ConAgra: announces results for Q2/2015

Omaha / NE. (caf) ConAgra Foods Inc., one of North America´s leading food companies, reported results for the fiscal 2015 second quarter ended November 23, 2014. Diluted EPS from continuing operations was 0.05 USD as reported for the fiscal second quarter versus 0.48 USD in the year-ago period. After adjusting for items impacting comparability, comparable diluted EPS was 0.61 USD this quarter and 0.62 USD in the year-ago period. Fiscal 2015 second-quarter highlights (percent cited versus year-ago period amounts, where applicable):

  • Diluted EPS from continuing operations of 0.05 USD as reported, due to significant non-cash impairment charges, versus diluted EPS of 0.48 USD a year ago. After adjusting for items impacting comparability, comparable diluted EPS of 0.61 USD this quarter was in line with plans and slightly below year-ago comparable EPS of 0.62 USD.
  • Consumer Foods sales decreased two percent, with volume down one percent, largely as expected. Key brands are stabilizing as planned. Comparable segment operating profit increased.
  • Commercial Foods sales and comparable operating profit grew as the segment gained domestic share and benefited from better potato crop quality.
  • Private Brands profits were substantially below year ago amounts, reflecting pricing concessions made last fiscal year which have not yet been lapped, weak volumes resulting from an intense bidding environment, and higher commodity costs.
    • Due to expectations for a continuation of soft volumes and difficult pricing conditions in the near term, the company now expects the recovery in this segment to take longer than originally planned. Fiscal 2015 full year comparable Private Brands segment operating profit is expected to be considerably below comparable fiscal 2014 amounts.
    • In connection with the revised outlook, the company recognized pre-tax impairment charges of approximately 247 million USD, writing down Private Brands goodwill and other intangible assets; this amount is identified as an item impacting comparability.
    • Based on executional improvements underway, Private Brands profits are expected to demonstrate strong comparable year-over-year growth in fiscal 2016; profit margins are expected to improve gradually thereafter.
  • The company continues to expect full-year diluted EPS to show a mid-single digit rate of growth over the comparable diluted EPS of 2.17 USD earned in fiscal 2014.
  • The company continues to expect to repay approximately one billion USD of debt this fiscal year, approximately 500 million USD of which was repaid earlier in the fiscal year; other capital allocation goals are also unchanged.

Gary Rodkin, ConAgra Foods´ chief executive officer, said, «We are pleased that the fundamentals in our Consumer Foods and Commercial Foods segments are improving. Key retail brands are strengthening, Lamb Weston is gaining domestic share and benefiting from a better quality potato crop, and we are generating COGS and SG+A efficiencies across our operations. EPS came in as planned this quarter; despite challenges in one of our segments, we have reaffirmed our full-year EPS guidance because we expect two of our segments to continue to deliver good performance, and for our whole organization to continue generating strong productivity and efficiencies».

«Based on current executional challenges, we expect the recovery in the Private Brands segment to take longer than previously expected. Our team is highly focused on opportunities to drive improved execution in this segment over the next several quarters, and we expect these efforts to enable the segment to grow profits in fiscal 2016. We remain confident in the long-term potential for our Private Brands segment given the important role of these products to consumers and trade customers and our ability to utilize our infrastructure to add value for customers».

Consumer Foods Segment

Branded food items sold worldwide in retail channels.

The Consumer Foods segment posted sales of approximately two billion USD and operating profit of 302 million USD, as reported. Sales declined two percent, with volume down one percent and price/mix down one percent; this was in line with expectations. Foreign exchange did not significantly impact the year-over-year sales comparison.

  • Brands posting sales growth for the quarter include ACT II, Chef Boyardee, Hebrew National, Marie Callender´s, PAM, Reddi-wip, Slim Jim, Swiss Miss and others. The company notes good performance in alternative channels given the focus on those opportunities this fiscal year.
  • The packaging, assortment, product, and merchandising initiatives designed to improve the performance of Chef Boyardee, Healthy Choice, and Orville Redenbacher´s, are making a positive difference; those brands are expected to continue to improve sequentially over the next several quarters.

Operating profit of 302 million USD was six percent above year-ago amounts as reported. After adjusting for eight million USD of net expense in the current quarter and four million USD of net expense in the year-ago period from items impacting comparability, current quarter operating profit of 310 million USD increased seven percent over comparable year-ago amounts. The comparable profit growth reflects lower advertising expense in light of stronger promotional support, as well as manageable inflation and good productivity and efficiencies.

Commercial Foods Segment

Specialty potato, seasonings, blends, flavors, and bakery products, as well as consumer branded and private branded packaged food items, sold to foodservice and commercial channels worldwide.

Sales for the Commercial Foods segment were 1.1 billion USD, up two percent over year-ago period amounts, and segment operating profit was 148 million USD, 16 percent above year-ago period amounts, as reported. After adjusting for nine million USD of expense in the year-ago period from items impacting comparability, current quarter operating profit increased eight percent on a comparable basis.

Sales and operating profits for Lamb Weston potato products increased, due to strong performance domestically, a better quality raw potato crop, and good operating efficiencies. Strong domestic performance this year more than offset weaker international sales and profits related to near-term challenges facing quick-serve restaurant customers in key Asian markets. Given the strength of its domestic business, Lamb Weston expects overall profit growth this fiscal year, despite short-term challenges in some international markets and the negative impact of the ongoing longshoremen labor dispute. Profits for the rest of the Commercial Foods segment were in line with year-ago period amounts.

