Conagra Brands: Reports Strong Q2-2022 Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the second quarter of fiscal year 2022, which ended in Illinois on November 28, 2021. All comparisons are against the prior-year fiscal period, unless otherwise noted.

Second Quarter 2022 Financial Highlights

  • Second quarter net sales increased 2.1 percent; organic net sales increased 2.6 percent. On a two-year compounded annualized basis, fiscal 2022 second quarter net sales increased 4.1 percent and organic net sales increased 5.3 percent.
  • Operating margin decreased 435 basis points to 13.4 percent; adjusted operating margin decreased 500 basis points to 14.6 percent.
  • Diluted earnings per share (EPS) for the second quarter decreased 26.0 percent to USD 0.57, and adjusted EPS decreased 21.0 percent to USD 0.64. On a two-year compounded annualized basis, second quarter EPS increased 3.7 percent and adjusted EPS increased 0.8 percent.
  • The Company is reiterating its adjusted EPS guidance for fiscal 2022 and updating its organic net sales and adjusted operating margin guidance to reflect continued top line strength, higher inflation expectations, and the timing of additional pricing actions. The Company’s updated fiscal 2022 guidance is as follows:
    • Organic net sales growth is expected to be approximately +3 percent versus prior guidance of approximately +1 percent
    • Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 14 percent versus prior guidance of approximately 11 percent
    • Adjusted operating margin is expected to be approximately 15.5 percent versus prior guidance of approximately 16 percent
    • 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, «Our business delivered another quarter of strong net sales growth as we continued to experience elevated levels of demand across our portfolio. I am proud of our team for continuing to demonstrate great agility in navigating the dynamic external landscape with a refuse to lose attitude and dedication to executing our Conagra Way playbook every day. Our focus on strategic innovation and our intentional approach to investment helped us maintain brand momentum in the second quarter and continue capturing share across each of our domains – frozen, snacks, and staples.»

He continued, «Looking ahead, we expect to continue experiencing cost pressures above original expectations in the second half of fiscal 2022. However, we believe the sustained elevated consumer demand coupled with the mitigating actions we have successfully executed, and will continue executing, put us on track to overcome these near-term challenges, improve margins in the back half of the fiscal year, and deliver on our profit plan.»

Total Company Second Quarter Results

In the quarter, net sales increased 2.1 percent to USD 3.1 billion. The increase in net sales primarily reflects:

  • a 0.7 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 0.2 percent increase from the favourable impact of foreign exchange; and
  • a 2.6 percent increase in organic net sales.

The 2.6 percent increase in organic net sales was driven by a 6.8 percent improvement in price/mix, which was partially offset by a 4.2 percent decrease in volume. Price/mix was driven by favourable brand mix and net pricing as the company’s inflation-driven pricing actions were reflected in the marketplace throughout the quarter. 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 second quarter volume growth rates in the company’s retail reporting segments.

Gross profit decreased 15.1 percent to USD 755 million in the quarter, and adjusted gross profit decreased 14.4 percent to USD 767 million. Second quarter gross profit benefited from higher organic net sales, 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 cost of goods sold inflation of 16.4 percent and the lost profit from the Sold Businesses. Gross margin decreased 500 basis points to 24.7 percent in the quarter, and adjusted gross margin decreased 483 basis points to 25.1 percent. Adjusted gross margin declined more than originally expected as the company experienced higher-than-expected cost of goods sold inflation, made additional investments to prioritize servicing orders to maximize food supply for consumers, and experienced additional transitory supply chain costs.

Selling, general, and administrative expense (SG+A), which includes advertising and promotional expense (A+P), decreased 3.5 percent to USD 345 million in the quarter. Adjusted SG+A, which excludes A+P, was relatively flat compared to the prior-year period, increasing 1.7 percent to USD 248 million.

A+P for the quarter increased 12.5 percent to USD 71 million, driven primarily by higher eCommerce investments.

Net interest expense was USD 95 million in the quarter. Compared to the prior-year period, net interest expense decreased 11.8 percent or USD 13 million, primarily due to a lower weighted average interest rate on outstanding debt.

The average diluted share count decreased 1.8 percent compared to the prior-year period to 482 million, driven by the company’s share repurchase activity in prior quarters.

In the quarter, net income attributable to Conagra Brands decreased 27.3 percent to USD 275 million, or USD 0.57 per diluted share. Adjusted net income attributable to Conagra Brands decreased 22.8 percent to USD 306 million, or USD 0.64 per diluted share, in the quarter. The decreases were driven primarily by the decrease in gross profit. The combination of higher than expected inflation, investments to service orders, and additional transitory costs is estimated to have impacted adjusted EPS by approximately USD 0.04 to USD 0.06 in the quarter.

Adjusted Ebitda, which includes equity method investment earnings and pension and post-retirement non-service income, decreased 17.9 percent to USD 585 million in the quarter, primarily driven by the decrease in adjusted gross profit.

