Conagra Brands, Inc. (CAG) Q4 2022 Earnings Call Transcript

Conagra Brands, Inc. (NYSE: CAG) Q4 2022 earnings call dated Jul. 14, 2022

Corporate Participants:

Melissa Napier — Senior Vice President of Investor Relations

Sean Connolly — President and Chief Executive Officer

David Marberger — Executive Vice President and Chief Financial Officer

Analysts:

Andrew Lazar — Barclays Capital — Analyst

Ken Goldman — JPMorgan — Analyst

David Palmer — Evercore ISI — Analyst

Alexia Howard — Bernstein — Analyst

Chris Growe — Stifel — Analyst

Robert Moskow — Credit Suisse — Analyst

Bryan Spillane — Bank of America Securities — Analyst

Jason English — Goldman Sachs — Analyst

Simon Negin — UBS — Analyst

Presentation:

Operator

Good morning, and welcome to the Conagra Brands Fourth Quarter and Fiscal 2022 Results Conference Call. [Operator instructions] After today’s presentation there will be an opportunity to ask questions. [Operator instructions]

I would now like to turn the conference over to Melissa Napier, Head of Investor Relations for ConAgra Brands. Please go ahead.

Melissa Napier — Senior Vice President of Investor Relations

Good morning. This is Melissa Napier, Head of Investor Relations for Conagra Brands. I’m here with Sean Connolly, our CEO; and Dave Marberger, our CFO. Today, Sean and Dave will discuss our fourth quarter and fiscal 2022 results and provide some perspectives on fiscal 2023. 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 those 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. It’s great to be working with you again. Good morning everyone, and thank you for joining our Fourth Quarter Fiscal ’22 Earnings Call. I’ll start with what we would like you to take away from the call this morning.

Throughout fiscal ’22, our team took decisive actions to offset inflation and invest in our business. We faced heightened costs throughout the year, but inflationary pressures were especially high in the fourth quarter. As a result, we implemented additional inflation-justified pricing actions to help offset the impact. We continued to make deliberate strategic investments in our business to better serve our customers and meet the strong consumer demand for our products as physical availability is an important part of maintaining and building trust and loyalty.

I’m pleased that our brands continue to resonate with consumers, demonstrated by broad-based share gains within the portfolio, particularly within our most strategic domains of Frozen and Snacks. We are continuing to drive growth, gain share in attractive categories, and we remain disciplined in executing the Conagra Way to create lasting connections with consumers.

As we’ve communicated throughout the year, the external factors I touched on a moment ago, as well as investments we made to maximize service and product availability in the face of supply constraints, all contributed to increased margin pressure. We continued to pull levers to manage these factors, and we were pleased to see margin improvement materialize in the fourth quarter in Grocery & Snacks, as well as Foodservice. This represents an important inflection point that we expect will extend to our Refrigerated and Frozen and our International businesses within fiscal ’23.

I also want to highlight the strong fourth quarter performance of our joint venture, Ardent Mills, which effectively managed through recent volatility in the wheat markets and continued to prove an effective hedge against inflation.

Looking ahead to fiscal ’23, we expect to see continued strength in our sales, driven by strong innovation, the impact of pricing actions, and progress in the supply chain to help offset continued inflation and elasticities. While we expect elasticities to increase incrementally from fiscal ’22 levels as more inflation-justified pricing comes to market, we believe they will remain below historical levels. These expectations are reflected in the fiscal ’23 guidance we’re providing today.

With this expected macroeconomic backdrop, we are lowering our long-term leverage target, which Dave will discuss later. As you know, maintaining a strong and flexible balance sheet and keeping our investment-grade credit rating remain important to us. With that overview, let’s take a look at the results.

While we had planned for high inflation, it was higher than we anticipated. Slide 7 shows our cost of goods increased 16% in fiscal ’22, far higher than the 9% we anticipated at the time of our fiscal ’21 fourth quarter call a year ago. Inflation was particularly acute during the fiscal ’22 fourth quarter when our cost of goods sold were 17% higher than the year-ago period and 24% higher on a two-year basis.

The elevated levels of inflation we experienced in fiscal ’22, particularly in the fourth quarter, required decisive actions in response. A critical part of that response included the inflation-justified pricing we implemented throughout fiscal ’22. On Slide 8, you can see the change in on-shelf pricing by quarter.

On-self prices for our brands rose across all three domestic retail domains compared to the same period a year ago and also increased in Q4 as we experienced additional inflationary pressures. We closely monitor the impact of these pricing actions on volumes. We’ve been pleased that price elasticity has remained below historical levels.

Slide 9 demonstrates that unit sales have stayed largely consistent on a three-year basis, even as the on-shelf prices for our brands have increased. Even in Q4, as more significant inflation-justified pricing took effect, the increase in elasticity was relatively modest and below historical norm. As we monitor the impact of our pricing actions on volume, we look at the relative impact between branded foods and private label.

While private label is gaining some share more broadly in food, we have not seen notable migration toward private label in the heavily branded categories in which we compete. The superior relative value of our products continues to resonate with our customers and our consumers, and the resiliency of our portfolio means we are well-positioned to take additional action in fiscal ’23 if we continue to experience incremental inflation. As a result of our decisive actions, we’re beginning to see the expected recovery in our margin performance.

As I mentioned earlier, the fourth quarter represented an important inflection point as we saw margin improvements materialize in Grocery & Snacks and Foodservice, which helped drive fourth-quarter operating margin improvement for the total company. As I already noted, we expect our Refrigerated and Frozen and International segments to deliver operating margin improvement as fiscal ’23 progresses.

