ConAgra: delivers continued margin expansion propelling first quarter EPS ahead of expectations

Chicago / IL. (caf) ConAgra Foods Inc., one of North America’s leading food companies, reported results for the fiscal 2017 first quarter ended August 28, 2016. Highlights (all comparisons are against the year ago period, unless otherwise noted):

GAAP diluted EPS from continuing operations of 0.42 USD grew 10 percent from 0.38 USD; adjusted diluted EPS from continuing operations of 0.61 USD, better than anticipated, grew 49 percent.
Net sales decreased 5 percent, largely driven by the Company’s decisive actions to build a higher quality revenue base, divestitures, and foreign exchange. Specifically, divestitures and the impact of foreign exchange reduced sales approximately 2 percentage points.
Gross profit (net sales less cost of goods sold) as a percent of net sales expanded approximately 200 basis points behind pricing and trade spending discipline, mix improvement, and supply chain efficiencies.
Completed sales of Spicetec Flavors + Seasonings and JM Swank businesses during the quarter.

CEO Perspective

Sean Connolly, president and chief executive officer of ConAgra Foods, commented, «We continue to make strong progress as we reshape our portfolio, capabilities, and culture. Our efforts to infuse focus and discipline into our consumer businesses are clearly enabling us to expand our margins as we build a higher quality revenue base, improve efficiency, and deliver stronger, more consistent performance. While we are taking broad-based actions to build a higher quality revenue base, the related volume declines are concentrated in brands where we have historically under-priced and over-promoted».

He added, «I’m very pleased with the outstanding performance of the Lamb Weston business this quarter. We look forward to sharing more detailed information on Lamb Weston and Conagra Brands at each company’s respective investor event next month».

Total Company Results

Net sales decreased 5 percent as a result of volume declines associated with the Company’s actions to build a higher quality revenue base, partially offset by Lamb Weston’s continued growth and increased price/mix. Divestitures and the impact of foreign exchange reduced sales approximately 2 percentage points.

GAAP gross profit grew 3 percent to 724 million USD from 701 million USD in the year-ago period, and adjusted gross profit grew 3 percent to 728 million USD. The increases were driven primarily by increased price/mix, input cost favorability, and supply chain productivity, which more than offset the decline in volume. As a percentage of net sales, both GAAP gross profit and adjusted gross profit were 27 percent compared with 25 percent in the prior year.

GAAP diluted EPS from continuing operations for the first quarter of fiscal 2017 was 0.42 USD compared to 0.38 USD in the year-ago period, an increase of 10 percent from year-ago period. Adjusted diluted EPS from continuing operations was 0.61 USD, compared to 0.41 USD in the year-ago period, an increase of 49 percent. The growth reflects strong performance in the Commercial segment’s Lamb Weston business, margin expansion in the Grocery + Snacks segment, lower selling, general, and administrative (SG+A) expenses, and lower interest expense as a result of debt reduction. These benefits were partially offset by volume declines, the previously reported recall in the Refrigerated + Frozen segment, and the impact of foreign exchange.

New Reporting Segments

To align with the recent changes to the organization, the Company now reports results in five reporting segments:

Grocery + Snacks – Branded, shelf-stable food items sold in retail channels in the United States
Refrigerated + Frozen – Branded, refrigerated and frozen food items sold in retail channels in the United States
International – Branded food items sold in retail channels outside the United States
Foodservice – Food items sold to restaurants, foodservice operators, and commercial customers primarily in the United States
Commercial – Lamb Weston, Spicetec Flavors + Seasonings, and JM Swank businesses

The former Consumer segment consisted primarily of the new Grocery + Snacks, Refrigerated + Frozen, and International segments. The former Commercial segment consisted primarily of the new Foodservice and Commercial segments. The new Commercial segment consists primarily of the Lamb Weston business, which will be spun off later this year. Following the completion of the spin-off, Conagra Brands expects to report the results for the Lamb Weston business as discontinued operations for all periods prior to the spin-off. The Grocery + Snacks, Refrigerated + Frozen, International, and Foodservice segments consist primarily of the businesses that will remain with Conagra Brands following completion of the spin-off.

Unconsolidated joint ventures will continue to be reported as equity method investment earnings in the consolidated Statement of Operations.

Grocery + Snacks Segment

Net sales for the segment decreased 5 percent. More disciplined pricing and trade promotion practices resulted in price/mix increasing 1 percent while volume declined 6 percent.

Operating profit for the Grocery + Snacks segment reflected strong margin expansion in the quarter. Supply chain productivity, favorable input costs, disciplined pricing and trade promotion practices, and continued SG+A discipline more than offset decreased sales and drove a 29 percent increase in operating profit and a 31 percent increase in adjusted operating profit.

Refrigerated + Frozen Segment

Net sales for the segment decreased 8 percent reflecting the Company’s decisive actions to build a higher quality revenue base. Price/mix increased 3 percent, while volume declined 11 percent, behind the impact from increased pricing in Banquet frozen entrees and reduction of deep trade and promotion discounts.

Operating profit and adjusted operating profit for the Refrigerated + Frozen Segment grew 14 percent. Disciplined pricing actions, favorable input costs, and supply chain productivity more than offset decreased sales and the impact of the frozen food product recall.

