Conagra Brands: Reports Third Quarter 2023 Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the third quarter of fiscal year 2023, which ended on February 26, 2023. All comparisons are against the prior-year fiscal period, unless otherwise noted. Highlights:

  • Third quarter net sales increased 5.9 percent; organic net sales increased 6.1 percent
  • Operating margin increased 355 basis points in the quarter to 15.9 percent; adjusted operating margin increased 321 basis points to 16.9 percent
  • Diluted earnings per share (EPS) for the third quarter increased 57.8 percent to USD 0.71, and adjusted EPS increased 31.0 percent to USD 0.76
  • The company is updating its fiscal 2023 guidance to reflect:
    • Organic net sales growth of 7 percent to 7.5 percent compared to fiscal 2022
    • Adjusted operating margin between 15.5 percent and 15.6 percent
    • Adjusted EPS between USD 2.70 and USD 2.75 representing growth of 14 percent to 17 percent compared to fiscal 2022

CEO Perspective

Sean Connolly, president and chief executive officer, commented, «We delivered another quarter of strong results reflecting the ongoing strength of our brands and successful execution of the Conagra Way playbook. Our top-line posted solid growth as we demonstrated strong pricing execution with modest elasticities. Additionally, our productivity and service level improvement allowed us to continue to make meaningful progress on our adjusted gross margin and adjusted operating margin recovery, despite more impactful supply chain disruptions than anticipated. In response to our continued business momentum and ongoing operating dynamics, we are raising our fiscal 2023 EPS guidance and narrowing our ranges for organic net sales growth and adjusted operating margin. We remain committed to executing on our strategic business priorities including generating value for our shareholders.»

Total Company Third Quarter Results

  • In the quarter, net sales increased 5.9 percent to USD 3.1 billion. The increase in net sales primarily reflects:
    • a 0.2 percent decrease from the unfavorable impact of foreign exchange; and
    • a 6.1 percent increase in organic net sales.
  • The 6.1 percent increase in organic net sales was driven by a 15.1 percent improvement in price/mix, which was partially offset by a 9.0 percent decrease in volume. Price/mix was driven by the company’s inflation-driven pricing actions. The volume decrease was primarily driven by the elasticity impact from inflation-driven pricing actions and supply chain, including manufacturing disruptions.
  • Gross profit increased 20.3 percent to USD 839 million in the quarter, and adjusted gross profit increased 23.9 percent to USD 869 million. Third quarter gross profit benefited from higher organic net sales and productivity, which more than offset the negative impacts of cost of goods sold inflation (including unfavorable commodity positions) and unfavorable operating leverage. Gross margin increased 325 basis points to 27.2 percent in the quarter, and adjusted gross margin increased 409 basis points to 28.1 percent.
  • Selling, general, and administrative expense (SG+A), which includes advertising and promotional expense (A+P), increased 3.2 percent to USD 349 million in the quarter and adjusted SG+A, which excludes A+P, increased 12.4 percent to USD 266 million driven by increased incentive compensation compared to the prior year quarter.
  • A+P for the quarter increased 23.9 percent to USD 81 million, driven primarily by increased investment in modern marketing, including social and digital platforms.
  • Net interest expense was USD 104 million in the quarter. Compared to the prior-year period, net interest expense increased 10.3 percent or USD 10 million, primarily due to a higher weighted average interest rate on outstanding debt.
  • The average diluted share count in the quarter was 479 million shares.
  • In the quarter, net income attributable to Conagra Brands increased 56.4 percent to USD 342 million, or USD 0.71 per diluted share. Adjusted net income attributable to Conagra Brands increased 31.3 percent to USD 366 million, or USD 0.76 per diluted share. The increase was driven primarily by the increase in gross profit.
  • Adjusted Ebitda, which includes equity method investment earnings and pension and postretirement non-service income, increased 21.1 percent to USD 669 million in the quarter, primarily driven by the increase in adjusted gross profit, slightly offset by lower pension income.

Grocery + Snacks Segment Third Quarter Results

Reported and organic net sales for the Grocery + Snacks segment increased 3.7 percent to USD 1.2 billion in the quarter. In the quarter, price/mix increased 13.7 percent and volume decreased 10.0 percent. Price/mix was driven by favorability in inflation-driven pricing. The volume decrease was primarily driven by the elasticity impact from inflation-driven pricing actions and shortages from supply chain disruptions. In the quarter, the company gained share in snacking categories including meat snacks and microwave popcorn, and some staples categories including refried beans and Asian sauces and marinades. Operating profit for the segment increased 10.8 percent to USD 256 million in the quarter. Adjusted operating profit increased 8.0 percent to USD 257 million as higher organic net sales and productivity more than offset the negative impacts of cost of goods sold inflation (including unfavorable commodity positions), continued elevated supply chain costs, and increased A+P and SG+A.

