Conferencia de resultados del primer trimestre fiscal de 2027 de Conagra Brands (CAG): Inflación y perspectivas del segundo trimestre

Conagra Brands (CAG) mantuvo sus supuestos de planificación para el ejercicio fiscal 2027 tras el primer trimestre, al tiempo que destacó mayores costes de transporte, hipótesis cautelosas de elasticidad de precios y una mayor inversión en marcas. La dirección sigue teniendo como objetivo la reducción de la deuda y prevé que la mayoría de los beneficios de la simplificación de la cartera se consoliden en el ejercicio fiscal 2028.

Puntos clave

• La dirección prevé que las ventas orgánicas del segundo trimestre caigan un 2%, lo que refleja la elasticidad de los precios y las diferencias temporales relacionadas con Acción de Gracias entre los envíos y el consumo.
• La inflación para el ejercicio fiscal 2027 se sigue proyectando entre el 5% y el 6%, pero ahora hacia el límite superior del rango, ya que la inflación del transporte se sitúa en aproximadamente el doble de la tasa prevista inicialmente.
• Se espera que el margen operativo del segundo trimestre se sitúe en el rango alto de un solo dígito, frente al 11,5% del primer trimestre, debido a una mayor inflación, el desfase temporal en los gastos generales, de ventas y administrativos (SG&A) y un mayor gasto en publicidad y promoción.
• Conagra cerró el primer trimestre con un apalancamiento de 3,99x y prevé finalizar el ejercicio fiscal 2027 en aproximadamente 4x, al tiempo que amortiza unos 250 millones de dólares de deuda.
• Se sigue esperando que el margen bruto de todo el año se mantenga relativamente estable con respecto al ejercicio anterior, dado que la fijación de precios, la elasticidad y los menores volúmenes de alimentos congelados ya están reflejados en las previsiones.
• Conagra está acelerando la simplificación de referencias (SKU), incluida una revisión de más de 400 SKU de comidas individuales. La dirección prevé que la mayor parte del beneficio financiero se materialice en el ejercicio fiscal 2028.

Datos financieros clave

Rendimiento empresarial y operativo

El ajuste de precios introducido tras la conferencia de resultados del cuarto trimestre está llegando al mercado. La dirección afirmó que la aceptación por parte de los minoristas fue coherente con sus hipótesis de planificación. Conagra ha modelado la elasticidad de los precios de productos de alimentación en aproximadamente 2:1 y la de aperitivos en aproximadamente 1:1, sin asumir que los competidores vayan a imitar sus acciones de fijación de precios.

Los dulces de consumo caprichoso mostraron un sólido rendimiento en el primer trimestre, mientras que los aperitivos saludables se mantuvieron por debajo de las expectativas de la dirección. Los aperitivos de carne y las semillas tienen una exposición significativa a las tiendas de conveniencia, donde el aumento del precio de la gasolina ha presionado el tráfico de clientes. Conagra planea incrementar el marketing y la innovación en aperitivos de carne y palomitas de maíz a partir del segundo trimestre.

La dirección señaló que la empresa registró cierto beneficio en los alimentos congelados debido a la demanda relacionada con el brote de Cyclospora, pero el impacto no fue significativo y se vio compensado en parte en otras áreas de la cartera. La empresa destacó la confianza en la marca, la comodidad y la fiabilidad de Birds Eye como pilares que impulsan una mayor fidelización de los consumidores.

Conagra también está aplicando un criterio de rentabilidad sobre la inversión más estricto a las promociones. La dirección afirmó que no repetirá promociones que diluyan la rentabilidad, incluida cierta actividad en la marca Sandwich Bros. Estos supuestos ya están incluidos en las previsiones para el ejercicio fiscal 2027.

La simplificación de la cartera sigue siendo una prioridad operativa fundamental. Conagra abandonó la marca de pizzas Celeste, lo que tuvo un impacto negativo menor en las ventas netas del primer trimestre, pero fue positivo para el beneficio. La iniciativa global se centra en reducir las referencias (SKU), formatos y formulaciones de baja productividad, al tiempo que mejora la escala de compras, la eficiencia de fabricación y la rotación en los anaqueles.

