Conagra (CAG) Q3 2026 Earnings Call Transcript

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Date

April 1, 2026, 9:30 a.m. ET

Call participants

• Chief Executive Officer — Sean Connolly
• Chief Financial Officer — Dave Marberger
• Senior Director of Investor Relations — Matthew Nieses

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Takeaways

• Material spend hedge coverage -- Management reported approximately 60% material cost coverage for Q1 of fiscal 2027 and 40% for the full year, with steel and certain crop-based ingredients having higher coverage, while protein coverage remains lowest at 15%.
• Freight cost exposure -- Contracted line haul accounts for a high percentage of freight, mitigating exposure to recent spot rate increases, with coverage extending through much of the next fiscal year.
• Organic net sales outlook -- The company expects “positive organic net sales growth” in the upcoming quarter, citing shipment and consumption alignment, and contributions from newly shipping innovation.
• Operating margin guidance -- Expectations have shifted to the “high end” of the previously guided 11%-11.5% range, with full-year operating margin aided by lower advertising and promotion spending in Q4, a 53rd week, and favorable seasonal factors.
• Free cash flow conversion target -- The company increased its free cash flow conversion goal from 100% to 105%, and emphasized ongoing focus on inventory reduction, working capital efficiency, and cash tax planning as pillars of that improvement.
• Volume growth drivers -- Frozen and snacks segments are said to be driving overall portfolio volume gains, with “velocity” increases attributed to successful innovation rather than retailer inventory shifts.
• Ardent Mills contribution -- Earnings from Ardent Mills, a key joint venture, are pressured by “overall wheat prices and the volatility,” which reduced commodity trading profits, but the dividend payout remains on plan despite equity earnings being “off $0.10.”
• Inventory levels and AI implementation -- Inventory on the balance sheet stands at $2 billion, with ongoing reductions enabled by supply chain initiatives and Project Catalyst, which deploys AI for inventory optimization.
• Margin compression in frozen segment -- Margin pressure in frozen foods was attributed to an intentional volume-focused strategy and increased animal protein costs, with management citing plans for repatriating outsourced production to improve future margins.
• Pricing actions and elasticity -- Select price increases in canned and cocoa-oriented products produced “encouraging” elasticity behavior, supporting a surgical approach to pricing in line with segment strategies.

Summary

Conagra Brands(NYSE:CAG) provided detailed input cost hedging information, confirming fiscal 2027 visibility for most materials but noting limited protein coverage at only 15% for the year. Management stated that freight rate risk is mitigated by high contract coverage, but acknowledged spot rates have recently surpassed contracted levels, and those increases have been accounted for in current guidance. The company increased its free cash flow conversion target, driven by improvements in inventory management and advanced planning systems, and announced continued reductions in inventory as a competitive focus. Operating margin guidance was shifted to the high end of prior expectations, underpinned by advertising leverage, a benefit from an extra fiscal week, and ongoing productivity from process improvements. Results at Ardent Mills, an important profit contributor, reflected headwinds from muted wheat commodity volatility, with the company emphasizing stability of cash dividends despite lower earnings from the joint venture.

• Sean Connolly described the ongoing strategy as a “horses-for-courses strategy,” where growth businesses focus on volume growth in frozen and snacks, while shelf stable and refrigerated lines prioritize cash maximization, leading to differentiated pricing and volume approaches by business unit.
• Dave Marberger stated, “We built up inventory levels coming out of COVID,” and disclosed a current balance of $2 billion, with targeted reductions planned via both process advances and Project Catalyst technology.
• Elasticity data after recent price increases indicate that volume response may allow continued pricing action for inflationary pressures, particularly in categories where the company has observed good elasticity.
• Management stated that ship-to-consumption alignment has been restored after past year disruptions, and shipment fluctuations are not expected to materially impact fourth-quarter results.
• Productivity improvements and investments in new in-house chicken processing capacity are on schedule, intended to bring that volume back internally next year for further operating margin upside.
• Tariff headwinds are expected to be lower than initially estimated, with approximately half of the $80 million wrap from mitigation forecast to impact next fiscal year.