As you could see on Slide 11, our team delivered solid Q4 results in the face of a highly dynamic and challenging operating environment. Compared to the fourth quarter of ’21, organic net sales for the fourth quarter increased at just under 7%, with growth in all four segments. And importantly, adjusted operating margin increased approximately 100 basis points, and adjusted EPS was up over 20%.

I’d like to briefly detail our performance across our three retail domains, starting with our Frozen business on Slide 12. Frozen continues to be one of the strongest businesses in our portfolio and offers modern attributes, convenience, and quality to make it the perfect fit for today’s consumer. In Q4, we continued to deliver strong growth on both a one-year and three-year basis. And within this consumer domain we’ve seen growth across key categories, highlighted by more than double-digit year-over-year growth in both plant-based protein and single-serve meals.

Now let’s talk about Snacks. As shown on Slide 13, we’ve seen a meaningful acceleration in retail sales growth in our Snacks business over the last three years. In the fourth quarter, our Snacks business grew 11% year-over-year. That equates to 34% growth over the same period in 2019. In this domain, we’ve driven growth in key categories, including meat snacks, hot cocoa, microwave popcorn, and salty snacks.

Our retail sales of ingredients and enhancers, and shelf-stable meals and sides have also been growing meaningfully over a three-year period, and that trend continued in the fourth quarter. As you can see on Slide 14, this business grew 5% year-over-year and 10% on a three-year basis. In particular, we saw a large increase in the retail sales for syrup, which was up nearly 20% in Q4 on a two-year basis.

As we execute our Conagra Way playbook, innovation has remained a key to our success across the portfolio. Slide 15 shows the impact of our disciplined approach to delivering new products and a modernized portfolio. During the fourth quarter, our innovation outperformed the strong results we delivered in the year-ago period, and once again, our innovation rose to the top of the pack in several key categories, including with toppings, single-serve meals, and plant-based protein.

Looking at Slide 16, you can see that we continue to grow sales on both a one- and three-year basis. Total Conagra retail sales were up 15.8% on a three-year basis for the year. We also continued to gain share in the important Frozen & Snacks categories with our category-weighted share growth up both on a one-year and three-year basis.

With that context for fiscal ’22, let’s turn to our outlook for fiscal ’23. We expect our strong brands, on-trend innovation, effective pricing, and strengthened supply chain to drive top line growth and margin improvement. Continued inflationary pressure in fiscal ’23 is expected to result in incremental increases in elasticity, which, overall, we anticipate will continue to remain below historical levels.

Our outlook also reflects our expectation that we will have higher capex and interest expense in fiscal ’23, lower pension income, and that elevated performance from Ardent Mills in fiscal ’22 will moderate. We look forward to sharing more details about our expectations for the year at our upcoming Investor Day. In 2023, we expect organic net sales growth of 4% to 5%, adjusted operating margin of approximately 15%, adjusted EPS growth of 1% to 5%.

Before I turn the call over to Dave, I’ll remind you that my team and I are looking forward to hosting an Investor Day on July 27 to discuss our plans for the future. In response to feedback, we’ve decided to hold our event in a virtual-only format to best accommodate our investors and analysts. Registration, dial-in, and Q&A details for the virtual event are available on our website.

Dave, over to you.

David Marberger — Executive Vice President and Chief Financial Officer

Thanks Sean, and good morning everyone. I’ll start with some highlights from the quarter and full year, which are shown on Slide 22. Overall, we feel very good about how we are exiting fiscal ’22 and the way we navigated the dynamic operating environment that impacted our entire industry throughout the year. During fiscal ’22, we delivered strong top line growth with full-year organic net sales up 3.8% compared to fiscal ’21, reflecting the continued relevancy of our portfolio to consumers.

While higher-than-expected cost of goods sold inflation weighed on our adjusted operating margins throughout the year, we were encouraged to see Q4 operating margins improve versus year-ago. Overall, our full fiscal year ’22 adjusted operating margins decreased by 312 basis points versus last year to 14.4%, which was in line with the revised expectations we provided during our third quarter call. Fiscal ’22 adjusted EPS of $2.36 was also in line with our revised expectations.

Turning to Slide 23, you can see our net sales bridge for the quarter and full year. During the fourth quarter, the 6.8% increase in organic net sales was driven by a 13.2% improvement in price/mix as a result of continued inflation-justified pricing actions, as well as favorable brand mix. This was partially offset by a 6.4% decrease in volume.

The headwinds from the divestiture of our Egg Beaters business and the impact of foreign exchange were the final contributors toward the 6.2% increase in total Conagra Brands net sales during the fourth quarter. The bottom half of the slide highlights the drivers of our net sales growth for full-year fiscal ’22 versus the prior year.

The highlight here is the 3.8% organic net sales growth that I just mentioned which showcases the underlying health of the business and our ability to execute inflation-justified pricing actions. This point is reinforced on Slide 24, which shows the top-line performance of each of our segments.

As Sean mentioned, we are pleased that net sales continued to grow across the portfolio for both the quarter and full year when compared to the respective year-ago periods. We also continued to see market share gains, reflecting the strength of our brands. The sales momentum of the business is strong as we exit fiscal ’22.

We detailed our adjusted operating margin bridge on Slide 25. In aggregate, our adjusted operating margin was 15% for the fourth quarter, approximately 100 basis points above the year-ago period. As you can see, we realized a 9% benefit from favorable price/mix and a 1.8% benefit from net productivity in our supply chain.