Las comidas individuales son un área de atención clave, con más de 400 SKU en la cartera actual. La dirección aclaró que la simplificación no indica un menor compromiso con la categoría; por el contrario, busca concentrar la inversión y la distribución en los productos de mayor impacto.

Previsiones de la dirección

La dirección mantuvo su estimación de una caída del 2% en las ventas orgánicas durante el segundo trimestre. Las perspectivas incorporan supuestos cautelosos sobre la elasticidad y el desfase estacional en torno a Acción de Gracias, lo que podría provocar que los envíos se sitúen por debajo del consumo.

Se espera que la inflación en el segundo y tercer trimestre sea superior a la del primer trimestre, con tasas similares entre el T2 y el T3. La dirección prevé que la inflación se modere en el T4 en comparación con el T3 a medida que Conagra empiece a superar los elevados costes de transporte, aceite comestible, embalaje corrugado y aluminio. Las comparaciones generales de costes podrían ser más favorables en el ejercicio fiscal 2028.

El descenso previsto desde un margen operativo del 11,5% en el primer trimestre a un rango alto de un solo dígito en el segundo trimestre responde a tres factores principales: una mayor inflación, la reversión de los beneficios temporales en los gastos generales, de ventas y administrativos (SG&A) y el aumento del gasto en A&P. Aproximadamente la mitad del beneficio de SG&A del primer trimestre fue de carácter extraordinario, mientras que la otra mitad se trasladará previsiblemente al T2. El beneficio total de SG&A en el primer trimestre representó aproximadamente 0,03 dólares por acción.

Conagra sigue esperando que el margen bruto de todo el año se mantenga relativamente estable respecto al año anterior. Las previsiones ya incluyen la elasticidad esperada de los precios, los descensos de volumen en alimentos congelados y los efectos de absorción de costes de fabricación asociados.

La dirección reiteró un objetivo de apalancamiento a largo plazo de 3x. Prevé que el apalancamiento se mantenga cerca de 4x al cierre del ejercicio fiscal 2027, antes de avanzar más en el ejercicio fiscal 2028 gracias a la mejora de la rentabilidad y al ajuste del dividendo de la empresa.

Riesgos y aspectos a vigilar

• La inflación en el transporte se ha acelerado debido a la escasez de conductores y a los precios del petróleo, situándose en aproximadamente el doble del plan inicial de Conagra.
• La nueva fijación de precios en los alimentos congelados aún se está implantando en el mercado, lo que genera incertidumbre sobre la elasticidad real de los consumidores.
• Los menores volúmenes de productos congelados y refrigerados podrían presionar la absorción de costes de fabricación, aunque la dirección señaló que este efecto está contemplado en las previsiones.
• La demanda en las tiendas de conveniencia ha sufrido la presión por el alza de los precios de la gasolina, lo que afecta a los aperitivos de carne y las semillas.
• La volatilidad del precio del trigo dificulta prever con precisión la contribución de Ardent Mills en la comercialización de materias primas.
• La reducción de SKU debe coordinarse con los calendarios de reorganización de los minoristas y la gestión de inventario, lo que retrasa la mayoría de los beneficios previstos hasta el ejercicio fiscal 2028.

Aspectos destacados de la sesión de preguntas y respuestas con analistas

¿Por qué prevé Conagra que las ventas orgánicas del T2 caigan un 2% a pesar de las tendencias de consumo relativamente estables? La dirección citó la implantación de precios, los supuestos de elasticidad prudentes y los plazos de Acción de Gracias. El consumo estacional podría superar a los envíos durante el trimestre.

¿Qué está impulsando las mayores expectativas de inflación? Los costes de las proteínas han sido más favorables de lo previsto, pero ese beneficio se ve compensado con creces por la inflación del transporte. La dirección prevé que la inflación en el T2 y el T3 supere los niveles del T1 antes de moderarse en el T4.

