ConAgra Foods: Reports Strong Fourth-Quarter EPS Growth

Omaha / NE. (caf) ConAgra Foods Inc., one of North America´s leading food companies, reported results for the fiscal 2013 fourth quarter ended May 26, 2013. Diluted EPS from continuing operations was 0,45 USD for the fiscal fourth quarter, up significantly from (0,21 USD) in the year-ago period. Excluding 0,15 USD per diluted share of net expense in the current quarter and 0,72 USD of net expense in the year-ago period, from items impacting comparability, current-quarter diluted EPS from continuing operations of 0,60 USD was 18 percent above the comparable 0,51 USD earned in the year-ago period.

Diluted EPS from continuing operations for the full fiscal 2013 was 1,85 USD as reported, up 65 percent over the 1,12 USD earned in fiscal 2012; after adjusting for items impacting comparability in the current and prior year, fiscal 2013 diluted EPS from continuing operations was 2,16 USD, up 17 percent over 1,84 USD earned last fiscal year.

Gary Rodkin, ConAgra Foods´ chief executive officer: «We are pleased to have driven a 17 percent increase in comparable EPS for fiscal 2013 and to have posted comparable year-over-year Consumer Foods volume growth in the fiscal fourth quarter as planned. Today we provided our current view of our strong near-term and long-term EPS growth potential, taking into account an increase in expected synergies from the recent Ralcorp transaction, as well as the benefit of our ongoing innovation, marketing and margin management initiatives. We are confident in our strategy and our ability to execute it. After the strong fiscal 2013 performance from the Commercial Foods segment, we will be dealing with some profit headwinds related to that segment in fiscal 2014 and we expect to manage through these and still post very good EPS growth for the fiscal year. As we look to the longer term, given the opportunities ahead of us, we expect to grow comparable EPS by at least ten percent per year from fiscal 2015 to 2017; this is expected to result in five consecutive years of double-digit EPS growth and EPS in excess of 3,00 USD per share in fiscal 2017».

Consumer Foods Segment

Branded and non-branded food sold in retail and foodservice channels

Sales for the Commercial Foods segment were 1,3 billion USD, four percent above year-ago period amounts. Segment operating profit was 156 million USD, 13 percent above year-ago period amounts.

All major product lines posted sales growth. The segment´s strong profit growth in the quarter was largely the result of good performance for the flour milling operations, which increased volumes, drove favourable price/mix and posted strong results for grain and by product merchandising. While the Lamb Weston potato operations posted good sales and profit performance domestically, softness in key Asian markets continued to weigh on international results, driving a modest operating profit decline for Lamb Weston overall.

For this segment in fiscal 2014, the company is currently preparing for the formation of Ardent Mills, into which the company expects to contribute its milling operations. The details of that transaction were announced in March. While the company expects approximately 0,03 USD of EPS dilution shortly after the formation of the venture, over the long term, the venture´s profit growth is expected to be accretive to ConAgra Foods´ EPS. Pertaining to the Lamb Weston potato operations, a major foodservice customer did not renew a sizeable amount of potato business and this will negatively impact segment profits in fiscal 2014. The company expects to gradually reallocate that production and service capacity to other customers. The company currently estimates that fiscal 2014 diluted EPS will be negatively impacted by approximately 0,06 USD to 0,07 USD due to this transition at Lamb Weston.

Commercial Foods Segment

Specialty potato, seasonings, blends, flavours and milled grain products sold to foodservice and commercial channels worldwide.

Sales for the Commercial Foods segment were 1,3 billion USD, four percent above year-ago period amounts. Segment operating profit was 156 USD million, 13 percent above year-ago period amounts.

All major product lines posted sales growth. The segment´s strong profit growth in the quarter was largely the result of good performance for the flour milling operations, which increased volumes, drove favourable price/mix and posted strong results for grain and byproduct merchandising. While the Lamb Weston potato operations posted good sales and profit performance domestically, softness in key Asian markets continued to weigh on international results, driving a modest operating profit decline for Lamb Weston overall.

For this segment in fiscal 2014, the company is currently preparing for the formation of Ardent Mills, into which the company expects to contribute its milling operations. The details of that transaction were announced on March 5, 2013. While the company expects approximately 0,03 USD of EPS dilution shortly after the formation of the venture, over the long term, the venture´s profit growth is expected to be accretive to ConAgra Foods´ EPS. Pertaining to the Lamb Weston potato operations, a major foodservice customer did not renew a sizeable amount of potato business and this will negatively impact segment profits in fiscal 2014. The company expects to gradually reallocate that production and service capacity to other customers. The company currently estimates that fiscal 2014 diluted EPS will be negatively impacted by approximately 0,06 USD to 0,07 USD due to this transition at Lamb Weston.

Ralcorp

Ralcorp businesses contributed a total of 962 million USD in sales and 108 million USD of operating profit in the fiscal fourth quarter as reported. After adjusting for two million USD of net expense from items impacting comparability, operating profit was 110 million USD for the quarter, resulting in contribution for the full fiscal year which was in line with previously communicated goals. The company currently reports Ralcorp results within two new segments: Ralcorp Food Group and Ralcorp Frozen Bakery Products, listed as such in the segment detail later in this document.

Hedging Activities

This language primarily relates to operations other than the company´s milling operations. Hedge gains and losses are 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 37 million USD of unfavourable impact in the current quarter and 53 million USD of unfavourable impact in the year-ago period. The company identifies these amounts as items impacting comparability.

