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Conagra Brands CFO details steep inflation, supply chains, and worker absenteeism due to COVID-19

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Dave Marberger, Conagra Brands CFO, joins Yahoo Finance Live to discuss the food company's latest earnings report, higher input costs due to inflation, supply chain disruptions, and staffing shortages in factories due to COVID-19 outbreaks.

Video Transcript

JULIE HYMAN: We have been focusing on the food and beverage industry over the last couple of hours, the effect of what we're seeing in the jobs market, as well as, of course, the effect of inflation and supply chains, all of those themes weaving into Conagra Brands earnings, which it reported yesterday sales rising about 2%, but earnings and margins falling a bit short of estimates because of all of these pressures that we have been talking about.

I want to bring in chief financial officer Dave Marberger now from Conagra. Dave, thank you so much for being here. Obviously, we have been watching these trends really, really closely. Now, as you're looking at margins right now and costs going ahead into 2022, where do you expect to see sort of the biggest pain points?

DAVE MARBERGER: Well, thanks for having me. It's good to be on. As we reported yesterday, our top line is strong. We delivered 2 and 1/2% top line sales. Our demand is so strong, we can't actually supply all the demand. But as you referenced, our costs and our inflation has continued to accelerate. So for the second quarter, our inflation was up 16 and 1/2%. So that's on our total cost of goods sold. That's up 16 and 1/2%.

I've been in this industry a long time. I've never seen inflation like that. And we're seeing cost increases across all of our material areas. We called out a few. We buy a lot of animal proteins, a lot of beef, chicken, poultry. Those costs in the quarter were up 70%. So we're dealing with a lot of inflation right now across all of our materials. We're also seeing inflation in the transportation and logistics market. So we always try to cut our costs to keep our prices down. But in this environment, we've had to actually take our prices up.

And so we took price increases at the beginning of our fiscal year. You saw that in our results yesterday. Our price mix benefit in sales was actually close to 7%. And then in December, we announced an additional set of price increases that have been accepted. So you'll see that as we approach our fourth quarter in March. And so it's a combination of driving productivity and efficiency to take out cost, but also passing some of this onto our customers because of the magnitude of the inflation we're seeing.

BRIAN SOZZI: Dave, that is a large number, 16 and 1/2% inflation. Definitely a number I have not seen either really in my time covering food. I mean, do you see any relief in sight? Do you see peak inflation hitting at all this year?

DAVE MARBERGER: Well, we've seen it accelerate. We are seeing some areas because, you know, our inflation consists of a very broad basket of goods, both ingredients and packaging materials. And so we are seeing some of the individual items start to moderate a bit. But as we forecasted our second half through the end of May, we are still forecasting close to 11 and 1/2% inflation for our second half. And that's off of a second half last year that was up about 6 and 1/2%.

So even though the rate of inflation will start to come down from the 16 and 1/2%, it's still up double digits for our second half. And so, you know, we're managing through that. We're very optimistic in Q4 when we're wrapping on some pretty significant inflation. And our new pricing actions actually hit market that we're going to start to see an inflection in our margins. And we talked about that a lot yesterday on our earnings call.

JULIE HYMAN: And Dave, I'm also curious about what amount of the increase in costs you're seeing, I mean, you talked about cost of goods sold. What about on the wage side and what you're seeing in terms of what you're having to pay employees?

DAVE MARBERGER: Yeah, so part of that, we obviously have a lot of labor in our plants. We have manufacturing plants all over the country. And so part of that inflation number includes labor. So we're seeing increases in labor. You know, we always look at competitive compensation. And so when we're hiring employees at Conagra, we always look at the marketplace to determine that we're competitive. And so we're continuing to do that. That's an ongoing process that we have. So, you know, we've seen increases in our labor costs, but we always see the increases. And so we just continue to manage that, and we stay close to the market to make sure that we're competitive.

BRIAN SOZZI: And then, Dave, you mentioned a bit on the earnings call, putting out this word "absenteeism" as it pertains, I guess, to employees in the factories. What are you seeing in your factories right now as omicron spreads?

DAVE MARBERGER: So Sean talked about yesterday, we have seen a spike with omicron very recently. But I'm going to pivot back to when COVID really started in March of 2020. We've been in a mode as an organization and as a supply chain organization of managing disruptions in our labor force going back that long. And so literally every day that we come in, we have a call with the entire supply chain where we look at across all of our manufacturing plants, what's the absenteeism, whether somebody caught COVID or they're being quarantined and how are we going to mobilize around running our production lines.

And so that's actually become kind of normal course for us. And so there's been so many different evolutions. We had delta, now we have omicron. So it's just us continuing to persevere, evaluate the situation, because remember, we have plants all over the country, and omicron is spiking in different regions. And so we have different absenteeism depending on the actual factory. And so our supply chain organization does an amazing job of assessing and then mobilizing so that we can keep producing food to keep food on people's tables in this country.

BRIAN SOZZI: And Dave, if I've learned anything from following Conagra from some time, Conagra's a pretty innovative company in snacks and frozen foods. Have you had to pull back in terms of pushing the envelope on product innovation, just given everything you are seeing with the pandemic?

DAVE MARBERGER: You know, it's a great question. And when COVID first hit, you know, there was such a spike in demand that we were looking at ways to optimize output. And one of the things that we evaluated was, do we reduce the number of SKUs that we produce so that we can get more throughput on some of the core SKUs? And as we started down that path and we've done some of that, our customers have said, you know, listen, we do not want you to dial back on innovation. You guys have done a great job in frozen and snacking innovating. It's driving traffic to the stores. And we don't want you to pull back on that.

And so we've continued to put our foot on the accelerator with innovation. You know, there are some where maybe we've delayed a few launches just because of balancing the core with the new products. But we've essentially kept our innovation pipeline going. Customers want it, consumers want it. And we're really excited what we have in the pipeline for the next few years.

JULIE HYMAN: Anything you want to share with us about what you're most excited about? Any product that you've really been enjoying tasting that you think consumers are going to love?

DAVE MARBERGER: Well, I have to say, my favorite day of the week-- this is normally not the case-- is Monday. And the reason I love Monday is because that's when we do our product innovation meetings, and they let me come as CFO. So I get together with all of our chefs and with all the brand and marketing and sales people, and we go through and we look at new products. We taste them. We evaluate them versus the competition. And we actually-- I always make sure the margins are acceptable.

And so we do that every Monday. And so I have a great opportunity to taste so many different things that we're looking at. So I'm a big fan of our frozen meals. I love healthy choice. I'm a big consumer of healthy choice, especially, you know, we've gone hybrid. So Fridays, we work from home. I'm always eating healthy choice meals for my lunch. And we're seeing more of that in terms of our demand. That's a big part of the demand, more people working at home.

And so but I love all our products. I mean, Reddi-wip's amazing. I use that all the time. Slim Jim, especially my younger kids, they love Slim Jim. And so we just have a great portfolio. We have so many brands and products that I can hit a lot of my eating occasions.

JULIE HYMAN: I have to say, as we've been showing the VO, there's some stuff I didn't know that Conagra was responsible for. I'm a big fan of the Frontera salsa myself. Dave, thank you for being here. Dave Marberger is Conagra Brands CEO-- CFO, excuse me. Appreciate your time here this morning.

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