Conagra Brands: Reports Strong Q4-2021 And FY Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the fourth quarter and full fiscal year 2021, which ended on May 30, 2021. All comparisons are against the prior-year fiscal period, unless otherwise noted. Highlights of the quarter and the financial year:

Fourth quarter

  • Net sales decreased 16.7 percent, and organic net sales decreased 10.1 percent driven by lapping the prior year’s significant surge in at-home food consumption at the onset of the Covid-19 pandemic. On a two-year compounded annualized basis, fiscal 2021 fourth quarter net sales increased 2.4 percent and organic net sales increased 4.5 percent.
  • Operating margin decreased 143 basis points to 10.5 percent; adjusted operating margin decreased 311 basis points to 14.0 percent.
  • Diluted earnings per share from continuing operations (EPS) for the fourth quarter grew 56.1 percent to USD 0.64, and adjusted EPS declined 28.0 percent to USD 0.54. On a two-year compounded annualized basis, fourth quarter EPS increased 56.9 percent and adjusted EPS increased 22.5 percent.

Full year fiscal 2021

  • Net sales increased 1.2 percent and organic net sales increased 5.1 percent. Organic net sales benefited from strong growth in each of the Company’s three retail reporting segments. On a two-year compounded annualized basis, fiscal 2021 net sales increased 8.3 percent and organic net sales increased 5.4 percent.
  • Operating margin increased 279 basis points to 15.9 percent; adjusted operating margin increased 101 basis points to 17.5 percent.
  • EPS for fiscal 2021 grew 54.7 percent to USD 2.66; adjusted EPS grew 15.8 percent to USD 2.64. On a two-year basis, adjusted EPS grew 14.6 percent.
  • The Company divested the Egg Beaters business at quarter’s end.
  • The Company achieved its leverage target of 3.5x to 3.6x and ended the year at 3.6x.
  • The Company is revising its Fiscal 2022 guidance to reflect increased inflation since the fiscal third quarter. This impact will be particularly felt in the first half of fiscal 2022, as remediation measures – including pricing – lag the timing of realized cost inflation. The Company now expects fiscal 2022 results as follows:
  • Organic net sales growth of approximately flat compared to fiscal 2021
    • Adjusted operating margin of approximately 16 percent
    • Adjusted EPS of approximately USD 2.50
    • Adjusted EPS in the second half of the fiscal year is expected to be in-line with what was assumed for the second half of fiscal 2022 in the Company’s prior fiscal 2022 guidance.
  • The Board of Directors has authorized a 14 percent increase to the Company’s annualized dividend rate, beginning with the dividend payable on September 2, 2021, reflecting continued confidence in the strength of the business.
  • The Company plans to host an investor meeting in spring 2022 to provide information on its long-term outlook.

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, «I am very proud of how the entire Conagra Brands team responded to fiscal 2021’s dynamic environment. Our strong results – both in the absolute and relative to competition – reflect the team’s dedication to executing the Conagra Way each day. We successfully responded to the heightened consumer demand while continuing to invest in the long-term health of the business. Our business remains very strong, and we believe we are well-positioned to continue to win with consumers.»

He continued, «As the fourth quarter unfolded, input cost inflation accelerated and we now expect fiscal 2022 input cost inflation to be materially higher than we anticipated at the end of fiscal Q3. In response, we have further enhanced the aggressive and comprehensive action plan already being executed, which includes broad-based pricing. While we are pleased with the initial results, there will be a lag between the time we are hit with higher costs and when we realize the benefits of our actions. The impact of this lag is expected to be most acute in the first half of fiscal 2022. We anticipate second-half adjusted EPS to be in line with what we previously assumed within our prior fiscal 2022 guidance. The underlying strength of our business and our continued investments to further support our brands gives me confidence that we have a long runway of growth and shareholder value creation ahead of us. This confidence is underscored by our Board of Directors’ decision to increase our annual dividend by 14 percent after increasing it 29 percent last fiscal year. We look forward to discussing our longer-term outlook at an investor meeting in the spring of 2022.»

