The FINANCIAL -- On September 28 Conagra Brands, Inc. reported results for the first quarter fiscal year 2018, which ended on August 27, 2017.
Diluted earnings per share (EPS) from continuing operations grew 63.6% from $0.22 to $0.36; adjusted1 diluted EPS from continuing operations grew 17.9% from $0.39 to $0.46.
The Company delivered continued sequential improvement in its net sales growth rate. Net sales decreased 4.8% and organic net sales2 decreased 3.0%. The Company estimates that incremental slotting fees associated with innovation launches negatively impacted the net sales and organic net sales growth rates by approximately 50 basis points and 42 basis points, respectively.
Refrigerated & Frozen segment net sales grew 2% behind volume growth of 1%.
Gross margin expanded as higher price/mix and the impact of divesting lower margin businesses offset higher than expected inflation and incremental slotting fees.
Sean Connolly, president and chief executive officer of Conagra Brands, commented, "Fiscal 2018 is off to a strong start. We continued to see gross margin expansion, despite higher than expected inflation and our planned increase in slotting investments to fund innovation. Most notably, our sales trends improved further this quarter. Our sales trend improved as a result of accelerating velocities on our existing business as well as a strong start to our innovation. Overall, we remain encouraged that our value over volume strategy, as well as our rebuilt innovation capabilities, continued to deliver as expected. We are confident in our ability to build on this momentum and drive long-term shareholder value."
Total Company Results
Net sales decreased 4.8%, and organic net sales decreased 3.0%, reflecting continued sequential improvement. Investments in slotting fees increased year-over-year, to support innovation launches in the current year quarter. This higher level of investment negatively impacted the net sales and organic net sales growth rates by approximately 50 basis points and 42 basis points, respectively.
Gross margin3 increased 3 basis points to 28.8%. Adjusted gross margin increased 26 basis points to 29.2%. Improvements in price/mix and the impact of divesting lower margin businesses more than offset the impact of input cost inflation. The Company estimates that incremental slotting fees reduced adjusted gross margin expansion by approximately 35 basis points.
Diluted EPS from continuing operations grew 63.6% from $0.22 to $0.36; adjusted diluted EPS from continuing operations grew 17.9% from $0.39 to $0.46. The growth primarily reflects lower interest expense, lower selling, general, and administrative (SG&A) expenses, increased earnings in the Ardent Mills joint venture, and the benefit of fewer shares outstanding. These benefits were partially offset by volume declines, the impact of the divestitures of the Spicetec Flavors & Seasonings and JM Swank businesses in the first quarter of fiscal 2017, and a higher effective tax rate compared to the prior year period, according to Conagra Brands.
Grocery & Snacks Segment Results
Net sales for the Grocery & Snacks segment decreased 2% to $746 million. The acquisitions of the Duke's, BIGS, and Frontera businesses added over 3% to the growth rate. Organic net sales decreased 5%. As planned, volume declined 6% principally from continued actions to drive improvements in trade productivity, as well as the timing of merchandising and planned discontinuations of certain lower-performing products. Price/mix increased 1% as continued progress in pricing and trade productivity more than offset the impacts of increased slotting fees to support innovation in the PAM and P.F. Chang's Home Menu businesses.
Operating profit for the segment decreased 2%, and adjusted operating profit decreased 1%. The impacts of increased slotting investments, input costs, and acquisition-related SG&A expenses more than offset favorable net pricing and a shift in timing of advertising and promotion (A&P) investments.
Refrigerated & Frozen Segment Results
Net sales for the Refrigerated & Frozen segment increased 2% to $616 million. The acquisition of the Frontera business added 1% to the growth rate. Organic net sales increased 1%, aided by base business improvements and innovation launches under the Marie Callender's and Healthy Choice trademarks. The Reddi-wip business also experienced an improved base business in the quarter. Segment volume increased 1%, primarily driven by innovation launches. Price/mix was flat compared to the prior-year period as improvements in net pricing were offset by increased slotting investments associated with innovation launches.
Operating profit for the segment increased 11% in the quarter, and adjusted operating profit increased 5%. The increases were primarily driven by increased net sales, the timing of A&P investments, reductions in SG&A expenses, and non-recurring recall expenses in the prior-year period.
International Segment Results
Net sales for the International segment decreased 2% to $191 million, and organic net sales decreased 4% as the segment executes the value over volume strategy. Volume decreased 8% from a reduction in promotional intensity and the planned discontinuation of certain lower-performing products. Price/mix increased 4% from improvements in pricing and trade productivity. Foreign exchange favorably impacted net sales by 2%.
