Conagra Brands: Reports Solid First Quarter Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the first quarter of fiscal year 2022, which ended on August 29, 2021. All comparisons are against the prior-year fiscal period, unless otherwise noted. Certain terms used in this release, including «Organic net sales,» «Ebitda,» «Two-year compounded annualized,» and certain «adjusted» results, are defined under the section entitled «Definitions.»

Highlights

  • First quarter net sales decreased 1.0 percent; organic net sales decreased 0.4 percent. On a two-year compounded annualized basis, fiscal 2022 first quarter net sales increased 5.3 percent and organic net sales increased 7.0 percent.
  • Operating margin decreased 534 basis points to 13.7 percent; adjusted operating margin decreased 604 basis points to 14.1 percent.
  • Diluted earnings per share from continuing operations (EPS) for the first quarter decreased 26.9 percent to USD 0.49, and adjusted EPS decreased 28.6 percent to USD 0.50. On a two-year compounded annualized basis, first quarter EPS increased 16.6 percent and adjusted EPS increased 7.8 percent.
  • During the first quarter, the Company repurchased approximately 1.5 million shares of its common stock for approximately USD 50 million.
  • The Company is reaffirming its fiscal 2022 adjusted EPS guidance and updating its expected path to achieving that guidance. The Company’s updated fiscal 2022 guidance is as follows:
    • Organic net sales growth is expected to be approximately +1 percent versus prior guidance of approximately flat
    • Gross inflation (input cost inflation before the impacts of hedging) is expected to be approximately 11 percent versus prior guidance of approximately 9 percent
    • Adjusted operating margin is expected to be approximately 16 percent, representing no change to prior guidance
    • Adjusted EPS is expected to be approximately USD 2.50, representing no change to prior guidance

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, «Overall, I am pleased with the results we delivered in the first quarter, which have kept us on-track with our profit plan for the year. Our team showed great agility in navigating the dynamic external environment. We continue to experience ongoing inflationary pressure, but expect the sustained elevated consumer demand and the comprehensive actions we have executed and expect to execute in the future, will enable us to successfully deliver our adjusted EPS guidance for the year.»

He continued, «Our continuous execution of the Conagra Way playbook has positioned us well to continue capturing the benefits of the consumer behaviour shifts driven by the Covid-19 pandemic. We believe that our disciplined approach to investment and sustained focus on strategic innovation will help us maintain brand momentum. We remain confident in the long-term potential of each of our domains – frozen, snacks, and staples – and in our ability to continue creating sustained value for our shareholders.»

Total Company First Quarter Results

In the quarter, net sales decreased 1.0 percent to USD 2.7 billion. The decline in net sales primarily reflects:

  • a 1.1 percent net decrease from the divestitures of the H.K. Anderson business, the Peter Pan peanut butter business, and the Egg Beaters business (collectively, the Sold Businesses);
  • a 0.5 percent increase from the favourable impact of foreign exchange; and
  • a 0.4 percent decrease in organic net sales.

The 0.4 percent decrease in organic net sales was driven by a 2.0 percent decrease in volume and a favourable price/mix impact of 1.6 percent. The volume decrease was primarily a result of lapping the prior year’s surge in at-home food demand due to the Covid-19 pandemic. The year-over-year comparison negatively impacted fiscal 2022 first quarter growth rates in the Company’s three retail reporting segments. The price/mix favorability was primarily driven by favourable net pricing and brand mix as the company continued executing inflation-justified pricing actions, many of which began to be reflected in the marketplace late in the first quarter. The benefits from favourable net pricing and brand mix were slightly offset by the change in estimate associated with fiscal 2020’s fourth quarter trade expense accrual which reduced the current quarter’s growth rate by approximately 70 bps.

Gross profit decreased 16.9 percent to USD 673 million in the quarter, and adjusted gross profit decreased 18.0 percent to USD 675 million. Gross margin decreased 486 basis points to 25.4 percent in the quarter, and adjusted gross margin decreased 530 basis points to 25.4 percent. Gross profit in the quarter benefited from supply chain realized productivity, lower Covid-19 pandemic-related expenses, and cost synergies associated with the Pinnacle Foods acquisition. These benefits, however, were not enough to offset the impacts of the net sales decline, cost of goods sold inflation, and the lost profit from the Sold Businesses.

