Conagra Brands' Transformation Continues With Solid End To Strong Fiscal 2017

Conagra Brands' Transformation Continues With Solid End To Strong Fiscal 2017

Conagra Brands' Transformation Continues With Solid End To Strong Fiscal 2017

The FINANCIAL -- On June 29 Conagra Brands, Inc. reported results for the fourth quarter and full fiscal year 2017, which ended on May 28, 2017.   

Highlights

(all comparisons are against the prior year fiscal period, unless otherwise noted)

For the full fiscal year, diluted earnings per share (EPS) from continuing operations grew from $0.29 to $1.25, with the fourth quarter improving from $(0.27) to $0.36; adjusted1 diluted EPS from continuing operations grew 33.8% from $1.30 to $1.74 in fiscal 2017, with strong growth in the fourth quarter of 15.6% to $0.37.

For the full fiscal year, net sales decreased 9.7%; fourth quarter net sales decreased 9.3%.  Net sales excluding the impacts of divestitures and foreign exchange decreased 5.0% for the full fiscal year. The fourth quarter showed continued sequential improvement with a decrease of 3.6%.

For the full fiscal year, gross margin2 expanded 190 basis points, and adjusted gross margin expanded 180 basis points.

In the fourth quarter, the Company reached its fiscal 2017 target of repurchasing $1 billion of common stock. The Board has authorized an additional $1 billion of share repurchases.

In the fourth quarter, the Company continued to reshape its portfolio through disciplined M&A, completing the acquisition of Duke's meat snacks and BIGS seeds brands and announcing a definitive agreement to divest the Wesson oil brand.

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, "Fiscal 2017 marked our second year of tremendous progress in reshaping our company for success. The aggressive actions we have taken to upgrade the quality of our revenue base, while focusing and modernizing our portfolio, have enabled us to improve our margins and jump-start innovation. Guided by our portfolio management principles outlined at our investor day, we are producing solid results. We are confident in our ability to continue to build on this momentum and drive long-term shareholder value."

Adjusted financial measures, including net sales excluding the impacts of divestitures and foreign exchange, and are non-GAAP financial measures. Please see the end of this release for reconciliations to the most directly comparable GAAP financial measures.

Gross margin is defined as net sales less cost of goods sold.

Total Company Fiscal 2017 Results

For the full fiscal year, net sales decreased 9.7%. Net sales excluding the impacts of divestitures and foreign exchange decreased 5.0%, primarily as a result of volume declines associated with the Company's actions to build a higher quality revenue base. 

For the full fiscal year, gross margin increased 190 basis points from 28.0% to 29.9%. Adjusted gross margin increased 180 basis points to 30.2%. The Company estimates that its fiscal 2017 adjusted gross margin was reduced by approximately 20 basis points by the Spicetec Flavors & Seasonings and JM Swank businesses, which were divested in the first quarter of fiscal 2017. Gross margin improvement was driven primarily by supply chain realized productivity, the impact of divesting lower margin businesses, and improved price/mix. These benefits more than offset input cost inflation and negative effects of foreign exchange. 

For the full fiscal year, diluted EPS from continuing operations increased from $0.29 to $1.25, and adjusted diluted EPS from continuing operations increased 33.8% from $1.30 to $1.74. The growth in adjusted diluted EPS from continuing operations primarily reflects lower selling, general, and administrative (SG&A) expenses and lower interest expense as a result of debt reduction. These benefits were partially offset by planned volume declines, and the impact of the divestitures of the Spicetec Flavors & Seasonings and JM Swank businesses in the first quarter of fiscal year 2017, according to Conagra Brands.

Total Company Fourth Quarter Results

In the fourth quarter, net sales decreased 9.3%. Net sales excluding the impacts of divestitures and foreign exchange decreased 3.6%, primarily as a result of volume declines associated with the Company's actions to build a higher quality revenue base. The Company estimates that the acquisition of the Duke's meat snacks and BIGS seeds brands added approximately 40 basis points to the quarter's net sales growth rate.

In the fourth quarter, gross margin increased 10 basis points to 28.4%. Adjusted gross margin increased 130 basis points to 29.0%. The increases were driven primarily by supply chain realized productivity, improved pricing, and the impact of divesting lower margin businesses. These benefits more than offset unfavorable brand margin mix in the Grocery & Snacks and Refrigerated & Frozen segments as well as the impact of input cost inflation. 

