Omaha / NE. (caf) ConAgra Foods Inc., one of North America´s leading food companies, reported results for the fiscal 2016 first quarter ended August 30, 2015. Q1/2016 results highlights:
- Diluted EPS from continuing operations as reported was 0.38 USD, compared to 0.22 USD in the year-ago period. After adjusting for items impacting comparability, diluted comparable EPS of 0.45 USD this quarter exceeded 0.39 USD in the year-ago period.
- Consumer Foods posted strong operating profit growth and more than 250 basis points of comparable margin improvement through a combination of favorable price/mix and increased productivity.
- Commercial Foods posted good sales and operating profit performance, primarily due to strong volumes, favorable mix, and efficiencies for Lamb Weston.
- The divestiture process for the private label operations is proceeding as planned, and the company expects to have an announcement on the outcome of this process later this fall. The company recognized a large impairment charge for the private label operations, based on preliminary estimates, in connection with the reclassification of this business into assets held for sale.
Sean Connolly, chief executive officer of ConAgra Foods, said, «We are off to a strong start in fiscal 2016. While early days, we are making good progress against our plan to drive margin improvement within a more focused portfolio. In the near-term, we expect to grow profits modestly in fiscal 2016 across the Consumer Foods and Commercial Foods segments by building on the stronger foundations established last fiscal year, with an emphasis on improving price/mix and implementing relentless cost discipline».
«Our entire organization is focused on delivering long-term top- and bottom-line improvement. Rigorous portfolio segmentation work and improving innovation capabilities should benefit our top line over time, and we are in the midst of developing aggressive cost savings plans to drive improved SG+A, trade spend efficiency, and COGS. We are confident in our ability to unlock long-term value as we execute our plans to become a leaner, more focused company».
Overall Quarterly Results
For the fiscal 2016 first quarter ended August 30, 2015, diluted earnings per share from continuing operations were 0.38 USD as reported, versus 0.22 USD for the first quarter of fiscal 2015. After adjusting for items impacting comparability, comparable diluted EPS was 0.45 USD this quarter and 0.39 USD in the year-ago period.
The private label operations have been reclassified as discontinued operations given the company’s plans to exit this business, and there is no longer a Private Brands segment. In connection with the pending divestiture, the company has also moved small amounts across segments, and this has slightly altered historical presentation of results.
Consumer Foods Segment
Branded food items sold worldwide in retail channels.
The Consumer Foods segment posted sales of approximately 1.7 billion USD and operating profit of 242 million USD, as reported. Sales were flat as reported, with flat volume, a two percent benefit from price/mix, and two percent unfavorable impact of foreign exchange (all rounded).
In fiscal 2016, the Consumer Foods segment is focused on continuing to strengthen its core business by emphasizing its highest-potential brands, focusing on the most promising sales channels, expanding margins, and getting more brands ready for stronger marketing support in the future. The segment is showing early progress.
Segment operating profit was 242 million USD versus 193 million USD in the year-ago period, as reported. After adjusting for seven million USD of net expense in the current quarter and ten million USD of net expense in the year-ago period from items impacting comparability, current quarter operating profit of 248 million USD increased 22 percent over comparable year-ago amounts. Advertising investment increased five million USD, or seven percent. Comparable operating margin increased more than 250 basis points, reflecting the benefit of better price/mix as well as good productivity. The impact of foreign exchange negatively impacted profitability, while commodity inflation was not material this quarter.
Commercial Foods Segment
Specialty potato, seasonings, blends, flavors, and bakery products, as well as consumer branded and private label packaged food items, sold to restaurants, foodservice and commercial channels worldwide.
Sales for the Commercial Foods segment were 1.1 billion USD, ahead of 1.1 billion USD (rounded) a year ago, and operating profit was 139 million USD, ahead of 119 million USD a year ago, as reported. Sales for Lamb Weston’s potato operations grew globally, with domestic growth outpacing international growth. International sales are on track to return to normal levels in fiscal 2016 following the impact of the West Coast port labor dispute that was resolved last fiscal year. Sales for the rest of the segment were in line with year-ago amounts.
Segment operating profit grew 17 percent as reported and 13 percent after adjusting for items impacting comparability. All major business lines in the segment posted comparable profit growth. Lamb Weston made the most significant contribution to the segment’s profit increase, reflecting its strong sales performance, favorable mix, and operating efficiencies from good raw potato crop quality.
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 two million USD of net expense in the current quarter and 33 million USD of net expense in the year-ago period. The company identifies these amounts as items impacting comparability within the discussion of unallocated Corporate results.
- Unallocated Corporate amounts were 85 million USD of expense in the current quarter and 115 million USD of expense in the year-ago period. Current-quarter amounts include two million USD of hedge-related expense and eleven million USD of expense from other items impacting comparability. Year-ago period amounts include 33 million USD of hedge-related expense and 24 million USD of net expense related to other items impacting comparability. Excluding these amounts, unallocated Corporate expense was 72 million USD for the current quarter and 58 million USD in the year-ago period.
- Equity method investment earnings were 37 million USD for the current quarter and 26 million USD in the year-ago period; the year-over-year increase mostly reflects the inclusion of a full quarter’s profits for the Ardent Mills joint venture (only two months of activity were included in the year-ago amounts).
- Net interest expense was 80 million USD in the current quarter and 83 million USD in the year-ago period.
- The company is committed to an investment grade debt rating, and plans a balanced approach to capital allocation in fiscal 2016, including further debt reduction, repurchasing shares as market conditions warrant, and a top tier dividend. The company will assess opportunities to increase the dividend after it is further along with the strategic plan outlined at the end of fiscal 2015.
- Dividends for the quarter totalled 107 million USD versus 105 million USD in the year-ago period.
- The company did not repurchase any shares during the quarter.
- For the current quarter, capital expenditures for property, plant and equipment were 108 million USD, compared with 90 million USD in the year-ago period. Depreciation and amortization expense was approximately 92 million USD for the fiscal first quarter; this compares with a total of 96 million USD in the year-ago period.
Discontinued operations (currently the private label operations) posted a loss of (3.23 USD) per diluted share this quarter, reflecting a significant impairment charge related to the reclassification of assets as held for sale. After adjusting for this charge, the private label operations earned 0.04 USD per diluted share this quarter. Expected earnings from the private label operations were included in the company’s previously issued guidance.
Discontinued operations in the first quarter of fiscal 2015 contributed 0.90 USD per diluted share as reported and 0.08 USD per diluted share after adjusting for items impacting comparability. The largest item impacting comparability for that period was a gain related to Ardent Mills; the fair value of the company’s interest in Ardent Mills exceeded the carrying value of the former ConAgra Mills assets contributed in the formation of that entity.
The company notes that because the private label operations are now classified as assets held for sale, there will no longer be any depreciation or amortization expense for these assets. Due to timing, this change had a slight benefit in the current quarter and should have a larger benefit in subsequent quarters.
The company will offer more details on fiscal 2016 EPS guidance once it is further along with the process of divesting the private label operations, determining associated SG+A reduction targets, and finalizing investment levels for the remaining segments. The company expects the Consumer Foods and Commercial Foods segments to post modest comparable operating profit growth for the full fiscal year.
With regard to the second quarter of fiscal 2016, the company expects diluted EPS, adjusted for items impacting comparability, to be approximately in line with year-ago comparable amounts. Despite strong fundamentals and expectations for continued margin expansion, comparable operating profits for the Consumer Foods segment in the fiscal second quarter are expected to be negatively impacted by foreign exchange, as well as a planned increase in marketing investment. Profits for the Commercial Foods segment are expected to post an increase in profitability year-over-year in the fiscal second quarter. Expected contribution from the private label operations, which are now in discontinued operations, is included in this guidance. As previously mentioned, results from the private label operations will benefit from the absence of depreciation and amortization.
As announced on June 30, 2015, the company is focused on the divestiture of the private label operations, as well as on creating long-term value by:
- Aggressively reducing costs, with an increased focus on SG+A and the elimination of stranded costs once the sale of the private label operations is complete,
- Growing consumer brands (Consumer Foods segment) and Lamb Weston (within the Commercial Foods segment), as well as
- Balanced capital allocation.
These plans are still being developed, and the company will offer long-term financial expectations about these plans in due course.
Major Items Impacting Q1 Fiscal 2016 EPS Comparability
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, related to restructuring charges. ten million USD of this is classified within unallocated Corporate expense (all SG+A) and seven million USD is classified within the Consumer Foods segment (4 million USD COGS/3 million USD SG+A).
- Note: Comparable EPS contribution from the private label operations, now classified as discontinued operations, was approximately 0.04 USD per diluted share. Contribution from the private label operations was included in original guidance. The 0.04 USD per diluted share excludes an impairment charge of 3.27 USD per diluted share, or 1.95 billion USD pre-tax.
Included in the 0.22 USD diluted EPS from continuing operations for the first quarter of fiscal 2015 (EPS amounts rounded and after tax):
- Approximately 0.05 USD per diluted share of net expense, or 33 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 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.
- Approximately 0.04 USD per diluted share of net expense, or 25 million USD pre-tax, related to extinguishing debt. This is classified within unallocated Corporate expense.
- Approximately 0.02 USD per diluted share of net expense, or 16 million USD pre-tax, resulting from restructuring activities. ten million USD of this is classified within the Consumer Foods segment (8 million USD COGS/2 million USD SG+A), four million USD within the Commercial Foods segment (all SG+A) and two million USD within unallocated Corporate expense (essentially all SG+A).
- Approximately 0.01 USD per diluted share of net benefit, or two million USD pre-tax, related to historical legal matters, a portion of which is not taxable, within unallocated Corporate expense.
Note: Prior year comparable EPS included approximately 0.08 USD from operations subsequently reclassified to discontinued operations. The 0.08 USD per diluted share excludes items impacting comparability (Image: ConAgra).