Chicago / IL. (cag) ConAgra Brands Inc. reported results for the third quarter of fiscal year 2020, which ended on February 23, 2020.
- Third quarter net sales decreased 5.6 percent; organic net sales decreased 1.7 percent, in-line with the Company’s expectations, which were updated in February.
- Diluted earnings per share from continuing operations (EPS) was USD 0.42; Adjusted EPS of USD 0.47 was in-line with the Company’s updated expectations.
- The integration of Pinnacle remained on-track, and each of the Big 3 brands delivered sequential in-market performance improvement.
- The Company reduced debt by USD 450 million in the quarter and remained on-track with its de-leveraging target of 3.6x to 3.5x by the end of fiscal 2021.
Fourth Quarter and Full Year Outlook Highlights
- To-date in the fourth fiscal quarter, the Company has experienced significantly increased demand in its retail businesses, associated with the Covid-19 pandemic; the Company has also begun to experience declines in foodservice demand.
- The Company’s supply chain has executed very well to-date to meet the needs of customers and consumers.
- The Company now expects to exceed prior full-year guidance for total-company sales and profit metrics, assuming the end-to-end supply chain continues to operate effectively.
Sean Connolly, president and chief executive officer of Conagra Brands, commented, «Through the third quarter, we remained squarely on-track to deliver on our fiscal 2020 operational objectives, and our third quarter results were in-line with our updated expectations.»
He continued, «In more recent weeks, the entire team at Conagra Brands has been focused on supporting our customers, consumers, employees, and communities in the face of the Covid-19 pandemic. While we are still early in our fourth quarter, we have seen significantly elevated demand for our retail products as consumers have started filling their pantries for more at-home eating. On a quarter-to-date basis, shipments and consumption in our domestic retail business have increased approximately 50 percent, which have more than offset the impact of worsening trends in our foodservice business. Our teams have remained agile in responding to the elevated demand, and our supply chain has performed extremely well to fulfill customer orders. I’d like to thank our front-line employees who continue to work tirelessly to provide much-needed food to consumers in this unprecedented time – their efforts have been inspiring. Although the situation remains highly dynamic and our ultimate results depend on an effective and uninterrupted supply chain, we now believe that we will exceed our fiscal 2020 sales and profit guidance.»
Total Company Third Quarter Results
In the quarter, net sales decreased 5.6 percent to USD 2.6 billion. The decline in reported net sales primarily reflects:
- a 4.0 percent net decrease from the divestitures of the Wesson oil business, the Direct Store Delivery (DSD) snacks business, the Gelit business, and the Lender’s Bagel business, and the exit of the private label peanut butter business;
- a 0.1 percent net benefit due to foreign exchange; and
- a 1.7 percent decrease in organic net sales.
The 1.7 percent decrease in organic net sales was driven by a 1.3 percent decline in volume and an unfavorable price/mix impact of 0.4 percent. Volume was below planned levels in the quarter as the Company’s retail and foodservice businesses experienced broad-based category softness early in the quarter. Price/mix was unfavorable as additional price promotions and increased retailer investments more than offset favorable mix.
Gross profit decreased 9.0 percent to USD 684 million in the quarter, and adjusted gross profit decreased 10.5 percent to USD 699 million. The decreases were primarily driven by higher input costs, higher levels of brand-building investments with retailers, lower sales volume, higher inventory write-offs, and the lost profit associated with the Sold Businesses, partially offset by realized productivity and cost synergies.
Selling, general, and administrative expenses (SG+A), which include advertising and promotional (A+P) expense, decreased 4.2 percent to USD 320 million in the quarter. Adjusted SG+A, which excludes A+P expense, decreased 15.1 percent to USD 233 million, primarily as a result of incremental synergies associated with the Pinnacle Foods acquisition achieved in the quarter and the removal of costs associated with the Sold Businesses. These benefits were partially offset by higher stock-based compensation expense. A+P expense for the quarter was essentially flat at USD 66 million.
Net interest expense was USD 118 million in the quarter. Compared to the prior-year period, net interest expense decreased USD 13 million, driven by lower levels of debt outstanding.
The Company’s 489 million average diluted shares outstanding was an increase of approximately 1 million shares versus the prior-year period.
