Conagra: Reports Net Sales And EPS Growth in Q3-2018

Chicago / IL. (cag) ConAgra Brands Inc. reported results for the third quarter fiscal year 2018, which ended on February 25, 2018. Highlights (all comparisons are against the prior year fiscal period, unless otherwise noted):

Net sales grew 0.7 percent and organic net sales1 declined 2.2 percent in the quarter. Consumption trends continued to improve but exceeded shipments to customers in the third quarter. This follows shipments in excess of consumption in the second quarter.
The Refrigerated + Frozen segment continued its growth momentum in the third quarter with 3.2 percent net sales growth.
Elevated input cost inflation, including transportation costs, and increased investments to drive brand saliency, enhanced distribution, and consumer trial of new innovation negatively impacted gross margin.
Aided by a lower effective tax rate, diluted earnings per share (EPS) from continuing operations grew 112.2 percent from USD 0.41 to USD 0.87 in the quarter, and adjusted2 diluted EPS from continuing operations grew 27.1 percent from USD 0.48 to USD 0.61.
For fiscal 2018, the Company now expects adjusted EPS3 to be in the range of USD 2.03 to USD 2.05, above the previously estimated range of USD 1.95 to USD 2.02.

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, «»I continue to be pleased with the progress we are making on improving our fundamentals, particularly on the top line. Our efforts are paying off, and our businesses are gaining momentum. Our frozen portfolio, where we put most of our innovation focus this year, continues to show strong growth and share gains. Consumption in our Grocery + Snacks segment also continues to strengthen, and non-promoted consumption exceeded expectations in the quarter».

He added, «Overall, our transformation plan remains squarely on track. We continue to invest to drive brand saliency, enhanced distribution, and consumer trial in the face of higher inflation on input and transportation costs, which is pressuring near-term margins. Strong underlying trends are enabling us to increase our fiscal 2018 adjusted EPS guidance above the range provided at the CAGNY conference in February, which already accounted for the impact of tax reform».

Total Company Results

Net sales grew 0.7 percent, aided by recent acquisitions. Organic net sales decreased 2.2 percent as improving performance in domestic retail consumption and increased price/mix were offset by reductions in retailer inventory levels. Reductions in customer inventory levels were expected in the quarter but were higher than anticipated, particularly in the Grocery + Snacks segment. Additionally, net sales were reduced by continued investments with retail customers to drive brand saliency, enhanced distribution, and consumer trial.

Gross profit decreased 3.6 percent to USD 599 million in the quarter and adjusted gross profit decreased 4.3 percent to USD 598 million. The decreases were primarily driven by increased input costs and transportation expenses, as well as investments to drive brand saliency, enhanced distribution, and consumer trial, partially offset by realized productivity savings, and increased net sales. Although gross productivity was strong in the quarter, realized productivity was suppressed by higher-than-normal operating costs that were transitory in nature. Gross margin and adjusted gross margin were 30.0 percent in the quarter.

Diluted EPS from continuing operations grew from USD 0.41 to USD 0.87 in the quarter; adjusted diluted EPS from continuing operations grew 27.1 percent to USD 0.61, primarily reflecting a reduction in the effective tax rate, fewer shares outstanding, and favorable SG+A and A+P compared to the prior year quarter, partially offset by lower gross profit as outlined above.

Grocery + Snacks Segment Results

Net sales for the Grocery + Snacks segment decreased 1 percent to USD 838 million in the quarter, and organic net sales declined 6 percent. Consumption trends continued to improve in the quarter, and non-promoted consumption exceeded expectations. Volume declined 4 percent, driven by retailer inventory reductions, which were higher than anticipated, and deliberate actions to optimize distribution on certain lower-margin products, consistent with the Company’s value over volume strategy. Price/mix declined 2 percent as the Company increased its investments with retail customers to drive brand saliency, enhanced distribution, and consumer trial. The acquisitions of the Duke’s, BIGS, and Angie’s BOOMCHICKAPOP businesses added approximately 500 basis points to the net sales growth rate.