¿Por qué se espera que disminuya el margen operativo del T2? Los factores principales son una mayor inflación, el traslado de gastos de SG&A del T1 al T2 y el incremento del gasto en A&P. La inversión se centrará en comidas individuales, aperitivos de carne y palomitas de maíz.

¿Con qué rapidez puede disminuir el apalancamiento hacia 3x? Conagra prevé una amortización de deuda de aproximadamente 250 millones de dólares en el ejercicio fiscal 2027 y un apalancamiento cercano a 4x al cierre del ejercicio. La dirección prevé mayores avances en el ejercicio fiscal 2028, pero no facilitó un pronóstico específico de apalancamiento para ese año.

¿Cómo está gestionando Conagra el riesgo de refinanciación? La empresa afirmó que su deuda es casi en su totalidad a tipo fijo, a excepción del papel comercial utilizado para el capital circulante. En julio emitió un bono por 500 millones de dólares al 5,4% antes de los vencimientos de un bono de 500 millones de dólares y otro de 260 millones de dólares.

¿Cómo afecta la volatilidad del trigo a Ardent Mills? Su negocio principal de molienda de harina es comparativamente estable, mientras que la volatilidad del precio del trigo puede generar oportunidades en la comercialización de materias primas. Ardent Mills aportó aproximadamente 0,03 dólares por encima de las expectativas internas de Conagra en el T1, pero la dirección señaló que esta contribución es difícil de pronosticar con precisión.

Transcripción completa de la llamada de resultados

Transcripción completa de la conferencia de resultados

Comentarios de la dirección

Operator

Good morning, and welcome to the Conagra Brands Q1 Fiscal Year '27 Earnings Q&A Conference Call. [Operator Instructions] Please also note, today's event is being recorded.

At this time, I'd like to turn the floor over to Matt Neisius, Head of Investor Relations. Please go ahead.

Matthew Neisius

Good morning, everyone, and thank you for joining us. Once again, I'm joined this morning by John Brase, our CEO; and Dave Marberger, our CFO. We may be making some forward-looking statements and discussing non-GAAP financial measures 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'll now ask the operator to introduce the first question.

Operator

[Operator Instructions] Our first question today comes from Andrew Lazar from Barclays.

Preguntas y respuestas

Andrew Lazar

Maybe I want to start out -- can I pointing to organic sales in fiscal 2Q to decline 2%, a bit heavier than current consensus. It looks like quarter-to-date, maybe scanner looks to be running maybe closer to flattish. So, I guess, I'm just curious if anything has changed in your 2Q top line outlook and whether it's elasticity or something else that might cause a sequential deceleration or perhaps it's just more prudent planning?

John Brase

Andrew, let me start and turn it over to Dave. But I think in general, the pricing we discussed in the Q4 earnings call is really just hitting the market kind of as we speak. And so I would say in terms of our pricing assumptions, at this point, results are in line with how we planned the year. And I like the word you use, Andrew.

I think we've taken a very prudent approach to our elasticity assumptions and these assumptions remain unchanged, which is really frozen at more of a 2:1 elasticity that we've modeled for the year in grocery and snacks at more of a 1:1 elasticity. Now in terms of competitors and followership, I would say we have not assumed any followership our pricing moves. Obviously, if that happened, there could be some upside to those elasticity assumptions, but we have not modeled that in.

David Marberger

Just one additional piece of color. So we guided to 2%, down 2% organic for Q2. This contemplates Thanksgiving timing because you have the second quarter of this year versus third quarter. So we may ship a bit below consumption in the second quarter because of the seasonal items may have some more consumption versus shipments. So the 2% is consistent, like John said, with our original planning posture.

Operator

Our next question comes from Peter Galbo from Bank of America.