In the quarter, net income attributable to Conagra Brands decreased 15.6 percent to USD 204 million, or USD 0.42 per diluted share. Adjusted net income attributable to Conagra Brands decreased 7.5 percent to USD 232 million, or USD 0.47 per diluted share, in the quarter. The decrease in adjusted net income attributable to Conagra Brands was driven primarily by the decrease in operating profit, lower equity method investment earnings, and higher income tax rate, partially offset by higher pension and postretirement non-service income and lower interest expense. The decrease in adjusted EPS in the quarter was primarily driven by the decrease in adjusted net income.
Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, decreased 7.1 percent to USD 515 million in the quarter.
Grocery + Snacks Segment Third Quarter Results
Net sales for the Grocery + Snacks segment decreased 9.5 percent to USD 1.02 billion in the quarter, with the divestiture of the Wesson oil and DSD snacks businesses, and the exit of private label peanut butter subtracting 5.9 percent. On an organic basis, volume decreased 1.7 percent and price/mix decreased 1.9 percent. Volume decreased across multiple categories more than the Company planned, reflecting softer-than-expected consumer takeaway trends. The Company believes that year-over-year category performance early in the third quarter was negatively impacted by a relatively warmer winter. The unfavorable price/mix was primarily driven by unfavorable mix and increased promotional support on Chef Boyardee and the Hunts tomatoes business. Several snack brands, including Slim Jim, ACT II, Snack Pack, Angie’s, BIGS, and DAVID Seeds, experienced growth.
Operating profit for the segment decreased 11.4 percent to USD 199 million in the quarter. Adjusted operating profit decreased 14.5 percent to USD 210 million, primarily driven by input cost inflation, the lost profit from the Sold Businesses, higher inventory write-offs, and lower sales volume, partially offset by favorable realized productivity and cost synergies.
Refrigerated + Frozen Segment Third Quarter Results
Net sales for the Refrigerated + Frozen segment decreased 1.6 percent to USD 1.08 billion in the quarter, with the divestiture of the Gelit and Lender’s Bagel businesses subtracting 1.9 percent. Organic net sales increased 0.3 percent. On an organic net sales basis, volume decreased 0.4 percent and price/mix increased 0.7 percent. In the frozen business, several brands such as Birds Eye, Healthy Choice, and Gardein, continued to report solid organic growth in the quarter, and the fiscal 2020 frozen innovation, which was launched earlier in the fiscal year across multiple brands, continued to perform well in-market. Several businesses, however, including frozen single serve meals, experienced softer-than-expected growth associated with unfavorable category dynamics and a relatively warmer winter. Several refrigerated brands also declined in the quarter. Increased price/mix in the segment was primarily driven by favorable mix from the continued strength in the Company’s innovation.
Operating profit for the segment increased 0.8 percent to USD 191 million in the quarter. Adjusted operating profit decreased 0.3 percent to USD 201 million as the benefit of realized productivity improvements and cost synergies were more than offset by higher input costs, the lost profit from the Sold Businesses, and higher inventory write-offs.
International Segment Third Quarter Results
Net sales for the International segment decreased 3.2 percent to USD 221 million in the quarter reflecting:
- a 2.7 percent decrease from the divestiture of the Wesson oil business;
- a 1.4 percent increase from the favorable impact of foreign exchange; and
- a 1.9 percent decrease in organic net sales.
On an organic net sales basis, volume decreased 0.9 percent and price/mix decreased 1.0 percent. During the quarter, the segment continued to benefit from growth in the Canadian snacks and frozen businesses as well as improvement in the Indian operation. These benefits were more than offset by planned value-over-volume actions in the export business and the impact of economic softness in Mexico.
Operating profit for the segment decreased 25.3 percent to USD 22 million in the quarter. Adjusted operating profit decreased 20.4 percent to USD 22 million as higher input costs, increased retailer investments, and the lost profit from the Sold Businesses more than offset the benefits of realized productivity and cost synergies.
Foodservice Segment Third Quarter Results
Net sales for the Foodservice segment decreased 8.0 percent to USD 234 million in the quarter, with the divestitures of the Wesson oil and Lender’s Bagel businesses, and the exit of private label peanut butter subtracting 5.8 percent of net sales growth. Organic net sales decreased 2.2 percent. On an organic net sales basis, volume decreased 4.6 percent and price/mix increased 2.4 percent in the quarter. The impact of unplanned softness in restaurant industry traffic trends early in the quarter was partially offset by inflation-related pricing.