Industry glossary

• Elasticity: The percentage change in quantity sold relative to a percentage change in price, critical for evaluating pricing power.
• Ardent Mills: Joint venture owned by Conagra Brands, specializing in milling and wheat-based commodity operations with both core and trading revenue streams.
• Project Catalyst: Conagra’s internal initiative leveraging AI and advanced technologies to optimize supply chain processes and reduce inventory levels.
• Line haul: The main portion of freight transportation contracted for shipping products between facilities or distribution centers, distinct from spot market logistics.

Full Conference Call Transcript

Operator: I was living alone. Living a lie. This is my confession. I was living a lie before we made. There were so many nights, so many nights full of dark tension. There were so many nights that I regret. You gave me something that I can know. Do not to. A little light when I am not myself when I found you. But in you give me freedom, freedom I did not care. I did not care enough to stop me falling. I did not care about myself. Until you are lifting me up, lifting me up, and I freedom, freedom, freedom I have been looking for. Freedom, freedom is you.

You give me freedom, freedom, freedom I have been looking for. Freedom. Freedom is you. Ever risk time I hear this voice, I was living a lie, living a lie. This is my confession. I was living a lie before we made. There were so many nights, so many nights full of dark temptation. There were so many nights that I regret. You give me something that I can know value for. I did not care enough to stop me falling. I did not care about my me up, and I was down and out. It is the highest I have ever. But in that moment, you made me believe.

You give me freedom, freedom, freedom I have been looking for. Freedom. Freedom is you. You give me freedom, freedom, freedom. I have been looking for. Freedom, freedom is you. Every time I. Good day, and welcome to the Conagra Brands, Inc. Third Quarter Fiscal 2026 Earnings Q&A Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the call over to Matthew Nieses, Senior Director of Investor Relations for Conagra Brands, Inc. Please go ahead.

Matthew Nieses: Good morning, everyone, and thank you for joining us. Once again, I am joined this morning by Sean Connolly, our CEO, and Dave Marberger, our CFO. We may be making some forward-looking statements and discussing non-GAAP financials during this Q&A session. Please see our earnings release, prepared remarks, presentation materials, and filings with the SEC in the Investor Relations section of our website for descriptions of our risk factors, GAAP to non-GAAP reconciliations, and information on our comparability items. I will now ask the operator to introduce the first question.

Operator: Our first question comes from Andrew Lazar with Barclays. Please go ahead.

Andrew Lazar: Great. Thanks so much. Good morning, everybody. Maybe, Sean, to start off, I would really like your thoughts on, if the industry does end up facing another round of broad-based inflation, whether you think Conagra Brands, Inc. and the industry at large would be able to count on pricing as one lever to help offset it as it has in the past? If this time is different, just given consumers are particularly value conscious at this stage? And I ask it because I think some industry players clearly are needing to remain highly focused on debt paydown and protecting profitability, even if it prolongs the volume recovery dynamic.

Sean Connolly: Yep. Great question. Here is how I would tell you to think about that. First, as a reminder, believe it or not, it was all the way back at the beginning of our fiscal 2024 when we pivoted to a focus on restoring volume growth in frozen and snacks, even if it meant eating some inflation and enduring some margin compression, while that strategy has proven to be quite effective, because you have seen our volume trajectory improve every quarter since with the exception of that brief period last year where we had the temporary supply constraints. So we are very pleased and pleased to see our total portfolio growing again this quarter.

As for what comes next, our plan at this point is to stay agile. If inflation is benign, you will see us likely continue to focus on continued volume momentum. If for some reason inflation was to go the other way, we will keep our options open. After all, we are a company that is intensely focused on maximizing cash flow. And we have already proven that we can move the volume needle to growth in frozen and snacks when we need to. So net, we will be agile. But right now, I would say it is too early to speculate on a particular course of action.

