Conagra Brands: Reports Strong Q1-2023 Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the first quarter of fiscal year 2023, which ended in Illinois on August 28, 2022. All comparisons are against Q1-2022, unless otherwise noted.

Highlights

  • First quarter net sales increased 9.5 percent; organic net sales increased 9.7 percent
  • Operating margin in the quarter was (0.7 percent); adjusted operating margin was 13.7 percent
  • Diluted loss per share for the first quarter was USD 0.16, and adjusted earnings per share (EPS) was USD 0.57
  • First quarter operating margin, net income, and diluted EPS were impacted by non-cash goodwill and intangible asset impairment charges, primarily driven by an increased discount rate
  • The company is reaffirming its fiscal 2023 guidance reflecting:
    • Organic net sales growth of 4 percent to 5 percent compared to fiscal 2022
    • Adjusted operating margin of approximately 15 percent
    • Adjusted EPS growth of 1 percent to 5 percent compared to fiscal 2022

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, «The strength of our brands and continued execution of the Conagra Way playbook resulted in strong sales and adjusted operating profit during the first quarter. We continued to deliver improved service and productivity as we navigate ongoing inflationary pressures and industry-wide supply chain challenges. Our strong start to fiscal 2023 reaffirms our confidence in our outlook for the balance of the fiscal year as we remain focused on generating value for our shareholders.»

Total Company First Quarter Results

In the quarter, net sales increased 9.5 percent to USD 2.9 billion. The increase in net sales primarily reflects:

  • a 0.2 percent decrease from the unfavorable impact of foreign exchange; and
  • a 9.7 percent increase in organic net sales.

The 9.7 percent increase in organic net sales was driven by a 14.3 percent improvement in price/mix, which was partially offset by a 4.6 percent decrease in volume. Price/mix was driven by the company’s inflation-driven pricing actions that were reflected in the marketplace throughout the quarter. The volume decrease was primarily a result of the elasticity impact from inflation-driven pricing actions; however, the elasticity impact was favorable to expectations.

Gross profit increased 7.0 percent to USD 720 million in the quarter, and adjusted gross profit increased 7.1 percent to USD 723 million. First quarter gross profit benefited from higher organic net sales and supply chain realized productivity which more than offset the negative impacts of cost of goods sold inflation of 15 percent, unfavorable operating leverage, and continued elevated supply chain operating costs. Gross margin decreased 58 basis points to 24.8 percent in the quarter, and adjusted gross margin decreased 54 basis points to 24.9 percent.

Selling, general, and administrative expense (SG+A), which includes advertising and promotional expense (A+P), increased 139.1 percent to USD 742 million in the quarter primarily due to USD 386 million of non-cash goodwill and brand impairment charges. These charges were largely driven by an increased discount rate given the current interest rate environment. Adjusted SG+A, which excludes A+P, increased 10.5 percent to USD 263 million driven by increased incentive compensation compared to the prior year quarter.

A+P expense of USD 62 million in the quarter was flat to the prior year period.

Net interest expense was USD 97 million in the quarter. Compared to the prior-year period, net interest expense increased 3.0 percent or USD 3 million, primarily due to a higher weighted average interest rate on outstanding debt.

The average diluted share count in the quarter was 481 million shares. During the first quarter, the Company repurchased approximately 1.4 million shares of its common stock for approximately USD 50 million.

In the quarter, net loss attributable to Conagra Brands was USD 78 million, or USD 0.16 per diluted share. Adjusted net income attributable to Conagra Brands increased 14.2 percent to USD 275 million, or USD 0.57 per diluted share. The increase was driven primarily by the increase in gross profit and a strong performance from the company’s Ardent Mills joint venture.

Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, increased 9.1 percent to USD 547 million in the quarter, primarily driven by the increase in adjusted gross profit and a strong performance from the company’s Ardent Mills joint venture, slightly offset by lower pension income.

Grocery + Snacks Segment First Quarter Results

Reported and organic net sales for the Grocery + Snacks segment increased 10.5 percent to USD 1.2 billion in the quarter.

In the quarter, price/mix increased 16.6 percent and volume decreased 6.1 percent. Price/mix was driven by favorability in inflation-driven pricing coupled with favorable brand mix. The volume decline was primarily due to the elasticity impact from inflation-driven pricing actions. In the quarter, the company gained share in snacking categories including meat snacks and microwave popcorn, and staples categories including syrup and Asian sauces and marinades.

Operating profit for the segment increased 16.0 percent to USD 250 million in the quarter. Adjusted operating profit increased 15.4 percent to USD 254 million as higher organic net sales and supply chain realized productivity more than offset the negative impacts of cost of goods sold inflation, continued elevated supply chain operating costs, unfavorable operating leverage, and increased SG+A.

Refrigerated + Frozen Segment First Quarter Results

Reported and organic net sales for the Refrigerated + Frozen segment increased 9.6 percent to USD 1.2 billion in the quarter.

