The FINANCIAL — On December 22 Conagra Brands, Inc. reported results for the fiscal 2017 second quarter ended November 27, 2016.
(all comparisons are against the year ago period, unless otherwise noted)
Diluted EPS from continuing operations grew 44.4% from $0.18 to $0.26; adjusted diluted EPS from continuing operations grew 25.6% to $0.49, despite the inclusion of Spicetec Flavors and Seasoning and JM Swank in the prior year.
“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 measures.
Net sales decreased 11.5%, largely driven by the Company’s continued progress in building a higher quality revenue base. The Company estimates that the impacts of divestitures and foreign exchange lowered sales by 5.5%.
Gross margin (net sales less cost of goods sold as a percent of net sales) expanded 270 basis points, and adjusted gross margin expanded 250 basis points.
The Company completed the spin-off of Lamb Weston in the quarter. Lamb Weston has been re-classified as discontinued operations for all periods presented.
Sean Connolly, president and chief executive officer of Conagra Brands, commented, “We are successfully reshaping our portfolio, capabilities, and culture. Our increased focus and discipline on driving value over volume are enabling us to expand our margins as we build a higher-quality revenue base, improve efficiency, and deliver stronger, more consistent performance.”
He added, “We expect to improve sales growth trends in the second half of the fiscal year as we begin to lap the pricing and trade actions we undertook last year. Accordingly, we are reaffirming the fiscal 2017 guidance we provided at our investor day on Oct. 18, 2016.”
Total Company Results
Net sales decreased 11.5% as a result of volume declines associated with the Company’s actions to build a higher quality revenue base, divestitures, and foreign exchange. The Company estimates that the impacts of divestitures and foreign exchange lowered sales by 5.5%.
As a percentage of net sales, gross profit increased 270 basis points from 28.3% to 31.0%. Adjusted gross profit as a percentage of net sales increased 250 basis points to 31.1%. The increases were driven primarily by improved price/mix, supply chain productivity, input cost favorability, and an inventory write-down in the prior year associated with exiting a non-core business in the Foodservice segment. These benefits more than offset the decline in volume and negative effects of foreign exchange.
Diluted EPS from continuing operations increased 44.4% from $0.18 to $0.26, and adjusted diluted EPS from continuing operations increased 25.6% to $0.49. The growth reflects lower selling, general, and administrative (SG&A) expenses associated with cost savings programs and the timing of planned expenses, and lower interest expense as a result of debt reduction. These benefits were partially offset by volume declines and the inclusion of Spicetec and JM Swank in the prior year period, according to Conagra.
Grocery & Snacks Segment
Net sales for the segment decreased 6% to $854 million. More disciplined pricing and trade promotion practices resulted in price/mix increasing 1% while volume declined 7%.
Operating profit for the segment increased 19%, and adjusted operating profit increased 18%, reflecting strong margin expansion in the quarter. Continued discipline on pricing and trade promotion, supply chain productivity, favorable input costs, and the benefits of our cost savings efforts more than offset decreased sales.
Refrigerated & Frozen Segment
Net sales for the segment decreased almost 11% to $740 million. Price/mix increased 1% and volume declined over 11%, reflecting the continued actions to upgrade the volume base by optimizing pricing, improving trade promotion productivity, and SKU rationalization. Net sales were also negatively affected by a transitory increase in Egg Beaters’ volume last year. 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 decreased 5%, and adjusted operating profit decreased 8%. Lower volume more than offset improved pricing actions, favorable input costs and supply chain productivity. The Company estimates that 5 points of the decline, on a reported and adjusted basis, relate to the avian flu-related benefits in the prior year.
Net sales for the segment decreased 5% to $211 million. A 2% increase in price/mix was offset by a 4% decrease in foreign exchange and 3% decrease in volume.
The segment reported an operating loss of $27 million compared with operating profit of $20 million in the year-ago period, reflecting goodwill impairment charges of approximately $44 million pre-tax, driven by a devaluation of the Mexican peso. Adjusted segment operating profit decreased 17% to $18 million, primarily driven by the impact of foreign exchange.
Net sales for the segment decreased 1% to $283 million. Volume was flat to the prior year’s quarter while price/mix decreased 1%.
Operating profit for the segment grew 56% as the business wrote down inventory in the prior year while exiting a non-core business. The Company estimates that the impact from the exited business added 52 percentage points to segment operating profit growth.
Corporate expenses decreased 36% from $178 million to $113 million, and adjusted corporate expenses decreased 33% to $36 million, reflecting planned benefits from the Company’s cost savings efforts.
Advertising & Promotion expense decreased 9% to $97 million in the quarter, reflecting timing of planned expenses and improved efficiency in spend.
Equity method investment earnings decreased 2% to $17 million as the Company’s Ardent Mills joint venture performed below expectations due to market conditions.
Net interest expense decreased 32% to $54 million, driven by significant debt reduction over the past several quarters.
In the second quarter, the Company paid a quarterly dividend of $0.25 per share.
As previously announced, the Board of Directors approved its first dividend since the completion of the spin-off of the Lamb Weston business on November 9, 2016. A quarterly dividend payment of $0.20 per share will be paid on March 1, 2017 to stockholders of record as of the close of business on January 30, 2017.
The Company also repurchased approximately 2.2 million shares for $85 million during the quarter.
The Company is reaffirming its fiscal year 2017 outlook. The Company expects net sales to decrease between 4% and 5% (excluding the impacts of divestitures), and to achieve adjusted gross margin of 30.4% to 30.6%, adjusted operating margin of 15.3% to 15.5%, and adjusted EPS of between $1.65 and $1.70.
The inability to predict the amount and timing of items impacting comparability makes a detailed reconciliation of these forward looking measures impracticable.
Major Items Affecting Second Quarter Fiscal 2017 EPS Comparability
Included in the $0.26 diluted EPS from continuing operations for the second quarter of fiscal 2017 (EPS amounts rounded and after tax)
Approximately $0.03 per diluted share of net expense, or $20 million pre-tax ($13 million after tax), related to restructuring plans ($2 million in cost of goods sold and $18 million in SG&A)
Approximately $0.09 per diluted share of net expense, or $61 million pre-tax ($39 million after tax), related to extinguishment of debt (all SG&A)
Approximately $0.09 per diluted share of net expense, or $44 million pre-tax ($41 million after tax), related to an impairment of goodwill in the Mexican business (all SG&A)
Approximately $0.02 per diluted share of net expense related to tax items associated with the Spicetec and JM Swank divestitures.
Included in the $0.18 diluted EPS from continuing operations for the second quarter of fiscal 2016 (EPS amounts rounded and after tax)
Approximately $0.19 per diluted share of net expense, or $133 million pre-tax ($82 million after tax), related to restructuring plans ($6 million in cost of goods sold, $127 million in SG&A)
Approximately $0.02 per diluted share of net expense related to tax items in connection with an international tax matter