There are 3.5 months to go before we guide for fiscal 2027 and, obviously, a lot can unfold by the hour these days. Certainly a lot can unfold in the next 3.5 months. One thing we can be sure of is that we will drive a lot of productivity while we optimize all our other levers to mitigate any inflation that might come our way. Remember, we did take pricing this year on a bunch of products, our canned foods and our cocoa-oriented products, and the elasticities have been quite encouraging. So let us see how the dust settles and then we will take the smartest course of action to deal with whatever we are seeing at the time.

But as I sit here today, I see a lot of positives. The business has strong momentum, especially in frozen and snacks. Shares are excellent. Cash flow is strong. Productivity is robust. And people are highly engaged in delivering some of the most exciting innovations we have had. So a lot to feel good about.

Andrew Lazar: Great. Thank you for that. And then just, Dave, real quickly, maybe what sort of visibility do we have at this stage on costs going into fiscal 2027? Just based on where you might already have some hedges in place. I am not asking for your overall estimate for next year, but just how much visibility do you think you have on where you already know what you have got in place?

Dave Marberger: Yeah, Andrew, let me give you a little color there. So for our fiscal 2027, our material spend coverage is generally consistent with prior years at this point. We are roughly 60% covered, and this is total materials. Sixty percent covered for Q1 and roughly 40% covered for the full fiscal year. Areas where we have a bit more coverage than historically would be steel. Freight, remember, we contract line haul. That is a big percentage of freight, and so that is on contract. And then some of our crop-based ingredients, we have better coverage. Then a little bit less coverage on diesel fuel.

We are through the end of this fiscal year there, but not as covered as we have been in the past. And just as a reminder, proteins probably have the lowest coverage of anything. So for next year, we are only about 15% covered. We are more spot market when it gets to the animal proteins. Hopefully that gives you a little bit of a feel.

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

David Palmer: Thanks. Those were precisely my questions. So let me just follow up on that a little bit. When you look at your portfolio, you have obviously been prioritizing volume over the last fiscal year. And that has helped. There are some other notable companies in the space that have been aggressive in prioritizing volume first just like you. I wonder where we are now in terms of where you think your pricing power is? Do you feel like you are in a better spot now with regard to relative price points to private label in some of your categories versus main competitors and others? In terms of your volume momentum overall?

And I really am asking because in the past, you have said things like, we will be okay if inflation is not over 3% in terms of getting to our algo. And I just wonder if today, if we do go over 3%, if you will be able to drive profitable growth going forward. And thank you.

Sean Connolly: Hey, David. First of all, private label, just since you brought that up, we under-index in terms of private label development in our categories, particularly in our almost non-existent in our biggest business, which is frozen meals. But our strategy has been, I have called it a horses-for-courses strategy, where our growth businesses have been focused on getting back to volume growth. That is frozen and snacks, and that is happening. Our staples business is focused on cash maximization. That is a lot of things like our canned food business, and we have taken inflation-justified price on those categories and we have seen good elasticity.

So it is a surgical approach that we have taken historically, but make no mistake about it, because we have dealt with the most protracted inflation super cycle that I have certainly seen in my 35 years doing this. And after a few years of every company taking justified pricing, people said, look, you cannot shrink your way to prosperity, show us that you can get the volumes moving again. And we have done that, and our portfolio responsiveness, I think, has outpaced our peers, which shows you we are delivering good value and we are delivering exciting innovation.

But as I mentioned to Andrew, as to what is to come, we will see what the field gives us when we have to snap the chalk line here. And if things settle down with the war and things like that and things look more benign, I think it makes sense to stay focused on keeping the momentum that we have got in volume. But if for some reason things broke the other way and we are looking at a whole slog of new costs, we can pivot as well, because to the degree you do take price and you sacrifice a little volume, it is more of a volume sabbatical than it is a permanent volume rebase.