Unknown Analyst

Just wanted to touch on the updated inflation guidance for the year, having moved kind of at the higher end of the $5 to $6 million I know you had kind of Q1 inflation in the 5-ish percent range, more towards the low end. But just kind of how you see it pacing over the balance of the year? And maybe just help us think about exit rate. Are we above that 5% to 6% as we get and kind of how we might think about it again from a phasing perspective.

David Marberger

Yes, Peter, thanks for the question. Let me try to give you a little bit of color here. So as we talked about for Q1, we did have some favorability in proteins relative to our planning -- so we were a bit favorable, which drove some of the favorability we saw in Q1. But as we went through Q1, obviously, we've seen an acceleration in inflation around logistics or transportation cost, really driven by the driver shortage and oil prices as well. So as we forecast inflation, we're still in that 5% to 6% range for the year, we said towards the higher end of the range.

And really, what's happening is the favorability that we've seen in proteins, which we would continue to see is a little bit more than offset by the -- basically the doubling of inflation in transportation versus where we planned it for the year. So it's kind of a trade-off there. In terms of the flow of the year, we would expect -- and we usually don't give this much detail, but I think it's important because I think there's some confusion on this inflation. We would expect our inflation rate in Q2 and Q3 to be higher than Q1 and and that to be about the same.

And then we expect our Q4 inflation rate to actually be lower than Q3. So that's kind of the flow. And as we sit here today, we have no reason to believe that we wouldn't be wrapping on not just the transportation costs that we're seeing but things like edible oils and kind of our corrugated aluminum, we have a lot of areas where we're still seeing high inflation which we will have all during fiscal '27. I don't see a reason why we couldn't expect that we would wrap on that. So obviously, we'll have to get closer for that. But I feel like Q4 will be lower than Q3, and we should be wrapping on a lot of these higher inflation categories in our materials when we get into fiscal '28.

Operator

Our next question comes from David Palmer from Evercore.

David Palmer

I wanted to ask you about the pricing, the acceptance at retail, how much is that factor into what you're thinking there? Or your price elasticity modeling just basically a price impact to the consumer in a vacuum of competitors, not also pricing? And I have a quick follow-up.

John Brase

Yes. Thanks for the question. I think in terms of pricing, I kind of go back to my opening comments, I'd really say really in line with our expectations. And so we're really past kind of the customer acceptance of that now pricing is effective in market. And I would tell you that customer acceptance there was no surprises versus our planning posture. And so that's how I think about pricing as we move forward.

David Palmer

And then I noticed you had some comments about not not repeating a promotion from last year on the Sandwich Bros brand. Is that the kind of thing that you will be seeing throughout the year that there'll be promotions that you see that you already see that were not effective from a profitability standpoint? And is that baked into your guidance? And I'll pass it on.

John Brase

Yes, great question. And again, I think we continue to look at our promotional dollars through a real ROI mindset. And I think we've been really prudent of saying, hey, we're not going to repeat promos that have been dilutive to the company. And I think that's what you're seeing in some of this simplification, really focusing on those high leverage elements that can bring value to not only the consumer but also to the shareholders. And so we're going to continue to make that a part of how we operate. But I would tell you, again, everything -- all those assumptions have been embedded into the fiscal year forecast.

Operator

Our next question comes from Tom Palmer from JPMorgan.

Thomas Palmer

I wanted to maybe just clarify on your second quarter expectations. You've got this high single-digit operating margin outlook incremental pricing is flowing through. There was the SG&A call out. I just want to make sure I kind of have my arms around the gross margin cadence here. Like is there a step down expected in gross margin as we move into 2Q? Or is this really about the timing of SG&A that swings the margin lower?

David Marberger

Yes, Tom, let me take that. There's really 3 drivers. If you would look at where we landed on operating margin, let me just kind of go there at 11.5% for Q1. We said higher single digits for Q2. There's really 3 drivers. One, as I just mentioned, we expect higher inflation in Q2 versus Q1. The second piece is the SG&A favorability that we had in Q1. It was roughly $0.03 of our EPS beat.

