six quarters long on the -- on the lag phase.

Do you see it playing out like a similar lanes for the recovery phase? 

Sean Connolly -- President and Chief Executive Officer

Yeah. You know, it's interesting, David, I have -- in my office up on my whiteboard for the last year, I've got this little handwritten analysis I've done of the earnings power of a cohort of 10 units and how the P&L unfolds when you're faced with multiple waves of price -- of inflation, which require multiple waves of pricing. And as I said to Andrew earlier, it's very predictable. It's very mechanical.

What's been unusual in this cycle is the sheer magnitude of the inflation supercycle and the number of ways. So, the reason the shape of that curve on that slide you see it is because it reflects multiple waves of COGS inflation and the follow-on pricing effects. The sheer number of those waves is now slowing down. And that is why you're seeing the sharp recovery and sometimes it slows down faster than you might expect, which is why the recovery might come in faster.

But overall, the mechanics of it are very predictable. You know, if we got hit with, another, you know, 18 months of five waves, it would kind of -- you know, that's the rinse and repeat comment, you know, the cycle starts all over again. You know, I can't find a lot of examples of that happening in history after a supercycle like this. So, you know, I think what you're seeing now is -- is a reflection of good execution on our part in kind of the beginning of the sunsetting of this supercycle.

And that's why we say we think we've got some runway from here as the supply chain continues to improve and productivity continues to ramp up. Dave, you want to add to that? 

Dave Marberger -- Chief Financial Officer

Yeah, just to build on that -- and, David, back to something I said earlier -- for H2 gross margins, we expect that delta of approximately 300 basis points to hold. So that, you know, translated to that chart. That just means that that relationship for the second half will continue, right, where the sales per unit and the price per unit is above the cost because we're -- we've already incurred that inflation, Our three-year inflation number, when you use the 10% estimate for this year, is 33%. So, we have significant inflation that's in our base.

We are now catching up to that. So, that drives that -- that margin improvement for the second half. 

David Palmer -- Evercore ISI -- Analyst

And just to follow up on that, in the -- I'm looking at the volume numbers in grocery and snacks, for example, that was a little weaker than we would have expected. I wonder just if you back up a second and say -- you know, what is the big worry that people would think of? Is that perhaps there would be a need for promotion, give back to stabilize volume in your higher price elasticity categories out there? Is there something that you're monitoring that would tell you that perhaps there would be a slamming of a door and a quick end to this recovery phase? Are there things that you're really watching out for? And perhaps I'm leading the witness a little bit on grocery and snacks. Is that volume concerning to you at all in that area?

Sean Connolly -- President and Chief Executive Officer

Yeah, let's talk about it. First, no door slam, OK? So, what we're seeing right now is very consistent with what we expect. And it was an excellent quarter and things are unfolding the way we would expect. With respect to grocery and snack volumes, grocery and snacks, volumes came in right where they should have come in, given the magnitude of pricing we've taken in the first half of this year.

Now, in terms of what you're observing, good eye, the shipment numbers look about two points worse than what you might expect given the elasticities that we've talked about. That does not reflect a Q2 phenomenon. That reflects strong shipments in this segment in Q2 a year ago. Why was that? Because that's precisely when we came off allocation on a handful of brands in G&S.

And our customers, as you can imagine, these are good, strong brands. We're quite eager to replenish their inventories. So, that's -- that's -- that's when you -- when I look at that number, I see about two points of what -- what might look like an excess drop in volume. It's entirely about the year-ago period and nothing about right now.

So, net net, you know, what -- what keeps up -- keeps us up at night, it's the stuff that we can't predict. You know, it's like a return of some kind of new COVID strain or, you know, more unexpected friction in supply chain because you can't get materials from suppliers, things like that. You know, as we said, we're making good progress in supply chain, but it's not perfect yet. We still have more junior people.

And our labor situations got significantly better, but we've got newer employees who are still ramping up the learning curve. These are the things that, you know -- that drive the volatility. And it's led us to have our year-to-go outlook. I stay in a range I would describe as prudent, given that we're making progress, but it's not all the way back to bright.

Dave, you want to add to that? 

Dave Marberger -- Chief Financial Officer

Yeah. I would just add, I think, David, when you start looking quarter to quarter and then at the segment level, because these are shipments and there's timing, you're going to get some dynamics. I would just pivot and say if you look at our first half, you know, we're shipping at 9% and consumption is 10%. So, we've always said we shift to consumption.

