Conagra Brands: Reports Strong Q3-2022 Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the third quarter of fiscal year 2022, which ended on February 27, 2022. All comparisons are against the prior-year fiscal period, unless otherwise noted. Highlights

  • Third quarter net sales increased 5.1 percent; organic net sales increased 6.0 percent. On a two-year compounded annualized basis, third quarter net sales increased 6.8 percent and organic net sales increased 7.8 percent.
  • Operating margin decreased 387 basis points to 12.3 percent; adjusted operating margin decreased 230 basis points to 13.7 percent.
  • Diluted earnings per share (EPS) for the third quarter decreased 22.4 percent to USD 0.45, and adjusted EPS decreased 1.7 percent to USD 0.58. On a two-year compounded annualized basis, third quarter EPS increased 3.5 percent and adjusted EPS increased 11.1 percent.
  • The company is updating its fiscal 2022 guidance, and providing fourth quarter guidance, to reflect expectations for continued top line strength, higher cost of goods sold inflation, 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 +4 percent versus prior guidance of approximately +3 percent
    • Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 16 percent versus prior guidance of approximately 14 percent
    • Adjusted operating margin is expected to be approximately 14.5 percent versus prior guidance of approximately 15.5 percent
    • Adjusted EPS is expected to be approximately USD 2.35, versus prior guidance of approximately USD 2.50
    • Pro Forma FY22 adjusted diluted EPS is estimated at approximately USD 2.65, excluding the impact of the FY22 lag between inflation and in-market pricing
  • The company’s Fiscal 2022 fourth quarter guidance is as follows:
    • Organic net sales growth is expected to be approximately +7 percent
    • Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 16 percent
    • Adjusted operating margin is expected to be approximately 15.5 percent
    • Adjusted EPS is expected to be approximately USD 0.64

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, «Our business delivered another quarter of strong net sales growth as our brands continued to resonate with consumers. Our focus on strategic innovation and our intentional approach to investment helped us capture share across each of our domains – frozen, snacks, and staples. The team’s dedication to executing our Conagra Way playbook has continued to pay dividends in the face of a challenging external landscape.»

He continued, «We experienced higher-than-expected cost pressures as the third quarter progressed and expect those pressures to continue into the fourth quarter, particularly in certain frozen, refrigerated, and snacks businesses. In response, we have taken steps to implement additional inflation-driven pricing actions. We will begin to see the benefits of these actions in the first quarter of fiscal 2023. Consumer demand has remained strong in the face of our pricing actions to date, but there will continue to be a lag between the timing of the incremental inflation and the benefits of our mitigating actions.»

Total Company Third Quarter Results

In the quarter, net sales increased 5.1 percent to USD 2.9 billion. The increase in net sales primarily reflects:

  • a 0.8 percent net decrease from the divestitures of the Peter Pan peanut butter business and the Egg Beaters business (collectively, the Sold Businesses);
  • a 0.1 percent decrease from the unfavorable impact of foreign exchange; and
  • a 6.0 percent increase in organic net sales.

The 6.0 percent increase in organic net sales was driven by a 8.6 percent improvement in price/mix, which was partially offset by a 2.6 percent decrease in volume. Price/mix was driven the company’s inflation-driven pricing actions that were reflected in the marketplace throughout the quarter and favorable brand mix. 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 decreased 8.1 percent to USD 697 million in the quarter, and adjusted gross profit decreased 7.9 percent to USD 701 million. Third 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 15.4 percent, the lost profit from the Sold Businesses, and elevated supply chain operating costs. Gross margin decreased 344 basis points to 23.9 percent in the quarter, and adjusted gross margin decreased 342 basis points to 24.1 percent.

Selling, general, and administrative expense (SG+A), which includes advertising and promotional expense (A+P), increased 9.2 percent to USD 338 million in the quarter primarily due to an impairment on businesses held for sale. Adjusted SG+A, which excludes A+P, decreased 3.3 percent to USD 237 million driven by decreased incentive and deferred compensation.

A+P for the quarter decreased 11.5 percent to USD 65 million, driven primarily by reduced broadcast media investments.

Net interest expense was USD 95 million in the quarter. Compared to the prior-year period, net interest expense decreased 6.1 percent or USD 6 million, primarily due to a lower weighted average interest rate on outstanding debt.

The average diluted share count decreased 1.1 percent compared to the prior-year period to 482 million shares, driven by the company’s share repurchase activity in prior quarters.

In the quarter, net income attributable to Conagra Brands decreased 22.4 percent to USD 218 million, or USD 0.45 per diluted share. Adjusted net income attributable to Conagra Brands decreased 3.1 percent to USD 279 million, or USD 0.58 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 postretirement non-service income, decreased 2.4 percent to USD 553 million in the quarter, primarily driven by the decrease in adjusted gross profit, partially offset by a strong performance from the company’s Ardent Mills joint venture.

Grocery + Snacks Segment Third Quarter Results

Net sales for the Grocery + Snacks segment increased 6.2 percent to USD 1.2 billion in the quarter reflecting:

  • a 0.8 percent decrease from the impact of the Sold Businesses; and
  • a 7.0 percent increase in organic net sales.

On an organic net sales basis, price/mix increased 8.8 percent and volume decreased 1.8 percent. Price/mix was primarily 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 staples categories such as beans and syrup, and in snacking categories, including popcorn and meat snacks.