Although our productivity in the quarter was below historic levels, given continued supply chain challenges, the rate was up compared to Q3 and we are seeing steady improvement in our supply chain operations as we exit fiscal year ’22. The price and productivity benefits were more than offset by gross market inflation of 17.3%, which impacted our operating margins by more than 12%. I will unpack the inflation impacts in more detail shortly. Together, these factors contributed to the 147-basis-point decrease in our adjusted gross margin for the quarter compared to the year-ago period.

Advertising and promotion costs for the quarter decreased 38.7%, driven primarily by lacking the — lapping the significant increases in A&P during Q4 last year. This decrease contributed 1.1% to overall adjusted operating margin. Adjusted SG&A costs also declined during the quarter, driven by decreased incentives and deferred compensation, contributing an additional 1.3% benefit.

Slide 26 breaks down our adjusted operating margins by segment. We were encouraged to see both our adjusted gross margins and adjusted operating margins in our Grocery & Snacks and Foodservice segments hit inflection points during the fourth quarter and begin to improve compared to last year. The recovery in these segments drove the 13.5% year-over-year improvement in adjusted operating profit during the fourth quarter.

Our Refrigerated and Frozen segment was most impacted by higher than anticipated input cost inflation in Q4, particularly in proteins and edible oils. The above forecast inflation in Refrigerated and Frozen has pushed forward the lag until additional inflation-justified pricing is reflected in market. As we have mentioned previously, we believe our Refrigerated and Frozen segment, and our Frozen portfolio in particular, is well positioned for further success.

Our International segment was also impacted by higher than anticipated inflation and some FX headwinds versus prior year. Pricing actions were implemented as planned, but were not enough to fully offset the cost headwinds incurred. As Sean mentioned earlier, we expect to see operating margins expand in both our Refrigerated and Frozen and International segments in fiscal ’23 as pricing actions catch up to the recent inflation.

I would like to take a deeper dive into the gross market inflation we experienced during the quarter, shown here on Slide 27. Inflation continued to rise to over 17%, above the high-end of the range that we were anticipating at the time of our third quarter call. It rose most acutely for commodities that are particularly difficult to hedge, including chicken and pork. Even though we forecasted a significant acceleration of our chicken and pork costs in Q4, as depicted in the charts on the right, actual inflation came in even higher, especially in chicken, which hit record levels compared to our expectations as of the Q3 call.

We continue to pull on a number of levers to offset the elevated costs, including an additional round of inflation-justified pricing actions implemented during the fourth quarter of fiscal ’22 that will be effective in the first quarter of fiscal ’23 and new pricing that will take effect in the second quarter of fiscal ’23. Another strong performance by Ardent Mills also proved to be an effective inflation hedge in our Q4 results.

Slide 28 details our adjusted EPS bridge for the quarter compared to last year. The sales increase and recovery of overall operating margins was the primary driver of the increase in our adjusted EPS during the fourth quarter, contributing $0.09. We also saw a $0.02 benefit from our equity method investment earnings, which increased 42.1% during the quarter to $48 million due to solid results from Ardent Mills, as effective management at the joint venture allowed it to capitalize on volatile market conditions.

A benefit from pension and post-retirement non-service income and higher adjusted taxes were the additional drivers of our EPS change. The $0.65 in adjusted diluted EPS, that we generated for the quarter, brought our full-year adjusted EPS to $2.36, down 10.6% from fiscal ’21. On a two-year compounded annualized basis, full-year fiscal ’22 adjusted EPS increased 1.7%.

Turning to Slide 29, you can see our balance sheet and cash flow metrics for the quarter and full year. We feel good about ending the year with a net debt-to-EBITDA ratio of four times, which was generally in line with the target we outlined during our third-quarter call. We aim to continue decreasing this ratio moving forward as we prepare for more market volatility, which I will discuss in more detail shortly. Capital expenditures decreased by $42 million year over year to $464 million, or 4% of net sales. Lastly, we continued to prioritize returning capital to shareholders as we paid $582 million in dividends in fiscal ’22.

I’d now like to spend a minute talking about our guidance for fiscal ’23. Slide 30 outlines our expectations for our three key metrics, including organic net sales growth of plus 4% to plus 5%, adjusted operating margin of approximately 15%, and adjusted EPS growth between plus 1% and plus 5%. In addition, we aim to continue reducing our long-term net debt-to-EBITDA ratio to three times, as I alluded to earlier. The macro-environment remains volatile, and this target reflects our strategy to maintain an even stronger balance sheet as we navigate continued headwinds moving forward, and we continue to remain committed to a solid investment-grade credit rating.

Before we open the line up for questions, I want to unpack the assumptions behind our guidance, shown here on Slide 31. We expect the high inflationary environment we experienced in fiscal ’22 to continue into fiscal ’23, with levels in the low teens off of the fiscal ’22 gross market inflation of 16%. As I noted, we have communicated additional inflation-justified pricing actions to help offset these elevated costs, which we anticipate being realized during the first and second quarters of fiscal ’23, and we are keeping a close eye on how these actions impact elasticities.

We forecast the environment to remain dynamic through fiscal ’23, with the elasticities increasing from fiscal ’22 levels, but remaining below pre-COVID historical levels. From an investment perspective, we expect capex spend of approximately $500 million, as we prioritize reinvesting in the business as a lever to combat inflation with a focus on capacity expansion and productivity enablers.

