Chicago / IL. (cag) ConAgra Brands Inc. reported results for the second quarter of fiscal year 2020, which ended on November 24, 2019. All comparisons are against the prior-year fiscal period, unless otherwise noted.
Highlights
- Second quarter net sales increased 18.3 percent; organic net sales increased 1.6 percent, with positive organic net sales growth in each reporting segment.
- Diluted earnings per share from continuing operations (EPS) was USD 0.53 in the quarter; adjusted EPS was USD 0.63, with high single-digit growth in adjusted net income.
- The Company’s integration of Pinnacle remained on-track in the quarter, with approximately USD 42 million of incremental cost synergies realized in the quarter, bringing total cumulative cost synergy realization to USD 112 million from the closing of the acquisition through the end of the second quarter.
- The Company is updating its total targeted annual cost synergies for the Pinnacle acquisition from USD 285 million by the end of fiscal 2022 to USD 305 million by the end of fiscal 2022. The Company expects the additional USD 20 million of cost synergies to be fully realized in fiscal 2020 and plans to reinvest the additional savings this fiscal year into longer-term sales-driving investments.
- During the quarter, the Company continued to reshape its portfolio by divesting its Direct Store Delivery (DSD) snacks business. Subsequent to quarter end, the Company sold a peanut butter manufacturing facility and began the process of exiting the manufacture and sale of private label peanut butter. The Company is updating its fiscal 2020 guidance primarily to reflect the impacts of these portfolio initiatives.
CEO Perspective
Sean Connolly, president and chief executive officer of Conagra Brands, commented, «Our second quarter results reflect solid execution in applying the Conagra Way playbook across our portfolio. We maintained our strong momentum in frozen and snacks. We also made good progress on our large grocery brands, Hunt’s and Chef Boyardee, both of which made sequential improvements. We also continued to make very good progress on the Pinnacle integration, and we remain squarely on-track with our plans to improve key Pinnacle brands.»
He continued, «Our expectation for fiscal 2020 remains that first-half investments will result in strong second-half performance. The second-half is when we expect to see the greatest impact from new frozen and snacks innovation, continued smart promotional support in key grocery brands, the ongoing implementation of our Pinnacle action plan, and synergy capture.»
Total Company Second Quarter Results
In the quarter, net sales increased 18.3 percent to USD 2.8 billion. Reported net sales growth primarily reflects:
- a 19.6 percent increase from the acquisition of Pinnacle;
- a 2.9 percent net decrease from the divestitures of the Wesson oil business, the Gelit business, and the DSD snacks business (the «Sold Businesses»); and
- a 1.6 percent increase in organic net sales.
The 1.6 percent increase in organic net sales in the quarter was driven by 1.0 percent volume growth and 0.6 percent price/mix favorability. Favorable net pricing and mix were partially offset by the Company’s continued actions to support its brands with brand-building investments with retailers.
Gross profit increased 17.8 percent to USD 798 million in the quarter, and adjusted gross profit increased 14.1 percent to USD 804 million. The increases were primarily driven by the net impact of the addition of Pinnacle’s gross profit and cost synergies, as well as the benefits of price/mix and supply chain productivity. These benefits were partially offset by a reduction in profit associated with the Sold Businesses, input cost inflation, and increased brand-building investments with retailers.
Selling, general, and administrative expenses (SG+A), which include advertising and promotional (A+P) expense, decreased 24.1 percent to USD 370 million in the quarter. Largely in-line with expectations, adjusted SG+A, which excludes A+P expense, increased 19.6 percent to USD 260 million, primarily as a result of additional Pinnacle-related expenses.
A+P expense for the quarter decreased 12.5 percent to USD 61 million. An increase in working media investment this quarter was more than offset by reductions in non-working spending, as well as A+P synergies associated with the Pinnacle transaction.
Net interest expense was USD 121 million in the quarter. Compared to the prior-year period, net interest expense increased USD 41 million on a reported basis and USD 47 million on an adjusted basis. The increase was driven by higher levels of debt outstanding as a result of the net debt issued in connection with the Pinnacle acquisition.
Conagra Brands’ 488 million average diluted shares outstanding as of quarter end is an increase of 67 million shares versus the prior-year period. The increase was primarily driven by the shares issued in connection with the Pinnacle acquisition.
