Chicago / IL. (cag) ConAgra Brands Inc. reported results for the third quarter of fiscal year 2021, which ended on February 28, 2021. All comparisons are against the prior-year fiscal period, unless otherwise noted.
Third Quarter 2021 Financial Highlights
- Third quarter net sales increased 8.5 percent; organic net sales increased 9.7 percent, which is above the Company’s guidance range.
- Operating margin increased 193 basis points to 16.2 percent; adjusted operating margin increased 31 basis points to 16.0 percent, which is in-line with the Company’s guidance range.
- Diluted earnings per share from continuing operations (EPS) for the third quarter grew 38.1 percent to USD 0.58, and adjusted EPS grew 25.5 percent to USD 0.59, which is in-line with the Company’s guidance range.
- During the third quarter, the Company repurchased approximately 8.8 million shares of its common stock for USD 298 million.
- The Company is providing guidance for the fourth quarter of fiscal 2021:
- Organic net sales growth is expected in the range of (10) percent to (12) percent
- Adjusted operating margin is expected in the range of 14 percent to 15 percent
- Adjusted EPS is expected in the range of USD 0.49 to USD 0.55
- The Company is reaffirming its fiscal 2022 guidance.
CEO Perspective
Sean Connolly, president and chief executive officer of Conagra Brands, commented, «We have made significant investments in our business over the past five-plus years, modernizing our products to generate consumer demand. Our strong third-quarter results benefited from these investments. We continued to invest in the business during the quarter, with a focus on ensuring our products are available both online and in stores, as we aim to maximize consumer acquisition during this period of heightened demand.»
He continued, «We remain confident that each of our retail domains – frozen, snacks, and staples – is well-positioned to sustain the benefits of the eat-at-home habits consumers have developed during the Covid-19 pandemic. Our continued business momentum, coupled with our disciplined approach to investment, reinforce our confidence in the long-term potential of the business and our ability to create sustained value for our shareholders. We further demonstrated this confidence by repurchasing nearly USD 300 million of our common stock this quarter, which came after we raised our quarterly dividend 29 percent earlier this fiscal year.»
Total Company Third Quarter Results
In the quarter, net sales increased 8.5 percent to USD 2.8 billion. The growth in reported net sales primarily reflects:
- a 1.2 percent net decrease from the divestitures of the Lender’s bagel business, the H.K. Anderson business, and the Peter Pan peanut butter business, and the exit of the private label peanut butter business (collectively, the Sold Businesses); and
- a 9.7 percent increase in organic net sales.
The 9.7 percent increase in organic net sales was driven by a 6.1 percent increase in volume and a favorable price/mix impact of 3.6 percent. The volume increase was primarily driven by continued elevated at-home food consumption as a result of the Covid-19 pandemic, which benefitted the Company’s retail segments. This increase was partially offset by the pandemic’s negative impact on the Foodservice segment as well as a temporary supply chain disruption related to a winter storm near the end of the quarter. The price/mix favorability was primarily driven by favorable mix, lower promotional activity, and inflation-justified pricing in Foodservice.
Gross profit increased 10.8 percent to USD 758 million in the quarter, and adjusted gross profit increased 8.9 percent to USD 761 million. Gross margin increased 58 basis points to 27.4 percent in the quarter, and adjusted gross margin increased 12 basis points to 27.5 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 input cost inflation, higher transportation costs, Covid-19-related expenses, and the lost profit from the Sold Businesses.
Selling, general, and administrative expense (SG+A), which includes advertising and promotional expense (A+P), decreased 3.2 percent to USD 310 million in the quarter. Adjusted SG+A, which excludes A+P, increased 5.2 percent to USD 244 million, primarily as a result of higher incentive compensation, as well as higher commissions expense as a result of increased sales compared to the prior-year period. This expense was slightly offset by favorability from synergies and Covid-19-related savings, such as reduced travel expense.
A+P for the quarter increased 11.8 percent to USD 73 million, driven primarily by higher eCommerce investments.
Net interest expense was USD 101 million in the quarter. Compared to the prior-year period, net interest expense decreased 14.5 percent or USD 17 million, driven primarily by lower levels of debt outstanding.