We also plan to increase our SG&A investment to support talent, infrastructure, and continued automation. Interest expense is anticipated to be roughly $410 million for the year; pension and post-retirement income, approximately $25 million; and our tax rate estimate is approximately 24%. These three items combined represent an approximate $0.13 headwind to fiscal ’22 adjusted EPS and are incorporated into our fiscal ’23 EPS guidance of plus 1% to plus 5%. The higher interest rate environment is the main driver of the expected interest expense increase in pension income decline.

We anticipate Ardent Mills having another strong year, but expect fiscal ’23 results to moderate versus fiscal ’22, particularly versus the elevated performance in the second half of fiscal ’22. To reiterate, we are confident about how Conagra ended the year and are optimistic about our future opportunities. We are looking forward to walking through these opportunities and our strategies to unlock them in more detail at our Investor Day later this month.

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 and Answers:

Operator

Thank you, and we will now begin the question-and-answer session. [Operator instructions] And our first question today will come from Andrew Lazar with Barclays. Please go ahead.

Andrew, please go ahead with your question.

Andrew Lazar — Barclays Capital — Analyst

Great. Can you guys hear me okay?

Melissa Napier — Senior Vice President of Investor Relations

Yeah, we can hear you now.

Sean Connolly — President and Chief Executive Officer

Yes.

Andrew Lazar — Barclays Capital — Analyst

Great. Thanks very much, I appreciate it. All right, so just to start off, I realize elasticity is certainly below historical levels and as you’ve talked about, and — but volume was down a bit more, let’s say, than what we’ve seen from other food companies, all of whom have had as much pricing or more than Conagra, at least on a year-over-year basis. So, I guess I’m trying to get a sense whether elasticity is starting to catch up with the company maybe more than others are seeing or if there’s something else going on, because a bunch of companies have started to talk about the benefit they’re seeing from trading in to at-home eating from away-from-home eating, which is blunting maybe what would have been expected to be greater elasticity at this stage, given all the pricing that’s taking place, and it just speaks to whether your assumption around below historical levels of elasticity for ’23 is conservative or where that comes in? And then I’ve just got a follow-up.

Sean Connolly — President and Chief Executive Officer

Yeah, Andrew, it’s Sean, I’ll answer that. It’s pretty clear, as we look at the data, we’re experiencing the same trading-in that others referenced, and the demand for our products remains quite strong. So as you saw on the slides, our brand health is in a very good place, and I would say no to the question of are we experiencing something unique in elasticities, as — based on what we’re seeing right now, the answer to that is unequivocally no.

Consumer demand has remained very strong, these elasticities, as you mentioned, have been meaningfully better than historical norms, but what I draw your attention to is supply chain constraints, while we’re making progress in supply chain, the constraints are still with us, and they were still a factor in Q4, and we did see retailers burn through inventory faster than we could replenish it. And that clearly put an upper control limit on parts of our portfolio, including some of our fastest-growing, strongest brands and including Refrigerated and Frozen.

So we’ll give you a full update on a tremendous amount of good work that’s going on in supply chain. We are making progress there, and we’ve got a very exciting transformation plan ahead. We’ll update you on that on our Investor Day in a couple of weeks, and we’ll also, as we always do, preview some of the exciting new innovation that will come into the market, that’s currently coming into the market that will continue to drive strong sales. But I’d say, for now, my key points are brands are performing very well, and the innovation is thriving. The pricing power we’re seeing is quite strong. Despite that strong pricing power, the elasticities remain well below historical norms. Supply chain is making progress, but it’s not fully back to normal yet, and looking forward, our outlook for ’23, we believe, is quite prudent.

Andrew Lazar — Barclays Capital — Analyst

That’s helpful, thanks. And then, I guess, your full-year guidance, even putting all the below-the-line items sort of aside for a minute, seems to imply a high-single-digit increase in EBIT growth. Even with your comments, I think, even last quarter about the need and desire to ramp up A&P spend in fiscal ’23 in a still kind-of-inflationary environment. So, trying to get a sense of what are the key drivers to get there and your level of confidence in that type of growth on the EBIT side? Thanks so much.

Sean Connolly — President and Chief Executive Officer

Sure, Andrew. So if you take it from the top, we guided to low teens inflation off of the 16% this year. So, we follow that, we think that’s going to be higher actually in Q1, and as the year goes, the percentage will come down, but low teens is what we assume there. We’re assuming that our supply chain productivity, which came in at 1.8% for Q4, we expect that as our supply chain continues to stabilize, that that will improve as the year goes on.

We, obviously, have a big impact of pricing in ’23, the carry-in pricing, which will be significant. And then as I talked about on my comments, we have pricing that is actually in-market now in Q1 and will actually be in-market in the beginning of Q2 as well. And so, big impact from pricing, and we do expect that both our SG&A and A&P investment will grow at a greater rate than the sales guide. So we are investing in both of those areas, but given the pricing, given the ramp-up of productivity, and given inflation at low teens off of what was a high base in fiscal ’22, we feel comfortable with what that’s going to do in terms of our EBIT growth for ’23.

Andrew Lazar — Barclays Capital — Analyst

Thanks very much.

Sean Connolly — President and Chief Executive Officer

Thank you.

Operator

And our next question will come from Ken Goldman with JPMorgan. Please go ahead.

Ken Goldman — JPMorgan — Analyst

Hi, thank you. One of the other larger food companies recently said that as soon as this November quarter, the dollar impact from higher pricing could equal the dollar impact from inflation, roughly with maybe pricing being a net benefit afterwards, just given the lag effect. So I’m just curious, I know every company is different and the timing of hedges are different and so forth, but is this kind of cadence something you could see as well? I really am asking when might it be reasonable for us to kind of anticipate pricing in a dollar sense being at least as high as your inflation this year, and maybe it’s too hard to be precise, I’m just curious for your rough thoughts.