Operating profit for the segment decreased 20.2 percent to USD 232 million in the quarter primarily related to a prior year gain from the divestiture of the Peter Pan business. Adjusted operating profit decreased 2.7 percent to USD 238 million, primarily driven by cost of goods inflation, elevated supply chain operating costs, and the lost profit from the Sold Businesses. These negative impacts were partially offset by higher organic net sales, supply chain realized productivity, lower Covid-19 pandemic-related expenses, and cost synergies associated with the Pinnacle Foods acquisition.

Refrigerated + Frozen Segment Third Quarter Results

Net sales for the Refrigerated + Frozen segment increased 2.9 percent to USD 1.2 billion in the quarter reflecting:

  • a 1.0 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, price mix increased 8.4 percent and volume decreased 4.5 percent. The price/mix increase was driven by favorability in inflation-driven pricing and favorable brand mix. The volume decline was primarily due to the elasticity impact from inflation-driven pricing actions coupled with supply constraints. In the quarter, the company gained share in categories such as frozen single serve meals, frozen multi serve meals, and frozen desserts.

Operating profit for the segment decreased 26.4 percent to USD 158 million in the quarter. Adjusted operating profit decreased 20.6 percent to USD 176 million primarily due to cost of goods sold inflation, elevated supply chain operating costs, 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 Third Quarter Results

Net sales for the International segment increased 0.1 percent to USD 241 million in the quarter reflecting:

  • a 0.1 percent decrease from the impact of the Sold Businesses,
  • a 0.8 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 8.0 percent and volume decreased 7.0 percent. The price/mix increase was driven by inflation-driven pricing and favorable product mix. Volume decreased primarily due to the elasticity impact from inflation-driven pricing actions.

Operating profit for the segment increased 7.1 percent to USD 30 million in the quarter. Adjusted operating profit increased 7.7 percent to USD 30 million as the benefits from supply chain realized productivity, higher organic net sales, and favorable foreign exchange more than offset the negative impacts of cost of goods sold inflation.

Foodservice Segment Third Quarter Results

Net sales for the Foodservice segment increased 18.9 percent to USD 235 million in the quarter reflecting an 18.9 percent increase in organic net sales.

On an organic net sales basis, volume increased 10.5 percent as restaurant traffic continued to improve from the impacts of the Covid-19 pandemic, partially offset by the elasticity impact from inflation-driven pricing actions. Price/mix was favorable at 8.4 percent in the quarter driven by inflation-driven pricing and favorable product mix.

Operating profit for the segment decreased 63.9 percent to USD 5 million and adjusted operating profit increased 14.8 percent to USD 15 million in the quarter as the benefits of higher organic net sales and favorable supply chain realized productivity more than offset the impacts of cost of goods sold inflation and elevated supply chain operating costs.

Other Third Quarter Items

Corporate expenses decreased 32.9 percent to USD 65 million in the quarter primarily from lapping incremental expenses related to the extinguishment of debt in the prior year period. Adjusted corporate expense decreased 6.2 percent to USD 60 million in the quarter driven by decreased incentive and deferred compensation.

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 48 million. The USD 27 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 33.4 percent compared to 26.5 percent in the prior-year period. The adjusted effective tax rate was 24.4 percent compared to 23.9 percent in the prior-year period.

In the quarter, the company paid a dividend of USD 0.3125 per share.

Outlook

The company is updating its fiscal 2022 guidance, and providing fourth quarter guidance, to reflect expectations for continued top line strength, 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 third 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. Due to the nature of the timing lag associated with announcing and implementing incremental pricing actions, the benefits associated with the actions are not expected to fully offset the incremental input cost headwinds within fiscal 2022.

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

  • Organic net sales growth is expected to be approximately +4 percent versus prior guidance of approximately +3 percent
  • Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 16 percent versus prior guidance of approximately 14 percent
  • Adjusted operating margin is expected to be approximately 14.5 percent versus prior guidance of approximately 15.5 percent
  • Adjusted EPS is expected to be approximately USD 2.35, versus prior guidance of approximately USD 2.50

The company’s Fiscal 2022 fourth quarter guidance is as follows:

  • Organic net sales growth is expected to be approximately +7 percent
  • Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 16 percent
  • Adjusted operating margin is expected to be approximately 15.5 percent
  • Adjusted EPS is expected to be approximately USD 0.64

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 continue to 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 and world events continue 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 0.45 EPS for the third 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 0.06 per diluted share of net expense related to impairment on businesses held for sale
  • Approximately USD 0.05 per diluted share of net expense related to unusual tax items

The following are included in the USD 0.58 EPS for the third 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 0.02 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 0.06 per diluted share of net benefit related to the gain on divestiture of a business
  • Approximately USD 0.04 per diluted share of net expense related to the early extinguishment of debt
  • Approximately USD 0.01 per diluted share of net expense related to consulting fees on tax matters
  • Approximately USD 0.01 per diluted share of net expense due to legal matters

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.

References to two-year compounded annualized numbers are calculated as: ([(1 + current year period’s growth rate) * (1 + prior year period’s growth rate)] ^ 0.5) – 1.

Please note that certain prior year amounts have been reclassified to conform with current year presentation.

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