Half of that was a onetime benefit. Half of it was timing where it didn't hit in Q1. It's going to hit in Q2. And then the third piece is accelerating our investment in A&P. So we expect to increase A&P as a percentage of net sales to versus 2.3% as it was in Q1. So they're really the 3 drivers. So you will see a little bit of a on gross margin from the higher inflation versus Q1.

Operator

Our next question comes from Alexia Howard from Bernstein.

Alexia Howard

Great. Could I ask about the leverage. So, you've talked about the 3x being the long-term target. And I think it increased a little bit this quarter. I think you're saying that you'll still probably be at 4x by the end of the year or you said through fiscal '27 it will remain at this 4x. So how quickly do you expect to start on that deleveraging trajectory? And how quickly do you expect to achieve that goal?

David Marberger

Yes. Alexia, if you start with this year, yes, we -- we guided to expecting to finish the year approximately 4x on our leverage. We finished Q1 at 3.99x, that's actually favorable to where we thought. Usually, what will happen in Q1 and Q2 as our leverage will click up because we're very seasonal with our inventory, right, with our seasonal businesses and things like our tomato operations, we built all the inventory in Q1 and Q2. So obviously, we use cash in the first half and then we have cash inflow in the second half. So that's very normal.

So we're still on track with the approximately 4 times that -- we don't get specific with this, but it's implied. We do expect to pay down debt in the year for the full year. Approximately $250 million of debt pay down is what we would expect for this year. Our target is 3x. We are maniacally focused on getting there as soon as possible.

As we get into fiscal '28, John talked about it, we're focused on improving margins and profitability of this business. So with improved profitability and the dividend adjustment that we made, we feel like we're going to be able to make great progress in fiscal '28 on getting that leverage down. We're not going to give you that number today, but we want to get to 3x as soon as possible.

Operator

Our next question comes from Chris Crey from Wells Fargo Securities.

Christopher Carey

This is Chris Carey. I wanted to ask about the -- next portfolio. Can you just give us a sense of maybe where you are on some of the interventions to improve performance. You talked about, I think, popcorn, Blim Jim, yes, what are the expectations more from a volume standpoint as you look forward and perhaps lap some of the elasticities over the medium term?

And then just maybe not a location, but just curious whether you're seeing or you thought you saw any benefit in your frozen business from Cyclosp-related demand and if that's a factor in how you're viewing the next few quarters in frozen.

John Brase

Great. I'll take both of those. As you think about snacking, let's start with the positives. Really, our Sweet Treats portfolio continues to perform really, really well and had a very strong quarter Q1, and that's really behind both StackPac and Swiss must continue to really be performing very well in the market. I think permissible snacking, as you said, is really where we're not where we want to be there. And I think a couple of points of drivers there. The first is, obviously, we're very overdeveloped in our meat snacks and our seeds business in the convenience channel, which has been really challenged lately with the higher gas prices.

But I think aside that, there's work to do from my standpoint in terms of from an execution and a channel lens, we need to do a better job of participating where the growth is really coming from, specifically in the meat snacks category. As you take a step back and you think about meat snacks and popcorn and seeds, these are fantastic categories, and we are the market leader. And so it's our responsibility to kind of drive these categories forward.

And so I think what you're going to see, and you're already seeing as we go into Q2, a significant step-up in our brand building and marketing specifically pinpointed at meat snacks and popcorn specifically there, but then also innovation, a major step-up in innovation. We think those are the -- those are the 2 critical levers that kind of get us back to a growth trajectory in those important businesses.

On Cyclospora, just a quick one there. We did see some benefit, but I would tell you, nothing material as we think about Q1 and we also actually saw some offsets from Plecospora as you think about like our Wish-Bone salad dressing as an example. So again, nothing material there. But I think more than the onetime benefit, I think what's really important is this is a reflection of consumers coming to a brand they know and trust with Birds Eye, and we did a great job of delivering for them. And so I think as you think about that brand, we've got such an opportunity to drive better -- more trial and more engaged with consumers. We deliver great taste great convenience and honestly, reliability that they're looking for in their vegetables. So we think a great opportunity to continue to drive.