And you tend to see the volumes come back when inflation moves again and you see those prices get rolled back. So as I said, we have to stay agile, but it feels really good to see that we have a portfolio that is responsive to proper pricing and wise investments and strong innovation when we need it to be. But look, investors always want to see top-line and bottom-line growth. Sometimes the macro environment can make it challenging to do both at the same time. We will stay agile and we will post you as we get to next quarter in terms of what we are seeing and what the exact plan is.

Operator: Up next, we have Meghan Clapp with Morgan Stanley. Please go ahead.

Meghan Clapp: Hi, good morning. Thanks so much. Just wanted to start with maybe a question on the fourth quarter. As you look at the third quarter, you obviously had some nice momentum, a return to organic sales. There were a lot of moving parts just with the retailer timing and some of the year-over-year dynamics. So as we think about the fourth quarter, maybe you can just help us with some of the building blocks as we think about top line and should shipments generally match consumption? And then on the operating margin line, can you just help us understand the building blocks to the sequential improvement that is embedded as well? Thanks. Okay. That is helpful. Thank you.

And just as a follow-up, the operating margin you are now expecting at the high end of the guide, could you maybe just talk about what is driving that? And as we look at the exit rate on the fourth quarter, I think it implies something above 12. Understanding there are a lot of moving parts right now, but if inflation stays in this low single-digit range as you would hope it moderates to normalizes over time, should we think about that exit rate as being informative of a starting point going forward at this point?

Sean Connolly: Hey, Meghan, let me start by tackling the shipment versus consumption question because I saw a couple of early reports this morning that I think might have that wrong. I would not spend a lot of time overthinking shipments versus consumption with our company, because of the supply interruption last year, and then some merchandising timing shifts in frozen this year out of Q2 into Q3, our shipment patterns have moved around a bit compared to what they normally do. But over fiscal 2025 and fiscal 2026 combined, we are basically shipping almost exactly to consumption, which is what we always do as a company. It has just been a bit lumpier quarter to quarter because of those dynamics.

And so with respect to this quarter, I would not get overly exercised around there being an implication in Q4. It is actually more the reversal of Q3, which is where we had a bunch of holiday shipments last year, and those merchandising shipments this year moved to Q3. So not a lot of drama there, and that is the shipment versus consumption piece of the year to go. Dave, you want to tackle anything else?

Dave Marberger: Yes. And just to add to that, Meghan, we do expect positive organic net sales growth in Q4. That is obviously implied with our full-year guide, kind of the midpoint of the range for organic. Consumption and shipment should be more in line in Q4, talking to what Sean just explained. And we are excited about our innovation slate, and you start shipping some of that innovation, so you start to see some of that in Q4. So they are really the building blocks for the top line. As it relates to operating margin, yes, we expect an inflection from Q3 to Q4.

Really the big drivers of that: A&P as a percentage of sales will not be as high in Q4 as it was in Q3, so it will be more in line with that kind of 2.5% average. The 53rd week actually gives some leverage in terms of overall operating margin. And then just some of the seasonality of trade, timing of productivity, timing of inflation, all those kinds of things give us additional benefit in operating margin relative to Q3. So I would say they are the key building blocks. Regarding the last part of your question, I am not going to comment on fiscal 2027.

What I can say is, if you just look at when we gave guidance at the beginning of the year, 11% to 11.5% operating margin when there were so many things going on at that time, and since then have been so many dynamics, I feel really good that we are actually now going to guide to the higher end of that range. And that all starts with our inflation call, which was core inflation and tariffs, pretty much on that call. Our productivity programs are really doing well. The investments we have made in our supply chain and technology and in process are really, really delivering. And so they are really the key.

As Sean talked about, we have taken price increases, particularly in our canned products, and the elasticity has been in line. And so when you look at it, it is how we planned the year. There obviously have been some puts and takes. But generally speaking, we feel really good that we are coming in as we expected to on margin. And we expect that productivity to continue into next year. Obviously, we have more work to do on inflation. There are a lot of dynamics. Things are changing all the time. But I talked about the coverage we have. We are locked in on certain key areas, which is good for us.

