ConAgra Profit Tops Expectations 

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The FINANCIAL — On December 22 ConAgra Foods, Inc., reported results for the fiscal 2016 second quarter ended November 29, 2015.

Highlights (% cited indicates change vs. year-ago amounts, where applicable. SG&A refers to selling, general, and administrative expense, and COGS refers to cost of goods sold)

Diluted EPS from continuing operations as reported was $0.37, compared with $0.49 in the year-ago period.

After adjusting for items impacting comparability, diluted comparable EPS of $0.71 this quarter was ahead of $0.61 in the year-ago period; these amounts include contribution from discontinued operations in both periods.

As expected, fiscal second quarter diluted comparable EPS of $0.71 includes approximately $46 million of pretax benefit, or $0.07 per diluted share of after-tax benefit, from the absence of depreciation and amortization for the private label operations which are being divested. As discussed in the fiscal first quarter, this is a result of these assets being classified as held for sale.

Consumer Foods posted double-digit operating profit growth, as the benefit of favorable price/mix, strong net productivity, and lower commodity input costs more than offset increased marketing investment and the unfavorable impact of foreign exchange.

Commercial Foods posted double-digit operating profit growth, largely on the strength of Lamb Weston’s international volumes as well as lower product costs.

During the quarter, the company announced plans to:

Generate $300 million of annual efficiency improvements by the end of fiscal 2019, reflecting $200 million of expected SG&A savings and $100 million of trade spend reduction,

Relocate its corporate headquarters from Omaha, NE to Chicago, IL, and

Separate into two independent pure play companies, Conagra Brands and Lamb Weston. The transaction is expected to be structured as a spinoff of the Lamb Weston business, tax free to the company and its shareholders, in the fall of calendar 2016. Prior to the spinoff, each company will host an investor day to outline financial goals and priorities.

The previously announced sale of the company’s private label operations (classified as discontinued operations) to TreeHouse Foods, Inc. is on track and expected to close in the first quarter of calendar 2016.

CEO Perspective:

“I am pleased with our performance in the second quarter,” said Sean Connolly, CEO and president, ConAgra Foods. “In our branded business we achieved our objective of delivering strong margin expansion by continuing to focus on price/mix, productivity, and portfolio segmentation. At Lamb Weston, we continued to generate good growth, particularly in our international business.”

“We’re encouraged by the progress we’re seeing in advance of separating into two independent pure-play companies, which is a direct reflection of our team’s determination and commitment to perform better and more consistently,” added Connolly.

“Our team has been very productive in the first half of the fiscal year, with the divestiture of the private label operations, the rollout of our cost-reduction program, the relocation of our headquarters to Chicago, and the announcement of the plan to split into two companies. The bold moves we’re making are positioning us well to deliver long-term shareholder value,” concluded Connolly.

Overall Quarterly Results

For the fiscal 2016 second quarter ended November 29, 2015, diluted earnings per share from continuing operations were $0.37 as reported, vs. $0.49 for the second quarter of fiscal 2015. After adjusting for items impacting comparability, comparable diluted EPS was $0.71 this quarter and $0.61 in the year-ago period. Items impacting comparability are summarized and reconciled for Regulation G purposes starting on page 10.

Consumer Foods Segment

Branded food items sold worldwide in retail channels.

The Consumer Foods segment posted sales of approximately $2.0 billion and operating profit of $331 million in the fiscal second quarter, as reported. Sales declined 3%, with a 3% volume decrease, 2% favorable price/mix, and a negative 2% impact of foreign exchange (all rounded).

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Brands posting sales growth for the quarter include Marie Callender’s, Slim Jim, Reddi-wip, Odom’s Tennessee Pride, Blue Bonnet, Libby’s, Peter Pan, Egg Beater’s, PF Chang’s, DAVID, Van Camp’s, Kid Cuisine, and Crunch ’n Munch.

As previously discussed, the company is eliminating some volume that does not meet profit standards; these initiatives contributed to the 3% volume decline.

Other brand details are in the written Q&A document accompanying this release.

Segment operating profit was $331 million versus $301 million in the year-ago period, as reported. After adjusting for $10 million of net expense in the current quarter and $8 million of net expense in the year-ago period from items impacting comparability, current quarter operating profit of $341 million increased 10% over comparable year-ago amounts. Strong productivity and overall lower commodity input costs contributed to the quarterly profit growth. Advertising investment increased $16 million, or 18%, consistent with the company’s plans to increase support behind key brands to drive long-term growth. Foreign exchange negatively impacted profitability by approximately $12 million this quarter.

Commercial Foods Segment

Specialty potato, seasonings, blends, flavors, and bakery products, as well as consumer branded and private label packaged food items, sold to restaurants, foodservice and commercial channels worldwide.