Operator

Our next question comes from Max Gumport from BNP.

Max Andrew Gumport

Question, just coming back to the 1Q and your reaffirmed outlook for the year. Obviously, it was a sizable EPS to be versus consensus, and I think first year expectations too. They get some help from inflation. There were some SG&A timing benefit as well and your inflation outlook for the remainder of the year has picked up. But I'm curious to what degree the firmed outlook maybe has embedded additional conservatism in that, especially with regard to mills as well given the weak price volatility.

David Marberger

Yes, Max. Let me take that. Starting with Q1, you kind of hit it. We had a beat to our expectations really driven by, I think, 4 things: our SG&A which was the timing and then the 1 time we had the Ardent Mills benefit. We had the inflation lower than our internal forecast. And then we did get a bit of benefit on the tariff refund that we got in the quarter, which was close to us then.

When you look for the full year, SG&A, we talked about it, the onetime, the onetime and then you have the timing and -- but that's pretty much on track. The big -- the big impact is the acceleration of transport and inflation. It's double the rate that -- and we had assumed inflation for transportation at double the rate. The good news is that we have some other areas in materials where we're favorable to that. So there's a lot of puts and takes there.

The other dynamic is we're just starting with our frozen pricing. And so we really need to see how this plays out. We've been very clear on how we've modeled elasticities there could be a scenario where maybe that winds up being conservative, maybe not. So we just need to see how that plays out. And then Ardent Mills, we were favorable about $0.03 in the quarter to our expectations for Ardent Mills. Wheat prices have been extremely volatile, right?

If you just kind of look from May to now, they're up significantly, but they've been up and down. And so that creates trading opportunities for the ethos the Ardent business. And so the thing with that is it's a little bit more difficult to forecast that with Precision for the full year. So we thought it was prudent to hold the year, it's 1 quarter, and then we'll update at the half and if things continue as they do in Q1, then maybe we have some upside there, but we want to wait a little longer to see.

Operator

Our next question comes from Robert Moskow from TD Cowen.

Robert Moskow

I don't know if I saw kind of a firm guide on gross margin for the year, 3 months ago, I think the guide was kind of flattish. But now you have the higher cost and the other element that I wanted to ask about, Dave, is in the frozen and refrigerated division, the volumes are going to be down like 10%. And at the same time, you were also increasing capacity, particularly in frozen chicken. So I'm just wondering if there's -- how are you managing through the leverage consequences of that. Is that a drag -- have you already put into your numbers a drag from that dynamic?

David Marberger

Yes, Rob, good questions. The first one, we've held our guidance for operating margin for the year. So obviously, gross margin is a big part of that. We've had puts and takes in the cost. And so we're still where we were before, which is relatively flat to the prior year in terms of gross margin. To your second question, yes, obviously, we have modeled the pricing and the elasticity impacts and there's volume impacts where we have decreases in volume in our frozen business. We've modeled that. We've taken into account the absorption impact. So all of that is included in guidance that we provided, and we'll just see how that plays out.

Operator

Our next one comes from Rob Dickerson from U.S. Bancorp.

Robert Dickerson

John, I just want to ask you about the simplification process, kind of how you're thinking about SKU rationalization and then maybe even brand rationalization, right? I realize you said last quarter prepared remarks this quarter again, kind of looking at everything, but there was -- it was noted in those prepared remarks that, I guess you exited Pizza -- and I'm just curious, I mean, clearly, when you exit that, that rationalize SKUs. So like are there parts of the portfolio such that you could simplify by just kind of stepping away from certain brands that are online that you have? And then I guess, secondly, just kind of broadly, like how are you thinking at this point about the manufacturing footprint.

David Palmer

Rob, thanks for the question. And if you guys will indulge me, I'm going to go a little bit long on this 1 because I think it really is important for you to kind of understand how we're thinking about this. I am incredibly excited about the opportunity we have to really reduce complexity across the enterprise. And I will tell you, SKU optimization is definitely one of those areas. As we've discussed before, we have an extremely long tail of SKUs that we are getting after. Right now, we did -- we stood up an internal work stream that's really looking to significantly reduce SKU count.

