Conagra Brands Reports Continued Margin Expansion And EPS Growth In Third Quarter

Conagra Brands Reports Continued Margin Expansion And EPS Growth In Third Quarter

Conagra Brands Reports Continued Margin Expansion And EPS Growth In Third Quarter

The FINANCIAL -- On March 23 Conagra Brands, Inc. reported results for the fiscal 2017 third quarter ended February 26, 2017.

Highlights

Diluted EPS from continuing operations grew from $0.16 to $0.41; adjusted diluted EPS from continuing operations grew 37.1% from $0.35 to $0.48, despite the inclusion in the prior-year period of the Spicetec Flavors and Seasonings and JM Swank businesses, which were divested in the first quarter of fiscal year 2017, according to Conagra Brands.

"Adjusted" financial measures exclude the comparability items summarized at the end of this release and are non-GAAP. Please see the end of this release for reconciliations to the most directly comparable GAAP financial measures.

Net sales decreased 9.9%. Net sales excluding the impacts of divestitures and foreign exchange decreased 4.8%, largely driven by the Company's continued progress in building a higher quality revenue base.

Gross margin (net sales less cost of goods sold as a percent of net sales) expanded 310 basis points, and adjusted gross margin expanded 180 basis points.

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, "I am pleased with our ongoing progress in reshaping our portfolio, capabilities, and culture. Our disciplined focus on controlling costs and upgrading the quality of our revenue base are delivering the desired impact. We are also excited about our innovation lineup, which we expect to begin hitting stores this summer."

He added, "Now that we have completed the third quarter, we are updating our full year guidance to reflect the beneficial timing of certain costs and the softer near-term macro environment. We expect to deliver adjusted diluted EPS at or slightly above the high-end of our range with net sales (excluding the impacts of divestitures and foreign exchange) at or slightly below the low-end of our range."

Total Company Results

Net sales decreased 9.9%. Net sales excluding the impacts of divestitures and foreign exchange decreased 4.8%, primarily as a result of volume declines associated with the Company's actions to build a higher quality revenue base.

Gross margin increased 310 basis points from 28.2% to 31.3%. Adjusted gross margin increased 180 basis points to 31.6%. The increases were driven primarily by input cost favorability, supply chain productivity, improved pricing, and the impact of divesting lower margin businesses. These benefits more than offset the volume declines, unfavorable mix, and the negative effects of foreign exchange.

Diluted EPS from continuing operations increased from $0.16 to $0.41, and adjusted diluted EPS from continuing operations increased 37.1% from $0.35 to $0.48. The growth primarily reflects lower selling, general, and administrative (SG&A) expenses associated with cost savings programs, lower interest expense as a result of debt reduction, and improved profitability in the Ardent Mills joint venture. These benefits were partially offset by volume declines and the impact of the divestitures of the Spicetec Flavors and Seasonings and JM Swank businesses in the first quarter of fiscal year 2017.

Grocery & Snacks Segment

Net sales for the Grocery & Snacks segment decreased 5% to $850 million. Volume declined 5% resulting from a reduction in promotional intensity and the planned exit of certain lower-performing products. Price/mix was flat to the prior-year period as the continued progress in pricing and trade productivity was fully offset by unfavorable mix.

Operating profit for the segment increased 32%, and adjusted operating profit increased 8%, reflecting continued margin expansion in the quarter. Continued discipline on pricing and trade promotion, favorable input costs, supply chain productivity, and the benefits of our cost savings efforts more than offset decreased net sales.

Refrigerated & Frozen Segment

Net sales for the Refrigerated & Frozen segment decreased 6% to $666 million. Volume declined 6%, reflecting the continued actions to upgrade the quality of the revenue base by optimizing pricing and improving trade promotion productivity as well as the planned discontinuation of certain lower- performing products. Price/mix was flat compared to the prior-year period as improvements in pricing and trade promotion practices across much of the portfolio were completely offset by reduced prices in select deflationary categories and unfavorable mix. Net sales growth was also negatively affected by a transitory increase in Egg Beaters' volume in the prior-year period associated with the avian flu outbreak. The Company's egg supply was unaffected by last year's avian flu outbreak, resulting in incremental sales for the brand.

Operating profit for the segment increased 10%, and adjusted operating profit increased 5%. The benefits of favorable input costs, supply chain productivity, and SG&A cost savings more than offset lower sales. The Company estimates that the avian flu-relatedbenefits in the prior-year period reduced the segment's operating profit growth, on a reported and adjusted basis, by approximately 5 percentage points.

 

International Segment

Net sales for the International segment decreased 3% to $205 million. A 3% increase in price/mix was more than offset by a 2% decrease in foreign exchange and 4% decrease in volume.

Operating profit for the segment increased 10%, and adjusted operating profit increased 7% behind higher price/mix and lower SG&A expenses.

Foodservice Segment

Net sales for the Foodservice segment decreased 3% to $260 million. Volume decreased 6% and price/mix increased 3%, primarily reflecting the impact of exiting a non-core business in the prior-year period.

Operating profit for the segment was flat to the prior-year period, reflecting general stability in the business.

Corporate Expenses

Corporate expenses decreased 31% from $152 million to $105 million, and adjusted corporate expenses decreased 23% to $53 million, reflecting planned benefits from the Company's cost savings efforts.

Other Items

Advertising and promotion expense decreased 3% to $91 million in the quarter, reflecting improved efficiency in spend and alignment of investments with the Company's portfolio segmentation.

Equity method investment earnings increased $13 million to $22 million as a result of improved performance in the Ardent Mills joint venture.

Net interest expense decreased 40% to $46 million, driven by significant debt reduction over the past several quarters.

Capital Allocation

In the third quarter, the Company paid a quarterly dividend of $0.25 per share to shareholders of record at the close of business on October 31, 2016. During the third quarter, the Board of Directors of Conagra Brands also approved its first dividend since the completion of the spin-off of the Lamb Weston business at the quarterly rate of $0.20 per share.

The Company repurchased approximately 11 million shares for $425 million during the quarter. In fiscal 2017 through the end of the third quarter, the Company had repurchased approximately 15 million shares for $595 million.

During the third quarter, the Company used approximately $504 million of cash to redeem senior debt.

Outlook

With three fiscal quarters complete, the Company is updating its fiscal year 2017 outlook. Adjusted diluted EPS is expected to be at or slightly above the high-end of the $1.65 to $1.70 range. Net sales (excluding the impacts of divestitures and foreign exchange) are expected to be at or slightly below the low-end of the range of down 4% to 5%. Adjusted gross margin is expected to be within range of 30.4% to 30.6%. Adjusted operating margin is expected to be slightly above the range of 15.3% to 15.5%.

The inability to predict the amount and timing of 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.

Major Items Affecting Third Quarter Fiscal 2017 EPS Comparability

Included in the $0.41 diluted EPS from continuing operations for the third quarter of fiscal 2017 (EPS amounts rounded and after tax)

Approximately $0.02 per diluted share of net expense, or $14 million pre-tax ($9 million after tax), related to restructuring plans ($5 million in cost of goods sold and $9 million in SG&A)

Approximately $0.02 per diluted share of net expense, or $14 million pre-tax ($9 million after tax), related to a pension settlement (all SG&A)

Approximately $0.05 per diluted share of net expense, or $33 million pre-tax ($21 million after tax), related to extinguishment of debt (all SG&A)

Approximately $0.02 per diluted share of net benefit related to the receipt of foreign tax incentives.

Included in the $0.16 diluted EPS from continuing operations for the third quarter of fiscal 2016 (EPS amounts rounded and after tax)

Approximately $0.16 per diluted share of net expense, or $109 million pre-tax ($70 million after tax), related to restructuring plans ($36 million in cost of goods sold, $73 million in SG&A)

Approximately $0.04 per diluted share of net expense, or $24 million pre-tax ($15 million after tax), related to extinguishment of debt (all SG&A)