Conagra: Reports Solid Q1-2019 Results

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the first quarter of fiscal year 2019, which ended on August 26, 2018. All comparisons are against the prior year fiscal period, unless otherwise noted. Highlights:

  • In the quarter, net sales grew 1.7 percent, and organic net sales1 excluding the sale of the Trenton, Missouri production facility (Trenton) grew 1.2 percent, with growth in all four operating segments.
  • The Refrigerated + Frozen segment continued its momentum, with 3.2 percent net sales growth and organic net sales growth of 1.4 percent. The segment has delivered organic net sales growth for five consecutive quarters.
  • Grocery + Snacks reported another quarter of organic net sales growth, led by the snacks businesses.
  • Adjusted operating margin was above the guidance range.
  • Diluted earnings per share (EPS) from continuing operations increased 25.0 percent from USD 0.36 to USD 0.45 in the quarter, and adjusted diluted EPS from continuing operations grew 2.2 percent from USD 0.46 to USD 0.47, in-line with the Company’s previously-provided guidance range.
  • The Company reaffirms its full year fiscal 2019 standalone guidance for all previously-provided metrics.

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, «Fiscal 2019 is off to a good start despite a continued, challenging inflationary environment. Our first quarter results were largely in-line with expectations as we delivered net sales growth in all four operating segments behind a strong innovation slate. We also earned increased distribution, particularly in our frozen business. We continue to stay focused on supporting our brands with robust marketing programs, including increased retailer investments, to drive brand saliency, enhanced distribution, and consumer trial of our products.»

He continued, «Conagra is well positioned to build upon our tremendous platform and accelerate the next wave of change with the addition of Pinnacle Foods. We now expect the transaction to close by the end of October 2018. We look forward to executing our proven approach to innovation and brand-building to enhance their portfolio of leading brands and drive long-term shareholder value.»

Total Company First Quarter Results

In the quarter, net sales increased 1.7 percent. The recent acquisitions of Angie’s BoomChickaPop and Sandwich Bros. of Wisconsin added 200 basis points to the net sales growth rate. The sales of the Trenton, Missouri production facility and the Canadian Del Monte business reduced the net sales growth rate by 120 basis points. Organic net sales excluding Trenton increased 1.2 percent, with all four operating segments showing growth. Volume was approximately flat as growth in the Refrigerated + Frozen, Grocery + Snacks, and International segments was offset by the impact of continued value over volume actions in the Foodservice segment. Price/mix was favorable by 1.2 percent as improved pricing and mix offset increased retailer investments to drive brand saliency, enhanced distribution, and consumer trial.

In the quarter, gross profit and adjusted gross profit decreased 0.7 percent and 0.6 percent, respectively. Supply chain realized productivity, favorable price/mix and the profit contribution from recent acquisitions were more than offset by higher transportation and input costs as well as the previously-mentioned increases in retailer investments.

In the quarter, selling, general, and administrative (SG+A) expenses decreased 0.9 percent. As expected, adjusted SG+A expenses increased 9.7 percent behind higher stock-based compensation expense due to a higher stock price compared to the prior-year period, increased spending on certain planned projects, and planned decreases in transition service agreement income.

In the quarter, diluted EPS from continuing operations grew 25.0 percent, and adjusted diluted EPS from continuing operations grew 2.2 percent. The growth was primarily driven by a lower tax rate and a lower share count, which more than offset higher adjusted SG+A expenses, lower pension and postretirement non-service income, and lower equity method investment earnings.

Grocery + Snacks Segment First Quarter Results

Net sales for the Grocery + Snacks segment increased 3.4 percent to USD 771 million in the quarter, and organic net sales grew 0.1 percent as the acquisition of Angie’s BoomChickaPop added 330 basis points to the net sales growth rate. Volume grew 0.1 percent as strong growth in snacks businesses, such as Slim Jim, Duke’s, Orville Redenbacher’s, and Act II, as well as strong performance in Chef Boyardee, more than offset declines in certain non-core grocery brands.  Price/mix was flat to the prior-year period as favorable pricing and mix were offset by the continued shift from advertising and promotion (A+P) investments to retailer investments to drive brand saliency, enhanced distribution, and consumer trial.

Operating profit for the segment increased 1.5 percent to USD 179 million. Adjusted operating profit decreased 2.1 percent as higher transportation and input costs and higher SG+A expenses more than offset higher net sales, the profit contribution of acquisitions, and supply chain realized productivity.