In the fourth quarter, diluted EPS from continuing operations increased from a loss of $0.27 to earnings of $0.36, and adjusted diluted EPS from continuing operations increased 15.6% from $0.32 to $0.37. The growth primarily reflects lower SG&A expenses and lower interest expense. These benefits were partially offset by volume declines and the impact of the divestitures of the Spicetec Flavors & Seasonings and JM Swank businesses in the first quarter of fiscal 2017.

Grocery & Snacks Segment Fourth Quarter Results

In the fourth quarter, net sales for the Grocery & Snacks segment decreased 3% to $749 million. Volume declined 2% from a reduction in promotional intensity and the planned discontinuation of certain lower-performing products. Price/mix decreased 1% as the continued progress in pricing and trade productivity was more than offset by unfavorable mix. The Company estimates that the acquisition of the Duke's meat snacks and BIGS seeds brands added approximately 100 basis points to the segment's fourth quarter net sales growth rate.

Operating profit for the segment decreased 56%. The decrease was largely driven by intangible impairment charges of $67 million pre-tax related to the Chef Boyardee brand and impairment charges and other costs of $31 million pre-tax related to a Wesson oil production facility that is not expected to be included in the Wesson divestiture. Adjusted operating profit decreased 5%, driven primarily by increased advertising and promotion (A&P) investments. Favorable SG&A and net pricing offset the negative impact of volume declines and unfavorable brand margin mix. The unfavorable brand margin mix was primarily driven by recent growth-oriented acquisitions, where margins are expected to rise over time.

Refrigerated & Frozen Segment Fourth Quarter Results

In the fourth quarter, net sales for the Refrigerated & Frozen segment decreased 5% to $640 million. Volume declined 5%, reflecting the Company's continued actions to upgrade the quality of its 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. 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 in the prior-year period.

Operating profit for the segment increased 8% in the quarter, and adjusted operating profit increased 2%. The benefits of SG&A cost savings and supply chain productivity more than offset lower net sales and unfavorable brand margin mix, primarily related to the Egg Beaters brand. The Company estimates that the avian flu-related benefits in the prior-year period reduced the segment's operating profit growth, on a reported and adjusted basis, by approximately 3 percentage points.

International Segment Fourth Quarter Results

In the fourth quarter, net sales for the International segment decreased 1% to $205 million. A 3% increase in price/mix was more than offset by a 3% unfavorable impact of foreign exchange and 1% decrease in volume.

The segment reported an operating loss of $11 million from an operating profit of $14 million in the year-ago period, reflecting pre-tax goodwill and intangible impairment charges of $28 million related to the Canadian and Mexican businesses. Adjusted operating profit increased 33% behind higher price/mix and lower SG&A expenses.

Foodservice Segment Fourth Quarter Results

In the fourth quarter, net sales for the Foodservice segment decreased 5% to $267 million. Volume decreased 17% and price/mix increased 12%, primarily reflecting the impact of exiting a non-core business in the prior-year period.

Operating profit for the segment increased 2%, reflecting general stability in the business and SG&A cost savings. 

Corporate Expenses Fourth Quarter Results

In the fourth quarter, corporate expenses decreased from $412 million to $59 million, primarily driven by a $349 million expense related to the year-end re-measurement of pension amounts in the year-ago period. Adjusted corporate expenses decreased 10% to $54 million, primarily reflecting planned benefits from the Company's cost savings efforts.

Other Items

A&P expense increased 12% to $76 million in the quarter as the Company invested to drive brand saliency in connection with innovation launches.

In the fourth quarter, equity method investment earnings increased 24% to $19 million as a result of improved performance by the Ardent Mills joint venture.

Net interest expense decreased 38% to $38 million, driven by significant debt reduction over the past several quarters.

Capital Allocation

In the fourth quarter, the Company paid a quarterly dividend of $0.20 per share.

In the fourth quarter, the Company made a $150 million pension contribution to increase the funded status of its pension plans.

The Company repurchased approximately 10 million shares of its common stock for $405 million during the fourth quarter. During the full fiscal year, the Company repurchased approximately 25 million shares for approximately $1 billion.

