16 July 2024
English German
Global Industry

Conagra Foods: Fiscal 2016 Q3 EPS Above Expectations

Omaha / NE. (caf) ConAgra Foods Inc., one of North America’s leading food companies, reported results for the fiscal 2016 third quarter ended February 28. Highlights (percent cited indicates change versus 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 0.41 USD, compared with 0.49 USD in the year-ago period.
  • After adjusting for items impacting comparability, diluted comparable EPS of 0.68 USD this quarter was ahead of 0.59 USD in the year-ago period. As previously communicated, guidance for this quarter, as well as the basis for comparison in the year-ago period, included contribution from discontinued operations.
    • Current quarter diluted EPS from discontinued operations (amounting to 0.05 USD as reported, and 0.11 USD adjusted for items impacting comparability) reflects about two months of results from the divested private label operations and includes approximately 36 million USD of pre-tax benefit, or 0.05 USD per diluted share of after-tax benefit, from the absence of private label-related depreciation and amortization expense. As previously discussed, this is due to the classification of the private label assets as held for sale during the quarter. The private label operations were divested during the quarter.
  • Consumer Foods improved comparable operating margins by over 300 basis points and drove strong double-digit comparable operating profit growth with a deliberate focus on price/mix, good productivity, and favorable input costs.
  • Commercial Foods posted comparable operating profit growth in excess of 20 percent and expanded margins, reflecting volume increases across the segment as well as lower costs.  Lamb Weston posted good volume performance, reflecting the lapping of the impact of the West Coast port labor dispute.
  • The company completed the divestiture of the private label business during the quarter, receiving in excess of 2.6 billion USD in proceeds. The company has utilized a significant portion of the proceeds to reduce debt by approximately 2.15 billion USD so far, and as part of a balanced capital allocation program plans to utilize more of the remaining proceeds for further debt reduction. The company is committed to an investment grade credit rating.

CEO Perspective:

Sean Connolly, CEO of ConAgra Foods commented, «Our results for the quarter exceeded our expectations as our actions to drive improved profitability continued to take hold. Our focus on improving price/mix and driving efficiencies is enabling us to enhance our overall fundamentals in both of our segments resulting in solid comparable operating profit growth and expanding operating margins».

He continued, «With the sale of our private label business completed, we are focused on successfully executing our plans to reduce costs and deliver improved price/mix, while continuing to segment our portfolio to enable more impactful marketing and support investments to drive future innovation and deliver improved margins and shareholder value. We are on track to establish two independent segments with excellent operating foundations as we separate into two pure-play companies in the fall».

Overall Quarterly Results

For the fiscal 2016 third quarter ended February 28, 2016, diluted earnings per share from continuing operations were 0.41 USD as reported, versus 0.49 USD for the third quarter of fiscal 2015. After adjusting for items impacting comparability, comparable diluted EPS was 0.68 USD this quarter and 0.59 USD in the year-ago period.

Consumer Foods Segment

Branded food items sold worldwide in retail channels.

The Consumer Foods segment posted sales of approximately 1.9 billion USD and operating profit of 291 million USD in the fiscal third quarter, as reported. Sales declined 2 percent, with a 4 percent volume decrease, 3 percent favorable price/mix, and a negative 1 percent impact of foreign exchange (all rounded) compared to year-ago period amounts.

The company has emphasized margins over volume this fiscal year as part of building a healthy foundation. In connection with this, the company has implemented changes to improve the efficiency of trade spending, increased list prices on Banquet products and other brands in connection with product improvements and selected commodity pass-through, and focused on improving mix. These factors played a significant role in the quarter’s 4 percent volume decline and significant margin expansion.

  • Brands posting sales growth for the quarter include Marie Callender’s, Hunt’s, Slim Jim, Reddi-wip, Ro*Tel, PAM, and others.
  • Other brand details are in the written Q+A document accompanying this release.

Segment operating profit was 291 million USD versus 266 million USD in the year-ago period, as reported. After adjusting for 48 million USD of net expense in the current quarter, and 23 million USD of net expense in the year-ago period from items impacting comparability, current quarter comparable operating profit of 339 million USD increased 17 percent over comparable year-ago amounts. Comparable operating margin expanded by over 300 basis points. In addition to the benefits of price/mix, good productivity and overall lower commodity input costs also contributed to the strong quarterly profit performance. Advertising investment increased 10 million USD, or 12 percent compared to year-ago period amounts, as part of our strategy to increase support behind high-potential brand equities. Foreign exchange negatively impacted profitability by approximately 12 million USD this quarter. Year-ago profit included a significant hedge loss, which favourably impacted the comparison 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 USD, up 6 percent over year-ago amounts (rounded). Sales for Lamb Weston’s potato operations grew across North America as well as in international markets. International sales performance for Lamb Weston was notably strong, reflecting the lapping of the impact of the West Coast port labor dispute in the year-ago period, as well as improving demand across several international markets.