Refrigerated + Frozen Segment First Quarter Results

Net sales for the Refrigerated + Frozen segment increased 3.2 percent to USD 635 million in the quarter, and organic net sales grew 1.4 percent as the acquisition of Sandwich Bros. of Wisconsin added 180 basis points to the net sales growth rate.  Volume grew 0.5 percent as innovation launches, such as Banquet Mega Bowls and Mega Meals, Healthy Choice Power Bowls, Marie Callender’s bowls, P.F. Chang’s Home Menu bowls and skillets, Odom’s Tennessee Pride sandwiches and Reddi-wip Non-Dairy whipped topping, more than offset declines in certain refrigerated businesses. Price/mix increased 0.9 percent as improved pricing and mix were partially offset by increases in retailer investments to drive brand saliency, enhanced distribution, and consumer trial.

Operating profit decreased 6.4 percent in the quarter, and adjusted operating profit decreased 6.3 percent as higher net sales and supply chain realized productivity were more than offset by higher input costs and transportation expenses.

International Segment First Quarter Results

Net sales for the International segment increased 1.5 percent to USD 194 million in the quarter, and organic net sales increased 6.3 percent. Volume increased 4.4 percent driven by snacks businesses in Canada and Mexico, and price/mix improved 1.9 percent behind improved pricing. The impact of foreign exchange unfavourably impacted the net sales growth rate by approximately 320 basis points. The acquisition of Angie’s BoomChickaPop increased the net sales growth rate by approximately 90 basis points, and the divestiture of the Canadian Del Monte businesses reduced the net sales growth rate by approximately 250 basis points.

Operating profit increased 97.4 percent to USD 37 million in the quarter, largely driven by a gain on the sale of the Canadian Del Monte business. Adjusted operating profit increased 43.4 percent as higher net sales, strong realized productivity, and lower SG+A more than offset higher input costs and unfavorable foreign exchange.

Foodservice Segment First Quarter Results

Net sales for the Foodservice segment decreased 6.9 percent to USD 234 million in the quarter, and organic net sales excluding Trenton increased 0.1 percent. The impact of the Trenton sale was a reduction in the net sales growth rate by approximately 700 basis points. Volume decreased 5.0 percent behind the planned discontinuations of certain lower-performing businesses as part of the value over volume strategy. Price/mix increased 5.1 percent behind improved mix and pricing to cover inflation.

Operating profit increased 18.7 percent in the quarter as the benefits of favorable price/mix and supply chain realized productivity more than offset higher input and transportation costs as well as the lost profit from Trenton.

Other First Quarter Items

Corporate expenses increased 32.9 percent to USD 81 million in the quarter, and adjusted corporate expenses increased 24.6 percent to USD 62 million behind higher stock-based compensation expense due to a higher stock price compared to the prior-year period, increased spending on certain planned projects, and planned decreases in transition service agreement income.

A+P expense decreased 22.1 percent, or USD 12 million, to USD 43 million in the quarter as the Company continued to shift investments from A+P investments to retailer investments in order to drive brand saliency, enhanced distribution, and consumer trial.

Pension and post-retirement non-service income decreased 50.5 percent, or USD 10 million, to USD 10 million in the quarter, reflecting the previously-disclosed asset mix shift in the Company’s pension plans.

Equity method investment earnings decreased 45.9 percent, or USD 14 million, to USD 16 million as improvements in operational efficiencies in the Ardent Mills joint venture were more than offset by less favorable market conditions compared to the year-ago period.

Net interest expense increased 34.5 percent, or USD 13 million, to USD 49 million in the quarter, primarily driven by more debt outstanding compared to the prior year period as well as the amortization of fees associated with the bridge credit facility that the Company entered into in connection with the pending acquisition of Pinnacle Foods. Adjusted interest expense increased 19.1 percent, or USD 7 million, to USD 43 million.

In the quarter, the effective tax rate was 24.4 percent, and the adjusted tax rate was 25.5 percent. The higher-than-expected tax rate was primarily driven by discrete items related to changes in state tax rate estimates.

In the quarter, the Company paid a quarterly dividend of USD 0.2125 per share. As previously communicated, in light of the Company’s pending acquisition of Pinnacle Foods, the Company intends to maintain its quarterly dividend at the current annual rate of USD 0.85 per share during fiscal 2019. In the future, the Company expects modest dividend increases while it focuses on deleveraging, subject to approval of its Board of Directors.