Sean Connolly — President and Chief Executive Officer

Ken, I’ll give you my thoughts on that and mechanically how it works, and Dave, you can add anything if you want, but this inflation, as we’ve experienced over the last year or so, it tends to come in waves, and that means we take successive waves of pricing. Each one of those pricing actions then triggers its own lag effect, which lasts about 90 days. Once you get through that lag effect, you really start to see the benefit of the pricing in the P&L. And then the following year, when you wrap that lag window, you really start to see some meaningful year-on-year improvements in the profitability.

The tricky thing is if you have to feather in new pricing actions, you also feather in the lags. So that’s why each year is different because you’ve got different levels of waves of inflation, and you’ve got different responses. The good news is, hopefully, this inflation cycle is getting mature. We’ve been pretty aggressive in getting the actions into place, and after you get through those 90 days, you can start to see some benefits. And we don’t have, as you know, a lot of categories that are pure pass-through categories like a coffee. We have a couple. We’ve got a couple of meat businesses, but we don’t have a lot of those.

So, to me, the positive thing here, while inflation is tough to deal with is, as I said before, it also can help liberate some of these brands from some of these legacy price thresholds where they can get stuck for a period of time, and if you do that and then you kind of get past the year and you wrap some of the immediate challenges you face, some good things can happen in the P&L, and that’s not unprecedented at all.

Dave, you want to add to that?

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, just let me build on that and tie it into the guidance. So, Ken, just kind of a concise way to think about it is, our organic net sales guide is 4% to 5%. We expect price/mix to be low teens. We expect inflation to be low teens. So if that is true, then the pricing dollars will exceed the inflation dollars next year.

Ken Goldman — JPMorgan — Analyst

Great. That’s very helpful, Dave and Sean. Thank you. And can I ask a quick follow-up? Is there any way to sort of quantify the impact of those supply chain constraints on your volumes in the fourth quarter, even if roughly? I think it would maybe help some people understand or get a better sense of how much that affected you. And is there a chance that this year, you’ll see maybe a reversal of that effect as your production improves and retailers hopefully replenish some inventory?

Sean Connolly — President and Chief Executive Officer

I won’t put any numbers on it, Ken, but it is category specific. We can see it very clearly, and where we’re probably most noteworthy, as I mentioned in my remarks a minute ago is, Refrigerated and Frozen, and that’s — as you all know, that is our — this Frozen business is our most strategic domain. We’ve just had persistent strength there. They’re really — and our Frozen Meals business isn’t a trade-down alternative.

So that is one of the key pieces of this portfolio and among our very strongest brands. We’ve driven virtually all the category growth there. I don’t expect any change to that underlying strength at all. We’ve just got to continue to get our suppliers back to full health and continue to get our ability to get service levels back to the traditional high-90 level.

Dave, you want to make any comments to that?

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, and you just said it. I think, a lot of times, we think of, when we talk about supply chain, we think of the labor in our plants and our distribution centers, which is a key part of it, and we’re seeing that come back. But another key part that is really impacting us in particular categories is supply, ingredient supply, so our suppliers and making sure that they’re able to supply. And so if we’re missing an ingredient, we can’t produce, and so that’s part of the impact. So we’re working through that. We’re making progress, but as Sean said, that did impact volumes, particularly in Refrigerated and Frozen this quarter.

Ken Goldman — JPMorgan — Analyst

Thanks. I look forward to the Investor Day.

David Marberger — Executive Vice President and Chief Financial Officer

Thanks.

Operator

And our next question will come from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Evercore ISI — Analyst

Thanks. On supply chain savings, I would imagine those were difficult to capture in fiscal ’22, given all the COVID-related forces, and I would also imagine that there were significant friction costs, which you talked about last quarter. Could you perhaps talk about your assumptions for those supply chain friction costs for ’23, how that would compare to ’22? And also supply chain savings, how you think that capture will be in fiscal ’23 versus 22?

Sean Connolly — President and Chief Executive Officer

Yeah, David, Let me give you just kind of a quick way to think about it, and Dave you can add anything. As we plan our ’23 in terms of supply chain, we’re not planning for a complete reversal of the supply chain friction that we’ve experienced over the last year. As you know, as we’ve said before, we prioritize doing what it took this past year to get as many units of our products out the door as we could, and that had a cost to it and was less efficient than normal.

We are assuming some progress because we are seeing some progress and some green shoots in supply chain, but from a planning posture standpoint, we’re not assuming everything gets back to bright. There will still be some inefficiencies in there, according to what we’ve planned. When we see you in a couple of weeks, we’re going to take you through that in quite some detail, and in addition, some investments we are making to really transform and modernize supply chain, so we can capture some good margin opportunities that we see going forward. So, we’ll take you through that in a couple of weeks.

Dave, you want to add anything to that?

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, sure. So, David, if you look at the Q4 bridge, our productivity, net of the offsets, was 1.8%, that was better than the 1.5% we had in Q3. As you know, historically we run about 2.5% to 3% of productivity, if you kind of look back pre-COVID. So the way to think about ’23 is, we will gradually ramp our productivity numbers back to what we were historically and we’re just gradually with each passing quarter, we expect to continue the improvement in the operations.

