Conagra Brands: Reports Strong Q2-2021 Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the second quarter of fiscal year 2021, which ended on November 29, 2020. All comparisons are against the prior-year fiscal period, unless otherwise noted.

Second Quarter 2021 Financial Highlights

  • Second quarter net sales increased 6.2 percent, and organic net sales increased 8.1 percent, with significant growth in each of the Company’s three retail segments on both a reported and an organic basis.
  • Total Company operating margin increased 250 basis points to 17.7 percent, and adjusted operating margin increased 250 basis points to 19.6 percent.
  • Diluted earnings per share from continuing operations (EPS) for the second quarter grew 45.3 percent to USD 0.77, and adjusted EPS grew 28.6 percent to USD 0.81.
  • From the close of the Pinnacle Foods acquisition through the end of the second quarter, the Company has reduced its gross debt by USD 2.3 billion; this reduction in debt, together with strong earnings, enabled the Company to achieve its targeted Net Leverage Ratio ahead of schedule.
  • The Company is providing guidance for the third quarter of fiscal 2021:
    • Organic net sales growth is expected in the range of +6 percent to +8 percent
    • Adjusted operating margin is expected in the range of 16.0 percent to 16.5 percent
    • Adjusted EPS is expected in the range of USD 0.56 to USD 0.60
  • The Company is reaffirming its fiscal 2022 guidance, which does not yet include the impact of the pending sale of the Peter Pan peanut butter business.

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, «Our second quarter results reflect strong performance across the business and outstanding execution delivered by employees across the company. We exceeded expectations on net sales, profitability, and de-leveraging while continuing to invest in the business. We have continued to selectively invest in production capacity and marketing support to increase the availability and awareness of our products to maximize long-term brand health.»

He continued, «We remain confident that Conagra Brands is well-positioned to capture the benefits of the shifting consumer behavior, many of which we believe will continue well into the future. The 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.»

Total Company Second Quarter Results

In the quarter, net sales increased 6.2 percent to USD 3.0 billion. The growth in reported net sales primarily reflects:

  • a 1.7 percent net decrease from the divestitures of the Direct Store Delivery (DSD) snacks business, the Lender’s bagel business, the H.K. Anderson business, and the exit of the private label peanut butter business (collectively, the Sold Businesses);
  • a 0.2 percent net decrease due to foreign exchange; and
  • a 8.1 percent increase in organic net sales.

The 8.1 percent increase in organic net sales was driven by a 6.6 percent increase in volume and a favorable price/mix impact of 1.5 percent. The volume increase was primarily driven by consumers increasing their at-home food consumption as a result of the Covid-19 pandemic, which benefitted the Company’s retail segments but negatively impacted the Foodservice segment. The price/mix favorability was primarily driven by favorable sales mix.

Gross profit increased 11.4 percent to USD 889 million in the quarter, and adjusted gross profit increased 11.4 percent to USD 895 million. Gross margin increased 139 basis points to 29.7 percent in the quarter, and adjusted gross margin increased 139 basis points to 29.9 percent. The net sales increase, together with very strong 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, the impact of foreign exchange, and lost profit from the Sold Businesses.

Selling, general, and administrative expense (SG+A), which includes advertising and promotional expense (A+P), decreased 3.3 percent to USD 358 million in the quarter. Adjusted SG+A, which excludes A+P, decreased 6.2 percent to USD 244 million, primarily as a result of cost synergies associated with the Pinnacle Foods acquisition as well as temporarily reduced spending as employees worked from home and business travel was reduced. A+P for the quarter increased 4.7 percent to USD 64 million, driven primarily by higher eCommerce investments.

Net interest expense was USD 108 million in the quarter. Compared to the prior-year period, net interest expense decreased 11.3 percent or USD 14 million, driven by lower levels of debt outstanding.

The Company’s 491 million average diluted shares outstanding in the quarter was an increase of 0.5 percent versus the prior-year period.

In the quarter, net income attributable to Conagra Brands increased 45.4 percent to USD 379 million, or USD 0.77 per diluted share. Adjusted net income attributable to Conagra Brands increased 29.5 percent to USD 396 million, or USD 0.81 per diluted share, in the quarter. The increases were driven primarily by the increase in gross profit and reduction in SG+A. The increase in adjusted EPS in the quarter was primarily driven by the increase in adjusted net income attributable to Conagra Brands, slightly offset by higher average diluted shares outstanding.

Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, increased 16.7 percent to USD 712 million in the quarter, primarily driven by the previously mentioned increase in adjusted gross profit and decrease in adjusted SG+A.

Grocery + Snacks Segment Second Quarter Results

Net sales for the Grocery + Snacks segment increased 12.5 percent to USD 1.3 billion in the quarter reflecting:

  • a 2.8 percent decrease from the impact of the Sold Businesses; and
  • a 15.3 percent increase in organic net sales.

On an organic net sales basis, volume increased 13.6 percent and price/mix increased 1.7 percent. Volume benefited from increased at-home eating as a result of the Covid-19 pandemic and replenishment of customer inventory levels. The increase in price/mix was primarily driven by favorable mix. Many grocery and snack brands experienced strong organic sales growth in the quarter, including snack brands Orville Redenbacher’s, Act II, Swiss Miss, Snack Pack, and Duncan Hines and staples brands such as RO*TEL, Libby’s, Chef Boyardee, PAM, Hunt’s, and Armour Star.

Operating profit for the segment increased 19.9 percent to USD 316 million in the quarter. Adjusted operating profit increased 16.8 percent to USD 319 million, primarily driven by organic net sales growth, very strong supply chain realized productivity, and cost synergies associated with the Pinnacle Foods acquisition. These benefits were partially offset by the impacts of input cost inflation, higher transportation costs, Covid-19-related expenses, and the lost profit from the Sold Businesses.

Refrigerated + Frozen Segment Second Quarter Results

Net sales for the Refrigerated + Frozen segment increased 6.8 percent to USD 1.2 billion in the quarter reflecting:

  • a 1.0 percent decrease from the impact of the Sold Businesses; and
  • a 7.8 percent increase in organic net sales.

On an organic net sales basis, volume increased 6.4 percent and price/mix increased 1.4 percent. Volume benefited from increased at-home eating as a result of the Covid-19 pandemic. The price/mix increase was primarily driven by lower promotion levels. Many brands, including P.F. Chang’s Home Menu, Reddi-wip, Hebrew National, Hungry-Man, Gardein, Marie Callender’s, and Birds Eye experienced strong organic net sales growth in the quarter.

Operating profit for the segment increased 41.1 percent to USD 264 million in the quarter. Adjusted operating profit increased 25.6 percent to USD 272 million as the benefits of higher organic net sales, very strong supply chain realized productivity, 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, and lost profit from the Sold Businesses.

International Segment Second Quarter Results

Net sales for the International segment increased 6.6 percent to USD 250 million in the quarter reflecting:

  • a 2.5 percent decrease from the unfavorable impact of foreign exchange; and
  • a 9.1 percent increase in organic net sales.

On an organic net sales basis, volume increased 6.4 percent and price/mix increased 2.7 percent. During the quarter, the segment benefited from elevated demand related to the impacts of the Covid-19 pandemic, and experienced strong growth in both Canada and Mexico.

Operating profit for the segment increased 49.3 percent to USD 40 million in the quarter. Adjusted operating profit increased 48.4 percent to USD 40 million as the increase in organic net sales, together with the benefits from favorable supply chain realized productivity and product mix were partially offset by the impacts of higher input costs and foreign exchange.

Foodservice Segment Second Quarter Results

Net sales for the Foodservice segment decreased 23.1 percent to USD 212 million in the quarter reflecting:

  • a 1.7 percent decrease from the impact of the Sold Businesses; and
  • a 21.4 percent decrease in organic net sales.

On an organic net sales basis, volume decreased 25.3 percent primarily driven by lower restaurant traffic as a result of the Covid-19 pandemic. Price/mix was favorable at 3.9 percent in the quarter primarily driven by increased pricing to offset higher input costs.

Operating profit for the segment decreased 41.6 percent to USD 22 million in the quarter, as the impacts of lower organic net sales and higher input costs more than offset the impacts of favorable supply chain realized productivity and cost synergies associated with the Pinnacle Foods acquisition.