So we feel good that the building blocks for next year’s plan are there, but we have to wait the next three months to give specific guidance, obviously. And then it is not operating margin, but on the free cash flow front, we continue to feel really good. We took our conversion up to 105% from 100%, and we took it up at CAGNY. And this is all from focus that we have in this company on free cash flow. It is part of the culture. It is part of the incentive plan for everybody in this company that is compensated. Free cash flow is in their incentive.

And so we are very focused on it in areas like cash tax efficiency, areas like Ardent Mills, where although our equity profit is off $0.10, our cash is on plan. So they are going to continue to dividend at plan despite the equity earnings being down. And then inventory. We built up inventory levels coming out of COVID. Our safety stocks were high, and we have continued to ramp that down. If you look at our balance sheet, we have $2 billion of inventory. And with Project Catalyst, us being able to leverage AI and other technology, we think we have a long runway to keep taking inventory out and be more competitive.

So we are pretty bullish on that front. We will talk more about that when we give guidance, but obviously that has a cost impact as well. So I would say they are the building blocks and foundations for how to think about margin ending this year going into next year.

Operator: Our next question comes from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo: Hey guys, good morning. Thanks for the questions. Dave, maybe if I could just start on Ardent Mills, the change or the revision to that line item. I think it is the second one of the year. And historically, in that business, when there has been a lot of wheat volatility, you have been able to take advantage, and I think in Q4, you are kind of calling that maybe it is the opposite. So I just want to understand what is happening there, particularly in the fourth quarter, and then just any early read on how we might start to think about the run rate of Ardent for 2027? Okay. Thanks for that, Dave. That is helpful.

And Sean, I think on Dave’s initial comments on inflation for next year, he mentioned a bit on contracting on certain crop-based ingredients. There is a lot of concern in the market just given where fertilizer costs have gone, and you all are a pretty big procurer of vegetables. So as you all are thinking through that, what the conversations are like with your growing partners, and whether that is really an issue for this growth season or whether it is more of a 2027 growth cycle event? Thanks very much.

Dave Marberger: Sure, Peter. So just taking it from the top, as I have talked about, broadly speaking, Ardent has two sources of revenue and profit. They have their core business margin, where they mill flour and sell that at a profit. That business is consistent and that business is tracking. And then they have what we call commodity trading revenue. And that is where there is a lot of activity hedging and different arbitrage where Ardent can be in a position to make a lot of money. And what really drives the upside there are overall wheat prices and the volatility of the markets.

And through the first three quarters of this year, wheat prices have been low and there has been less volatility in the wheat market. So not as much opportunity for Ardent to take advantage on the commodity trading side. Obviously, with the start of the war, wheat prices have gone up in the futures and volatility has increased. And so you do not see those benefits immediately. And so with our forecast for this year, we have called the number where we are now. But clearly, there is more volatility that the Ardent team is working through now. We will work through it as well, just to determine what kind of impact that could have on next year.

We do not have line of sight to that at this time. But there is more volatility at this point since the war.

Sean Connolly: Well, fertilizer would be more of an F2028 event than F2027. But our conversations are very productive. I think everybody is in the same boat, Pete. I mean, it is kind of like the news of the hour around here that we are responding to. And so it is just super dynamic. We have to stay on top of it. It changes day to day and you have to be agile. That is why I started my comments today to Andrew saying we will be responsive to the hand we are dealt, and we will choose the smartest course of action. And that is just the nature of operating in incredibly dynamic times.

Operator: Thanks, Peter. Our next question comes from Tom Palmer with JPMorgan. Please go ahead.

Tom Palmer: Good morning. Thanks for the question. Maybe I could just start off with a clarification on some of the inflation and freight commentary. You noted that you are covered in terms of contracts. I think in the past when we have seen rates run up, not totally dissimilar to now, we have seen spot running well above contracted rates and maybe contracted rates not holding in the way that you might think of a contract holding. To what extent are you seeing that now, especially when I look at some of that margin pressure in the refrigerated business this quarter? Thank you.