David Palmer — Evercore ISI — Analyst

And then you mentioned in one slide or you showed how you have a relatively high contribution from innovation versus peers and I wonder, going forward into ’23, how you’re thinking about the ability to get even more innovation impact given the ability for retailers to absorb that in the post-COVID era. And does that really — how much of that is in the plan for ’23 and in addition to, perhaps some higher expense in terms of promotions and other growth spending? Thanks.

Sean Connolly — President and Chief Executive Officer

Well, I’d say both are in the plan for ’23. We are assuming very strong innovation performance and we are investing behind that innovation. So you’re seeing A&P rise in support of that innovation. And if you look at our track record now of these successive launches of innovation that we’ve had, when we started this journey, and our real first big innovation slate was, I think, as far back as ’16, ’17, there was some concern, what happens when you wrap this success?

Well, each year our innovation waves have gotten better and stronger than the year before, and our ’22 results were fantastic versus a very successful ’21. We’re expecting fiscal ’23 innovation to be even stronger than that, and we’re investing behind that. We do have demand from our customers for that innovation. So it’s sold in, and interestingly, as we told you before, even during the height of the pandemic, we paused innovation a lot less than what I expected at the time. We had tremendous customer demand for our innovation even then and we kept the train rolling. So, that’s all baked into the plan for this year.

David Palmer — Evercore ISI — Analyst

Thank you.

Operator

And our next question will come from Alexia Howard with Bernstein. Please go ahead.

Alexia Howard — Bernstein — Analyst

Good morning, everyone.

Sean Connolly — President and Chief Executive Officer

Morning.

Alexia Howard — Bernstein — Analyst

Can I, first of all, ask about the gross margin trajectory from here, I realize you’re not giving formal guidance, but given that the inflation seems to be higher than expected at the moment and the price — the next round of pricing doesn’t kick in until the second quarter. Does that mean that the near-term pressures on gross margin are likely to be fairly hefty? And will that — is that expected to then improve through the rest of the year? And then I’ll have a follow-up.

David Marberger — Executive Vice President and Chief Financial Officer

Yes, Alexia. That’s right. I — when you look at inflation, given our exit rate of 17%, we’re expecting low teens inflation for all of fiscal ’23, but we expect that inflation rate to be higher in Q1, given the exit rate. So, as we go forward, we expect the percentage inflation will come down versus Q1. So that would — and then the pricing that we’re taking in Q1 and Q2 comes in. So, you should see gradual improvement of gross margin as ’23 progresses.

Alexia Howard — Bernstein — Analyst

Great. Thank you. And then just as a follow-up, the — you mentioned favorable mix across a lot of the segments this time around. Could you just give a qualitative description of what was going on and whether that’s expected to continue? And I’ll pass it on.

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, a lot of that is brand mix, Alexia. So we have a big portfolio. So, depending on the mix of what we sell, we will see benefit. So, when we see growth and brands like Slim Jim, some of our core frozen items, those things have better kind of sales and margin mix. So, it’s really at the brand level that’s driving that.

Alexia Howard — Bernstein — Analyst

And you’d expect that to continue presumably into ’23?

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, we always manage that for favorable mix. Mix is always one that’s tricky because there’s a lot that goes into it, but generally, we’re always managing our portfolio to drive favorable mix for sure.

Alexia Howard — Bernstein — Analyst

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

Operator

And our next question will come from Chris Growe with Stifel. Please go ahead.

Chris Growe — Stifel — Analyst

Good morning. Thank you.

Sean Connolly — President and Chief Executive Officer

Morning.

Chris Growe — Stifel — Analyst

I just had — I had a question for you first. Just a bit of a follow-up to — I think to Ken’s earlier question. Last quarter, Dave, we talked about that gap between pricing and inflation and that $0.30 in the EPS, and then — and now there’s been more inflation, and obviously, you’ve got more pricing coming through to catch up with that. Is there — would there be a point or embedded in your guidance, some element of that $0.30 or whatever the new number is coming back in fiscal ’23, so perhaps in the second half as we’ve caught up on pricing and inflation?

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, Chris, if you look at our guidance, I think, given what our estimate is for price/mix, which is low teens and then inflation at low teens, you will see that come back in. So that is part of the guidance. I think, with the $2.65 [Phonetic], we were clear last quarter that that wasn’t guidance, that was a pro forma number. And if you take the guidance that we put out there of plus 1% to plus 5% for ’23, you — included in that is the $0.13 headwind from the non-operational items for pension, interest, and tax. That gets you — if you translate that, the number is kind of a $2.51 to $2.61, then we’re not planning Ardent up as much, and we’re investing in SG&A. So when you put those things back in, you can clearly see that we are building in, catching up on the lag in the 50 — in the fiscal ’23 guide.

Chris Growe — Stifel — Analyst

Okay. Yeah, thank you. That makes sense. And just a question on A&P, which is to say that, I guess, to be clear, you expect it to be up in fiscal ’23 is the question. And then related to that, well, A&P was down this quarter and, obviously, a comparison issue, Could — in terms of the total pressure against the brands, if I can call that, because you’ve got promotional investments above the line going as well. Was your total sort of pressure against the brands down less or maybe even up, or whatever the answer is, in relation to that above-the-line spending that’s going on as well? Thank you.

Sean Connolly — President and Chief Executive Officer

Chris, we’re going to get into this in quite a bit of detail in a couple of weeks when we talk through how we create this — the connections between our consumer and our brands, but what I would say is, our total investment has been very strong and it remains very strong. And in any given quarter, we might toggle investment below the line, we might toggle it above the line, depending upon what we think in that window is right for the business.

