Product quality issues hamper Conagra in Q1

Conagra Brands faced manufacturing downtime that hampered production and led to higher costs in Q1, President and CEO Sean Connolly said on an earnings call earlier this month. 

The packaged foods company dealt with multiple product quality issues over the past quarter, forcing it to pause production to address finished goods that did not meet specifications in some instances, Connolly said. 

The CEO highlighted two instances that contributed to lost manufacturing time and inventory in Q1. A finished good for one foodservice customer failed to meet specifications, prompting Conagra to scrap the product. “We disposed of the product and lost manufacturing time during our diagnostic,” he noted.

The company also found quality issues with cans in its chili and beans business. While no recall was issued and production is now up and running properly, Connolly said that lost inventory will linger into Q2. 

“These types of challenges can result in downtime needed to determine and solve the root cause of the issue, as well as proper testing to ramp production back up,” Connolly told investors. “That lost time can result in higher costs and less production.” 

Although Conagra reported increased supply chain productivity during the quarter, operational challenges have more than offset benefits. “We’ve continued to see some discrete inefficiencies pop up that resulted in higher costs,” Connolly said.

Despite the disruptions, Conagra reported its Q1 profit margins remain in line with its FY 2023 forecast. The company’s adjusted gross profit was up 7.1%, benefiting in part from ongoing progress on supply chain productivity initiatives, Executive Vice President and CFO Dave Marberger said on the call. 

In addition, inflation, including elevated supply chain costs, pushed Conagra to raise prices in Q1, which it expects to keep up through the fiscal year, according to an Oct. 6 filing. The filing noted Conagra experienced material shortages and heightened costs in part because the war in Ukraine pressured supply of key ingredients. 

“We’re seeing the full magnitude of pricing from FY ‘22 in the quarter,” Marberger said. “And we also expect to see some gradual improvement in our net productivity as the supply chain and service levels continue to normalize.”