Chicago / IL. (cag) ConAgra Brands Inc. reported results for the fourth quarter and full fiscal year 2020, which ended on May 31, 2020. All comparisons are against the prior-year fiscal period, unless otherwise noted.
Highlights
CEO Perspective
Sean Connolly, president and chief executive officer of Conagra Brands, commented, «I am very pleased with how our Company has responded to the Covid-19 pandemic. The team’s dedication to supporting our customers, consumers, employees, and communities during the fourth quarter is a true reflection of the Conagra Way in action. We have effectively responded to elevated demand, continued to make good progress on improving the overall business, kept our synergy capture on-track, and begun to launch our fiscal 2021 innovation slate. Not only did we invest to support demand during the quarter, we did it while significantly reducing our leverage.»
He continued, «Our business clearly benefited from increased at-home eating in the fourth quarter, as the elevated retail demand outweighed the reduced foodservice demand. In retail, many consumers tried our modernized products for the first time and then returned for more. While we are optimistic about the long-term implications of recent consumer behavior shifts, given Covid-19 uncertainties, we are only providing guidance for the first quarter of fiscal 2021. We intend to provide an update on our fiscal 2021 outlook next quarter.»
20200630-CONAGRA-Q4-2020.Total Company Fourth Quarter Results
In the quarter, net sales increased 25.8 percent to USD 3.3 billion. The growth in reported net sales primarily reflects:
- a 3.1 percent net decrease from the divestitures of the Direct Store Delivery (DSD) snacks business, the Gelit business, the Lender’s Bagel business, and the Wesson oil business, and the exit of the private label peanut butter business (collectively, the «Sold Businesses»);
- a 0.7 percent net decrease due to foreign exchange;
- an 8.1 percent net increase due to the impact of the 53rd week; and
- a 21.5 percent net increase in organic net sales.
The 21.5 percent increase in organic net sales was driven by a 21.0 percent increase in volume and a favorable price/mix impact of 0.5 percent. The significant volume increase was primarily driven by consumers increasing their at-home food consumption as a result of the Covid-19 pandemic, which benefitted the Company’s retail businesses and negatively impacted the Foodservice segment. Price/mix was also favorable as both pricing and sales mix were favorable compared to the prior-year period.
Gross profit increased 30.3 percent to USD 923 million in the quarter, and adjusted gross profit increased 31.1 percent to USD 929 million. The increases were primarily driven by the increased sales volume. Additionally, supply chain realized productivity, the impact of the 53rd week, favorable price/mix, and cost synergies associated with the Pinnacle Foods acquisition were partially offset by higher input costs as well as pandemic-related costs. Pandemic-related costs included investments in employee safety protocols, bonuses paid to supply chain employees, and costs necessary to meet elevated levels of demand. Gross margin increased 97 basis points to 28.1 percent in the quarter, and adjusted gross margin increased 113 basis points to 28.3 percent, as margin improvements in the Grocery + Snacks and Refrigerated + Frozen segments were partially offset by a margin decline the Foodservice segment.
Selling, general, and administrative expenses (SG+A), which include advertising and promotional expense (A+P), increased 34.8 percent to USD 532 million in the quarter. Adjusted SG+A, which excludes A+P, increased 5.7 percent to USD 308 million, primarily as a result of incremental incentive compensation versus the fourth quarter of the prior year, and the impact of the 53rd week. These increased expenses were partially offset by cost synergies associated with the Pinnacle Foods acquisition as well as temporarily reduced spending as employees worked from home and business travel was eliminated. A+P for the quarter decreased 20.0 percent to USD 59 million as the Company chose to reduce demand-driving A+P investments due to the already-elevated retail demand.
Net interest expense was USD 125 million in the quarter. Compared to the prior-year period, net interest expense decreased USD 6 million, driven by lower levels of debt outstanding.
The Company’s 489 million average diluted shares outstanding was an increase of approximately 2 million shares versus the prior-year period.