Total Company Fourth Quarter Results

In the quarter, net sales decreased 16.7 percent to USD 2.7 billion. The decline in reported net sales primarily reflects:

  • a 1.5 percent decrease from the Sold Businesses, which include the H.K. Anderson business, the Peter Pan peanut butter business as well as the Egg Beaters business, which was sold at quarter end;
  • a 0.5 percent increase from the impact of foreign exchange;
  • a 5.6 percent decrease from the impact of last year’s 53rd week; and
  • a 10.1 percent decrease in organic net sales.

The 10.1 percent decrease in organic net sales was driven by a 12.8 percent decrease in volume and a favorable price/mix impact of 2.7 percent. The volume decrease was primarily driven by lapping the prior year’s surge in at-home food consumption at the onset of the Covid-19 pandemic. Last year’s surge negatively impacted fiscal 2021 fourth quarter growth rates in the Company’s three retail reporting segments and benefited its Foodservice segment’s growth rate. The price/mix favorability was primarily driven by favorable mix, lower promotional activity, and inflation-justified pricing that began to roll-out during the quarter.

Gross profit decreased 21.8 percent to USD 722 million in the quarter, and adjusted gross profit decreased 22.4 percent to USD 721 million. Gross margin decreased 172 basis points to 26.3 percent in the quarter, and adjusted gross margin decreased 194 basis points to 26.3 percent. Gross profit in the quarter benefited from supply chain realized productivity, cost synergies associated with the Pinnacle Foods acquisition, and favorable margin mix; however, these benefits were not enough to offset the impacts of the net sales decline, cost of good sold inflation, which increased rapidly as the quarter progressed, and the lost profit from the Sold Businesses and last year’s 53rd week.

Selling, general, and administrative expense (SG+A), which includes A+P, decreased 18.2 percent to USD 435 million in the quarter. Adjusted SG+A, which excludes A+P, decreased 14.7 percent to USD 263 million, primarily as a result of lower incentive compensation and commissions expense compared to the prior-year period and from the additional expense incurred last year due to the 53rd week.

A+P for the quarter increased 27.1 percent to USD 75 million, driven primarily by higher E-commerce investments.

Net interest expense was USD 98 million in the quarter. Compared to the prior-year period, net interest expense decreased 21.5 percent or USD 27 million, as a result of lower levels of debt outstanding.

The average diluted share count decreased 1.3 percent compared to the prior-year period to 483 million shares, driven by the Company’s decision to recommence strategic share repurchase activity earlier in the fiscal year.

In the quarter, net income attributable to Conagra Brands increased 53.6 percent to USD 310 million, or USD 0.64 per diluted share, as tax benefits associated with a restructuring of the Ardent Mills joint venture investment offset declines in gross profit. Adjusted net income attributable to Conagra Brands decreased 29.1 percent to USD 261 million, or USD 0.54 per diluted share in the quarter, driven primarily by the decrease in gross profit.

Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, decreased 24.6 percent to USD 520 million in the quarter, primarily driven by the decrease in adjusted gross profit.

Total Company Fiscal 2021 Results

For the full fiscal year, net sales increased 1.2 percent to USD 11.2 billion. The growth in reported net sales primarily reflects:

  • a 2.0 percent net decrease from the Sold Businesses; which include the Lender’s bagel business, the Direct Store Delivery (DSD) Snacks business, the H.K. Anderson business, the Peter Pan peanut butter business, the private label peanut butter business, and the Egg Beaters business, which was sold at quarter end;
  • a 1.9 percent decrease from the impact of last year’s 53rd week; and
  • a 5.1 percent increase in organic net sales.

For the full fiscal year, gross profit increased 3.6 percent to USD 3.2 billion and adjusted gross profit increased 3.0 percent to USD 3.2 billion. Gross margin increased 66 basis points to 28.4 percent, and adjusted gross margin increased 50 basis points to 28.6 percent. The benefits from the organic net sales increase, supply chain realized productivity, favorable margin mix, cost synergies associated with the Pinnacle Foods acquisition, and favorable fixed cost leverage more than offset the impacts from cost of goods sold inflation, increased Covid-19-related expenses, and the lost profit from the Sold Businesses, and last year’s 53rd week.

For the full fiscal year, EPS increased 54.7 percent to USD 2.66, and adjusted EPS grew 15.8 percent to USD 2.64, driven by an increase in adjusted operating profit, an increase in equity method investment earnings, lower interest expense, and a decrease in the number of shares outstanding.