The average diluted share count decreased 0.2 percent compared to the prior-year period to 488 million, driven by the Company’s share repurchase activity. Compared to the second quarter of fiscal 2021, the average diluted share count decreased 0.7 percent.
In the quarter, net income attributable to Conagra Brands increased 37.8 percent to USD 281 million, or USD 0.58 per diluted share. Adjusted net income attributable to Conagra Brands increased 24.1 percent to USD 287 million, or USD 0.59 per diluted share, in the quarter. The increases were driven primarily by the increase in gross profit.
Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, increased 9.9 percent to USD 566 million in the quarter, primarily driven by the increase in adjusted gross profit.
Grocery + Snacks Segment Third Quarter Results
Net sales for the Grocery + Snacks segment increased 10.8 percent to USD 1.1 billion in the quarter reflecting:
- a 2.3 percent decrease from the impact of the Sold Businesses; and
- a 13.1 percent increase in organic net sales.
On an organic net sales basis, volume increased 9.4 percent and price/mix increased 3.7 percent. Volume benefited from continued elevated at-home food consumption as a result of the Covid-19 pandemic. The increase in price/mix was primarily driven by reduced promotional activity and favorable mix. Many snacks and staples brands experienced strong organic net sales growth in the quarter, including snack brands Orville Redenbacher’s, Act II, Swiss Miss, Snack Pack, and Slim Jim as well as staples brands Chef Boyardee, Libby’s, PAM, Hunt’s, and Armour Star.
Operating profit for the segment increased 45.6 percent to USD 290 million in the quarter. Adjusted operating profit increased 16.4 percent to USD 245 million, primarily driven by organic net sales growth, supply chain realized productivity, favorable margin mix, cost synergies associated with the Pinnacle Foods acquisition, and fixed cost leverage. These benefits were partially offset by the impacts of input cost inflation, higher transportation costs, Covid-19-related expenses, higher SG+A, and lost profit from the Sold Businesses.
Refrigerated + Frozen Segment Third Quarter Results
Net sales for the Refrigerated + Frozen segment increased 11.7 percent to USD 1.2 billion in the quarter reflecting:
- a 0.4 percent decrease from the impact of the Sold Businesses; and
- a 12.1 percent increase in organic net sales.
On an organic net sales basis, volume increased 7.8 percent and price/mix increased 4.3 percent. Volume benefited from continued elevated at-home food consumption as a result of the Covid-19 pandemic. The price/mix increase was primarily driven by favorable mix and lower promotional activity. Marie Callender’s, Birds Eye, Banquet, P.F. Chang’s Home Menu, and Reddi-wip were among the brands with the strongest organic sales growth in the quarter.
Operating profit for the segment increased 12.5 percent to USD 215 million in the quarter. Adjusted operating profit increased 10.0 percent to USD 222 million as the benefits of higher organic net sales, supply chain realized productivity, favorable margin mix, fixed cost leverage, and cost synergies associated with the Pinnacle Foods acquisition more than offset the impacts of input cost inflation, higher transportation costs, Covid-19-related expenses, increased A+P investments, and lost profit from the Sold Businesses.
International Segment Third Quarter Results
Net sales for the International segment increased 9.0 percent to USD 241 million in the quarter reflecting:
- a 0.5 percent decrease from the impact of the Sold Businesses,
- a 0.3 percent decrease from the unfavorable impact of foreign exchange; and
- a 9.8 percent increase in organic net sales.
On an organic net sales basis, volume increased 6.7 percent and price/mix increased 3.1 percent. During the quarter, the segment benefited from elevated demand related to the impacts of the Covid-19 pandemic, and experienced strong growth in each of its regions across snacks, staples, and frozen. The price/mix increase was driven by inflation-justified pricing and favorable mix.
Operating profit for the segment increased 24.7 percent to USD 28 million in the quarter. Adjusted operating profit increased 24.7 percent to USD 28 million as the benefits from the increase in organic net sales, supply chain realized productivity, fixed cost leverage, and favorable product mix were partially offset by the impacts of higher input costs, higher transportation costs, and foreign exchange.