Refrigerated + Frozen Segment Third Quarter Results

Reported and organic net sales for the Refrigerated + Frozen segment increased 5.6 percent to USD 1.3 billion in the quarter. In the quarter, price mix increased 15.4 percent and volume decreased 9.8 percent. Price/mix was driven by favorability in inflation-driven pricing. The volume decrease was primarily driven by the elasticity impact from inflation-driven pricing actions and shortages from supply chain disruptions. In the quarter, the company gained share in categories such as frozen sides, plant-based protein, and frozen breakfast sausage. Operating profit for the segment increased 66.9 percent to USD 264 million in the quarter. Adjusted operating profit increased 53.8 percent to USD 271 million as higher organic net sales and productivity more than offset the negative impacts of cost of goods sold inflation (including unfavorable commodity positions), unfavorable operating leverage, and increased A+P and SG+A.

International Segment Third Quarter Results

Net sales for the International segment increased 7.7 percent to USD 260 million in the quarter reflecting:

  • a 1.8 percent decrease from the unfavorable impact of foreign exchange; and
  • a 9.5 percent increase in organic net sales.

On an organic net sales basis, price/mix increased 16.5 percent and volume decreased 7.0 percent. Price/mix was driven by inflation-driven pricing. The volume decrease was primarily a result of the elasticity impact from inflation-driven pricing actions. Operating profit for the segment increased 24.3 percent to USD 37 million in the quarter. Adjusted operating profit increased 23.9 percent to USD 37 million as the benefits from higher organic net sales and productivity were more than offset by the negative impact of cost of goods sold inflation (including unfavorable commodity positions), unfavorable operating leverage and continued elevated supply chain costs.

Foodservice Segment Third Quarter Results

Reported and organic net sales for the Foodservice segment increased 17.3 percent to USD 275 million in the quarter. In the quarter, price/mix increased 18.5 percent and volume decreased 1.2 percent. Price/mix was driven by inflation-driven pricing. The volume decline was primarily a result of the elasticity impact from inflation-driven pricing actions. Operating profit for the segment increased 409.6 percent to USD 24 million and adjusted operating profit increased 69.7 percent to USD 25 million in the quarter as the benefits of higher organic net sales and productivity more than offset the impacts of cost of goods sold inflation (including unfavorable commodity positions) and unfavorable operating leverage.

Other Third Quarter Items

Corporate expenses increased 40.3 percent to USD 91 million in the quarter and adjusted corporate expense increased 14.3 percent to USD 68 million in the quarter driven by increased incentive compensation compared to the prior year quarter. Pension and post-retirement non-service income was USD 6 million in the quarter compared to USD 16 million of income in the prior-year period. In the quarter, equity method investment earnings were USD 51 million driven by continued 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 22.6 percent compared to 33.4 percent in the prior-year period. The adjusted effective tax rate was 22.8 percent compared to 24.4 percent in the prior-year period. In the quarter, the company paid a dividend of USD 0.33 per share.

Outlook

The company is raising its full year fiscal 2023 adjusted EPS outlook and narrowing its guidance ranges on organic net sales growth and adjusted operating margin in response to year-to-date trends. The company’s updated fiscal 2023 guidance is as follows:

  • Organic net sales growth is expected to be 7 percent to 7.5 percent compared to fiscal 2022
  • Adjusted operating margin is expected to be between 15.5 percent and 15.6 percent
  • Adjusted EPS is expected to be between USD 2.70 and USD 2.75, representing growth of 14 percent to 17 percent compared to fiscal 2022
  • Net Leverage Ratio of approximately 3.65x
  • Capital expenditures of approximately USD 370M
  • Interest expense of approximately USD 410M
  • Adjusted effective tax rate of approximately 24 percent
  • Pension income of approximately USD 25M

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 0.71 EPS for the third quarter of fiscal 2023 (EPS amounts are rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.

  • Approximately USD 0.01 per diluted share of net expense due to fire related costs
  • Approximately USD 0.04 per diluted share of net expense related to corporate hedging derivative losses

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 of businesses held for sale
  • Approximately USD 0.05 per diluted share of net expense related to unusual tax items

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

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