For the full fiscal year, the Company generated USD 1.5 billion in net cash flows from operating activities and USD 962 million of free cash flow.

Grocery + Snacks Segment Fourth Quarter Results

Net sales for the Grocery + Snacks segment decreased 26.4 percent to USD 1.1 billion in the quarter reflecting:

  • a 2.6 percent decrease from the impact of the Sold Businesses;
  • a 4.8 percent decrease from the impact of last year’s 53rd week; and
  • a 19.0 percent decrease in organic net sales.

On an organic net sales basis, volume decreased 19.8 percent and price/mix increased 0.8 percent. The volume decline was due to lapping the prior year’s surge in at-home food consumption at the onset of the Covid-19 pandemic. Price/mix favorability was driven by inflation-justified pricing actions partially offset by unfavorable brand mix. In the quarter, the Company gained share in staples categories such as canned tomatoes and canned meat, and snacking categories including microwave popcorn and seeds.

Operating profit for the segment decreased 32.2 percent to USD 204 million in the quarter. Adjusted operating profit decreased 38.1 percent to USD 218 million, primarily driven by the organic net sales decline, cost of goods sold inflation, lost profits from the segment’s Sold Businesses and last year’s 53rd week, increased Covid-19 related expenses, and incremental A+P investments. These benefits were partially offset by supply chain realized productivity, cost synergies associated with the Pinnacle Foods acquisition, and lower SG+A.

Refrigerated + Frozen Segment Fourth Quarter Results

Net sales for the Refrigerated + Frozen segment decreased 12.0 percent to USD 1.2 billion in the quarter reflecting:

  • a 0.2 percent decrease from the impact of the Sold Businesses;
  • a 6.3 percent decrease from the impact of last year’s 53rd week; and
  • a 5.5 percent decrease in organic net sales.

On an organic net sales basis, volume decreased 8.9 percent and price/mix increased 3.4 percent. The volume decline was due to lapping the prior year’s surge in at-home food consumption at the onset of the Covid-19 pandemic. The price/mix increase was primarily driven by favorable brand mix, as well as slight favorability in pricing. In the quarter, the Company gained share in categories such as frozen vegetables, whipped topping, frozen handhelds, and frozen appetizers.

Operating profit for the segment decreased 30.3 percent to USD 118 million in the quarter. Adjusted operating profit decreased 25.9 percent to USD 198 million as the benefits of supply chain realized productivity, lower SG+A, decreased Covid-19 related expenses, and cost synergies associated with the Pinnacle Foods acquisition were more than offset by cost of goods sold inflation, lower organic net sales, lost profit from the segment’s Sold Businesses and last year’s 53rd week, and increased A+P investment.

International Segment Fourth Quarter Results

Net sales for the International segment decreased 13.8 percent to USD 229 million in the quarter reflecting:

  • a 0.1 percent decrease from the impact of the Sold Businesses;
  • a 6.5 percent increase from the favorable impact of foreign exchange;
  • a 5.5 percent decrease from the impact of last year’s 53rd week; and
  • a 14.7 percent decrease in organic net sales.

On an organic net sales basis, volume decreased 21.2 percent and price/mix increased 6.5 percent. Volume decreased primarily due to lapping the prior year’s surge in demand at the onset of the Covid-19 pandemic. The price/mix increase was driven by inflation-justified pricing and favorable mix.

Operating profit for the segment decreased 4.0 percent to USD 26 million in the quarter. Adjusted operating profit decreased 24.3 percent to USD 27 million due to the decline in organic net sales, lost profit from last year’s 53rd week, and increased A+P investment, partially offset by the favorable impact of foreign exchange.

Foodservice Segment Fourth Quarter Results

Net sales for the Foodservice segment increased 20.8 percent to USD 233 million in the quarter reflecting:

  • a 1.4 percent decrease from the impact of the Sold Businesses;
  • a 8.8 percent decrease from the impact of last year’s 53rd week; and
  • a 31.0 percent increase in organic net sales.

On an organic net sales basis, volume increased 30.2 percent as restaurant traffic began to recover from the impacts of the Covid-19 pandemic. Price/mix was favorable 0.8 percent in the quarter, primarily driven by increased pricing to offset higher input costs.