That's what's happening. We feel good about where our -- where we are with retailer inventories. We feel good about our own inventories. The elasticities, as we showed on the chart, are at that sort of 0.5 level, and they've been there.

And that's the entire portfolio. So, you do get some dynamics quarter to quarter, which Sean described, but generally, we're tracking in line with consumption.

Sean Connolly -- President and Chief Executive Officer

Yeah. Before we go to the next question, I want to come back to volumes for a second because this is a really important one for folks to get right as you think about assessing kind of where we are, is it a good guy or a bad guy. You know, to accurately assess volume performance across a cohort of companies, you have to look at total scanned volume change over time for the whole peer set. And as you saw on Slide 8, ConAgra ranks No.

1 in our peer group in terms of volume resiliency over the past three years, which is obviously a testament to our brand health. And as I said in my prepared remarks, there's always some elasticity when you price as much as we have cumulatively. But those elasticities have in fact been relatively benign and remarkably consistent, and they've been lower than our peers, lower. That's the data.

So -- but in any given quarter and in any given segment, frankly, you may see more or less volume impact based on the recency of the pricing actions that you take. And as you know, we took a lot in Q1 and in Q2, but overall, we're in very good shape in the absolute and versus others. And, you know, don't forget, as we've said many times, over time, these elasticities tend to wane as consumers adapt.

David Palmer -- Evercore ISI -- Analyst

Thank you.

Operator

Our next question comes from Max Gumport from BNP. Please go ahead with your question.

Max Gumport -- Exane BNP Paribas -- Analyst

Hey, thanks for the question. I'm wondering -- beyond price elasticities, which can sometimes be a bit of a blunt measurement of the reaction of consumers to price increases, especially given the broad-based nature of pricing across the industry, I'm wondering if you've seen any changes in the degree or ways in which consumers start trading down, for instance, from food away from home to food at home, from branded to private label or to more value branded products, or maybe between grocery categories. I'm just curious what you're seeing on that front and how you'd expect this dynamic to develop from here. Thanks. 

Sean Connolly -- President and Chief Executive Officer

So, Matt, I think it's pretty simple. The first big trade-down is the trade-down from away from home to at home. Know, if you're looking at consumers over $100,000 a year income, you're still seeing they're going out to eat. But below that threshold, you know, it's not where it was pre-pandemic.

So, one of the reasons -- a big one of the reasons why you see muted elasticities across the sector on average is because there has been -- there was a trade-down into at-home eating during COVID, and that has not fully reverted to away from home because the prices away from home have gone up so high that it's a better value to continue to eat in home as people are trying to stretch their household balance sheet. And we are the beneficiary of that, and it shows up in muted elasticities. When you double click down from there, within grocery, what you see is there is trade-down taking effect. And if you look at private label by category, you can see that, in certain categories, they are making progress.

Those categories almost always tend to be categories that are more highly commoditized. So, you know, things like in food, like cooking oil; in outside of food, things like ibuprofen, you know, when -- when the consumer knows it's a single-ingredient product and one is a lot cheaper than the other, the switching costs are lower, it's easier to make the trade down. So, that is happening. The good news for us is we don't have a lot of those categories.

We had them, we exited them, and now our private label interaction is -- is lower than average in the space. And on the strategically important stuff that's really vital to our -- our go-forward cash flow is things like frozen or our snacks categories. We've got very strong relative market shares, very little private label alternative, and that's one of the reasons we continue to thrive.

Max Gumport -- Exane BNP Paribas -- Analyst

Great. Thanks very much. And one follow-up. It looks like you took your capex guidance down from 500 million to 425 million.

I'm just wondering what's driving that change. Thanks very much. 

Dave Marberger -- Chief Financial Officer

Yeah, Max, that's all timing. We're still prioritizing investing in capacity and automation in our supply chain, which we've talked about. So, that's all just timing for the fiscal year.

Operator

Our next question comes from Pamela Kaufman from Morgan Stanley. Please go ahead with your question.

Pam Kaufman -- Morgan Stanley -- Analyst

Hi. Good morning.

Sean Connolly -- President and Chief Executive Officer

Good morning.

Pam Kaufman -- Morgan Stanley -- Analyst

I just had a follow-up to your last response. In general, it seems like the softer macro backdrop this year creates a favorable environment for your business and for food-at-home consumption. So, as consumers look for savings, can you talk about how your categories and how frozen dinners have performed in prior recessions? And how are you leaning into this opportunity and highlighting the value to consumers?

Sean Connolly -- President and Chief Executive Officer

Yeah, our frozen business has been unbelievably strong. And I don't think you can compare it at all to, you know -- the, you know, the 2008 period, the financial crash, because the category looked totally different. You know, we started doing a massive overhaul of the frozen section of the grocery store ConAgra did in 2015, starting with frozen single-serve meals. And we -- we completely changed the way those products show up to the consumer in terms of food quality, packaging quality, sustainability, etc., etc. And since then, we've driven a massive amount of growth for retailers in the frozen single-serve meal category.

And ConAgra has accounted for somewhere in the neighborhood of 90% of that growth. So, we've -- we've almost singlehandedly done it. What we're doing now is keeping the momentum in frozen in single-serve meals where we've been so successful because there are structural things in place that have only furthered the opportunity there. Things like more people working from home during the week, that obviously contributes to more breakfast and more lunch occasion at home where these products fit.

So, we're -- we're capitalizing on that. The other part of our strategy is to continue that we've got a great suite of brands, continue to extend them into adjacencies like multiserve meals, appetizers, snacks, desserts, novelties, things like that. There are a lot of ZIP codes in the frozen space that still have opportunity to be overhauled the way we've overhauled frozen single-serve meals. And that's -- that's a big part of our go-forward strategy and one of the things that's going to help create value with this portfolio along with this awesome snacks business that we've got.

And we'll talk about both of these very, very strong, attractive portfolios in frozen and snacks in quite some detail at CAGNY.

Pam Kaufman -- Morgan Stanley -- Analyst

Great. And just under supply chain, it sounds like it's getting better, but there's still room for improvement. Can you talk about where you still see supply chain challenges and where -- where there's room for improvement? Where are your service levels today versus targeted? And how much gross margin recovery can this drive on top of the improvement that you saw this quarter?

Sean Connolly -- President and Chief Executive Officer

Yeah. Let me -- it's Sean. Let me tackle that. And Dave, if I missed anything, jump in.

But we're absolutely seeing meaningful progress in supply chain. But you got to remember that the industry has continued to see operating challenges, including labor, across the [Inaudible] supply chain -- supply chain have not faded. You're hearing that from me, you're hearing it from my peers. So, it is possible for ConAgra to make meaningful progress but also to see -- continue to see pockets of friction.

In terms of specifically what are we seeing, productivity is improving, and we are pleased with the progress on our supply chain initiatives. Service levels and fill rates have continued to improve -- improve over prior year. In the second quarter, our fill rates were over 90% by the end of the quarter. On average, in some categories, frankly, we're well above that and more back to normal, which is an awesome sign.

Productivity initiatives remain on track. But, you know, the point we're making here, and one of the reasons for our guidance, is progress isn't necessarily going to be linear. Productivity savings aren't fully offsetting input cost increases from commodities volatility, things like labor, transportation costs, and other supply chain inefficiencies since the supply chain is not yet fully normalized. We -- on labor, we have filled more positions, we're seeing less turnover.

But because our labor force, as I mentioned a few minutes ago, is less experienced, it's still less efficient. But obviously, that's going to improve as these newer employees crash the learning curve. So, that's kind of what we're seeing overall. Dave, you want to add anything, or I really hit it? 

Dave Marberger -- Chief Financial Officer

Yeah, I would just add to your question about margin. So, if you look at the Q2 bridge that we have in the deck, the operating margin bridge, you see the productivity and other cost of goods sold at plus 1.3% of margin points. And, you know, once we get to a more normalized supply chain operation, we would expect that to improve. We're not going to get specific numbers, but that's where you would see it in the margins.

Pam Kaufman -- Morgan Stanley -- Analyst

Got it. Thank you.

Operator

And our next question comes from Robert Moskow from Credit Suisse. Please go ahead with your question.

Robert Moskow -- Credit Suisse -- Analyst

Hi. Thanks. You know, Sean and Dave, like, one of the major concerns I hear from investors is that the top-line trends that are so robust right now are going to dissipate by the end of the year because you're going to lap the vast majority of the pricing actions that you've taken. But you did talk about more sequential pricing that's going on right now.

So, I guess I'd like to know, by the end of the calendar year -- and I know you can't talk about fiscal '24 -- but by the end of the calendar year, do you think you'll still be in kind of like mid-single-digit pricing territory given, you know, where pricing is today in fiscal 3Q? And then, lastly, maybe you can talk a little bit about the retail reaction to all the -- the price increases. The rhetoric seems to be getting a little more combative on the margin. And I wanted to know if you thought there's any changes in those negotiations. Thanks. 

