Conagra Brands: Reports Strong Q1-2021 Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the first quarter of fiscal year 2021, which ended on August 30, 2020. All comparisons are against the prior-year fiscal period, unless otherwise noted.

First Quarter 2021 Financial Highlights

  • First quarter net sales increased 12.1 percent, and organic net sales increased 15.0 percent, with significant growth in each of the Company’s three retail segments on both a reported and an organic basis.
  • All four of the Company’s segments reported margin expansion in the quarter. Total Company operating margin increased 800 basis points to 19.0 percent, and adjusted operating margin increased 450 basis points to 20.2 percent.
  • Diluted earnings per share from continuing operations (EPS) for the first quarter grew 86.1 percent to USD 0.67, and adjusted EPS grew 62.8 percent to USD 0.70.
  • Subsequent to quarter-end, the Company’s board of directors approved a 29 percent increase in the quarterly dividend to USD 0.275 per share, or USD 1.10 per share on an annualized basis. The increase was enabled by the Company’s de-leveraging progress, which is ahead of its expected cadence, and reflects management’s ongoing confidence in the long-term strength of the business.
  • The Company is providing guidance for the second quarter of fiscal 2021:
    • Organic net sales growth is expected in the range of +6 percent to +8 percent
    • Adjusted operating margin is expected in the range of 18.0 percent to 18.5 percent
    • Adjusted EPS is expected in the range of USD 0.70 to USD 0.74
  • The Company expects to reach its net leverage ratio target of 3.5x to 3.6x by the third quarter of fiscal 2021.
  • The Company is reaffirming its fiscal 2022 algorithm.

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, «Fiscal 2021 is off to a strong start. Our first quarter results demonstrate that our business is healthy, our products are relevant, and our capabilities are strong. We exceeded our expectations on net sales, profitability, and de-leveraging, and continued to make investments to ensure the physical availability of our products, maintain momentum with consumers, and build brand health. Now that customers have begun rebuilding inventories and we have increased production capacity in certain areas of our business, we are selectively increasing our marketing support for the businesses where capacity permits. These investments are intended to help sustain brand momentum and maximize the long-term value of our consumer base.»

He continued, «Our execution of the Conagra Way for the past five years has positioned us very well to capture the benefits of the recent consumer behavior shifts, many of which we believe will continue well into the future. Our decision to increase the dividend, coupled with our commitment to continue to invest in the business, reflects our confidence in Conagra Brands and in our ability to create long-term value for our shareholders.»

Total Company First Quarter Results

In the quarter, net sales increased 12.1 percent to USD 2.7 billion. The growth in reported net sales primarily reflects:

  • a 2.4 percent net decrease from the divestitures of the Direct Store Delivery (DSD) snacks business, the Lender’s Bagel business, and the exit of the private label peanut butter business (collectively, the Sold Businesses);
  • a 0.5 percent net decrease due to foreign exchange; and
  • a 15.0 percent increase in organic net sales.

The 15.0 percent increase in organic net sales was driven by a 10.9 percent increase in volume and a favorable price/mix impact of 4.1 percent. The 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 segments but negatively impacted the Foodservice segment. The price/mix favorability was driven by favorable pricing and sales mix; approximately 70 bps of the increase in net sales and organic net sales reflects a change in estimate associated with the prior quarter’s trade expense accrual.

Gross profit increased 21.9 percent to USD 810 million in the quarter, and adjusted gross profit increased 21.7 percent to USD 823 million. Gross margin increased 245 basis points to 30.2 percent in the quarter, and adjusted gross margin increased 244 basis points to 30.7 percent. The net sales increase, together with supply chain realized productivity, favorable margin mix, cost synergies associated with the Pinnacle Foods acquisition, and fixed cost leverage combined to more than offset higher input costs, COVID-19-related expenses, the impact of foreign exchange, and lost profit from the Sold Businesses. The previously mentioned change in trade expense estimate increased adjusted gross margin by approximately 40 basis points in the quarter.

Selling, general, and administrative expense (SG+A), which includes advertising and promotional expense (A+P), decreased 25.1 percent to USD 300 million in the quarter. Adjusted SG+A, which excludes A+P, decreased 7.6 percent to USD 237 million, primarily as a result of 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 increased 1.5 percent to USD 46 million.

Net interest expense was USD 114 million in the quarter. Compared to the prior-year period, net interest expense decreased 7.3 percent to USD 9 million, driven by lower levels of debt outstanding.