Other Second Quarter Items

Corporate expenses increased 27.0 percent to USD 111 million in the quarter, primarily driven by expenses associated with the early extinguishment of debt. Adjusted corporate expense decreased 9.2 percent to USD 64 million in the quarter, as favorability from synergies and Covid-related savings, such as less travel expense, more than offset slightly higher incentive compensation expense.

Pension and post-retirement non-service income was USD 14 million in the quarter compared to USD 11 million of income in the prior-year period.

In the quarter, equity method investment earnings were USD 23 million. The 16.7 percent decrease on a reported basis and the 18.5 percent decrease on an adjusted basis were primarily driven by less favorable market conditions for the Ardent Mills joint venture.

In the quarter, the effective tax rate was 17.6 percent compared to 24.3 percent in the prior-year period, primarily driven by a release of our valuation allowance on capital loss carryforwards as a result of the pending sale of the Peter Pan peanut butter business. The adjusted effective tax rate was 23.2 percent compared to 23.4 percent in the prior-year period.

In the quarter, the Company paid a dividend of USD 0.2125 per share. As previously announced, during the second quarter the Company’s Board of Directors approved an increase in the quarterly dividend to USD 0.275 per share of common stock, with such increase effective in the third quarter.

The Company remains committed to a solid investment grade credit rating. Since the closing of the Pinnacle Foods acquisition through the end of the second quarter of fiscal 2021, the Company has reduced total gross debt by more than USD 2.3 billion, resulting in total debt of USD 9.3 billion and net debt of USD 9.2 billion as of the end of the second quarter of fiscal 2021. In the last four fiscal quarters ended November 29, 2020, the Company generated USD 1.1 billion in net income attributable to Conagra Brands and adjusted Ebitda of USD 2.6 billion. As of the second quarter of fiscal 2021, the Company’s net debt to last twelve month adjusted Ebitda ratio (Net Leverage Ratio) was 3.6x, achieving the 3.5x to 3.6x Net Leverage Ratio target ahead of schedule.

Portfolio Update

On December 7, 2020, the Company entered into a definitive agreement to sell its Peter Pan peanut butter business to Post Holdings, Inc. The transaction is subject to customary closing conditions and is expected to be completed in the first calendar quarter of 2021. The business is currently 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 net sales by approximately USD 110 million and adjusted EPS by approximately USD 0.03.

Outlook

The ultimate impact of the Covid-19 pandemic on the Company’s full year fiscal 2021 consolidated results remains uncertain. The Company continues to expect demand in retail channels to remain elevated and demand in foodservice channels to remain challenged versus historical norms. However, the degree and timing of changes in retail and foodservice demand levels are difficult to predict with enough certainty to provide a full-year outlook at this time.

In the third quarter to-date, the Company has seen a sustained increase in demand in its retail segments. The Company has also continued to see reduced demand in its Foodservice segment when compared to pre-Covid-19 demand levels. Covid-19-related costs have also continued to impact the business. Based on these factors, the Company is providing the following third quarter fiscal 2021 guidance:

  • Organic net sales growth of +6 percent to +8 percent
  • Adjusted operating margin of 16.0 percent to 16.5 percent
  • Adjusted EPS of USD 0.56 to USD 0.60

The Company’s third quarter guidance does not yet include any impacts from the pending sale of the Peter Pan peanut butter business. It also 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 2.66 to USD 2.76
  • Free cash flow conversion (percentage of adjusted net income 3-year average) of 95+

The Company’s fiscal 2022 guidance does not yet include the impact of the pending sale of the Peter Pan peanut butter business. 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 0.77 EPS for the second quarter of fiscal 2021 (EPS amounts rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.

  • Approximately USD 0.03 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 the gain on divestiture of a business
  • Approximately USD 0.07 per diluted share of net expense related to the early extinguishment of debt
  • Approximately USD 0.05 per diluted share of net benefit related to a release of a valuation allowance on our capital loss carryforward
  • Approximately USD 0.01 per diluted share of negative impact due to rounding

The following are included in the USD 0.53 EPS 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 plans
  • Approximately USD 0.05 per diluted share of net expense related to an impairment of the Lender’s bagel business
  • 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 benefit related to unusual tax items
  • Approximately USD 0.01 per diluted share of negative 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.