Operating profit decreased 25.9 percent to USD 27 million in the quarter, as cost synergies captured in the quarter and realized productivity improvements were more than offset by lower organic net sales, higher input costs, the lost profit from the Sold Businesses, and higher inventory write-offs.
Other Third Quarter Items
Corporate expenses increased 19.8 percent to USD 75 million in the quarter. Adjusted corporate expenses decreased 17.1 percent to USD 60 million in the quarter as cost synergies more than offset higher stock-based compensation expense.
Pension and post-retirement non-service income was USD 16 million in the quarter, an increase of approximately USD 7 million compared to the prior-year period. Adjusted pension and post-retirement non-service income increased USD 5 million to USD 15 million as a result of lower interest costs due to pension remeasurements throughout the year.
Equity method investment earnings decreased 17.3 percent to USD 10 million in the quarter and adjusted equity method investment earnings decreased 12.5 percent to USD 11 million in the quarter. Unfavorable market conditions led to a year-over-year performance decline in the Ardent Mills joint venture.
In the quarter, the effective tax rate was 25.2 percent, and the adjusted effective tax rate was 24.8 percent.
In the quarter, the Company paid a dividend of USD 0.2125 per share.
The Company remains on-schedule with its de-leveraging targets and remains committed to a solid investment grade credit rating. Since the closing of the Pinnacle acquisition through the end of the third quarter, Conagra Brands has reduced total gross debt by more than USD 1.5 billion.
As previously disclosed, on January 2, 2020, the Company completed the divestiture of its Lender’s Bagel business.
Additionally, on the first day of the third quarter of fiscal 2020, the Company completed the sale of its peanut butter manufacturing facility in Streator, Illinois as part of its broader initiative to optimize the Company’s peanut butter business. This initiative includes the exit of the manufacture and sale of private label peanut butter.
Fiscal 2020 Outlook
The impact that the Covid-19 pandemic will have on the Company’s fiscal 2020 consolidated results of operations is uncertain. The dynamic nature of the current situation makes it challenging for management to estimate future performance of the businesses, particularly over the near term.
To-date in the fourth quarter, the Company has seen significantly increased demand in its retail business. The Company has also started to see reduced demand for its foodservice products and expects a 50-60 percent decline in Foodservice organic net sales in the fourth quarter. The Company’s supply chain has effectively serviced demand to-date.
As shown in the table below, the Company now expects to exceed prior full-year guidance for total-company sales and profit metrics, assuming the end-to-end supply chain continues to operate effectively.
Note that organic net sales growth excludes the impact of fiscal 2020’s 53rd week. All other metrics include the impact of the 53rd week.
|Metric||Prior Fiscal 2020 Guidance||Updated Fiscal 2020 Guidance|
|Organic Net Sales Growth||Flat to +0.5%||Above high end of range|
|Reported Net Sales Growth||+10.0% to +10.5%||Above high end of range|
|Adjusted Op. Margin||15.8% to 16.2%||Above high end of range|
|Adjusted Net Interest Expense||~$500 million||No change|
|Adjusted Effective Tax Rate||23% to 24%||No change|
|Avg. Diluted Shares||~488 million||No change|
|Adjusted Diluted EPS from Cont. Ops.||$2.00 to $2.07||Above high end of range|
|Free Cash Flow||~$950 million||Above $950 million|
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 0.42 diluted EPS from continuing operations for the third quarter of fiscal 2020 (EPS amounts rounded and after tax).
- Approximately USD 0.05 per diluted share of net expense related to restructuring
- Approximately USD 0.01 per diluted share of net expense related to corporate hedging derivative losses
- Approximately USD 0.01 per diluted share of positive impact due to rounding
The following are included in the USD 0.50 diluted EPS from continuing operations for the third quarter of fiscal 2019 (EPS amounts rounded and after tax).
- Approximately USD 0.06 per diluted share of net expense related to restructuring plans
- Approximately USD 0.04 per diluted share of net expense related to Pinnacle’s inventory valuation in connection with our acquisition accounting
- Approximately USD 0.06 per diluted share of net benefit related to the novation of a legacy guarantee related to a divested business
- Approximately USD 0.04 per diluted share of net benefit related to a fair value adjustment of cash settleable equity awards issued in connection with the Pinnacle acquisition
- Approximately USD 0.01 per diluted share of net tax expense related to unusual tax items