In the quarter, net income attributable to Conagra Brands increased 59.2 percent to USD 201 million, or USD 0.41 per diluted share. Adjusted net income attributable to Conagra Brands increased 110.6 percent to USD 368 million, or USD 0.75 per diluted share, in the quarter. The increases in net income attributable to Conagra Brands and adjusted net income were driven primarily by the increase in sales volume and associated profit. Net income attributable to Conagra Brands was also impacted by USD 112 million of post-tax expense related to intangible impairment charges related to several retail brands. The increase in adjusted EPS in the quarter was primarily driven by the increase in adjusted net income, slightly offset by higher average diluted shares outstanding.
Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, increased 50.5 percent to USD 690 million in the quarter.
Total Company Fiscal 2020 Results
For the full fiscal year, net sales increased 15.9 percent to USD 11.1 billion. Reported net sales growth reflects:
- an 8.3 percent net increase from the acquisition of Pinnacle Foods and the divestitures and exit of the Sold Businesses;
- a 0.2 percent net decrease due to foreign exchange;
- a 2.2 percent net increase due to the impact of the 53rd week; and
- a 5.6 percent net increase in organic net sales.
For the full fiscal year, gross profit increased 15.7 percent to USD 3.07 billion. Adjusted gross profit increased 14.3 percent to USD 3.11 billion primarily driven by the inclusion of Pinnacle’s gross profit, organic net sales growth, supply chain realized productivity, cost synergies associated with the Pinnacle Foods acquisition, and the inclusion of the 53rd week. These benefits were partially offset by higher input costs, a reduction in profit associated with the Sold Businesses, pandemic-related costs, and the impact of foreign exchange.
For the full fiscal year, EPS increased 12.4 percent to USD 1.72, and adjusted EPS grew 13.4 percent to USD 2.28. An increase in adjusted operating profit in Legacy Conagra, the inclusion of Pinnacle’s operating profit, and cost synergies associated with the Pinnacle Foods acquisition more than offset the impacts of higher interest expense, an increase in the number of shares outstanding, and the impact of the Sold Businesses.
For the full fiscal year, the Company generated USD 1.84 billion in net cash flows from operating activities (continuing operations) and USD 1.47 billion of free cash flow, both of which were above expectations. The Company benefitted from a USD 162 million increase in net income, a USD 234 million increase in accounts payable primarily related to inventory purchases in the fourth quarter, a USD 164 million reduction in inventories primarily associated with pandemic-related demand in the fourth quarter, and the delay of USD 47 million of certain federal cash tax payments related to the payment deadline being extended into the first quarter of fiscal 2021.
Grocery + Snacks Segment Fourth Quarter Results
Net sales for the Grocery + Snacks segment increased 44.1 percent to USD 1.5 billion in the quarter reflecting:
- a 5.3 percent decrease from the impact of the Sold Businesses;
- a 9.0 percent increase due to the impact of the 53rd week; and
- a 40.4 percent increase in organic net sales.
On an organic net sales basis, volume increased 38.0 percent and price/mix increased 2.4 percent. Volume increased across multiple categories as consumers increased their at-home food consumption in connection with the pandemic. The favorable price/mix was primarily attributable to favorable mix. Several grocery and snack brands experienced significant double-digit organic sales growth rate in the quarter, including Chef Boyardee, Hunt’s, Libby’s, Armour, Duncan Hines, Orville Redenbacher’s, Snack Pack, and Slim Jim.
Operating profit for the segment increased 115.4 percent to USD 300 million in the quarter. Adjusted operating profit increased 91.2 percent to USD 353 million, primarily driven by organic net sales growth, the impact of the 53rd week, cost synergies associated with the Pinnacle Foods acquisition, and supply chain realized productivity. These benefits were partially offset by input cost inflation, and the lost profit from the Sold Businesses.
Refrigerated + Frozen Segment Fourth Quarter Results
Net sales for the Refrigerated + Frozen segment increased 23.3 percent to USD 1.4 billion in the quarter reflecting:
- a 2.6 percent decrease from the impact of the Sold Businesses;
- an 8.3 percent increase due to the impact of the 53rd week; and
- a 17.6 percent increase in organic net sales.
On an organic net sales basis, volume increased 17.8 percent and price/mix decreased 0.2 percent. Volume increased across multiple categories as consumers increased their at-home food consumption in connection with the pandemic. As a result, many brands, including Birds Eye, Marie Callender’s, Banquet, Healthy Choice, P.F. Chang’s Home Menu, Odom’s Tennessee Pride, and Reddi-wip experienced considerable organic volume and net sales growth in the quarter. The slight price/mix decline was primarily attributable to unfavorable sales mix.