And then following up on Ardent, you mentioned earlier on the strong free cash flow conversion, how some of that was aided by not lowering the distributions from Ardent even as earnings have maybe not come in quite the way you expected? If we think about a potential rebound next year in Ardent’s earnings, to what extent should we think about that flowing through in terms of the earnings? Thanks.

Dave Marberger: Yes. So spot was actually running low for a lot of our fiscal year. Spot has now spiked up and is above contracted rates. A high percentage of our freight as we look into next year is contracted line haul. So a high percentage. So a smaller percentage is spot. That market has spiked up like you just alluded to. But we have incorporated all that for our fiscal 2026 guide. And then as I mentioned, next year, we are covered through a good part of next fiscal year with our freight contracts, and that is a high percentage. We do have some spot, but a high percentage is contracted. Yeah.

So, Tom, we look at this on a year-by-year basis. We have a lot of discussion with our joint venture partners on capital allocation priorities. As a general rule, Ardent Mills does an outstanding job managing their balance sheet. They keep their leverage low. And they are really efficient with their cash flow. So this year, they were in a position to be able to hold to plan despite some of the volatility I described earlier on the commodity trading revenue. So as a general rule, we have a payout ratio level that we set going into the year. And then we look at how the year plays out and then we go from there.

But generally speaking, we feel very good about the cash generation of Ardent Mills and getting timely distributions.

Operator: Our next question comes from Robert Moskow with TD Cowen. Please go ahead.

Robert Moskow: Thanks. A couple of questions. One, Dave, can you remind us what the tariff component of your cost inflation is this year? I think it is like 2% or so. How should we think about it for fiscal 2027? Does it lap? Will it turn to a zero? And does that automatically get you some relief in your inflation for next year? Okay. I will follow up on that. And then more broadly, I mean, the retail consumption data, Sean, looks really strong on a two-year volume CAGR basis for frozen.

But then when I just look at your shipments, and I try to do that same two-year CAGR just for the refrigerated and frozen division, it is down on a two-year basis. And that is trying to normalize for the supply chain disruption. Is that just because this division has refrigerated brands that have been down over that two-year period that you are not including in that Nielsen data?

Dave Marberger: Yes, Rob. So generally, going into the year, our overall inflation was 7%. Four percent was core and 3% were gross tariffs before mitigation. And we track mitigation as part of productivity, and we estimated 1% in mitigation. And that has pretty much played out. There has been some volatility, obviously, with the IEEP tariffs, but then we have the new tariffs that have come in. And so not a material change, I would say, to the original estimate, a little bit favorable. But then our core inflation has been a little unfavorable. So we are still at that total 7%, call it.

As we look to next year, because we had mitigation that we are going to wrap, there is going to be some headwind from a wrap perspective in tariffs. And so we originally said 1% mitigation, which would imply $80 million of headwind. We do not think it is going to be that much. It might be more like half of that, but we are going to have some headwind with tariffs just because we are wrapping on the mitigation that we had this year that now will not flow into next year.

Sean Connolly: I am not exactly sure what you are looking at, Rob, but that could be a piece of it. Some of the refrigerated businesses are nowhere near the strategic priority as our frozen business, as an example. So those could be categories where, as we follow our horses-for-courses approach, it is more of a value-over-volume. But I would say in general, on the core frozen business, you have seen strength on a one-year, and you have strength on a two-year. And staggering market share data around 88% of that business holding or gaining share, which I know was a central focus for investors last year when we had a supply interruption. It is like, will this bounce back?

Will it bounce back strong? And it has bounced back. So our refrigerated businesses, some of those businesses are more about cash contribution. There are some particularly high-margin businesses in there. And some of those refrigerated businesses we treat more like some of our center store businesses like cans, where we manage them for cash and not as much for volume growth. That is probably what you are seeing there.