Segment operating profit of 175 million USD increased 21 percent from year-ago period amounts. Lamb Westonmade the most significant contribution to the segment’s profit increase, reflecting increased global volumes, due in part to the benefit of lapping the West Coast port labor dispute. 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 3 million USD of net benefit in the current quarter and 4 million USD of net benefit 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 155 million USD of expense in the current quarter and 51 million USD of expense in the year-ago period. Current-quarter amounts include 3 million USD of hedge-related benefit, as well as 85 million USD of expense related to other items impacting comparability. Year-ago period amounts include 4 million USD of hedge-related benefit, and 3 million USD of other expense related to other items impacting comparability. Excluding these amounts, unallocated Corporate expense was 73 million USD for the current quarter and 52 million USD in the year-ago period; this increase principally reflects higher incentive compensation expenses.
  • Equity method investment earnings were 45 million USD for the current quarter and 33 million USD in the year-ago period, as reported. Excluding 18 million USD of benefit in the current quarter from the termination of a pension by a foreign equity method investment, current quarter equity method investment earnings of 27 million USD decreased from 33 million USD a year ago. The comparable decline is due to unfavorable grain market conditions impacting Ardent Mills performance.
  • Net interest expense was 77 million USD in the current quarter and 80 million USD in the year-ago period.

Capital Items

  • Dividends for the quarter totaled 109 million USD versus 107 million USD in the year-ago period.
  • The company did not repurchase any shares during the quarter.
  • The company reduced debt by approximately 2.15 billion USD during the quarter, as it utilized a significant portion of the proceeds from the divestiture of the private label operations. As part of balanced capital allocation, the company plans for further debt reduction, and reiterates its commitment to an investment grade credit rating.
  • For the current quarter, capital expenditures for property, plant and equipment from continuing operations were 100 million USD, compared with 83 million USD in the year-ago period. Depreciation and amortization expense was approximately 93 million USD for the fiscal third quarter; this compares with a total of 92 million USD in the year-ago period.

Discontinued Operations

Diluted EPS from discontinued operations (the private label operations) in the fiscal third quarter of 2016 was 0.05 USD as reported, and 0.11 USD after adjusting for items impacting comparability; this reflects approximately 2 months of contribution from the private label operations prior to the divestiture on February 1, 2016. The company’s previous EPS guidance included expected contribution from the private label operations. As previously noted, because the private label operations were classified as assets held for sale in the quarter, there was no depreciation or amortization expense for these assets. This benefitted EPS from discontinued operations in the third quarter by approximately 0.05 USD per diluted share, or 36 million USD pre-tax this quarter, as expected.

Loss per diluted share from discontinued operations in the third quarter of fiscal 2015 was (2.70) USD, reflecting sizeable impairment charges, and diluted per share income from discontinued operations for that period was approximately 0.06 USD after adjusting for items impacting comparability. See page 10 for details of items impacting comparability in the current and prior year.

Outlook

Given the recent divestiture of the private label business, which is classified within discontinued operations in current and prior periods, the company’s diluted EPS guidance for fiscal 2016 is now based on expectations for comparable results for continuing operations.

  • Fiscal 2016 year-to-date diluted EPS from continuing operations totals 1.16 USD as reported, and 1.56 USD adjusted for items impacting comparability.
  • The company expects full year fiscal 2016 diluted EPS from continuing operations, adjusted for items impacting comparability, to be in the range of 2.05 USD to 2.07 USD.

Major Items Impacting Third-quarter Fiscal 2016 EPS Comparability

Included in the 0.41 USD diluted EPS from continuing operations for the third quarter of fiscal 2016 (EPS amounts rounded and after tax):
  • Approximately 0.16 USD per diluted share of net expense, or 109 million USD pre-tax, related to restructuring charges. 61 million USD of this is classified within unallocated Corporate expense (all SG+A) and 48 million USD is classified within the Consumer Foods segment (36 million USD COGS / 12 million USD SG+A).
  • Approximately 0.04 USD per diluted share of net expense, or 24 million USD pre-tax, related to the early extinguishment of debt (all Corporate SG+A).
  • Approximately 0.03 USD per diluted share, or 18 million USD pre-tax, of net benefit related to pension termination at affiliate Lamb-Weston Meijer, classified within the results of equity method investment earnings.
  • Note: Comparable EPS contribution from the private label operations, now classified as discontinued operations, was approximately 0.11 USD per diluted share. Contribution from the private label operations was included in original guidance. The 0.11 USD per diluted share excludes 0.06 USD of net expense from items impacting comparability.

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

  • Approximately 0.03 USD per diluted share of net expense, or 15 million USD pre-tax, resulting from goodwill impairment charges related to the private label snacks business and now part of Consumer Foods (all SG+A).
  • Approximately 0.02 USD per diluted share of net expense, or 11 million USD pre-tax, resulting from restructuring and integration costs. 8 million USD is classified within the Consumer Foods segment (2 million USD in COGS, 6 million USD in SG+A), and 3 million USD of this is classified as unallocated Corporate expense (all SG+A).
  • Approximately 0.01 USD per diluted share of net benefit, or 4 million USD pre-tax, 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.

Note: Prior year comparable EPS included approximately 0.06 USD from operations subsequently reclassified to discontinued operations. The 0.06 USD per diluted share excludes items impacting comparability, the largest of which is 2.75 USD of expense related to impairment charges.


 OTHER TOPICS FROM THIS SECTION FOR YOU: