Conagra Brands: Reports First Quarter 2020 Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the first quarter of fiscal year 2020, which ended on August 25, 2019. All comparisons are against the prior-year fiscal period, unless otherwise noted. Certain terms used in this release, including «Organic net sales,» «Ebitda,» «Free cash flow,» «Legacy Conagra,» «Legacy Pinnacle,» and certain «adjusted» results, are defined under the section entitled «Definitions.» Effective as of the first quarter, the Company allocated the business components comprising the previous Pinnacle Foods reporting segment to the four Legacy Conagra reporting segments.

Highlights

  • First quarter net sales grew 30.3 percent, and organic net sales decreased 1.7 percent.
  • Diluted earnings per share from continuing operations (EPS) was USD 0.36 in the quarter; adjusted EPS of USD 0.43 benefitted from double-digit growth in adjusted net income.
  • The Legacy Conagra frozen and snacks businesses continued their strong momentum in the quarter with retail sales growth (as measured by IRI) of 2.5 percent and 7.2 percent, respectively.
  • For Legacy Conagra, the combined results of the Refrigerated + Frozen and Grocery + Snacks segments over-delivered planned organic net sales growth in the quarter.
  • The Legacy Conagra Foodservice and International businesses experienced softer-than-planned organic net sales growth in the quarter behind discrete events that are expected to be overcome in the balance of the year.
  • Legacy Pinnacle’s retail sales decline (as measured by IRI) of 4.6 percent was in-line with expectations as the Company continued to execute its value-over-volume strategy within the Legacy Pinnacle portfolio.
  • The Pinnacle integration and synergy realization remained on-track in the quarter, with approximately USD 40 million of cost synergies realized in the quarter, bringing total cost synergy realization to USD 71 million from the closing of the acquisition through the first quarter.
  • In the quarter, the Company reduced total gross debt by USD 148 million; the Company remains on-schedule with its previously-announced de-leveraging targets.
  • The Company is reaffirming its fiscal 2020 guidance for all previously-communicated metrics, including the expectation of stronger growth in the second half of the fiscal year. The guidance includes expected full-year results from the Direct Store Delivery (DSD) snacks business, the pending sale of which was announced after quarter end. The DSD snacks business divestiture transaction is expected to be completed before the end of the calendar year.

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, «After one quarter, fiscal 2020 is on-track with our plan as we execute against each of the priorities we outlined previously: maintaining the momentum on Legacy Conagra, applying our value-over-volume playbook to Pinnacle, and delivering against our integration, synergy, and de-leveraging commitments. I am pleased that our domestic retail businesses outperformed our first quarter organic net sales growth plan. While our Foodservice and International businesses experienced unplanned softness on the top line this quarter, they outperformed our operating profit and margin expectations. We believe the first quarter net sales issues in these segments were discrete and are now largely behind us.»

He continued, «Our expectation for fiscal 2020 is that the investments we are making in the first half of the year, in particular the second quarter, will result in strong second half performance, with the impacts of new innovation in the frozen and snacks businesses, smart promotional support in key grocery brands, the continued implementation of our Pinnacle improvement plan, and the impact of synergy capture all greatest in the third and fourth quarters. Given our progress in the first quarter, and expectations for the balance of the year, we are reaffirming our fiscal 2020 guidance across all elements.»

Total Company First Quarter Results

In the quarter, net sales increased 30.3 percent. Reported net sales growth primarily reflects:

  • a 35.8 percent increase from the acquisition of Pinnacle;
  • a 3.7 percent net decrease from the divestitures of the Wesson oil business, the Gelit business, and the Canadian Del Monte business, as well as the sale of the Trenton, Missouri production facility (Trenton) (the «Sold Businesses»);
  • a 0.1 percent decrease from the impact of foreign exchange; and
  • a 1.7 percent decrease in organic net sales.

The 1.7 percent decrease in organic net sales in the quarter was driven by a 2.5 percent volume decline behind unplanned softness in the International and Foodservice segments as well as planned elasticity-driven declines in the Grocery + Snacks segment. Price/mix increased 0.8 percent as favorable net pricing and mix were partially offset by the Company’s continued actions to support its brands with brand building investments with retailers.

Gross profit increased 28.9 percent to USD 665 million in the quarter, and adjusted gross profit increased 29.0 percent to USD 676 million. The increases were primarily driven by the net impact of the addition of Pinnacle’s gross profit and cost synergies, as well as the benefits of price/mix and supply chain productivity. These benefits were partially offset by a reduction in profit associated with the Sold Businesses, input cost inflation and the decline in organic net sales. Gross margin decreased 31 basis points to 27.8 percent in the quarter. Adjusted gross margin declined 29 basis points to 28.3 percent in the quarter, as the Pinnacle business was dilutive to the Company’s overall adjusted gross margin by approximately 46 basis points, including the impact of cost synergies related to the Legacy Pinnacle business.