Operating profit for the segment increased from USD 1 million to USD 19 million in the quarter, as the benefits of higher organic net sales, supply chain realized productivity, and fixed cost leverage more than offset the impact of higher input costs and Covid-19-related expenses.

Other Fourth Quarter Items

Corporate expenses decreased 25.1 percent to USD 80 million in the quarter and adjusted corporate expense decreased 16.1 percent to USD 79 million in the quarter primarily as a result of lower incentive compensation expense.

Pension and post-retirement non-service income was USD 13 million in the quarter compared to USD 27 million of expense in the prior-year period. The Company expenses actuarial gains and losses in excess of the 10 percent corridor annually at the pension measurement date. This practice resulted in a USD 45 million non-cash year-end pension expense in the prior year, driven by a reduction of the discount rate used to remeasure the pension obligations to present value and a reduction in asset values for certain plan assets. Adjusted pension and post-retirement non-service income decreased USD 4 million to USD 13 million in the quarter.

In the quarter, equity method investment earnings were USD 33 million. The 45.8 percent increase on a reported basis and the 44.8 percent increase on an adjusted basis were primarily driven by favorable market conditions for the Ardent Mills joint venture.

In the quarter, the effective tax rate was (32.0) percent compared to 22.9 percent in the prior-year period. The decrease was primarily driven by net non-cash income tax benefits associated with a restructuring of the ownership of our interest in the Ardent Mills joint venture. The adjusted effective tax rate was 21.3 percent compared to 23.0 percent in the prior-year period.

In the quarter, the Company paid a dividend of USD 0.275 per share.

Portfolio Update

On May 27, 2021, the Company completed the divestiture of the Egg Beaters liquid egg business. The business was reflected primarily within the Refrigerated + Frozen segment, and to a lesser extent within the International and Foodservice segments. The sale is expected to have an annualized impact of reducing reported net sales by approximately USD 40 million and adjusted EPS by approximately USD 0.01.

Dividend Update

Subsequent to quarter-end, the Company’s Board of Directors approved an increase of the annual dividend from USD 1.10 per share to USD 1.25 per share. The Company’s new quarterly dividend payment of USD 0.3125 per share of Conagra common stock will be paid on September 2, 2021 to stockholders of record as of the close of business on August 3, 2021.

Outlook

Management expects that consumer demand for its retail products will remain elevated versus historical levels during fiscal 2022, as consumers have developed new habits during the Covid-19 pandemic. However, the Company has recently experienced elevated cost of goods sold inflation, the rate of which increased during the fourth quarter of fiscal 2021. While the Company has taken, and expects to continue taking, appropriate actions to pull on multiple margin levers to counteract the impact of this inflation, including pricing and cost savings actions, the timing of the margin lever benefits is expected to be weighted towards the second half and therefore not expected to fully offset the input cost headwinds within fiscal 2022. This timing lag is expected to most acute in the first quarter. Therefore, the first quarter is expected to be the lowest margin quarter of the fiscal year.

The Company is providing the following updated fiscal 2022 guidance:

  • Organic net sales growth is expected to be approximately flat compared to fiscal 2021
  • Adjusted operating margin is expected to be approximately 16 percent
  • Adjusted EPS is expected to be approximately USD 2.50
  • Adjusted EPS in the second half of the fiscal year is expected to be in-line with what was assumed for the second half of fiscal 2022 in the Company’s prior fiscal 2022 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:

  • 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-justified 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 0.64 EPS for the fourth 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 0.02 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 0.14 per diluted share of net expense related to brand impairment charges, primarily related to Udi’s
  • Approximately USD 0.24 per diluted share of net non-cash income tax benefits associated with a restructuring of the ownership of our interest in the Ardent Mills joint venture
  • Approximately USD 0.03 per diluted share of net benefit related to a release of a valuation allowance on our capital loss carryforward primarily related to the Egg Beaters divestiture
  • Approximately USD 0.02 per diluted share of negative impact due to rounding

The following are included in the USD 0.41 EPS for the fourth 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 0.03 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 0.07 per diluted share of net expense related to pension value adjustment
  • Approximately USD 0.23 per diluted share of net expense related to brand impairment charges
  • Approximately USD 0.01 per diluted share of net expense related to legal matters
  • 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.

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