Selling, general, and administrative expense (SG+A), which includes advertising and promotional expense (A+P), increased 3.3 percent to USD 310 million in the quarter. Adjusted SG+A, which excludes A+P, was relatively flat compared to year-ago, increasing 0.4 percent to USD 238 million.

A+P for the quarter increased 35.3 percent to USD 62 million, driven primarily by higher eCommerce investments.

Net interest expense was USD 94 million in the quarter. Compared to the prior-year period, net interest expense decreased 17.1 percent or USD 20 million, driven primarily by lower levels of average debt outstanding.

The average diluted share count decreased 1.6 percent compared to the prior-year period to 482 million, driven by the Company’s share repurchase activity.

In the quarter, net income attributable to Conagra Brands decreased 28.5 percent to USD 235 million, or USD 0.49 per diluted share. Adjusted net income attributable to Conagra Brands decreased 30.2 percent to USD 241 million, or USD 0.50 per diluted share, in the quarter. The decreases were driven primarily by the decrease in gross profit.

Adjusted Ebitda, which includes equity method investment earnings and pension and post-retirement non-service income, decreased 22.6 percent to USD 501 million in the quarter, primarily driven by the decrease in adjusted gross profit.

Grocery + Snacks Segment First Quarter Results

Net sales for the Grocery + Snacks segment decreased 4.9 percent to USD 1.1 billion in the quarter reflecting:

  • a 1.6 percent decrease from the impact of the Sold Businesses; and
  • a 3.3 percent decrease in organic net sales.

On an organic net sales basis, volume decreased 3.3 percent and price/mix was flat. The volume decline was primarily due to lapping the prior year’s surge in at-home food demand from the Covid-19 pandemic. Price/mix was primarily driven by favorability in net pricing offset by unfavourable brand mix as well as approximately 60 bps related to the aforementioned impact from the prior year’s change in the trade expense estimate. In the quarter, the Company gained share in staples categories such as canned tomatoes and chili, and snacking categories, including popcorn and pudding.

Operating profit for the segment decreased 23.7 percent to USD 216 million in the quarter. Adjusted operating profit decreased 25.9 percent to USD 220 million, primarily driven by cost of goods inflation, the organic net sales decline, unfavourable fixed cost leverage related to lower volume, increased A+P investment, and the lost profit from the Sold Businesses. These negative impacts were partially offset by supply chain realized productivity, cost synergies associated with the Pinnacle Foods acquisition, and lower Covid-19 pandemic-related expenses.

Refrigerated + Frozen Segment First Quarter Results

Net sales for the Refrigerated + Frozen segment decreased 2.5 percent to USD 1.1 billion in the quarter reflecting:

  • a 0.8 percent decrease from the impact of the Sold Businesses; and
  • a 1.7 percent decline in organic net sales.

On an organic net sales basis, volume decreased 3.8 percent and price/mix increased 2.1 percent. The volume decline was primarily due to lapping the prior year’s surge in at-home food demand from the Covid-19 pandemic. The price/mix increase was primarily driven by favourable brand mix as well as slight favorability in net pricing. These benefits were partially offset by approximately 60 bps related to the aforementioned impact from the prior year’s change in the trade expense estimate. In the quarter, the Company gained share in categories such as frozen single serve meals, whipped topping, and frozen handhelds.

Operating profit for the segment decreased 34.4 percent to USD 158 million in the quarter. Adjusted operating profit decreased 33.8 percent to USD 163 million primarily due to cost of goods sold inflation, lower organic net sales, increased A+P investment, unfavourable fixed cost leverage related to lower volume, and the lost profit from the Sold Businesses. These impacts were partially offset by the benefits of supply chain realized productivity, lower Covid-19 pandemic-related expenses, and cost synergies associated with the Pinnacle Foods acquisition.

International Segment First Quarter Results

Net sales for the International segment increased 8.1 percent to USD 237 million in the quarter reflecting:

  • a 0.4 percent decrease from the impact of the Sold Businesses,
  • a 6.5 percent increase from the favourable impact of foreign exchange; and
  • a 2.0 percent increase in organic net sales.

On an organic net sales basis, volume decreased 4.6 percent and price/mix increased 6.6 percent. Volume decreased primarily due to lapping the prior year’s surge in demand from the Covid-19 pandemic. The price/mix increase was driven by inflation-justified pricing and favourable product mix.