Grocery + Snacks Segment Second Quarter Results

Net sales for the Grocery + Snacks segment decreased 1.4 percent to USD 1.3 billion in the quarter reflecting:

  • a 0.8 percent decrease from the impact of the Sold Businesses; and
  • a 0.6 percent decrease in organic net sales.

On an organic net sales basis, volume decreased 5.3 percent and price/mix increased 4.7 percent. 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 favourability in inflation-driven pricing coupled with favourable brand mix. In the quarter, the company gained share in staples categories such as beans, and in snacking categories, including popcorn and seeds.

Operating profit for the segment decreased 21.2 percent to USD 249 million in the quarter. Adjusted operating profit decreased 14.1 percent to USD 274 million, primarily driven by cost of goods inflation, the organic net sales decline, incremental transitory supply chain costs, 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 Second Quarter Results

Net sales for the Refrigerated + Frozen segment increased 3.0 percent to USD 1.3 billion in the quarter reflecting:

  • a 0.9 percent decrease from the impact of the Sold Businesses; and
  • a 3.9 percent increase in organic net sales.

On an organic net sales basis, volume decreased 4.7 percent and price/mix increased 8.6 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 driven by favourable brand mix and favourability in inflation-driven pricing. In the quarter, the company gained share in categories such as frozen single serve meals, whipped topping, and frozen desserts.

Operating profit for the segment decreased 36.3 percent to USD 168 million in the quarter. Adjusted operating profit decreased 30.4 percent to USD 189 million primarily due to cost of goods sold inflation, additional investments the company made to service orders, increased A+P investment, and the lost profit from the Sold Businesses. These impacts were partially offset by the benefits of supply chain realized productivity, higher organic net sales, lower COVID-19 pandemic-related expenses, and cost synergies associated with the Pinnacle Foods acquisition.

International Segment Second Quarter Results

Net sales for the International segment increased 5.0 percent to USD 262 million in the quarter reflecting:

  • a 0.1 percent decrease from the impact of the Sold Businesses,
  • a 3.0 percent increase from the favourable impact of foreign exchange; and
  • a 2.1 percent increase in organic net sales.

On an organic net sales basis, volume decreased 5.8 percent and price/mix increased 7.9 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-driven pricing and favourable product mix.

Operating profit for the segment decreased 5.8 percent to USD 37 million in the quarter. Adjusted operating profit decreased 5.9 percent to USD 37 million as the negative impacts of cost of goods sold inflation and increased A+P investment more than offset the benefits from favorable foreign exchange, supply chain realized productivity, and higher organic net sales.

Foodservice Segment Second Quarter Results

Net sales for the Foodservice segment increased 14.9 percent to USD 246 million in the quarter reflecting:

  • a 0.3 percent decrease from the impact of the Sold Businesses; and
  • a 15.2 percent increase in organic net sales.

On an organic net sales basis, volume increased 9.1 percent as restaurant traffic continued to improve from the impacts of the COVID-19 pandemic. Price/mix was favourable at 6.1 percent in the quarter driven by inflation-driven pricing and favourable product mix.

Operating profit for the segment decreased 39.1 percent to USD 14 million and adjusted operating profit decreased 18.1 percent to USD 19 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 Second Quarter Items

Corporate expenses decreased 47.0 percent to USD 59 million in the quarter primarily from lapping incremental expenses related to the extinguishment of debt in the prior year period. Adjusted corporate expense increased 10.1 percent to USD 71 million in the quarter driven by increased employee related costs.

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 30 million. The USD 7 million increase was primarily driven by favourable market conditions for the Ardent Mills joint venture.

In the quarter, the effective tax rate was 23.4 percent compared to 17.6 percent in the prior-year period. The adjusted effective tax rate was 22.9 percent compared to 23.2 percent in the prior-year period.

In the quarter, the company paid a dividend of USD 0.3125 per share, the first dividend payment at the increased rate.

Outlook

The company is reiterating its adjusted EPS guidance for fiscal 2022 and updating its organic net sales and adjusted operating margin guidance. The outlook reflects expectations for continued top line strength, and higher cost of goods sold inflation, and the timing effect of additional pricing actions.

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 previously anticipated.

The company also continues to experience elevated cost of goods sold inflation, the rate of which was higher than expected during the second quarter of fiscal 2022. The company has taken, and plans 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 increase as the fiscal year progresses and, as a result, the company continues to expect margins to improve in the second half of the fiscal year.

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

  • Organic net sales growth is expected to be approximately +3 percent versus prior guidance of approximately +1 percent
  • Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 14 percent versus prior guidance of approximately 11 percent
  • Adjusted operating margin is expected to be approximately 15.5 percent versus prior guidance of approximately 16 percent
  • 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, without limitation:

  • 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-driven 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 0.57 EPS for the second 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 0.02 per diluted share of net benefit related to legal matters
  • Approximately USD 0.01 per diluted share of net benefit related to proceeds received from the sale of a legacy investment
  • Approximately USD 0.07 per diluted share of net expense related to impairment on businesses held for sale
  • Approximately USD 0.01 per diluted share of net impact due to rounding

The following are included in the USD 0.77 EPS for the second 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 0.03 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 net impact due to rounding