Dave Marberger: Just, Rob, and I will let you follow up checking numbers. But if I just look at Q3, obviously this quarter for shipments for R&F volume was plus 3.9%. Q3 a year ago was minus 3%. So on a two-year basis, volume is actually up in shipments.

Robert Moskow: Yes. I was referring to overall dollars. They are down. But, yeah, I agree with you, Dave. Alright. Thank you.

Operator: Our next question comes from Chris Carey with Wells Fargo. Please go ahead.

Chris Carey: I wanted to see if you maybe could just take a two- to three-year view on the margin trajectory for your key U.S. businesses. The grocery and snacks business has seen pressure, but there has clearly been more pressure on the refrigerated and frozen side. When you digest the past few years, what are the key challenges that have impacted the business? Obviously, there has been inflation. I wonder if there are other things under the hood. And as you look out over the next several years, how tangible is your ability to claw back some of those margins? And maybe you can comment on your medium-term productivity initiatives as well. I would love any thoughts there. Okay. Alright. Great.

Thanks, Sean. And just, Dave, the free cash flow conversion has been a really good story. You upped that at CAGNY and a small increase again today. Are we run-rating at a new level for free cash flow conversion? Do you see a level of sustainability up here over 100%? And then just, it is kind of a confirmation of a prior question. The dividends are staying on Ardent, or I think that the cash component of Ardent has maintained despite the income statement component coming down. Does that get reset next year? Or can you maintain a level of dividends?

And by the way, and I know you are not guiding to Ardent nor am I suggesting, but is there some sort of mark-to-market that needs to happen there so that is kind of, you know, just a quick follow-up. So same thing on cash.

Sean Connolly: Yes, Chris, let me give you my thoughts on that. We are the biggest frozen food manufacturer in North America, if not the world. And we have, as a company, seen in this now five- to six-year deep inflation super cycle, a massive increase in the cost of goods we have had to deal with. And after about four years of taking inflation-justified pricing in order to protect margins, that is where we said on our growth businesses, you cannot shrink your way to prosperity and that is led by frozen. So we did pivot the strategy to stop taking at some point all this inflation-justified pricing in frozen to get volumes moving again.

But that means we had to eat some of that higher cost. And as a result, that business in particular, because it is so strategic to us, we got volumes moving. They are moving extremely well again this quarter. But we have had to eat some cost. And a lot of that cost has been in animal protein, because as you know animal proteins have been up. So that is exactly what has driven the margin compression in the frozen business. And it was a choice we made to protect our leading market shares and protect our sales.

And if you looked at even the velocities across our portfolio that came out yesterday, I think we have got the best velocities by a good chunk in the group. So now the question comes, what is next? Obviously, we have got the war curveball that we are dealing with. But as I said last quarter, assuming we can get some element of normalcy, we absolutely expect margin expansion going forward, particularly in frozen. And the building blocks have not changed. It starts with productivity. In fiscal 2026, between core productivity and tariff mitigations, that number is just over 5%, which is very strong.

Second, at some point, we are going to get inflation relief, hopefully back closer to our typical 2%, certainly getting the war behind us would help with that. Third, we have got the advancement of our supply chain resiliency investments, including the chicken plants, and that is going to enable us at some point to repatriate outsourced volume, which will be a good guy for margin. And then fourth, we are taking price. And we have taken price surgically. And we have seen encouraging elasticities.

And then the fifth thing is, as you have heard me talk in the last couple of quarters, we have kicked off this Project Catalyst, which is an ambitious initiative to reengineer our core work processes leveraging technology. And that is going to be a benefit to both the P&L and the balance sheet. In the P&L, it will be a benefit to sales and will be a benefit to profit. In the balance sheet, we see opportunity there in terms of reducing working capital, increasing cash. And that is a real tangible and exciting opportunity. So yes, it is margin and it is more than margin in that particular project.

So put those things together and we feel very good about the margin outlook from here. Obviously, it would not hurt if the world settled down a bit. But we will deal with that because that is not something we control. We have to respond to that.