Operating profit for the segment decreased 17.2 percent to USD 169 million in the quarter. Adjusted operating profit increased 45.7 percent to USD 267 million as the benefits of higher organic net sales, the impact of the 53rd week, supply chain realized productivity, and cost synergies associated with the Pinnacle Foods acquisition more than offset higher input costs and lost profit from the Sold Businesses.
International Segment Fourth Quarter Results
Net sales for the International segment increased 18.6 percent to USD 266 million in the quarter reflecting:
- a 7.2 percent increase due to the impact of the 53rd week;
- an 8.4 percent decrease from the unfavorable impact of foreign exchange; and
- a 19.8 percent increase in organic net sales.
On an organic net sales basis, volume increased 18.0 percent and price/mix increased 1.8 percent. During the quarter, the segment benefited from elevated demand related to the impacts of the pandemic. The Company’s Canadian, Mexican, and export businesses saw significant volume increases, which were partially offset by lower volumes in India due to the country-wide closure of manufacturing plants and stores during the quarter. The increase in price/mix was primarily attributable to favorable mix.
Operating profit for the segment increased 168.5 percent to USD 27 million in the quarter. Adjusted operating profit increased 47.2 percent to USD 36 million as the increase in organic net sales, the impact of the 53rd week, supply chain realized productivity, and cost synergies associated with the Pinnacle Foods acquisition were partially offset by higher input costs and the impact of foreign exchange.
Foodservice Segment Fourth Quarter Results
Net sales for the Foodservice segment decreased 27.9 percent to USD 193 million in the quarter reflecting:
- a 1.3 percent decrease from the impact of the Sold Businesses;
- a 4.9 percent increase due to the impact of the 53rd week; and
- a 31.5 percent decrease in organic net sales.
On an organic net sales basis, volume decreased 34.2 percent primarily driven by lower restaurant traffic as a result of the pandemic. Price/mix was favorable 2.7 percent in the quarter primarily driven by increased pricing to offset higher input costs.
Operating profit for the segment decreased 97.1 percent to USD 1 million in the quarter, as lower organic net sales, higher inventory write-offs, and higher input costs more than offset the impacts of supply chain realized productivity, cost synergies associated with the Pinnacle Foods acquisition, and the 53rd week.
Other Fourth Quarter Items
Corporate expenses increased 40.8 percent to USD 106 million and adjusted corporate expenses increased 12.6 percent to USD 94 million in the quarter, driven primarily by incremental incentive compensation and the impact of the 53rd week.
Pension and post-retirement non-service expense was USD 27 million in the quarter compared to USD 5 million of income in the prior-year period. The Company expenses actuarial gains and losses in excess of the 10 percent corridor annually at the pension measurement date. This practice resulted in a USD 45 million non-cash year-end pension expense for fiscal 2020, driven by a reduction of the discount rate used to remeasure the pension obligations to present value and a reduction in asset values for certain plan assets. Adjusted pension and post-retirement non-service income increased USD 8 million to USD 18 million.
In the quarter, equity method investment earnings more than doubled to USD 23 million on a reported and adjusted basis. The increase was primarily related to increased retail demand more than offsetting reduced foodservice demand in the Ardent Mills joint venture.
In the quarter, the effective tax rate was 22.9 percent, and the adjusted effective tax rate was 23.0 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. Since the closing of the Pinnacle acquisition through the end of the fourth quarter, Conagra Brands has reduced total gross debt by more than USD 1.8 billion, resulting in a net debt to last twelve month adjusted Ebitda ratio (Leverage Ratio) of 4.0x at of the end of fiscal 2020.
Outlook
The impact that the Covid-19 pandemic will have on the Company’s fiscal 2021 consolidated results remains uncertain. The Company does expect retail and foodservice demand levels to trend toward historical norms as the fiscal year progresses. However, the degree and timing of changes in retail and foodservice demand levels are difficult to predict with enough certainty to provide a full-year outlook at this time.