So, for example, if we’re in a launch window for new innovation going to market, we will put more money above the line for everything from slotting to in-store sampling on those new items, getting it onto an end-aisle display so people can discover it. If we’re not in a launch window, but we’re more in a sustaining window and we’re driving repeat, we might spend more on e-commerce and search and things like that. So we’re constantly toggling our spend to what we think is going to be most effective and most efficient in that window.

We got a big innovation late this year, so we’ve got some good launch, good trial generating support for that in our A&P line. At the same time, we’ve still got good support to get those things on shelf, get the right quality physical availability. So, overall, it’s working. It — and we’ll — this is an important topic and one that we do want to get into in a couple of weeks with you.

Chris Growe — Stifel — Analyst

Thank you.

Sean Connolly — President and Chief Executive Officer

Thanks.

Operator

And our next question will come from Robert Moskow with Credit Suisse. Please go ahead.

Robert Moskow — Credit Suisse — Analyst

Hey, thanks for the question. I kind of have two. But Dave, you’ve talked about low-teens price/mix and low-teens COGS inflation, and that’s the explanation for why there’s profit dollar growth in the relationship. But if you look at the gross margin impact in your slides from price/mix, it’s significantly lower than that price/mix kind of run rate. I think that’s because of the mix, and I think it’s because you’re growing Snacks faster than the rest of the business, and maybe the gross margin isn’t as beneficial to the mix when you do that.

So is it possible to decompose the price/mix? Like how much of it is truly price? And does — when I look at it that way, do those two things offset each other, the price and the COGS inflation?

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, What I would say, Robert, is that you have to remember that when we quote price, right, so this quarter was 13%, that’s always going to be lower in terms of the margin impact, right, of that price. Same thing with inflation. Inflation was 17%, but the margin impact of that was 12%. So, it’s really the same thing that price — if we’re low teens price next year, that’s going to equate to a lower margin impact, but then same thing on the low-teens inflation, right. So we’re quoting a percentage of either the sales or percentage of the cost of goods sold, but when you translate that into a margin impact, it’s lower. So it’s really that relationship.

Robert Moskow — Credit Suisse — Analyst

Okay. And maybe a follow-up. In your press release, when you talk about the reasons for the volume decline, it really is all about price elasticity. It doesn’t say anything about supply chain constraints or inability to serve customers. So, is it just not material enough to show up in the price release, that supply chain constraint?

Sean Connolly — President and Chief Executive Officer

It’s — there’s all factors at play, Rob. We’ve got — elasticities are happening, and they are happening well below historical norms, as I’ve said. And we’re not able to ship to our customers at the same rate that they are burning through inventory. So they’re both factors, and the one that’s very topical right now is people want to know how our — how’s consumer demand holding up in the face of very strong pricing, and it’s holding up extremely well relative to historical norms, but it’s not zero.

Dave, did you want to add something?

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, I just — I would just add, when you do the press release, obviously, you talk more about the material drivers of the thing, right? So it’s clearly, elasticities are the main driver of volume. There were some supply constraints, which we gave color to because we were asked so, but the main driver were the elasticities.

Robert Moskow — Credit Suisse — Analyst

Okay. Thank you.

Operator

And our next question will come from Bryan Spillane with Bank of America. Please go ahead.

Bryan Spillane — Bank of America Securities — Analyst

Thank you, operator. Good morning, Sean. Good morning, Dave. I just had a — just Dave, two questions for you related to — I guess, related to the balance sheet. The first one is just, given the net interest expense this year being impacted by higher rates, is that a fixed number now? Or if rates were to move in one direction or another, is there a potential that, that net interest expense could move?

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, I mean, we looked at all the forecasted rate increases for the year and then estimated what that number would be. So if it plays out as the forecasts are in terms of the number of rate increases, then that’s how we forecasted it. So, it’s really our commercial paper, because that’s really the variable piece where a lot of our debt is fixed, as you know, right, in terms of rate. So, it’s that, and then it’s a little bit of just the average borrowing for the year, just given some of the timing of working capital. So, but yeah, we’ve factored in right now what the current forecast is for rate increases.

Bryan Spillane — Bank of America Securities — Analyst

Okay. But given that it’s really just tied to the piece, that’s like CP, there shouldn’t be material move one way or another?

David Marberger — Executive Vice President and Chief Financial Officer

Yeah, it would — it’s all based on kind of where we are now. So, I would agree with it.

Bryan Spillane — Bank of America Securities — Analyst

And then just — if you could expand a little bit on the comments you made earlier about leverage and leverage targets and — because I ask this in the context of kind of drifting up to four times in a market that today is — equities are being more impacted by leverage today than they were a year ago or even on January 1st, I would argue. So, is there anything that you can do other than EBIT growing, is expected to grow in fiscal ’23, are there other levers you can pull, other actions you can take to maybe accelerate the deleveraging?

David Marberger — Executive Vice President and Chief Financial Officer

Well, I think, obviously, the core operations are the key driver, and we do expect to — for ’23 to be down versus where we ended fiscal ’22 on leverage. Obviously, as you’ve seen us over the last five to six years, we’ve done a lot of portfolio reshaping and divestitures, and so, obviously this is just a base forecast, so any divestitures we would have could reduce leverage further, depending on what we would execute.

Bryan Spillane — Bank of America Securities — Analyst

Okay. So it’s that — I guess that was my question. You’re not out of options, I guess, in terms of —

David Marberger — Executive Vice President and Chief Financial Officer

No.