The Company’s 490 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 89.4 percent to USD 329 million, or USD 0.67 per diluted share. Adjusted net income attributable to Conagra Brands increased 64.2 percent to USD 344 million, or USD 0.70 per diluted share, in the quarter. The increases were driven primarily by the increase in gross profit and reduction in SG+A. The increase in adjusted EPS in the quarter was primarily driven by the increase in adjusted net income attributable to Conagra Brands, slightly offset by higher average diluted shares outstanding.

Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, increased 34.5 percent to USD 647 million in the quarter primarily driven by the previously mentioned increase in adjusted Gross Profit and decrease in adjusted SG+A.

Grocery + Snacks Segment First Quarter Results

Net sales for the Grocery + Snacks segment increased 16.0 percent to USD 1.1 billion in the quarter reflecting:

  • a 4.7 percent decrease from the impact of the Sold Businesses; and
  • a 20.7 percent increase in organic net sales.

On an organic net sales basis, volume increased 17.2 percent and price/mix increased 3.5 percent. Volume benefited from increased at-home eating and replenishment of customer inventory levels. The increase in price/mix was primarily driven by favorable pricing and mix as well as the previously mentioned change in trade expense estimate. Many grocery and snack brands experienced strong double-digit organic sales growth in the quarter, including Hunts, PAM, Vlasic, Duncan Hines, Wishbone, Slim Jim, Orville Redenbacher’s, Act II, Swiss Miss, and Snack Pack.

Operating profit for the segment increased 86.9 percent to USD 284 million in the quarter. Adjusted operating profit increased 43.0 percent to USD 298 million, primarily driven by organic net sales growth, supply chain realized productivity, and cost synergies associated with the Pinnacle Foods acquisition. These benefits were partially offset by input cost inflation, COVID-19-related costs, and the lost profit from the Sold Businesses.

Refrigerated + Frozen Segment First Quarter Results

Net sales for the Refrigerated + Frozen segment increased 17.9 percent to USD 1.1 billion in the quarter reflecting:

  • a 1.1 percent decrease from the impact of the Sold Businesses; and
  • a 19.0 percent increase in organic net sales.

On an organic net sales basis, volume increased 12.8 percent and price/mix increased 6.2 percent. Volume benefited from increased at-home eating and replenishment of customer inventory levels. The price/mix increase was primarily driven by favorable pricing and mix as well as the previously mentioned change in trade expense estimate. Many brands, including Birds Eye, Marie Callender’s, Hungry Man, Healthy Choice, P.F. Chang’s Home Menu, Odom’s Tennessee Pride, Gardein, Hebrew National, and Reddi-wip experienced strong double-digit organic net sales growth in the quarter.

Operating profit for the segment increased 54.3 percent to USD 240 million in the quarter. Adjusted operating profit increased 42.8 percent to USD 246 million as the benefits of higher organic net sales, supply chain realized productivity, and cost synergies associated with the Pinnacle Foods acquisition more than offset higher input costs, COVID-19-related costs, and lost profit from the Sold Businesses.

International Segment First Quarter Results

Net sales for the International segment increased 7.2 percent to USD 219 million in the quarter reflecting:

  • a 5.9 percent decrease from the unfavorable impact of foreign exchange; and
  • a 13.1 percent increase in organic net sales.

On an organic net sales basis, volume increased 10.5 percent and price/mix increased 2.6 percent. During the quarter, the segment benefited from elevated demand related to the impacts of the pandemic, and the segment experienced strong growth in each of its regions. The segment also benefitted from the previously mentioned change in trade expense estimate.

Operating profit for the segment increased 55.5 percent to USD 39 million in the quarter. Adjusted operating profit increased 47.7 percent to USD 38 million as the increase in organic net sales, together with the benefits from favorable product mix and supply chain realized productivity were only partially offset by higher input costs and the impact of foreign exchange.

Foodservice Segment First Quarter Results

Net sales for the Foodservice segment decreased 21.8 percent to USD 195 million in the quarter reflecting:

  • a 1.5 percent decrease from the impact of the Sold Businesses; and
  • a 20.3 percent decrease in organic net sales.

On an organic net sales basis, volume decreased 24.2 percent primarily driven by lower restaurant traffic as a result of the COVID-19 pandemic. Price/mix was favorable 3.9 percent in the quarter primarily driven by favorable mix and increased pricing to offset higher input costs.