Sales for the Commercial Foods segment were $1.1 billion, up 1% over year-ago amounts (rounded), and operating profit was $162 million in the fiscal second quarter as reported. Sales for Lamb Weston’s potato operations grew globally and drove the segment’s sales gain. International sales performance for Lamb Weston was notably strong, partly reflecting the lapping of the impact of the West Coast port labor dispute in the year ago period as well as improving demand in key Asian markets.

Segment operating profit of $162 million increased 11% after adjusting for items impacting comparability. Lamb Weston made the most significant contribution to the segment’s profit increase, reflecting good international volumes and lower product costs. Profits for the remainder of the segment grew modestly.

Hedging Activities

Hedge gains and losses are generally 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 $2 million of net expense in the current quarter and $22 million of net expense in the year-ago period. The company identifies these amounts as items impacting comparability within the discussion of unallocated Corporate results.

Other Items

Unallocated Corporate amounts were $190 million of expense in the current quarter and $82 million of expense in the year-ago period. Current-quarter amounts include $2 million of hedge-related expense and $123 million of expense related to restructuring activities. Year-ago period amounts include $22 million of hedge-related expense and $4 million of net expense related to other items impacting comparability. Excluding these amounts, unallocated Corporate expense was $65 million for the current quarter and $56 million in the year-ago period, reflecting higher incentive compensation expenses.

Equity method investment earnings were $25 million for the current quarter and $34 million in the year-ago period; the year-over-year decrease reflects lower profits from the Ardent Mills joint venture due to unfavorable wheat market conditions.

Net interest expense was $80 million in the current quarter and $79 million in the year-ago period.

Capital Items

Dividends for the quarter totaled $108 million versus $106 million in the year-ago period.

The company did not repurchase any shares during the quarter.

The company repaid approximately $250 million of debt using a combination of commercial paper and cash.

For the current quarter, capital expenditures for property, plant and equipment from continuing operations were $69 million, compared with $67 million in the year-ago period. Depreciation and amortization expense was approximately $97 million for the fiscal second quarter; this compares with a total of $96 million in the year-ago period.

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Discontinued Operations:

Discontinued operations (currently the private label operations) posted a loss of $0.02 per diluted share in the fiscal second quarter as reported, reflecting an impairment charge of $0.18 per diluted share. After adjusting for items impacting comparability, the private label operations earned $0.13 per diluted share in the fiscal second quarter and $0.09 in the year-ago period. The company’s EPS guidance included expected contribution from the private label operations.

As previously noted, because the private label operations are now classified as assets held for sale, there is no longer any depreciation or amortization expense for these assets. This benefitted EPS from discontinued operations by approximately $0.07 per diluted share, or $46 million pretax this quarter, as expected.

As previously disclosed, the company’s current estimate of proceeds from the sale of the private label operations is approximately $2.7 billion, which is expected to be used primarily for debt reduction.

Outlook

The company currently expects fiscal 2016 third quarter comparable EPS to be modestly higher than comparable year-ago amounts. The company’s outlook includes expected contribution from the private label operations (classified as discontinued operations) in the current outlook and in the basis for comparison a year-ago; as noted previously, results for discontinued operations in the current fiscal year are benefitting from the absence of depreciation and amortization expense.

The company expects to complete the divestiture of the private label operations in the first quarter of calendar year 2016. The company will comment on expectations for the remainder of fiscal 2016 once the sale of the private label transaction is complete.

Major Items Impacting Second-quarter Fiscal 2016 EPS Comparability

Included in the $0.37 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 pretax, related to restructuring charges. $123 million of this is classified within unallocated Corporate expense (all SG&A) and $10 million is classified within the Consumer Foods segment ($6 million COGS/ $4 million SG&A).

Approximately $0.02 per diluted share of net expense related to tax items in connection with the planned divestiture of the private label operations.

Note: Comparable EPS contribution from the private label operations, now classified as discontinued operations, was approximately $0.13 per diluted share. Contribution from the private label operations was included in original guidance. The $0.13 per diluted share excludes $0.15 of net expense from items impacting comparability, the largest of which was an impairment charge of approximately $86 million pretax, or $0.18 after tax per diluted share. These amounts are shown as part of the Regulation G reconciliation on page 10.

Included in the $0.49 diluted EPS from continuing operations for the second quarter of fiscal 2015 (EPS amounts rounded and after tax).

Approximately $0.03 per diluted share of net expense, or $22 million pretax, related to the mark-to-market impact of derivatives used to hedge input costs, temporarily classified in unallocated Corporate expense. Hedge gains and losses are generally 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.

Approximately $0.02 per diluted share of net expense, or $12 million pretax, resulting from restructuring and integration costs. $4 million of this is classified as unallocated Corporate expense (SG&A), $8 million is classified within the Consumer Foods segment ($6 million in COGS, $2 million SG&A).

Approximately $0.02 per diluted share of net benefit from favorable adjustments to prior-year tax credits.

 

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