And I put this work into 2 buckets. There was smaller bucket, which you just alluded to, is there are certain brands and categories where we simply just don't see a future. And it just makes sense to exit those, those small really unprofitable brands or low-profit brands as soon as possible. And so we made the decision, as you saw with Celeste pizza, which had a minor impact on net sales for Q1, about impact, but it was actually profit accretive to the enterprise. And I think we'll continue to look for more of those small opportunities that we do see in front of us.

I think the larger opportunity though is what I'm really calling the simplification of our core platforms. And I want to use an example here that I think will bring this to life, single-serve meals. We've got over 400 single-serve meal SKUs and I believe there's a future where we can have a much simpler, more productive assortment. That doesn't mean for a second that we don't believe in the category that we have any plans to see distribution we're going to stop innovating. I would say just the opposite. We want to double down in this business.

And we think an optimized assortment can help drive velocity on our most impactful SKUs. So that -- in terms of SKU complexity, that's one component. But I would also tell you, we're looking to optimize our formats and formulations. We just have to do a better job of eliminating nonvalue-added complexity that the consumer quite frankly, isn't willing to pay for. So as looking at this, we're not just looking to do we're looking at formats and formulations as well. And I think as you fast forward, this is going to do several things for us.

It's going to drive stronger operational efficiency. It's going to drive procurement savings as we're procuring fewer items, but with greater scale. It's going to help us drive improved focus, which I think is so important. When we get focused on something, we execute with excellence. We need to focus our organization a bit more, and this will do that. And then and finally, improved velocity on shelf, which is good for us, good for our customers.

And so the last thing I'd say here is we're going to take a real measured approach in how we roll out the SKU simplification. We really need to coordinate this with our customer reset timing and look at inventory impacts. So I would see the majority of this benefit from this work to happen more in fiscal '28, but the decisions are happening right now.

Operator

All right. Our next question comes from Scott Marks from Jefferies.

Scott Marks

Wanted to just ask a little bit about the consumer. You made some comments in the prepared remarks talking about the consumer just being thoughtful about where they're spending their dollars, obviously, manage them through a volatile environment. Any updates you can share with us in terms of what you're seeing? Have things improved, gotten worse? Just any changes that you've seen recently?

David Palmer

Yes. Thanks for the question. And I think I would describe the macro environment is dynamic. That's probably an understatement. But in terms of the consumer, I would kind of say the word -- I would use is muted and continues to be kind of bifurcated by income, no doubt about it. But having said that, we really haven't seen any material step change in consumer behavior. There's pockets. C-store as an example, that's been a bit more pressured in recent months because of the gas prices, but overall, I would say the consumer has been relatively stable and resilient.

And our job is to continue to stay incredibly close to the consumer. And we've got to evolve alongside how they're evolving and delivering the food they want, where they want it, but also importantly, at the right value. And this is what I love about our portfolio we've got brands that compete all across the value spectrum, value brands like Banquet all the way up to more premium offerings like Healthy Choice. And so we've got a portfolio that can meet this dynamic consumer wherever they are.

Operator

Our next question comes from Lee Jordan from Goldman Sachs.

Leah Jordan

Just if you could provide more detail on the changes in your approach for the step-up in the A&P spend. It sounds like you've had some early traction. Just curious what's been working, how are you measuring that return? And where you allocating the step-up in spend you're planning to do in 2Q?

John Brase

Yes. As you think about A&P, this is a big one for me. We have so many great brands. But if I'm being truthful, we haven't consistently invested behind them. at the levels that are required to drive that brand affinity and awareness. And so we have a tremendous opportunity communicate more with consumers to ensure they understand we've got great value propositions out there. And our job is to make sure they fully understand it. And so as you think about the investments, I'm really pleased in 2 fronts. One, we're investing more; and two, we're getting that money to work a lot harder for us.