Dave Marberger: Yes, okay. Well, let me start with the free cash flow conversion. I am not going to guide to that now. What I would say is we always target a 90% or better free cash flow conversion as the base. Given our earnings and our ability to convert that to cash just in the normal course, we feel 90% is the appropriate target. So to get above that, we need to find additional cash-generating ideas. We have done that with cash tax efficiency this year with different planning that we have done that has really helped us there. And the big thing has been working capital specific to inventory, and I talked about it earlier.

We have a significant amount of inventory, and we believe we have great opportunity to really reduce that inventory in future years. Our inventory increased coming out of COVID because we had a lot of demand and we increased our safety stocks. And now we are methodically reducing it with our supply planning systems and our process. But when we leverage some of these new tools with AI now, we think that we can continue that acceleration of inventory reduction. And that is the kind of thing that is going to take you above 90%. So again, I am not going to specifically guide on that today. But we are laser focused on inventory.

And a big part of that too, I have done this a long time, to be able to take inventory down you have to have alignment between supply chain, sales, finance. And it may sound simple, sometimes that does not always happen. And we have great alignment here. And it starts at the top in terms of a commitment to taking inventory out. So we are investing and we feel pretty bullish on our ability to take that out. As it relates to Ardent Mills, when we set equity earnings for Ardent, we always have a payout ratio on those earnings, and that is how we start the year. And that payout ratio is pretty high.

It is not 100%, but it is pretty close. And then we go from there. And so this year, the earnings fell, but we kept the dividend to plan. So our payout ratio is above 100%, but you always reset it every year so that the dividend payment and the equity earnings to start the year are pretty much in sync. And then we evaluate their balance sheet as we go each quarter.

Operator: Our next question comes from Scott Marks with Jefferies. Please go ahead.

Scott Marks: First thing I just wanted to get clarity on, in terms of the volume growth in the business, wondering if you can help us understand how much of that was driven by some of the retailer inventory adjustments and how much of it would you attribute to just recovery from the supply chain disruptions a year ago? And then a follow-up just quickly. I know last quarter you had been talking about the new big chicken facility, talking about bringing in-house some production and that had been on track. Just wondering if you can share an update on that, how that is progressing versus expectations? Thanks.

Sean Connolly: Well, we certainly undershipped last quarter, Scott, and we caught that back up because the merchandising events moved into Q3. So the shipments associated with those moved into Q3. So on a two-year basis, as I mentioned before, we basically ship to consumption and there is not a material gap there at all. In terms of the takeaway portion of it, it is strong on a one- and a two-year basis. And if you look at the mix of TPDs versus velocities, the hero there has really been the velocity piece. And that is driven in large part by just the strength of the innovation we have seen.

So very pleased with the consumer takeaway that we have seen, particularly in frozen and snacks, which, obviously, you could see in the data has been quite strong. Yes. We sell a lot of chicken and we use a lot of chicken in our products and it is a combination of baked or roasted, whatever you want to call it, and fried. Both have been strong. Both projects are tracking right where we need them to be. We still do have production on the outside that will continue for a little bit. But then at some point when all our work is complete, we will have the opportunity to bring that back in as a good guy for our margins.

And just on the bake side, we did complete that project, and we are starting to bring that volume back this year. And so as we go into next year, that should be a tailwind in terms of having full year on that. And then the fried, we have made investments and that is going to go out longer.

Operator: Our next question comes from Carla Casella with JPMorgan. Please go ahead. Carla, is it possible your line is muted? It is open on our end, but we are still unable to hear you.

Matthew Nieses: I think that might be the last question, so why do we not go ahead and wrap today?

Operator: Alright. This concludes our question and answer session. I would like to turn the call back over to Matthew Nieses for closing remarks.

Matthew Nieses: Thank you, Bailey, and thank you all so much for joining us today. Please reach out to Investor Relations if you have any follow-up questions.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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