The Company also announced today that its Board of Directors has approved an additional $1 billion share repurchase authorization. The Company's total share repurchase authorization as of today is approximately $1.38 billion. The authorization has no expiration date. Shares are expected to be repurchased periodically, depending on market conditions and other factors, through open-market or privately negotiated transactions. This authorization is part of a broader capital allocation strategy that balances debt reduction, a top-tier dividend, share repurchases, and strategic growth investments.

Long-Term Algorithm and Fiscal 2018 Outlook

The Company is reiterating its three-year fiscal 2020 financial algorithm, which uses fiscal 2017 as the base year, as summarized below:

Organic net sales compound annual growth rate (CAGR) in the range of 1% to 2%. Organic net sales growth is defined as net sales growth excluding the impacts of foreign exchange as well as acquisitions and divestitures until the anniversary date of the transactions.

Adjusted gross margin of approximately 32% for the full fiscal year 2020

Adjusted operating margin of approximately 16.5% for the full fiscal year 2020

Adjusted EPS CAGR of approximately 10%

Annual dividend payout ratio of between 45% and 50%

The Company is providing fiscal 2018 guidance as summarized below:

Reported net sales growth in the range of (2)% to flat

Organic net sales growth in the range of (2)% to flat

Adjusted operating margin in the range of 15.9% to 16.3%

Effective tax rate in the range of 32.5% to 33.5%

Adjusted diluted EPS from continuing operations in the range of $1.84 to $1.89

The Company expects to repurchase approximately $1.1 billion of shares of its common stock in the fiscal year, subject to market and other conditions

The fiscal 2018 Outlook includes the expected results of the Wesson oil brand for the full fiscal year.

The inability to predict the amount and timing of the impacts of foreign exchange, acquisitions, and 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 Fourth Quarter Fiscal 2017 Comparability

Included in the $0.36 diluted EPS from continuing operations for the fourth quarter of fiscal 2017 (EPS amounts rounded and after tax)

Approximately $0.02 per diluted share of net expense, or $16.0 million pre-tax ($10.5 million after tax), related to restructuring plans ($5.5 million in cost of goods sold and $10.5 million in SG&A)

Approximately $0.05 per diluted share of net expense, or $31.4 million pre-tax ($19.6 million after tax), related to the planned divestiture of the Wesson oil brand, most of which is related to impairment charges on the Wesson oil production facility ($0.5 million in cost of goods sold and $30.9 million in SG&A)

Approximately $0.16 per diluted share of net expense, or $95.5 million pre-tax ($66.7 million after tax), related to goodwill and intangible impairment charges (all SG&A)

Approximately $0.01 per diluted share of net benefit, or $5.7 million pre-tax ($3.7 million after tax), related to a historical lawsuit (all SG&A)

Approximately $0.01 per diluted share of net expense, or $5.5 million pre-tax ($3.4 million after tax), related to hedging derivative losses (all SG&A)

Approximately $0.21 per diluted share of net tax benefit, or $91.3 million, related to a tax adjustment of valuation allowance associated with the planned divestiture of the Wesson oil brand (all Tax)

Included in the $(0.27) diluted EPS from continuing operations for the fourth quarter of fiscal 2016 (EPS amounts rounded and after tax)

Approximately $0.04 per diluted share of net expense, or $22.3 million pre-tax ($15.8 million after tax), related to restructuring plans ($3.6 million in cost of goods sold, $18.7 million in SG&A)

Approximately $0.07 per diluted share of net expense, or $50.1 million pre-tax ($31.6 million after tax), related to goodwill and intangible impairment charges (all SG&A)

Approximately $0.49 per diluted share of net expense, or $348.5 million pre-tax ($215.1 after tax), related to the year-end re-measurement of pension amounts (all SG&A)

Approximately $0.01 per diluted share of net expense, or $5.0 million pre-tax ($3.1 million after tax), associated with a historical lawsuit (all SG&A)

Approximately $0.02 per diluted share of net benefit, or $14.4 million pre-tax ($8.9 million after tax), related to hedging derivative (all SG&A)

Approximately $0.01 per diluted share of net tax expense, or $2.7 million, related to adjustments in prior-year tax credits (all Tax)