In the quarter, net income attributable to Conagra Brands increased 98.0 percent to USD 261 million, or USD 0.53 per diluted share. Adjusted net income attributable to Conagra Brands increased 8.3 percent to USD 306 million, or USD 0.63 per diluted share in the quarter. The increase in adjusted net income attributable to Conagra Brands was driven primarily by the addition of Pinnacle’s operating profit, the benefits of cost synergies, and the increase in organic net sales. These benefits were partially offset by higher interest expense and the removal of profit from the Sold Businesses. The decrease in adjusted EPS in the quarter was primarily driven by the increase in average diluted shares outstanding, partially offset by the increase in adjusted net income.
Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, increased 17.2 percent to USD 610 million in the quarter.
Grocery + Snacks Segment Second Quarter Results
Net sales for the Grocery + Snacks segment increased 14.2 percent to USD 1.1 billion in the quarter, with the acquisition of Pinnacle adding 16.9 percent of the net sales growth and the divestiture of the Wesson oil and DSD snacks businesses subtracting 3.6 percent. Organic net sales increased 0.9 percent. On an organic net sales basis, volume increased 2.1 percent during the quarter, and price/mix decreased 1.2 percent. The segment continued to benefit from the snacks business, with successful innovation and momentum in brands such as Slim Jim, Snack Pack, Swiss Miss, Angie’s BoomChickaPop, and Act II. The Hunt’s tomatoes and Chef Boyardee businesses showed sequential in-market improvement, after each brand responded to competitive dynamics. The action plans for Wishbone and Duncan Hines remain on-track.
Operating profit for the segment increased 20.1 percent to USD 264 million in the quarter. Adjusted operating profit increased 16.7 percent to USD 273 million, primarily driven by the addition of Pinnacle’s profit and the benefits of cost synergies, realized productivity, and organic net sales growth. These benefits were partially offset by the impacts of higher input costs and the loss of profit from the divestiture of the Wesson oil and DSD snacks businesses.
Refrigerated + Frozen Segment Second Quarter Results
Net sales for the Refrigerated + Frozen segment increased 28.8 percent to USD 1.2 billion in the quarter, with the acquisition of Pinnacle adding 28.1 percent of the net sales growth and the divestiture of the Gelit business subtracting 1.7 percent. Organic net sales increased 2.4 percent. On an organic net sales basis, volume increased 0.5 percent and price/mix increased 1.9 percent. The segment benefited from organic net sales growth across multiple brands, including Birds Eye, Healthy Choice, Marie Callender’s, and P.F. Chang’s Home Menu. The segment’s recently-launched innovations, including those within the Healthy Choice Power Bowls line and Marie Callender’s brand, as well as second-half launches, are expected to benefit the segment’s second-half organic net sales growth rate as they build in-market distribution and velocity.
Operating profit for the segment increased 19.5 percent to USD 187 million in the quarter, and adjusted operating profit increased 29.6 percent to USD 216 million. The increases were primarily driven by the addition of Pinnacle’s profit and the benefit of cost synergies and realized productivity improvements, which more than offset higher input costs.
International Segment Second Quarter Results
Net sales for the International segment increased 7.3 percent to USD 234 million in the quarter reflecting:
- an 8.6 percent increase from the acquisition of Pinnacle,
- a 2.6 percent decrease from the divestiture of the Wesson oil business,
- a 0.5 percent decrease from the unfavorable impact of foreign exchange, and
- a 1.8 percent increase in organic net sales.
On an organic net sales basis, volume increased 1.8 percent and price/mix was flat. During the quarter, the segment continued to benefit from growth in the snacks and frozen businesses.
Operating profit for the segment increased 17.1 percent to USD 26 million in the quarter. Adjusted operating profit decreased 8.3 percent to USD 27 million as the divestiture of the Wesson oil business, higher input costs, and the unfavorable impact of foreign exchange more than offset the benefits of organic net sales growth, realized productivity, and the addition of Pinnacle’s profit.
Foodservice Segment Second Quarter Results
Net sales for the Foodservice segment increased 6.8 percent to USD 276 million in the quarter, with the acquisition of Pinnacle adding 10.4 percent and the divestiture of the Wesson oil business subtracting 4.4 percent of net sales growth. Organic net sales increased 0.8 percent. On an organic net sales basis, price/mix increased 3.6 percent and volume declined 2.8 percent in the quarter, driven by continued execution of the segment’s value-over-volume strategy as well as inflation-related pricing.
Operating profit increased 11.4 percent to USD 38 million in the quarter, primarily driven by the addition of Pinnacle’s profit and the benefit of cost synergies, the impacts of organic net sales growth, and supply chain realized productivity improvements. The segment’s operating profit results were negatively impacted in the second quarter by higher input costs and the impact of the Wesson oil divestiture.