Sean Connolly -- President and Chief Executive Officer

All right. Let me -- let me try to hit each of those. And, Dave, if I missed anything, jump in. With respect to, you know, dollar sales and the year-on-year growth, you know, putting up 9%, whatever, that's not just as a reminder, that's not our long-term algorithm, right? That is -- that is a function of kind of where we are in this inflation supercycle.

So, that's -- you know, that's not going to be the go-forward run rate on -- on sales forever. That goes without saying. In terms of the pricing that we've taken, we took price in early Q1. We took -- that's pretty meaningful.

We took price again in early Q2 that was pretty meaningful. And then, we're taking price again, I would say, more surgically in January, call it, for Q3. That's kind of what's been negotiated with our customers. That's what's in place.

There's nothing else beyond that to talk about right now. But pricing, again, isn't window based; it's principle based. So, if we continue to see waves of inflation, you know, reemerge, then we'll do what we've got to do. In terms of retailer reaction, let me give you just a couple of thoughts on this.

Number one, with respect to margins, our margins and the good quarter we just had on margins, I think it's really important to remind everybody we're talking about margin recovery following a period of pretty meaningful margin compression. So, you know, that's kind of point one. And point two is we've been really clear with our retail partners that, a, all of the pricing we have taken is justified by COGS inflation; and, b, margin recovery is as important to them as it is to us because we need to recover our margins in order to sustain the innovation program that has driven category growth for these retailers in important aisles like frozen as I mentioned just a minute ago. And the third point I'll make is, you know, with respect to, you know, inflation from here, you know, it's still with us, right? So, we're -- we're calling 10% on the year.

It's not deflation; it's sustained inflation. And that's just an important reminder that we're not -- we're not looking at -- at a deflationary period. So, that's -- that's going to factor into the retailer conversations as well. Dave, anything you want to add to that?

Dave Marberger -- Chief Financial Officer

Yeah, Rob, I would just say we're not going to comment on calendar year. But if you just look at again, it goes back to looking quarter by quarter in the prior year and what our -- our price mix was by quarter. And as you look at last year, last fiscal '22, each quarter, our pricing ramped up, right? So, H1 last year, our price mix was roughly 4.5 percent. H2 of last year, it was about 11%.

Right. So, as we look at H2 this year, we're wrapping on a much higher price number. So, you could expect that the price mix component of our H2 to be lower because we're wrapping on an 11% versus a 4.5 in the first half. So, that's the way to think about it.

But it's, you know, that's the same things happening with inflation as well. That's why that margin increase -- that gross margin increase I talked about earlier, we expect to continue.

Robert Moskow -- Credit Suisse -- Analyst

You know, given that you've revised down your inflation outlook, is there any discussion about also revising down some of the price increases? 

Sean Connolly -- President and Chief Executive Officer

No, because a revised-down inflation outlook does not mean costs have dropped to below where they were prior to us taking pricing. In fact --

Robert Moskow -- Credit Suisse -- Analyst

Got it.

Sean Connolly -- President and Chief Executive Officer

You know, it's still a 10% full-year outlook lower than that in the back half, but it's still inflationary. And by the way, compared to the -- you know, the normal range for the industry of 2% to 3% inflation, when you're talking eight-ish percent inflation, that's a big inflationary year. So, you know, to the contrary, it leads you to think more about future price increases than it does price rollbacks. You know, in categories that are true pass-through categories, when you get down to a true category level, we've not category went for coffee as an example.

You know, coffee is one of those categories, is a pass-through category. Pricing comes up, you take it up. Pricing comes down, you take it down. It can be deflationary.

We're not experiencing deflation on average buying across the board.

Robert Moskow -- Credit Suisse -- Analyst

Got it. Thank you.

Melissa Napier -- Senior Vice President, Investor Relations

So, thank you, everyone. We are at time. Thanks again for joining us this morning. And we're looking forward to seeing you all at CAGNY next month.

Operator

And, ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

Duration: 0 minutes

Call participants:

Melissa Napier -- Senior Vice President, Investor Relations

Sean Connolly -- President and Chief Executive Officer

Dave Marberger -- Chief Financial Officer

Andrew Lazar -- Barclays -- Analyst

Cody Ross -- UBS -- Analyst

Ken Goldman -- JPMorgan Chase and Company -- Analyst

Alexia Howard -- AllianceBernstein -- Analyst

David Palmer -- Evercore ISI -- Analyst

Max Gumport -- Exane BNP Paribas -- Analyst

Pam Kaufman -- Morgan Stanley -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

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