Operating profit for the segment decreased 13 percent, and adjusted operating profit decreased 16 percent. The decreases were driven by higher input costs and transportation expenses, the previously-mentioned volume declines, and lower than expected supply chain realized productivity. Although gross productivity was strong in the quarter, realized productivity was suppressed by higher-than-normal operating costs that were transitory in nature. Additionally, the recent growth-focused acquisitions aided the segment’s operating profit growth rate but reduced the operating margin percentage as these businesses maintained strong A+P investments as well as elevated SG+A levels as they integrate into the Company.

Refrigerated + Frozen Segment Results

Net sales for the Refrigerated + Frozen segment increased 3 percent to USD 689 million in the quarter. Organic net sales grew 3 percent behind volume growth of 2 percent driven by core business improvements and innovation launches in the Marie Callender’s, Healthy Choice, and Banquet businesses. Price/mix increased 1 percent as mix improvements from recent innovation more than offset investments with retail customers to drive brand saliency, enhanced distribution, and consumer trial.

Operating profit for the segment decreased 2 percent in the quarter. Adjusted operating profit decreased 1 percent as the benefits of net sales growth and supply chain realized productivity savings were more than offset by increased input costs and transportation expenses.

International Segment Results

Net sales for the International segment increased 9 percent to USD 223 million in the quarter, and organic net sales grew 4 percent as foreign exchange favorably impacted the net sales growth rate by approximately 500 basis points. Volume increased 1 percent and price/mix increased 3 percent, reflecting the impacts of the ongoing value over volume strategy.

Operating profit for the segment increased 63 percent, and adjusted operating profit increased 67 percent in the quarter behind improved price/mix, timing and optimization of A+P spending, and the favorable impact of foreign exchange.

Foodservice Segment Results

Net sales for the Foodservice segment decreased 6 percent to USD 244 million in the quarter. Volume decreased 13 percent behind planned discontinuations of certain lower-performing businesses and softness in certain categories. Price/mix increased 7 percent driven by improved product mix as well as pricing to cover inflation.

Operating profit decreased 13 percent in the quarter primarily as the benefits of favorable price/mix and supply chain realized productivity were more than offset by the previously-mentioned decrease in volume as well as increased input costs.

Other Items

Corporate expenses decreased 18 percent to USD 87 million in the quarter. Adjusted corporate expenses decreased 27 percent to USD 38 million, primarily driven by timing of incentive compensation accruals in the year ago quarter and planned reductions in project spending. This favourability was partially offset by reduced transition service agreement income.

A+P expense decreased 14 percent to USD 78 million in the quarter as the Company continued to shift investments to drive brand saliency, enhanced distribution, and consumer trial.

Equity method investment earnings increased 33 percent to USD 29 million. Adjusted equity method investment earnings increased 14 percent to USD 25 million as the Ardent Mills joint venture benefited from continued improvements in operating efficiencies and favorable market conditions.

Net interest expense decreased 13 percent to USD 40 million in the quarter, driven by effective debt management.

On December 22, 2017, the 2017 U.S. Tax Cuts and Jobs Act (the «Tax Act») was signed into law. The Tax Act reduces the corporate federal statutory tax rate from a maximum of 35 percent to a flat 21 percent, and modifies certain policies, credits and deductions applicable to the Company. It also has certain international tax consequences. The Tax Act’s corporate rate reduction became effective January 1, 2018, in the middle of the Company’s third quarter. Given the Company’s off calendar fiscal year end, our fiscal 2018 federal statutory tax rate will be a blended rate. The Company’s federal statutory rate will reduce to 21 percent in fiscal 2019. Among items recorded during the third quarter as a result of the Tax Act are the revaluation of the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate tax rates and the transition tax related to the change to a territorial foreign tax regime. These changes resulted in a one-time estimated income tax benefit of USD 236.7 million in the quarter. This amount may be adjusted in the future as further information and interpretations of the Tax Act become available.

Capital Allocation

In the quarter, the Company paid a quarterly dividend of USD 0.2125 per share.

In the quarter, the Company repurchased approximately 8 million shares of its common stock for USD 280 million.

As previously disclosed, on February 26, 2018, the Company borrowed USD 300 million pursuant to a term loan agreement entered into on February 22, 2018. The term loan bears interest at a rate equal to three-month LIBOR plus 0.75 percent per annum or an alternate base rate described in the term loan agreement. The Company used the proceeds from this borrowing to make a voluntary pension plan contribution in the amount of USD 300 million.