And this is kind of this new modern marketing machine that we're building internally that I think can become a real competitive advantage. And so as you think about where we're focusing these investments, it's really in 3 places: single-serve meals, meat snacks and popcorn. We're going to be very, very targeted in those important growth ambitions.

And your last point is a good one, too. We're already seeing some really positive results in terms of improved reach and engagement from some of the changes that we're doing. We've gotten a lot more targeted in who we're going after, how we're going after them and our messaging is just sharper and more compelling. And so I think this is a tremendous opportunity to use this increased focus on brand building to help kind of return us to growth and then drive brand relevance.

Leah Jordan

That's very helpful. And then my follow-up was just on interest expense. I thought it was reiterated for the year. We've had to move higher in rates here recently. I think you're mostly fixed exposure, but I did think you had a little bit of floating. So just kind of catch up, remind us where your exposure is there. And then I also thought you may have some refinancing needs in the relative near term. So just how are you thinking about that in this interest rate environment as well?

David Marberger

Yes, let me take that. The first one, we're pretty much 100% fixed right now. The only variable debt that we have is our commercial paper and so we use that as sort of our working capital needs. So we're very high percentage fixed that we're really not exposed to the interest rate environment. Now yes, we do have 2 bonds coming due this month.

We have a $500 million note and a $260 million note. We actually went into the market in July and financed ahead. And so we issued a $500 million note, the rate came in at 5.4%. The timing was actually pretty good there, given what rates have done since then. So between the -- from the proceeds of that and just our normal kind of borrowing capacity, we're very comfortable refinancing these notes this month.

Operator

And our next question comes from Carlo Casella from JPMorgan.

Carla Casella

One on that last question as well as Lexia's earlier question on leverage. Have you had your conversations with the agencies because we've seen, in some cases, other peers that have cut their dividend and focused on deleveraging, but still gotten downgraded. Do you think they're kind of changing their view at all on your business?

David Marberger

Yes, Carla, we talk to the agencies all the time. And so they're very clear on our financial policy our priority of using our discretionary cash flow to pay down our debt as quickly as possible. So we're always working and talking to the agencies. They obviously looked at our cut of the dividend as a positive in terms of our credit rating and our position. So they know where we're going. They know what our priorities are. So now it's a matter of just continuing to get that leverage down.

We know the markers for levels where if you -- leverage exceed certain levels, you may be putting investment grade at risk. We're not near those levels. And we're moving in the right direction, which is down with our leverage and they know that. So that's our strategy. That's our focus, and they're very aligned with that.

Carla Casella

Okay. That's great. And then just one follow-up on Ardent Mills. How do we think about the volatility in wheat and how that flows through the numbers? I know it was a benefit for this quarter. But how should we think about that going forward?

David Marberger

Yes. So think of Ardent Mills as really two different businesses. They have a business where they mill flower and they sell flower at a margin and they're selling flower to the Domino's pizzas of the world and everything. So they're dealing with the same volume dynamics that the entire food industry is, but they do an amazing job of providing great customer service, that's a competitive advantage for them. But that business is more stable and more flattish. If you look at the other part of their business, it's what we call commodity revenue, and that's the trading opportunities they create when you have volatility in the wheat markets.

And so that's what we saw in Q1 and the hard part there is when that comes, it's a little bit difficult to forecast with precision. But generally, with more volatility Ardent Mills will benefit from that volatility with their commodity trading business. And so -- and the good news for us is we're very aligned from a capital allocation perspective. So in terms of profit, we have a minimum of 80% cash flow conversion on that profit, and we're very aligned with Ardent and our partners on that philosophy.

Operator

And ladies and gentlemen, at this time, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Matthew Neisus for closing remarks.

Matthew Neisius

Thank you, Jamie, and thank you all for joining us today. Feel free to reach out to Investor Relations with any additional questions. Have a good day.

Operator

And with that, we'll conclude today's Q&A session and conference call. We do thank you for joining. You may now disconnect your lines.