Near-term and Long-term Financial Expectations

  • The company currently expects fiscal 2014 diluted EPS, adjusted for items impacting comparability, to be approximately 2,40 USD, reflecting:
    • Approximately 0,25 USD of total diluted EPS benefit from the Ralcorp acquisition, unchanged from prior estimates.
    • Low-single-digit organic volume growth and mid-single-digit operating profit growth for the Consumer Foods segment.
    • A negative year-over-year impact of approximately 0,06 USD to 0,07 USD per diluted share related to lost foodservice business and transitioning capacity to serve other customers within the Lamb Weston potato operations (Commercial Foods segment).
    • Dilution of approximately 0,03 USD per diluted share resulting from contributing ConAgra Foods´ milling operations (Commercial Foods segment) into the soon-to-be created company Ardent Mills.
    • The company expects its fiscal 2014 fiscal first-quarter diluted EPS to be in line with comparable year-ago amounts due to significant slotting and marketing investments associated with summer 2013 new product introductions, as well as the timing of the impact of the customer transition issues at Lamb Weston. The other quarters of fiscal 2014 are expected to reflect good EPS growth.
  • The company currently expects cost-related synergies resulting from the Ralcorp acquisition to reach 300 million USD of annual pre-tax benefit by fiscal 2017, an increase from prior estimates of 225 million USD.
  • The company expects annual diluted EPS growth of at least ten percent, adjusted for items impacting comparability, for fiscal years 2015-2017 as significant cost synergies related to the Ralcorp acquisition materialize. Given the growth throughout this period, comparable EPS is expected to be greater than 3,00 USD in fiscal 2017.
  • After the 2015-2017 period, when the majority of cost-related synergies are realized, the company expects long-term annual diluted EPS growth of 7-9 percent, adjusted for items impacting comparability and long-term annual sales growth in the range of 3-4 percent. The long-term EPS and sales expectations reflect the benefit of ongoing innovation, marketing, margin enhancement initiatives and capital allocation as well as anticipated benefit from greater participation in the attractive private brand segment. These long-term goals apply for fiscal 2018 and beyond and are upward revisions from prior long-term targets of 6-8 percent for comparable annual EPS growth and three percent annual sales growth.
  • As part of the integration of Ralcorp, which will continue over the next 24-36 months, the company expects to incur restructuring charges. While the company is not yet in a position to quantify the financial details of the restructuring activities throughout that time period, the cash portion of these charges is not expected to be significant enough to impact the company´s plans for reinvesting in the business or repaying 1,5 billion USD of debt before the end of fiscal 2015. The restructuring costs will be treated as items impacting comparability for EPS purposes.

Major Items Impacting Fourth-quarter Fiscal 2013 EPS Comparability

Included in the 0,45 USD diluted EPS from continuing operations for the fourth quarter of fiscal 2013 (EPS amounts rounded and after tax):

  • Approximately 0,10 USD per diluted share of net expense or 67 million USD pre-tax, resulting from restructuring, integration and transaction costs (including acquisition-related restructuring). 61 million USD is within unallocated Corporate expense (11 million USD in cost of goods sold, «COGS», 50 million USD in Selling, General and Administrative expense, «SG+A»), four million USD is within Consumer Foods (all SG+A) and two million USD is within the Ralcorp results (essentially all within the Ralcorp Food Group, all SG+A).
  • Approximately 0,05 USD per diluted share of net expense or 37 million USD pre-tax, related to the mark-to-market impact of derivatives used to hedge input costs, temporarily classified in unallocated Corporate expense. Hedge gains and losses are 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.
  • Approximately 0,03 USD per diluted share of net benefit or 22 million USD pre-tax, related to historical legal matters, classified within unallocated Corporate expense.
  • Approximately 0,02 USD per diluted share of net expense or twelve million USD pre-tax, related to the year-end re-measurement of certain pensions, as well as the cost of early retirement of debt; this is classified within unallocated Corporate expense.
  • Approximately 0,01 USD per diluted share of acquisition-related tax expense.

Included in the (0,21 USD) diluted EPS from continuing operations for the fourth quarter of fiscal 2012 (EPS amounts rounded and after tax):

  • Approximately 0,60 USD per diluted share of net expense or 397 million USD pre-tax, resulting from the pension accounting changes discussed in the fiscal 2012 fourth-quarter earnings release and the associated Q+A. This entire amount is classified as unallocated Corporate expense.
  • Approximately 0,08 USD per diluted share of net expense or 53 million USD pre-tax, related to the mark-to-market impact of derivatives used to hedge input costs, temporarily classified in unallocated Corporate expense. Hedge gains and losses are 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.
  • Approximately 0,02 USD per diluted share of net expense or 13 million USD pre-tax, related to restructuring charges primarily in the Consumer Foods segment (six million USD COGS and six million USD SG+A).
  • Approximately 0,01 USD per diluted share of net expense or six million USD pre-tax, resulting from acquisition and related costs, which is classified primarily within the Consumer Foods segment (two million USD COGS, four million USD SG+A).
  • Unallocated corporate expense includes twelve million USD of benefit from historical insurance matters (seven million USD of benefit after tax or 0,02 USD per diluted share) and ten million USD of net expense related to historical legal matters, which is not tax-deductible (10 million USD of expense after tax or 0,02 USD per diluted share).
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