In the quarter, the Company did not repurchase shares of its common stock. As previously communicated, the Company plans to repurchase shares under its authorized program only at times and in amounts as are consistent with the prioritization of achieving its leverage targets.

Portfolio Update

During the quarter, on July 4, 2018, the Company completed the divestiture of its Canadian Del Monte processed fruit and vegetable business to Bonduelle Group.

As previously disclosed, a special meeting of Pinnacle Foods shareholders has been scheduled for October 23, 2018. At the special meeting, Pinnacle Foods’ shareholders will be asked to consider and vote on a proposal to approve Conagra Brands’ acquisition of Pinnacle Foods. The parties continue to expect the transaction to close by the end of October 2018, subject to the satisfaction of all conditions in the merger agreement, including the approval of Pinnacle Foods’ shareholders.

Standalone Outlook

All guidance metrics shown below include the expected results for the Wesson oil business for the full time-period indicated. The Company continues to assess alternatives for the Wesson oil business. All guidance metrics shown above do not include any impact from the pending acquisition of Pinnacle Foods. The Company is reaffirming its standalone fiscal year 2019 guidance as summarized below:

  • Reported net sales growth in the range of 0.5 percent to 1.5 percent
  • Organic net sales growth, excluding Trenton, in the range of 1.0 percent to 2.0 percent
  • Adjusted gross margin in the range of 29.7 percent to 30.0 percent
  • Input cost inflation in the range of 3.0 percent to 3.2 percent
  • Adjusted operating margin in the range of 15.0 percent to 15.3 percent
  • Effective tax rate in the range of 23 percent to 24 percent
  • Pension and postretirement non-service income of approximately USD 40 million

The Company is providing standalone fiscal second quarter 2019 guidance as summarized below:

  • Organic net sales growth, excluding Trenton, is expected to be flat to slightly down versus the prior-year period. The year-over-year growth rate will be negatively impacted by prior-year benefit from last year’s hurricanes, primarily in the Grocery + Snacks and Foodservice segments.
  • Reported net sales growth is expected to be approximately 40 basis points lower than the organic net sales growth rate, excluding Trenton.
  • Adjusted operating margin in the range of 14.4 percent to 14.7 percent
  • Adjusted diluted EPS in the range of USD 0.57 to USD 0.60

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 these forward-looking non-GAAP financial measures impracticable. Please see the end of this release for more information.

Items Affecting First Quarter Fiscal 2019 Comparability

Included in the USD 0.45 diluted EPS from continuing operations for the first quarter of fiscal 2019 (EPS amounts rounded and after tax)

  • Approximately USD 0.04 per diluted share of net expense, or USD 16.6 million pre-tax (USD 14.3 million after tax), related to costs associated with acquisitions and divestitures (USD 11.0 million SG+A, USD 5.6 million Interest)
  • Approximately USD 0.01 per diluted share of net expense, or USD 6.4 million pre-tax (USD 4.8 million after tax), related to corporate hedging of derivatives (COGS)
  • Approximately USD 0.01 per diluted share of net expense, or USD 4.3 million pre-tax (USD 3.2 million after tax), related to costs associated with preparing for the integration of Pinnacle Foods (SG+A)
  • Approximately USD 0.02 per diluted share of net gain, or USD 13.3 million pre-tax (USD 9.7 million after tax), related to the gain on sale of the Del Monte Canada business (SG+A)
  • Approximately USD 0.01 per diluted share of net gain, or USD 4.8 million, related to release of a Mexican tax reserve (Tax)
  • Approximately USD 0.01 per diluted share of beneficial impact due to rounding

Included in the USD 0.36 diluted EPS from continuing operations for the first quarter of fiscal 2018 (EPS amounts rounded and after tax)

  • Approximately USD 0.02 per diluted share of net expense, or USD 11.4 million pre-tax (USD 7.3 million after tax), related to restructuring plans (USD 2.3 million in COGS and USD 9.1 million in SG+A)
  • Approximately USD 0.01 per diluted share of net expense, or USD 6.0 million pre-tax (USD 3.7 million after tax), related to corporate hedging of derivatives (COGS)
  • Approximately USD 0.07 per diluted share of net tax expense, or USD 27.8 million, related to the planned repatriation of cash from foreign subsidiaries and the tax expense related to earnings of foreign subsidiaries previously deemed to be indefinitely reinvested (Tax)
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