Portfolio Update

As previously disclosed, on February 5, 2018, the Company completed the acquisition of the Sandwich Bros. of Wisconsin business.

As previously disclosed, on February 20, 2018, the Company announced it entered into a definitive agreement to sell its Del Monte processed fruit and vegetable business in Canada to Bonduelle Group. The sale is subject to customary closing conditions, including regulatory approvals, and is expected to be completed by the end of fiscal 2018. The transaction is valued at approximately CA USD 43 million, which was approximately US USD 34 million at the exchange rate on the date of announcement.

As previously disclosed, on March 6, 2018, Conagra Brands and The J.M. Smucker Company terminated the agreement for the sale of Conagra’s Wesson oil business to The J.M. Smucker Company. This outcome follows the decision of the Federal Trade Commission, announced on March 5, 2018, to challenge the pending transaction. The Company intends to continue its evaluation of the role of the Wesson oil business within its portfolio.

Fiscal 2018 Outlook

The Company is updating its fiscal 2018 guidance as summarized below:

Items being reiterated

Organic net sales growth near the high end of the range of (2) percent to flat.
Adjusted operating margin near the low end of the range of 15.9 percent to 16.3 percent.
Effective tax rate of in the range of 29 percent to 30 percent.
The repurchase of approximately USD 1.1 billion of shares of its common stock in the fiscal year, subject to market and other conditions.
Input cost inflation of approximately 3.7 percent for the full fiscal year.

Items being updated

Reported net sales growth approximately 150 basis points higher than the organic net sales growth rate due to the impacts of acquisitions and foreign exchange.
Adjusted diluted EPS from continuing operations in the range of USD 2.03 to USD 2.05.

The inability to predict the amount and timing of the impacts of foreign exchange, acquisitions, 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 Third Quarter Fiscal 2018 Comparability

Included in the USD 0.87 diluted EPS from continuing operations for the third quarter of fiscal 2018 (EPS amounts rounded and after tax)

Approximately USD 0.03 per diluted share of net expense, or USD 14.7 million pre-tax (USD 10.8 million after tax), related to restructuring plans (USD 0.1 million benefit in cost of goods sold (COGS) and USD 14.8 million expense in SG+A)
Approximately USD 0.01 per diluted share of net expense, or USD 3.1 million pre-tax (USD 2.1 million after tax), related to costs associated with acquisitions and planned divestitures (USD 0.6 million in COGS and USD 2.5 million in SG+A)
Approximately USD 0.06 of per diluted share of net expense, or USD 34.9 million pre-tax (USD 25.6 million after tax), related to the early exit of an unfavorable lease contract by purchasing the building (SG+A)
Approximately USD 0.01 per diluted share of net benefit, or USD 4.3 million pre-tax (USD 2.9 million after tax), related to the substantial liquidation of an international joint venture (Equity method investment earnings)
Approximately USD 0.20 per diluted share of net tax expense, or USD 78.6 million, associated with the termination of the sales agreement for the Wesson oil business which resulted in an increase to the valuation allowance on certain deferred tax assets (Tax)
Approximately USD 0.59 per diluted share of net tax benefit, or USD 236.7 million, for the initial estimated one-time impact of the Tax Act (Tax)
Approximately USD 0.05 per diluted share of net tax expense, or USD 19.4 million, for unusual tax items, including the indirect tax effect of the recent pension contribution and the effect of a law change in Mexico requiring deconsolidation for tax reporting purposes (Tax)

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

Approximately USD 0.02 per diluted share of net expense, or USD 13.7 million pre-tax (USD 8.9 million after tax), related to restructuring plans (USD 4.7 million in COGS and USD 9.0 million in SG+A)
Approximately USD 0.02 per diluted share of net expense, or USD 13.8 million pre-tax (USD 8.5 million after tax), related to a pension plan lump sum settlement (SG+A)
Approximately USD 0.05 per diluted share of net expense, or USD 32.7 million pre-tax (USD 21.1 million after tax), related to extinguishment of debt (SG+A)
Approximately USD 0.02 per diluted share of net tax benefit, or USD 7.1 million, primarily related to the receipt of foreign tax incentives (Tax)