ConAgra: Reports Strong Fiscal 2014 Second-Quarter EPS

Omaha / NE. (caf) ConAgra Foods Inc., one of North America´s leading food companies, reported results for the fiscal 2014 second quarter ended November 24, 2013. Diluted EPS from continuing operations was 0,54 USD as reported for the fiscal second quarter, up four percent from 0,52 USD in the year-ago period. Excluding 0,08 USD per diluted share of net expense in the current quarter, and 0,05 USD of net expense in the year-ago period, from items impacting comparability, current-quarter diluted EPS from continuing operations of 0,62 USD was nine percent above the comparable 0,57 USD earned in the year-ago period.

Gary Rodkin, ConAgra Foods´ chief executive officer, said, «We are pleased that our fiscal second-quarter EPS came in stronger than anticipated. Some of the EPS strength in the fiscal second quarter reflected some volume that we were expecting early in the fiscal third quarter, and we still expect good comparable EPS growth in the second half of fiscal 2014. Challenging industry conditions make us cautious about the near term, and our fiscal 2014 EPS guidance reflects this. Taking our strong second-quarter EPS performance and the industry environment into consideration, we are reaffirming our EPS goal in the range of 2,34 USD to 2,38 USD, adjusted for items impacting comparability».

Consumer Foods Segment

Branded food items sold worldwide in retail channels.

The Consumer Foods segment posted sales of approximately two billion USD and operating profit of 289 million USD, as reported. Sales were essentially flat, reflecting flat volumes and flat price/mix. The sequentially improved volume performance largely reflects changes in customer plans that resulted in replenished retail inventory levels prior to the holiday season. Ralcorp international sales are now part of this segment but not in year-ago amounts because of the date of the acquisition; contribution from this generated one percent favourable benefit to overall segment sales. The impact of foreign exchange negatively impacted segment sales by one percent.

Operating profit of 289 million USD was 13 percent above year-ago amounts as reported. After adjusting for four million USD of net expense in the current quarter and six million USD of net expense in the year-ago period from items impacting comparability, current quarter operating profit of 293 million USD increased eleven percent over comparable year-ago amounts. The comparable profit growth reflects manageable inflation, supply chain productivity initiatives, and a strong focus on selling, general, and administrative (SG+A) related efficiencies. Advertising and consumer promotion costs declined year-over-year, reflecting heavy investment a year ago, rebalancing spending to strengthen promotional support, and a focus on productivity.

Some of the sequential volume improvement in the fiscal second quarter reflects business that was expected to occur early in the fiscal third quarter, thus a shift in timing versus earlier plans. Given current business conditions, the company is cautious about near-term volume performance. The company currently expects overall comparable volumes for this segment for the full fiscal year to be down slightly compared with year-ago amounts. The company expects operating profit growth for this segment in the back half of the fiscal year, largely due to a combination of continued manageable inflation, supply chain productivity initiatives, SG+A efficiencies which include a reduction in marketing expense, and, to a lesser extent, the benefit of merchandising programs.

Commercial Foods Segment

Specialty potato, seasonings, blends, flavours, milled grain, as well as consumer branded and private branded packaged food items and bakery products, sold to foodservice and commercial channels worldwide.

Sales for the Commercial Foods segment were 1,6 billion USD, up three percent over year-ago amounts as reported. The sales growth reflects 79 million USD of benefit from acquisitions, specifically Ralcorp foodservice results that are now part of this segment (but not in year-ago amounts because of the date of the acquisition). Segment operating profit was 169 million USD, 13 percent below year-ago amounts as reported.

After adjusting for nine million USD of net expense in the current quarter for items impacting comparability, current quarter operating profit of 178 million USD declined nine percent on a comparable basis.

Lamb Weston potato products´ profits were below year-ago amounts, as expected, given that a major foodservice customer did not renew a sizeable amount of potato business toward the end of last fiscal year. Lamb Weston continues to expand business with other customers to recover the lost volume. During the quarter, the company fully transitioned to processing the current-year potato crop; the quality is below the level expected, and this will negatively affect manufacturing costs and margins for Lamb Weston over the next few quarters. Lamb Weston expects good but slower-than-planned growth internationally largely because some customers are facing short-term challenges in certain Asian markets.

Flour milling sales decreased, reflecting the pass-through of lower wheat costs, while milling profits were in line with year-ago amounts. Profits for the rest of the segment were in line with year-ago amounts, favourably influenced by five million USD of contribution from the former Ralcorp foodservice operations.