Selling, general, and administrative expenses (SG+A), which include advertising and promotional (A+P) expense, increased 55.8 percent to USD 401 million in the quarter. Adjusted SG+A, which excludes A+P expense, increased 19.9 percent to USD 256 million, primarily as a result of the addition of expenses associated with the Pinnacle business, partially offset by cost synergies. Adjusted SG+A as a percent of net sales decreased 93 basis points, reflecting these cost synergies and effective cost control across the Company.

A+P expense for the quarter increased 5.9 percent to USD 45 million primarily due to the addition of expenses associated with the Pinnacle business. Pinnacle-related increases were partially offset by the Company’s continued implementation of its strategy to shift marketing investments from certain lower-return A+P investments to brand building investments with retailers.

Net interest expense was USD 123 million in the quarter, reflecting an increase versus the prior-year period of USD 74 million on a reported basis and USD 79 million on an adjusted basis. The increase was driven by higher levels of debt outstanding as a result of the net debt issued in connection with the Pinnacle acquisition.

The average diluted shares outstanding of 488 million reflects an increase of 94 million shares versus the prior-year period. The increase was primarily driven by the shares issued in connection with the Pinnacle acquisition.

In the quarter, net income attributable to Conagra Brands decreased 2.5 percent to USD 174 million or USD 0.36 per diluted share. Adjusted net income attributable to Conagra Brands increased 12.5 percent to USD 210 million or USD 0.43 per diluted share in the quarter. The increase in adjusted net income attributable to Conagra Brands was driven primarily by the addition of Pinnacle’s operating profit and cost synergies. These benefits were partially offset by higher interest expense, the removal of profit from the Sold Businesses, and lower earnings in the Ardent Mills joint venture. The decrease in adjusted EPS in the quarter was primarily driven by the increase in average diluted shares outstanding, partially offset by the increase in adjusted net income.

Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, increased 35.4 percent to USD 481 million in the quarter, driven primarily by the addition of Pinnacle’s operating profit.

Segment Recast

As disclosed in the Company’s fourth quarter fiscal 2019 earnings release, beginning with the first quarter of fiscal 2020, the Company no longer reports Pinnacle as a standalone reporting segment. To better reflect how the Company is now managing the overall integrated business, the business components comprising the Pinnacle segment have been allocated to the four Legacy Conagra reporting segments.

On September 23, 2019, the Company furnished a Current Report on Form 8-K with recast historical segment financial information that reflects this recast.

Grocery + Snacks Segment First Quarter Results

Net sales for the Grocery + Snacks segment increased 26.9 percent to USD 978 million in the quarter with the acquisition of Pinnacle adding 34.7 percent to the net sales growth rate and the divestiture of the Wesson oil business subtracting 4.1 percent. Organic net sales declined 3.7 percent. On an organic net sales basis, volume decreased 3.0 percent during the quarter. Planned sales declines in the Hunt’s and Chef Boyardee businesses in the quarter were related to the lingering effects of competitive dynamics experienced in the fourth quarter of fiscal 2019. The Company’s action plans to reverse these trends are underway. The segment continued to benefit from momentum and innovation successes in the snacks businesses, including by the Slim Jim, David, BIGS, Angie’s BOOMCHICKAPOP, and Act II brands. The price/mix decrease of 0.7 percent in the quarter reflects favorable pricing and mix, the benefits of which were more than offset by the impacts of increased brand building investments with retailers. In-market retail sales for the Wish-Bone business showed growth following product quality and packaging improvements.

Operating profit for the segment decreased 15.1 percent to USD 152 million in the quarter. Adjusted operating profit increased 16.0 percent to USD 208 million, primarily driven by the addition of Pinnacle’s profit and cost synergies. In the Legacy Conagra business, the impacts of higher input costs, particularly in packaging, and the loss of profit from the divestiture of the Wesson oil business were partially offset by supply chain realized productivity improvements.

Refrigerated + Frozen Segment First Quarter Results

Net sales for the Refrigerated + Frozen segment increased 51.0 percent to USD 959 million in the quarter with the acquisition of Pinnacle adding 51.6 percent to the net sales growth rate and the divestiture of the Gelit business subtracting 2.1 percent. Organic net sales increased 1.5 percent. On an organic net sales basis, volume increased 0.2 percent and price/mix increased 1.3 percent. The segment benefited from solid performance across multiple brands, including Banquet, Healthy Choice, P.F. Chang’s, Reddi-wip, and Sandwich Bros. Additionally, the Birds Eye business launched several new innovations that are expected to benefit the second-half organic net sales growth rate as they build in-market distribution and velocity.

Operating profit for the segment increased 63.0 percent to USD 156 million in the quarter, and adjusted operating profit increased 80.2 percent to USD 172 million. The increases were primarily driven by the addition of Pinnacle’s profit and cost synergies. In the Legacy Conagra business, realized productivity improvements more than offset higher input costs.