The segment reported an operating profit of $19 million as compared to an operating loss of $149 million in the prior-year period, as the prior-year period included pre-tax goodwill and intangible impairment charges of $164 million related to the Canadian business. Adjusted operating profit increased 29% behind higher price/mix and lower A&P expenses, which were partially offset by increased input costs.
Foodservice Segment Results
Net sales for the Foodservice segment decreased 6% to $252 million as the segment executes the value over volume strategy. Volume decreased 18% and price/mix increased 12%, primarily reflecting the impact of exiting non-core and low-performing businesses.
Operating profit for the segment increased 7%. Adjusted operating profit decreased 1% as the impact of lower net sales more than offset expanding margins and reduced SG&A expenses.
Corporate expenses increased 13% to $40 million. Adjusted corporate expenses decreased 15% to $29 million, primarily reflecting the benefits from the Company's cost savings efforts.
A&P expense decreased 15% to $55 million as the Company optimized the timing of A&P investments to support innovation through the year.
Equity method investment earnings increased $17 million to $30 million as the Ardent Mills joint venture benefitted from more favorable market conditions and continued improvement in operating efficiencies.
Net interest expense decreased 38% to $36 million, driven by significant debt reduction over the past several quarters.
In the first quarter, the Company paid a quarterly dividend of $0.20 per share. As previously announced, the Company's board of directors approved a dividend payment at the quarterly rate of $0.2125 per share to be paid on November 30, 2017 to stockholders of record as of the close of business on October 31, 2017.
In the first quarter, the Company repurchased approximately 9 million shares of its common stock for $300 million.
On September 21, 2017 (subsequent to quarter-end) the Company entered into a definitive agreement to acquire Angie's Artisan Treats, LLC, the maker of Angie's BOOMCHICKAPOP ready-to-eat popcorn, from TPG Growth for $250 million in cash, net of cash acquired and subject to a working capital adjustment. The transaction is expected to close by the end of the calendar year, subject to customary closing conditions, including the receipt of regulatory approvals.
The business is expected to generate approximately $100 million in annual net sales for the calendar year 2017.
As previously disclosed on May 30, 2017, the Company entered into a definitive agreement to sell the Wesson oil business to The J.M. Smucker Company. The transaction is subject to certain customary closing conditions, including the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).
On August 28, 2017, Smucker and the Company each received a request for additional information under the HSR Act (a second request) from the U.S. Federal Trade Commission (FTC) in connection with the FTC's review of the transaction. Issuance of the second request extends the waiting period under the HSR Act until 30 days after both the Company and Smucker have substantially complied with the request, unless the waiting period is terminated earlier by the FTC. The parties are cooperating fully with the FTC as it conducts its review of the transaction.
Fiscal 2018 Outlook
The Company is reaffirming its 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
Input cost inflation is now expected to be approximately 3.3% for the full fiscal year. The impact of inflation is expected to be weighted to the first half of the fiscal year.
The fiscal 2018 outlook includes the expected results of the Wesson oil business 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.
Items Affecting First Quarter Fiscal 2018 Comparability
Included in the $0.36 diluted EPS from continuing operations for the first quarter of fiscal 2018 (EPS amounts rounded and after tax)
Approximately $0.02 per diluted share of net expense, or $11.4 million pre-tax ($7.3 million after tax), related to restructuring plans ($2.3 million in cost of goods sold (COGS) and $9.1 million in SG&A)
Approximately $0.01 per diluted share of net expense, or $6.0 million pre-tax ($3.7 million after tax), related to hedging derivative losses (all COGS)
Approximately $0.07 per diluted share of net tax expense, or $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 (all Tax)
Included in the $0.22 diluted EPS from continuing operations for the first quarter of fiscal 2017 (EPS amounts rounded and after tax)
Approximately $0.02 per diluted share of net expense, or $14.1 million pre-tax ($9.1 million after tax), related to restructuring plans ($5.2 million in COGS and $8.9 million in SG&A)
Approximately $0.17 per diluted share of net gain, or $198.2 million pre-tax ($75.3 million after tax), related to the gain on the sales of the Spicetec Flavors & Seasonings and JM Swank businesses (all SG&A)
Approximately $0.34 per diluted share of net expense, or $163.6 million pre-tax ($149.5 million after tax), related to an impairment charge in the Canadian business (all SG&A)
Approximately $0.02 per diluted share, or $7.5 million, of net gain from favorable adjustments to state tax assets related to net operating and capital losses (all Tax)