Operating profit for the segment decreased 11.4 percent to USD 34 million in the quarter. Adjusted operating profit decreased 11.1 percent to USD 34 million as the negative impacts of cost of goods sold inflation and higher SG+A, related to higher employee compensation and planned IT-related projects more than offset the benefits from higher organic net sales, favourable foreign exchange, and supply chain realized productivity.

Foodservice Segment First Quarter Results

Net sales for the Foodservice segment increased 20.9 percent to USD 240 million in the quarter reflecting:

  • a 0.8 percent decrease from the impact of the Sold Businesses; and
  • a 21.7 percent increase in organic net sales.

On an organic net sales basis, volume increased 20.1 percent as restaurant traffic continued to recover from the impacts of the Covid-19 pandemic. Price/mix was favourable at 1.6 percent in the quarter primarily driven by inflation-justified pricing.

Operating profit for the segment decreased 20.1 percent to USD 20 million and adjusted operating profit decreased 19 percent to USD 21 million in the quarter as the impacts of cost of goods sold inflation more than offset the benefits of higher organic net sales and favourable supply chain realized productivity.

Other First Quarter Items

Corporate expenses decreased 16.3 percent to USD 65 million in the quarter and adjusted corporate expense decreased 5.7 percent to USD 62 million in the quarter, in both cases primarily as a result of lower stock-based compensation which more than offset foreign currency transaction losses from remeasuring certain intercompany notes payable.

Pension and post-retirement non-service income was USD 16 million in the quarter compared to USD 14 million of income in the prior-year period.

In the quarter, equity method investment earnings were USD 20 million. The USD 14 million increase was primarily driven by favourable market conditions for the Ardent Mills joint venture.

In the quarter, the effective tax rate was 22.8 percent compared to 20.8 percent in the prior-year period. The adjusted effective tax rate was 24.0 percent compared to 22.8 percent in the prior-year period.

In the quarter, the Company paid a dividend of USD 0.275 per share. The Company’s first dividend at the increased rate of USD 0.3125 per share was paid shortly following quarter-end.

Outlook

The Company is reaffirming its fiscal 2022 adjusted EPS guidance and updating its expected path to achieving that guidance.

The Company previously shared its expectations that consumer demand for its retail products would remain elevated versus historical levels throughout fiscal 2022, as consumers have developed new habits during the Covid-19 pandemic. Given the trends to date, including stronger-than-expected consumer demand and lower-than-anticipated elasticities of demand, as well as additional planned pricing actions, organic net sales growth is now expected to be higher than originally anticipated.

The Company also continues to experience elevated cost of goods sold inflation, the rate of which continued to increase during the first quarter of fiscal 2022. The Company has taken, and expects to continue taking, a variety of actions to counteract the impact of this inflation, including incremental pricing actions and cost savings measures. The Company continues to expect that the timing of the associated benefits from these margin lever actions will be weighted towards the second half of the fiscal year, and as a result, the Company continues to expect margins to improve sequentially over the remainder of the year.

The Company’s updated fiscal 2022 guidance is as follows:

  • Organic net sales growth is expected to be approximately +1 percent versus prior guidance of approximately flat
  • Gross inflation (input cost inflation before the impacts of hedging) is expected to be approximately 11 percent versus prior guidance of approximately 9 percent
  • Adjusted operating margin is expected to be approximately 16 percent, representing no change to prior guidance
  • Adjusted EPS is expected to be approximately USD 2.50, representing no change to prior guidance

The above guidance is the Company’s best estimate of its expected financial performance in fiscal 2022. The Company’s ultimate fiscal 2022 performance will be highly dependent on factors including:

  • how consumers purchase food as foodservice establishments continue to reopen and people return to in-office work and in-person school;
  • the cost of goods sold inflation the Company experiences;
  • consumers’ response to inflation-justified price increases; and
  • the ability of the end-to-end supply chain to continue to operate effectively as the Covid-19 pandemic continues to evolve

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 0.49 EPS for the first quarter of fiscal 2022 (EPS amounts are rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.

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

The following are included in the USD 0.67 EPS for the first quarter of fiscal 2021 (EPS amounts are 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