Other Second Quarter Items
Corporate expenses decreased 64.0 percent to USD 88 million in the quarter. Adjusted corporate expenses increased 52.6 percent to USD 71 million in the quarter, primarily driven by the inclusion of Pinnacle-related expenses.
Pension and post-retirement non-service income was USD 11 million in the quarter, an increase of approximately USD 2 million compared to the prior-year period.
Equity method investment earnings decreased 26.9 percent to USD 28 million in the quarter, primarily due to a gain on the sale of an asset in the prior year period. Adjusted equity method investment earnings increased 24.7 percent to USD 28 million in the quarter. Favorable market conditions led to improved performance by the Ardent Mills joint venture.
In the quarter, the effective tax rate was 24.3 percent, and the adjusted effective tax rate was 23.4 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 completing the Pinnacle acquisition through the end of the second quarter, Conagra Brands has reduced total gross debt by USD 1.1 billion.
Portfolio Update
As previously disclosed, on October 21, 2019, the Company completed the divestiture of its DSD snacks business.
On November 25, 2019, after the end of the second quarter, the Company completed the sale of its peanut butter manufacturing facility in Streator, Illinois. The sale was part of a broader initiative to optimize the Company’s peanut butter business, which also included the decision to exit the manufacture and sale of private label peanut butter. The Company estimates the annualized impact of the exit from private label peanut butter to be a reduction in net sales of approximately USD 50 million and no material impact to adjusted operating profit.
Subsequent to the end of the quarter, the Company entered into a definitive agreement to divest its Lender’s bagel business, which is part of the Refrigerated + Frozen segment. The transaction is expected to close during the third quarter of fiscal year 2020. Following the closing of the transaction, the expected annualized impact of the divestiture is a reduction of approximately USD 50 million of net sales and USD 0.01 of adjusted EPS.
Fiscal 2020 Outlook
The Company is updating its fiscal 2020 guidance primarily to reflect the divestiture of the DSD snacks business and the exit of its private label peanut butter business, the process of which began subsequent to the quarter close. The updated guidance includes the expected results from the Lender’s business for the full fiscal year.
Note that organic net sales growth continues to exclude the impact of fiscal 2020’s 53rd week. All other metrics continue to include the impact of the 53rd week.
| Metric | Prior Fiscal 2020 Guidance | Updated Fiscal 2020 Guidance |
| Organic Net Sales Growth | +1.0 percent to +1.5 percent | +1.0 percent to +1.5 percent |
| Reported Net Sales Growth | +13.5 percent to +14.0 percent | +12.4 percent to +12.9 percent |
| Adj. Op. Margin | 16.2 percent to 16.8 percent | 16.2 percent to 16.8 percent |
| Adj. Net Interest Expense | App. USD 505 million | Slightly below USD 505 million |
| Adj. Effective Tax Rate | 24 percent to 25 percent | App. 24 percent |
| Avg. Diluted Shares | App. 488 million | App. 488 million |
| Adj. Diluted EPS from cont. ops. | USD 2.08 to USD 2.18 | USD 2.07 to USD 2.17 |
| Free Cash Flow | App. USD 1 billion | Slightly below USD 1 billion |
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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 these forward-looking non-GAAP financial measures impracticable. Please see the end of this release for more information.
Items Affecting Comparability of EPS
Included in the USD 0.53 diluted EPS from continuing operations for the second 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 0.06 per diluted share of net expense related to restructuring
- Approximately USD 0.05 per diluted share of net expense related to an impairment of the Lender’s business, which is now classified as an asset held for sale
- Approximately USD 0.02 per diluted share of net benefit related to a contract settlement gain
- Approximately USD 0.01 per diluted share of net expense related to environmental matters
- Approximately USD 0.01 per diluted share of net tax benefit related to unusual tax items
- Approximately USD 0.01 per diluted share of negative impact due to rounding
Included in the USD 0.32 diluted EPS from continuing operations for the second 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 0.21 per diluted share of net expense related to restructuring plans
- Approximately USD 0.18 per diluted share of net expense related to acquisitions and divestitures
- Approximately USD 0.01 per diluted share of net expense related to the integration of Pinnacle
- Approximately USD 0.04 per diluted share of net expense related to Pinnacle inventory fair value mark-up adjustment
- Approximately USD 0.03 per diluted share of net benefit related to the gain on the sale of an asset within the Ardent Mills joint venture
- Approximately USD 0.06 per diluted share of net tax benefit related to the tax adjustment of valuation allowance associated with the divestiture of the Wesson oil brand
- Approximately USD 0.01 per diluted share of net tax expense related to unusual tax items
- Approximately USD 0.01 per diluted share of beneficial impact due to rounding
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.