Operating profit for the segment decreased 20.0 percent to USD 25 million in the quarter, as the impacts of lower organic net sales and higher input costs more than offset the impacts of supply chain realized productivity, lower inventory write-offs, and cost synergies associated with the Pinnacle Foods acquisition.

Other First Quarter Items

Corporate expenses decreased 22.5 percent to USD 77 million in the quarter, primarily driven by lower corporate restructuring expense. Adjusted corporate expense increased 5.6 percent to USD 66 million in the quarter, as higher share-based payment and deferred compensation expense more than offset the benefit of cost synergies associated with the Pinnacle Foods acquisition.

Pension and post-retirement non-service income was USD 14 million in the quarter compared to USD 10 million of income in the prior-year period.

In the quarter, equity method investment earnings were USD 6.5 million. On a reported basis, the 46.8 percent decrease was primarily driven by a gain on the sale of an asset in the prior year. On an adjusted basis, the 4.5 percent decrease was primarily driven by less favorable market conditions in the Ardent Mills joint venture.

In the quarter, the effective tax rate was 20.8 percent, and the adjusted effective tax rate was 22.8 percent.

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

The Company remains committed to a solid investment grade credit rating. Since the closing of the Pinnacle Foods acquisition through the end of the first quarter of fiscal 2021, the Company has reduced total gross debt by more than USD 1.9 billion, resulting in total debt of USD 9.6 billion and net debt of USD 9.2 billion as of the end of the first quarter of fiscal 2021. In the last four fiscal quarters ending August 30, 2020, the Company generated USD 995 million in Net income attributable to Conagra Brands. As of the first quarter of fiscal 2021, the Company’s net debt to last twelve month adjusted Ebitda ratio was 3.7x.

Dividend Increase

Subsequent to quarter-end, the Company’s board of directors approved a quarterly dividend payment of USD 0.275 per share of Conagra common stock to be paid on December 2, 2020 to stockholders of record as of the close of business on November 2, 2020.

Portfolio Update

On September 28, 2020, the Company entered into a definitive agreement to sell its H.K. Anderson business to Utz Quality Foods, LLC. The transaction is subject to customary closing conditions and is expected to be completed in the second quarter of fiscal 2021. In fiscal 2020, the business generated approximately USD 10 million in net sales and was primarily reported in the Grocery + Snacks segment.

Outlook

The impact of the COVID-19 pandemic on the Company’s full year fiscal 2021 consolidated results is uncertain. The Company continues to expect demand in retail to remain elevated and demand in foodservice to remain challenged versus historical norms. 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.

In the second quarter to-date, the Company has continued to see a significant increase in demand in its retail segments. The Company has also continued to see reduced demand in its Foodservice segment when compared to pre-COVID-19 demand levels. COVID-19-related costs have also continued to impact the business. Based on these factors, the Company is providing second quarter fiscal 2021 guidance of:

  • Organic net sales growth of +6 percent to +8 percent
  • Adjusted operating margin of 18.0 percent to 18.5 percent
  • Adjusted EPS of USD 0.70 to USD 0.74

The Company’s second quarter guidance continues to assume that the end-to-end supply chain operates effectively during this period of heightened demand.

The Company expects to achieve its leverage ratio target of 3.5x to 3.6x by the third quarter of fiscal 2021.

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 0.67 EPS for the first quarter of fiscal 2021 (EPS amounts rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.

  • Approximately USD 0.04 per diluted share of net expense related to restructuring plans
  • Approximately USD 0.02 per diluted share of net benefit related to unusual tax items
  • Approximately USD 0.01 per diluted share of net expense due to rounding

The following are included in the USD 0.36 EPS for the first 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 0.08 per diluted share of net expense related to restructuring plans
  • Approximately USD 0.01 per diluted share of net expense related to corporate hedging activity
  • Approximately USD 0.01 per diluted share of net benefit related to a gain on an asset sale in the Ardent Mills joint venture
  • Approximately USD 0.06 per diluted share of net expense related to an impairment of goodwill associated with the planned divestiture of the DSD snacks business
  • Approximately USD 0.03 per diluted share of net expense related to an impairment of intangible assets
  • Approximately USD 0.10 per diluted share of net benefit related to unusual tax items primarily related to the reorganization of various Legacy Pinnacle legal entities and state tax planning strategies

Definitions

Organic net sales excludes, from reported net sales, the impacts of foreign exchange, divested businesses and 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.

References to Legacy Pinnacle refer to either business or income and expenses that were a part of the acquired Pinnacle Foods business and exclude any income or expense associated with the Legacy Conagra business.

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