Private Brands

Private brand food items sold in domestic markets.

Sales for the Private Brands segment were 1,1 billion USD in the quarter, up more than 900 million USD over year-ago amounts. This growth reflects the acquisition of the Ralcorp businesses; most of the former Ralcorp businesses are classified within this segment (and not in year-ago amounts because of the date of the acquisition). Operating profit for this segment was 89 million USD as reported and 91 million USD adjusted for items impacting comparability; the increase over prior-year amounts reflects the acquisition. Under the recently implemented organizational structure, the company has combined all of the private brand activities across the company in the Private Brands segment; this positions it for strong customer service and effective leveraging of the company´s infrastructure to support long-term private brand growth opportunities. Early feedback from major customers about the company´s long-term plans and commitment to private brands categories, and the resulting growth potential, has been very good.

The private brands operations are now focused on six major product lines: bars, cereal, condiments, pasta, snacks, and retail bakery. Each product group has a designated general manager with full profit responsibility and cross-functional support designed to drive growth; the company also has focused private brand selling efforts, with a private brand sales leader for each retail customer team. While private brands results so far this fiscal year have not been as strong as planned, these organizational changes, as well as the accompanying focus on improving customer partnerships, ensuring appropriate pricing architecture, and winning new business, are expected to gradually improve results over time. Overall, the former Ralcorp businesses are expected to contribute about 0,25 USD per share of diluted EPS this fiscal year, adjusted for items impacting comparability. This is in line with original goals, with a significant portion of the profit contribution coming from this new Private Brands segment.

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 nine million USD of unfavourable impact in the current quarter and 16 million USD of unfavourable impact in the year-ago period. The company identifies these amounts as items impacting comparability.

Other Items

• Unallocated Corporate amounts were 106 million USD of expense in the current quarter and 91 million USD of expense in the year-ago period. Current-quarter amounts include nine million USD of unfavourable hedge-related impact and 29 million USD of net expense from other items impacting comparability. Year-ago period amounts include 16 million USD of unfavourable hedge-related impact and ten million USD of expense related to other items impacting comparability. Excluding these amounts, unallocated Corporate expense was 68 million USD for the current quarter and 65 million USD in the year-ago period.
• Equity method investment earnings were five million USD for the current quarter and 13 million USD in the year-ago period; the year-over-year decline reflects a three million USD pension adjustment (identified as an item impacting comparability), as well as difficult market conditions for a European potato joint venture.
• Net interest expense was 95 million USD in the current quarter and 53 million USD in the year-ago period; the increase reflects the incremental interest related to the debt incurred to fund acquisitions, principally Ralcorp.

Capital Items

• Dividends for the current quarter totalled 106 million USD versus 97 million USD in the year-ago period, reflecting an increase in shares outstanding.
• The company repurchased approximately two million shares of common stock during the quarter for approximately 69 million USD.
• For the current quarter, capital expenditures for property, plant and equipment were 151 million USD, compared with 81 million USD in the year-ago period; approximately 28 million USD of the increase relates to Ralcorp. The comparable increase reflects several significant planned plant expansions and improvements. Depreciation and amortization expense was approximately 146 million USD for the fiscal second quarter; this compares with a total of 94 million USD in the year-ago period. Approximately 48 million USD of the increase in depreciation and amortization relates to Ralcorp.
• The company is currently preparing for the formation of Ardent Mills, a joint venture into which the company expects to contribute its milling operations. The details of that transaction, which is now expected to close in the first quarter of calendar 2014, were announced on March 05, 2013. While the company expects approximately 0,03 USD of EPS dilution this fiscal year, as previously discussed, due to the formation of the venture, over the long term, the venture´s profit growth is expected to be accretive to ConAgra Foods´ EPS.

Outlook

The company continues to expect fiscal 2014 diluted EPS, adjusted for items impacting comparability, to be in the range of 2,34 USD to 2,38 USD. This takes into account the stronger-than-planned fiscal second quarter EPS contribution, as well as caution about the overall business environment, the impact of the quality issues in this year´s potato crop at Lamb Weston, and the gradual nature of the executional improvements underway in the Private Brands segment.

The company´s long-term EPS growth rates, and multi-year synergy goals related to the Ralcorp acquisition, are unchanged from prior estimates. The company expects at least ten percent annual comparable EPS growth in the fiscal 2015 to 2017 period, and expects the Ralcorp transaction to generate 300 million USD of annual pre-tax cost-related synergies by the end of fiscal 2017.