Private Brands

Private brand food items sold in domestic markets.

Sales for the Private Brands segment were 1.1 billion USD in the quarter, down five percent from year-ago amounts, driven by six percent lower volume. Overall volume declines for major product lines including snacks, cereal, pasta, condiments, and bakery more than offset some progress winning new business and gaining distribution in new accounts, notably in crackers.

The segment posted an operating loss of 202 million USD, as reported, due to impairing goodwill and other intangible assets. After adjusting for 251 million USD of net expense from items impacting comparability (approximately 247 million USD of which were impairment charges) in the current quarter, and two million USD of items impacting comparability in year-ago period amounts, comparable operating profit declined 46 percent. Pricing concessions made last fiscal year but not yet lapped drove a meaningful portion of the comparable profit decline, while lower volumes resulting from an intense bidding environment as well as higher commodity costs also weighed on profitability. Pricing initiatives underway should help pass on the higher commodity costs over time.

Given recent performance and the current outlook, the company expects year-over-year profit improvement for this segment to occur in fiscal 2016 instead of fiscal 2015, and now expects fiscal 2015 comparable operating profits for the Private Brands segment to be below those of fiscal 2014. The outlook reflects expectations for a continuation of an intense bidding environment, heavy discounting by branded manufacturers, and the corresponding negative impacts on volume, price/mix, and profits in the near term. Pricing initiatives are expected to lag input cost increases this fiscal year, which are expected to weigh on fiscal 2015 profitability but benefit fiscal 2016 profitability. The company believes that improved execution will bolster customer relationships, make for a more stable base of business, and strengthen results over time. Initiatives to improve execution and the speed of overall decision-making through simpler and more customer-focused processes, as well as better connectivity throughout the organization, are underway, but are not expected to begin to favourably impact business results until fiscal 2016.

Hedging Activities

Hedge gains and losses are generally aggregated, and net amounts are reclassified from unallocated Corporate expense to the operating segments when the underlying commodity or foreign currency being hedged is expensed in segment cost of goods sold. The net of these activities resulted in 25 million USD of unfavorable impact in the current quarter and nine million USD of unfavorable impact in the year-ago period. The company identifies these amounts as items impacting comparability.

As part of its ongoing monitoring and review, the company recently determined that changes in correlations among commodities and certain of its index hedges, exacerbated by volatility, require the company to recognize changes in the fair value of such index hedges directly into segment results as part of the mark-to-market process. This contrasts with the current approach of temporarily classifying those amounts within unallocated Corporate results. Based on current positions, the company expects to recognize index hedge losses directly within segment results over the next few quarters. For other of its hedging activities, the company will continue with its current approach of temporarily classifying hedging results within unallocated Corporate expense prior to being recognized within segment results.

Other Items

  • Unallocated Corporate amounts were 92 million USD of expense in the current quarter and 97 million USD of expense in the year-ago period. Current-quarter amounts include 25 million USD of unfavorable hedge-related impact and nine million USD of net expense from other items impacting comparability. Year-ago period amounts include nine million USD of unfavorable hedge-related impact and 24 million USD of expense related to other items impacting comparability. Excluding these amounts, unallocated Corporate expense was 58 million USD for the current quarter and 64 million USD in the year-ago period.
  • Equity method investment earnings were 34 million USD for the current quarter and five million USD in the year-ago period; the year-over-year increase mostly reflects the inclusion of profits for Ardent Mills (which are not in year-ago amounts).
  • Net interest expense was 79 million USD in the current quarter and 95 million USD in the year-ago period; the decrease reflects significant debt repayment.

Capital Items

  • The company continues to expect to repay approximately one billion USD of debt this fiscal year, resulting in a cumulative debt repayment of approximately two billion USD since the acquisition of Ralcorp. The company repaid approximately 500 million USD of this year´s one billion USD goal earlier this fiscal year. Other capital allocation goals are also unchanged.
  • Dividends were 106 million USD this quarter and in the year-ago period.
  • Share repurchases during the quarter were minimal.
  • For the current quarter, capital expenditures for property, plant and equipment were 90 million USD, compared with 171 million USD in the year-ago period. The decrease reflects several significant planned plant expansions and improvements in the year-ago period. Depreciation and amortization expense was approximately 150 million USD for the fiscal second quarter; this compares with a total of 138 million USD in the year-ago period.

Outlook

The company continues to expect fiscal 2015 diluted EPS, adjusted for items impacting comparability, to show a mid-single digit rate of growth over the comparable diluted EPS of 2.17 USD earned in fiscal 2014. For the full fiscal year, a continuation of good performance from Consumer Foods and Commercial Foods, as well as the benefit of productivity and efficiency initiatives, are expected to offset a profit decline in the Private Brands segment. The company continues to expect operating cash flow to be in the range of 1.6 billion USD to 1.7 billion USD, and to reduce debt by a total of one billion USD in fiscal 2015 (500 million USD of which was repaid in the fiscal first quarter), thereby reaching its broader debt reduction goals for the fiscal 2013 to 2015 period.

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