In the quarter, price mix increased 12.1 percent and volume decreased 2.5 percent. The price/mix increase was driven by favorability in inflation-driven pricing. The volume decline was primarily due to the elasticity impact from inflation-driven pricing. In the quarter, the company gained share in categories such as frozen single serve meals, plant-based protein, and frozen breakfast.

Operating loss for the segment was USD 216 million in the quarter primarily driven by the impairment charges discussed in further detail below. Adjusted operating profit increased 8.0 percent to USD 176 million as higher organic net sales and supply chain realized productivity more than offset the negative impacts of cost of goods sold inflation, continued elevated supply chain operating costs, increased SG+A, and unfavorable operating leverage.

International Segment First Quarter Results

Net sales for the International segment decreased 1.3 percent to USD 234 million in the quarter reflecting:

  • a 2.3 percent decrease from the unfavorable impact of foreign exchange; and
  • a 1.0 percent increase in organic net sales.

On an organic net sales basis, price/mix increased 8.4 percent and volume decreased 7.4 percent. The price/mix increase was driven by inflation-driven pricing. Volume decreased primarily due to the elasticity impact from inflation-driven pricing actions.

Operating profit for the segment decreased 21.2 percent to USD 27 million in the quarter. Adjusted operating profit decreased 21.4 percent to USD 27 million as the benefits from higher organic net sales and supply chain realized productivity were more than offset by the negative impact of cost of goods sold inflation and unfavorable operating leverage.

Foodservice Segment First Quarter Results

Reported and organic net sales for the Foodservice segment increased 14.6 percent to USD 275 million in the quarter.

In the quarter, price/mix increased 18.8 percent and volume decreased 4.2 percent. The price/mix increase was driven by favorability in inflation-driven pricing. The volume decline was primarily due to the elasticity impact from inflation-driven pricing actions.

Operating profit for the segment decreased 94.1 percent to USD 1 million and adjusted operating profit increased 5.5 percent to USD 22 million in the quarter as the benefits of higher organic net sales and supply chain realized productivity more than offset the impacts of cost of goods sold inflation, elevated supply chain operating costs, and unfavorable operating leverage.

Other First Quarter Items

During the first quarter, the Company reorganized its reporting structure for certain brands within two reporting units in the Refrigerated + Frozen segment to increase brand management efficiencies. In connection with those changes and in accordance with U.S. GAAP, the company also evaluated goodwill for impairment, resulting in USD 386 million of goodwill and brand impairment charges in SG+A expenses with USD 244 million associated with the Bird’s Eye brand name.

Corporate expenses increased 29.3 percent to USD 84 million in the quarter and adjusted corporate expense increased 27.9 percent to USD 80 million in the quarter driven by increased incentive compensation compared to the prior year quarter.

Pension and post-retirement non-service income was USD 6 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 49 million. The USD 29 million increase was primarily driven by favorable market conditions for the Ardent Mills joint venture, and the venture’s effective management through recent volatility in the wheat markets.

In the quarter, the effective tax rate was (22.8) percent compared to 22.8 percent in the prior-year period which was largely impacted by the non-deductible goodwill impairments mentioned above. The adjusted effective tax rate was 22.9 percent compared to 24.0 percent in the prior-year period.

In the quarter, the Company paid a dividend of USD 0.3125 per share. The Company’s first dividend at the increased rate of USD 0.33 per share was paid shortly following quarter-end.

Outlook

The Company is reaffirming guidance provided on its fourth quarter fiscal 2022 earnings call and as detailed below. For the second quarter of fiscal 2023, the Company has planned for continued supply chain inefficiency tied to the dynamic operating environment and some incremental volume weakness tied to the new inflation-driven pricing that went into effect early in the quarter. Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to continue but moderate through the remainder of the fiscal year, resulting in low-teen levels, and commodity relief is expected to be weighted towards the back half of the fiscal year. Despite a strong early performance from its joint venture, Ardent Mills, the Company is not planning for elevated performance to continue throughout the remainder of the fiscal year due to the volatile nature of the business.

The company’s fiscal 2023 guidance remains as follows:

  • Organic net sales growth is expected to be 4 percent to 5 percent compared to fiscal 2022
  • Adjusted operating margin is expected to be approximately 15 percent
  • Adjusted diluted EPS growth is expected to be 1 percent to 5 percent compared to fiscal 2022
  • Capital expenditures of approximately USD 500M
  • Interest expense of approximately USD 410M
  • Effective tax rate of approximately 24 percent
  • Pension income of approximately USD 25M

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 0.16 loss per share for the first quarter of fiscal 2023 (EPS amounts are rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.

  • Approximately USD 0.01 per diluted share of net expense related to restructuring plans
  • Approximately USD 0.04 per diluted share of net expense related to impairment on businesses held for sale
  • Approximately USD 0.68 per diluted share of net expense related to goodwill and brand impairment charges

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