Foodservice Segment Third Quarter Results
Net sales for the Foodservice segment decreased 17.2 percent to USD 194 million in the quarter reflecting:
- a 0.7 percent decrease from the impact of the Sold Businesses; and
- a 16.5 percent decrease in organic net sales.
On an organic net sales basis, volume decreased 19.5 percent primarily driven by lower restaurant traffic as a result of the Covid-19 pandemic. Price/mix was favorable at 3.0 percent in the quarter primarily driven by increased pricing to offset higher input costs.
Operating profit for the segment decreased 53.3 percent to USD 13 million in the quarter, as the impacts of lower organic net sales and higher input costs, and Covid-19-related expenses, more than offset the impacts of favorable supply chain realized productivity and cost synergies associated with the Pinnacle Foods acquisition.
Other Third Quarter Items
Corporate expenses increased 28.8 percent to USD 97 million in the quarter, primarily driven by expenses associated with the early extinguishment of debt. Adjusted corporate expense increased 5.1 percent to USD 63 million in the quarter primarily as a result of higher incentive compensation expense.
Pension and post-retirement non-service income was USD 14 million in the quarter compared to USD 16 million of income in the prior-year period.
In the quarter, equity method investment earnings were USD 22 million. The 104.5 percent increase on a reported basis and the 93.3 percent increase on an adjusted basis were primarily driven by favorable market conditions.
In the quarter, the effective tax rate was 26.5 percent compared to 25.2 percent in the prior-year period. The adjusted effective tax rate was 23.9 percent compared to 24.8 percent in the prior-year period.
In the quarter, the Company paid a dividend of USD 0.275 per share.
Portfolio Update
As previously disclosed on January 25, 2021, the Company completed the divestiture of the Peter Pan peanut butter business. The business was reflected primarily within the Grocery + Snacks segment, and to a lesser extent within the International and Foodservice segments. The sale is expected to have an annualized impact of reducing reported net sales by approximately USD 110 million and adjusted EPS by approximately USD 0.03.
Outlook
In the fourth quarter to-date, the Company has seen a sustained increase in demand in its retail segments when compared to pre-Covid-19 demand levels, driven by continued elevate at-home eating as well as the impact of customers beginning to rebuild inventories. The Company has also continued to see reduced demand in its Foodservice segment when compared to pre-Covid-19 demand levels. The Company has begun to experience elevated inflation in cost of goods sold, and Covid-19-related costs have also continued to impact the business. Based on these factors, the Company is providing the following fourth quarter fiscal 2021 guidance:
- Organic net sales growth is expected in the range of (10) percent to (12) percent
- Adjusted operating margin is expected in the range of 14 percent to 15 percent
- Adjusted EPS is expected in the range of USD 0.49 to USD 0.55
The Company’s fourth quarter guidance continues to assume that the end-to-end supply chain operates effectively during this period of heightened demand.
The Company is reaffirming its fiscal 2022 guidance 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 2.63 to USD 2.73
- 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.
Items Affecting Comparability of EPS
The following are included in the USD 0.58 EPS for the third quarter of fiscal 2021 (EPS amounts rounded and after tax).
- Approximately USD 0.01 per diluted share of net benefit related to corporate hedging derivative gains
- Approximately USD 0.06 per diluted share of net benefit related to the gain on divestiture of a business
- Approximately USD 0.02 per diluted share of net expense related to restructuring plans
- Approximately USD 0.04 per diluted share of net expense related to the early extinguishment of debt
- Approximately USD 0.01 per diluted share of net expense related to tax consulting fees
- Approximately USD 0.01 per diluted share of net expense related to legal matters
The following are included in the USD 0.42 EPS for the third quarter of fiscal 2020 (EPS amounts rounded and after tax).
- Approximately USD 0.05 per diluted share of net expense related to restructuring plans
- Approximately USD 0.01 per diluted share of net expense related to corporate hedging derivative losses
- Approximately USD 0.01 per diluted share of positive impact due to rounding
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.