International Segment First Quarter Results

Net sales for the International segment increased 5.5 percent to USD 204 million in the quarter, driven by

  • a 14.0 percent increase from the acquisition of Pinnacle,
  • a 4.8 percent net decrease from the divestitures of the Canadian Del Monte business and the Wesson oil business,
  • a 0.7 percent decrease from the unfavorable impact of foreign exchange, and
  • a 3.0 percent decrease in organic net sales.

On an organic net sales basis, volume decreased 4.7 percent and price/mix increased 1.7 percent. During the quarter, the segment continued to benefit from growth in the snacks and frozen businesses but experienced unplanned softness in the Puerto Rico export market and the Indian business, which caused the segment’s net sales to be below expectations in the quarter. The Company expects that these sales will now occur later in the fiscal year.

Operating profit for the segment decreased 33.5 percent to USD 25 million in the quarter. Adjusted operating profit decreased 4.0 percent to USD 26 million as higher input costs, lower volume, the divestitures of the Canadian Del Monte and Wesson oil businesses, and the unfavorable impact of foreign exchange more than offset the benefits of favorable price/mix, realized productivity, and the addition of Pinnacle’s profit.

Foodservice Segment First Quarter Results

Net sales for the Foodservice segment increased 6.3 percent to USD 250 million in the quarter with the acquisition of Pinnacle adding 15.3 percent and the combined impact of the divestiture of the Wesson oil business and sale of Trenton subtracting 5.8 percent from the net sales growth rate. Organic net sales decreased 3.2 percent. On an organic net sales basis, price/mix increased 3.2 percent and volume declined 6.4 percent in the quarter driven by continued execution of the segment’s value-over-volume strategy, although at a higher-than-planned level. Net sales growth in the foodservice Gardein business was better than planned in the quarter, a trend the Company expects to benefit organic net sales growth rate in the second half of the fiscal year.

Operating profit increased 12.8 percent to USD 31 million in the quarter, primarily driven by the addition of Pinnacle’s profit and cost synergies. In the Legacy Conagra business, the impacts of favorable price/mix and supply chain realized productivity improvements were more than offset by higher input cost and the impact of the sales of the Trenton facility and the Wesson oil business.

Other First Quarter Items

Corporate expenses increased 23.2 percent to USD 100 million in the quarter. Adjusted corporate expenses increased 1.4 percent to USD 63 million in the quarter as the addition of expenses associated with the Pinnacle business was largely offset by cost synergies as well as the benefit of timing of certain expenses.

Pension and post-retirement non-service income was USD 10 million in the quarter, which is comparable to the prior-year period.

Equity method investment earnings decreased 24.2 percent to USD 12 million in the quarter, and adjusted equity method investment earnings decreased 57.8 percent to USD 7 million. Unfavorable market conditions led to lower performance by the Ardent Mills joint venture.

In the quarter, the effective tax rate was (7.0) percent, and the adjusted effective tax rate was 21.8 percent.

In the quarter, the Company paid a dividend of USD 0.2125 per share.

The Company remains on-schedule with its de-leveraging targets and remains committed to a solid investment grade credit rating. In the quarter, the Company reduced its total gross debt by USD 148 million as compared to the end of the fourth quarter of fiscal 2019 and through the end of the first quarter had reduced debt by over USD 1 billion since completing the Pinnacle acquisition. Compared to the end of the fourth quarter of fiscal 2019, net debt was approximately flat as the reduction in gross debt was funded primarily by cash on hand as of the end of the fourth quarter, in-line with expectations.

Portfolio Update

As previously disclosed on September 11, 2019, the Company has entered into a definitive agreement to sell its DSD snacks business. The transaction is subject to customary closing conditions and is expected to be completed before the end of the calendar year.

Fiscal 2020 Outlook

The Company is reaffirming its fiscal 2020 guidance. Note that organic net sales growth excludes the impact of fiscal 2020’s 53rd week. All other metrics include the impact of the 53rd week.

  • Organic net sales growth of 1.0 percent to 1.5 percent
  • Reported net sales growth of 13.5 percent to 14.0 percent
  • Adjusted operating margin in the range of 16.2 percent to 16.8 percent
  • Adjusted net interest expense of approximately USD 505 million
  • Adjusted effective tax rate of 24 percent to 25 percent
  • Average diluted share count of approximately 488 million
  • Adjusted EPS in the range of USD 2.08 to USD 2.18
  • Free cash flow of approximately USD 1 billion

The Company continues to expect second half results to show stronger organic net sales growth and adjusted EPS growth than the first half in light of the timing of the impact of new innovation, strong first-half brand-building investments that peak in the second quarter, the planned pace of synergy capture, and the lapping of both higher interest expense and share count.

All metrics include the expected results of the DSD snack business for the full fiscal year. Following the closing of the transaction, the expected annualized impact of the divestiture is a reduction of approximately USD 110 million of net sales and USD 0.02 of adjusted EPS.

The inability to predict the amount and timing of the impacts of foreign exchange, acquisitions, divestitures, and other items impacting comparability makes a detailed reconciliation of these forward-looking non-GAAP financial measures impracticable.

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