To-date in the first quarter, the Company has continued to see a significant increase in demand in its retail business. The Company has also continued to see reduced demand for its foodservice products when compared to pre-Covid-19 pandemic demand levels. Covid-19 related costs have also continued to impact the business. Based on these factors, the Company is providing first quarter fiscal 2021 guidance of:
- Organic net sales growth of 10 percent to 13 percent
- Adjusted operating margin of 17.0 percent to 17.5 percent
- Adjusted EPS of USD 0.54 to USD 0.59
The Company’s first quarter guidance continues to assume that the end-to-end supply chain operates effectively during this period of heightened demand.
The Company remains confident in its ability to achieve its leverage ratio target of 3.5x to 3.6x by the end of fiscal 2021.
Additionally, the Company is reaffirming its fiscal 2022 algorithm of:
- Organic net sales growth (3-year CAGR ending fiscal 2022) of 1 percent to 2 percent
- Adjusted operating margin of 18 percent to 19 percent
- Adjusted EPS of USD 2.66 to USD 2.76
- Free cash flow conversion (percentage of adjusted net income 3-year average) of 95 percent+
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 forward-looking non-GAAP financial measures impracticable. Please see the end of this release for more information.
Items Affecting Comparability of EPS
The following are included in the USD 0.41 diluted EPS from continuing operations for the fourth quarter of fiscal 2020 (EPS amounts rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.
- Approximately USD 0.03 per diluted share of net expense related to restructuring plans
- Approximately USD 0.01 per diluted share of net benefit related to corporate hedging derivative gains
- Approximately USD 0.07 per diluted share of net expense related to a pension valuation adjustment
- The Company expenses actuarial gains and losses in excess of the 10 percent corridor annually at the pension measurement date. This resulted in a large non-cash year-end pension expense for fiscal 2020, driven by a reduction of the discount rate used to remeasure the pension obligations to present value and a reduction in asset values for certain plan assets.
- Approximately USD 0.23 per diluted share of net expense related to intangible impairment charges primarily related to the Frontera, Gardein, Glutino, Hungry Man, and Udi’s brands
- Approximately USD 0.01 per diluted share of net expense related to legal matters
- Approximately USD 0.01 per diluted share of net expense due to rounding
The following are included in the USD 0.26 diluted EPS from continuing operations for the fourth quarter of fiscal 2019 (EPS amounts rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.
- Approximately USD 0.05 per diluted share of net expense related to restructuring plans
- Approximately USD 0.14 per diluted share of net expense related to intangible impairment charges primarily related to the Chef Boyardee brand
- Approximately USD 0.06 per diluted share of net benefit related to legal matters
- Approximately USD 0.01 per diluted share of net expense related to the fair value adjustment of cash settleable equity awards issued in connection with the Pinnacle acquisition
- Approximately USD 0.05 per diluted share of net gain related to the gain on divested businesses
- Approximately USD 0.01 per diluted share of net expense related to a pension valuation adjustment
- Approximately USD 0.02 per diluted share of net benefit from tax items primarily related to the capital loss valuation allowance adjustment
- Approximately USD 0.02 per diluted share of net expense from tax items primarily related to legal entity restructuring and other unusual tax items
Definitions
Organic net sales excludes, from reported net sales, the impacts of foreign exchange, divested businesses and acquisitions, including the Pinnacle acquisition (until the anniversary date of the acquisitions), as well as the impact of any 53rd week. All references to changes in volume and price/mix throughout this release are on an organic net sales basis.
References to adjusted items throughout this release refer to measures computed in accordance with GAAP less the impact of items impacting comparability. Items impacting comparability are income or expenses (and related tax impacts) that management believes have had, or are likely to have, a significant impact on the earnings of the applicable business segment or on the total corporation for the period in which the item is recognized, and are not indicative of the Company’s core operating results. These items thus affect the comparability of underlying results from period to period.
References to earnings before interest, taxes, depreciation, and amortization (Ebitda) refer to net income attributable to Conagra Brands before the impacts of discontinued operations, income tax expense (benefit), interest expense, depreciation, and amortization. References to adjusted Ebitda refer to Ebitda before the impacts of items impacting comparability.
Free cash flow is defined as net cash flow from operating activities from continuing operations less additions to property, plant, and equipment.
References to Legacy Conagra exclude any income or expenses associated with the recently acquired Pinnacle business (Graphic: Conagra Brands).