International Segment

Net sales for the segment decreased 6 percent to 195 million USD. The Company estimates that the impact of foreign exchange decreased the segment’s net sales by approximately 5 percent, while higher price/mix partially offset a 2 percent volume decrease in the segment.

The International segment reported an operating loss of 149 million USD compared with operating profit of 17 million USD in the year-ago period, reflecting goodwill and intangible impairment charges of approximately 164 million USD pre-tax. As result of the segment reorganization in the quarter, the Company now evaluates goodwill impairment at a lower business level than in the past. As part of this evaluation, significant foreign exchange movements and weaker sales trends have negatively impacted the value of certain businesses on a U.S. Dollar basis. Adjusted segment operating profit decreased 12 percent to 15 million USD.

Foodservice Segment

Net sales for the segment decreased 1 percent to 268 million USD. Operating profit decreased 17 percent from 26 million USD in the year-ago period to 22 million USD, and adjusted operating profit decreased 10 percent to 24 million USD.

The segment was negatively affected by the normalization of egg margins after last year’s avian influenza outbreak.

Commercial Segment

Lamb Weston’s 4 percent growth was more than offset by the impact of the divested businesses, which drove a 2 percent net sales decrease for the segment.

Operating profit grew 210 percent to 346 million USD, which includes 198 million USD of gains from the sales of the Spicetec Flavors + Seasonings and JM Swank businesses, compared with operating profit of 112 million USD in the year-ago period. Adjusted operating profit grew 33 percent to 148 million USD as Lamb Weston’s sales growth and favorable input costs more than offset the impact of the divested businesses.

As previously announced, the Company completed the divestitures of its Spicetec Flavors + Seasonings business and its JM Swank business during the quarter. The Commercial segment includes the results of these businesses through the completion of the sales of the businesses on July 25, 2016.

Corporate Expenses

GAAP corporate expenses were 49 million USD in the quarter compared with 79 million USD in the year-ago period. Adjusted corporate expenses were 38 million USD in the quarter compared with 66 million USD in the year-ago period, reflecting planned benefits from our cost savings efforts, along with some benefits related to timing of certain costs.

Hedge gains and losses are generally aggregated, and net amounts are reclassified from unallocated corporate expense to the operating segments when the underlying commodity or foreign currency being hedged is expensed in segment cost of goods sold. The net of these activities resulted in 1 million USD of net benefit in the current quarter and 2 million USD of net loss in the year-ago period. The company identifies these amounts as items that impact comparability within the discussion of unallocated Corporate results.

Other Items

Equity method investment earnings were 24 million USD for the current quarter and 37 million USD in the year-ago period. The decrease is primarily attributable to a decrease in Ardent Mills profitability.

Net interest expense was 59 million USD in the current quarter and 80 million USD in the year-ago period, driven by significant debt reduction over the past several quarters.

Capital Allocation

The Company repaid approximately 550 million USD of debt in the quarter.

Dividends paid during the quarter totalled 110 million USD compared with 107 million USD in the year-ago period. In addition, the Company repurchased approximately 1.8 million shares for 86 million USD during the quarter.

Capital expenditures for property, plant and equipment were 117 million USD in the quarter, and depreciation and amortization was 93 million USD.

Outlook

The Company expects this to be the last earnings release as ConAgra Foods.

The Company remains on-track to execute the spin-off of the Lamb Weston business this fall. The spin-off will result in two independent, publicly-traded, pure play companies, Conagra Brands and Lamb Weston.

Conagra Brands and Lamb Weston have announced their intention to host investor events on October 18, 2016 and October 13, 2016, respectively. Each company expects to share more details, including fiscal year 2017 and longer-term outlooks, growth initiatives, efficiency programs, and capital allocation priorities, at these events.

Major Items Impacting First-Quarter Fiscal 2017 EPS Comparability

Included in the 0.42 USD diluted EPS from continuing operations for the first quarter of fiscal 2017 (EPS amounts rounded and after tax):

Approximately 0.34 USD per diluted share of net expense, or 164 million USD pre-tax (150 million USD after tax), related to an impairment charge in the Canadian business. (all SG+A)
Approximately 0.02 USD per diluted share of net expense, or 14 million USD pre-tax (9 million USD after tax), related to restructuring plans. (5 million USD in cost of goods sold and 9 million USD in SG+A)
Approximately 0.02 USD per diluted share of net expense, or 10 million USD pre-tax (10 million USD after tax), related to the planned spin-off of Lamb Weston. (all SG+A)
Approximately 0.17 USD per diluted share of net gain, or 198 million USD pre-tax (75 million USD after tax), related to the gain on the sales of the Spicetec Flavors + Seasonings and JM Swank businesses. (all SG+A)
Approximately 0.02 USD per diluted share of net gain from favorable adjustments to state tax assets related to net operating and capital losses.

Included in the 0.38 USD diluted EPS from continuing operations for the first quarter of fiscal 2016 (EPS amounts rounded and after tax):

Approximately 0.02 USD per diluted share of net expense, or 17 million USD pre tax (11 million USD after tax), related to restructuring charges. (4 million USD in cost of goods sold, and 13 million USD in SG+A)
Approximately 0.01 USD from the impact of rounding