Bryan Spillane — Bank of America Securities — Analyst

— more than just organically deleveraging there. There could be other options or other actions you could take to kind of help that along.

David Marberger — Executive Vice President and Chief Financial Officer

Yeah.

Bryan Spillane — Bank of America Securities — Analyst

Okay. Perfect, thank you.

Operator

And our next question will come from Jason English with Goldman Sachs. Please go ahead.

Melissa Napier — Senior Vice President of Investor Relations

Jason, you might be muted. We can’t hear you.

Jason English — Goldman Sachs — Analyst

Thank you. Yes, indeed, I was. I was like two-thirds into my question, too. So, thank you, thanks for the shout-out. So thanks for slotting me in. I have two questions. First, on volume. You’re on a three-year stacked basis in Grocery and Snacks and Frozen and Refrigerated, you’re kind of back to flat, to where you were pre-COVID this quarter. And you’re guiding to like a high-single-digit, almost 10% type volume decline next year, suggesting that you expect to — maybe [Phonetic] occasions coming to your portfolio to be well below pre-COVID, despite what you’re talking about, sort of trade-in or away-from-home and despite what you’ve been saying about retention of any occasions post-COVID. How do we square all that?

Sean Connolly — President and Chief Executive Officer

Well, I think, our planning posture across the board for this ’23 plan, Jason, is to be prudent. We don’t want to plan in a way that puts us in a — we need to be in a heroic position in anything, in terms of elasticities, supply chain rebound, etc. We wanted — it remains a volatile environment, we think the best guide for fiscal ’23 is a prudent guide. And because, as we’ve seen in the last year, things are going to happen that are different from what you assume at the beginning of the year, and you got to be able to navigate that. So, that’s the environment we’re in right now and that’s the posture we’ve taken as we put together a plan.

Jason English — Goldman Sachs — Analyst

Yeah, that makes sense. That seems prudent. And separately, I’m in an event right now with a lot of your customers, and it’s kind of depressing. They’re talking about all this cost pressure, the limited ability to pass it through to consumer, the meaningful margin squeeze they’re under. And you’re the third food company in a row to get up and talk about the ability to price above inflation and get margin recovery, which we saw this quarter and you’re guiding to for next year. It kind of flies in the face of how I’ve always thought about the balance of power between the industry with it maybe a little bit more balanced rather than this sort of incongruent balance that we’re seeing right now where CPG guys are saying, they’re going to flex a lot of muscle, while your customers are feeling a lot of pain. What’s evolved to kind of cause that balance to pivot in this direction? And why do you believe it’s durable?

Sean Connolly — President and Chief Executive Officer

No, I wouldn’t characterize it the way you’re characterizing it, Jason. I mean, when you go into these macroeconomic dislocations that we’ve experienced, the pain tends to come in waves and manufacturers get hit with a lot of the pain early in the cycle, and that comes in the form of margin compression, as you’ve seen we’ve gone through in the last year. A lot of that associated with the lag effect, and then the lag effect is a transitory effect that you do emerge from.

So, it’s not as if your — what you’re doing as you move through that cycle is you’re recovering lost margin points as opposed to adding fresh new firepower at the profit line. That’s not what’s happening. This is about profit recovery, and that’s an important thing, manufacturers have to recover their margin. Why? Because the top priority for our retail customers is growth, and our retail customers here at Conagra know that our innovation has been the absolute key to driving growth for their categories. They need and want that innovation to continue, but they know that, that innovation costs us money.

We have to have healthy margins to be able to build out that innovation and get it to our customers in the market. And so they know we’ve got to take inflation-justified pricing to recover our margins after we go through these windows where we experience the compression that happens early in the inflation cycle, and that’s exactly kind of how things are playing out.

Jason English — Goldman Sachs — Analyst

Got it. Understood. Thanks. I’ll pass it on.

Operator

And our next question will come from Cody Ross with UBS. Please go ahead.

Simon Negin — UBS — Analyst

Good morning. This is Simon Negin filling in for Cody Ross. The past two years have presented unprecedented challenges and it demonstrated the importance of a strong organization. Moving into another period of uncertainty, what are some of the areas that you’ve changed and doubled out on that will continue to aid in navigating tough waters?

Sean Connolly — President and Chief Executive Officer

Well, that’s we could setup for our Investor Day in a couple of weeks, because we’ve got — I’d say, there are areas of just continuous improvement and continued progress, like our innovation program, for example, just has been very strong for five-plus years running now, and it gets even stronger. There are other areas where we’ve got new things happening that are exciting and offer margin-improvement opportunities going forward, particularly the work we’ve got going on in supply chain transformation and modernization, which we’ll talk about in a couple of weeks.

And then, I’d say, just from a team standpoint, culturally. Our culture has remained incredibly strong throughout COVID. We’ve had our office open since June 15, 2020, and keeping our team together, because the work we do is very spontaneous, and iterative, and creative in nature. And so the importance of being together is critical to our ability to keep our innovation as agile as it is, and we’ll just continue to get that stronger as we go forward.

Simon Negin — UBS — Analyst

Great. Thanks so much.

Operator

And this will conclude the question and answer session. I’d like to turn the conference back over to Melissa Napier for any closing remarks.

Melissa Napier — Senior Vice President of Investor Relations

Great. Thanks to everyone for joining us today. Bailey and I will be around all day for any follow-up questions. And as Sean mentioned, we are really looking forward to our Investor Day in a few weeks. You can visit our Investor Relations page on our external website for more information about Investor Day, as well as the link to register. Thanks, everyone.

Operator

[Operator Closing Remarks]