ConAgra Foods reports fiscal 2016 fourth quarter results

Omaha / NE. (caf) ConAgra Foods Inc., one of North America’s leading food companies, reported results for the fiscal 2016 fourth quarter ended May 29. 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):

  • As reported, diluted EPS from continuing operations for the fourth quarter of fiscal 2016 was (0.07) USD, reflecting a charge for the year-end re-measurement of pension amounts, compared with 0.54 USD in the year-ago period. Adjusted for items impacting comparability, diluted EPS from continuing operations was 0.52 USD, largely as planned, compared with 0.55 USD in the year-ago period.
    • The comparable EPS decline reflects the fact that the year-ago period included an additional week, and that the current period included higher incentives expense, higher marketing expense, and a negative impact from foreign exchange. The impact of these items was expected, and included in the previously communicated 2016 fourth quarter guidance.
    • The company estimates that the additional week in the year-ago period contributed an estimated 7 percent to sales and volume performance in results for the fiscal 2015 fourth quarter.
  • Consumer Foods continued to post good margins in the quarter as it generated productivity savings, experienced favorable commodity input costs, and continued to improve discipline around promotional strategies.
  • Commercial Foods demonstrated good performance in the quarter, driven by Lamb Weston’s results globally, with particular strength in key Asian markets.
  • The company recently announced separate agreements to sell its Spicetec Flavors + Seasonings business and its JM Swank business, which are parts of the Commercial Foods segment. The transactions, which are expected to close in the first quarter of fiscal 2017, are expected to generate combined net proceeds of approximately 479 million USD.
  • As previously discussed, the company plans to complete the relocation of its corporate headquarters from Omaha, NE to Chicago, IL in the first quarter of fiscal 2017.

CEO Perspective

Sean Connolly, CEO of ConAgra Foods commented, «Fiscal 2016 was a year of tremendous accomplishment and progress, as we reshaped the portfolio, strengthened the balance sheet, and transformed our culture. Specifically, we divested the Private Brands operations, repaid approximately 2.5 billion USD of debt, announced plans to spin-off Lamb Weston and sell other parts of the Commercial Foods segment, and prepared to move our headquarters to Chicago as part of becoming more lean and agile».

He continued, «Amidst all of this change, both of our operating segments posted very good results, largely reflecting increased focus on expanding margins through continued supply chain productivity, better price/mix, and lower SG+A. In the near term, we will remain focused on these areas while pursuing targeted and impactful marketing and innovation to deliver consistent margin and profit improvement. Each segment is in an excellent position as we prepare to operate Conagra Brands and Lamb Weston as more focused pure plays later this year, and I want to congratulate our team on their successes getting us to this point».

Overall Results

For the fiscal 2016 fourth quarter ended May 29, 2016, diluted earnings per share from continuing operations were (0.07) USD as reported, compared with 0.54 USD for the fourth quarter of fiscal 2015. The reported loss in the fourth quarter was largely the result of a charge for the re-measurement of pension amounts. After adjusting for items impacting comparability, comparable diluted EPS from continuing operations was 0.52 USD this quarter and 0.55 USD in the year-ago period. Items impacting comparability are summarized and reconciled for Regulation G purposes starting on page 11.

For the full year fiscal 2016, diluted earnings per share from continuing operations were 1.09 USD compared with 1.73 USD for fiscal 2015. After adjusting for items impacting comparability, fiscal 2016 comparable diluted earnings per share from continuing operations were 2.08 USD, compared with 1.93 USD in fiscal 2015.

Consumer Foods Segment

Branded food items sold worldwide in retail channels.
The focus of the Consumer Foods team in the fiscal fourth quarter, and throughout the fiscal year, was on strengthening the business by building a higher quality volume base; this involved taking actions that emphasize profit margins over volume. In particular, the company’s price increases on certain Banquet branded products, associated with product quality improvements, as well as improved trade promotion discipline across several areas of the portfolio, negatively impacted volume but favorably impacted margin. Supply chain productivity and favorable commodity input costs played a significant role in the segment’s comparable operating margin expansion. The strong margin performance has enabled increased marketing investment in product-line renovations.

The Consumer Foods segment posted sales of approximately 1.7 billion USD and operating profit of 230 million USD in the fiscal fourth quarter, as reported. Sales declined 12 percent, approximately 7 points of which is attributable to the benefit of the extra week in the year-ago period. Adjusting for the benefit of the extra week in the year-ago period, sales declined 5 percent, reflecting a 4 percent volume decrease, flat price/mix, and a negative 1 percent impact from foreign exchange (all rounded).

  • Adjusting for the benefit of the extra week in the year-ago period, brands posting sales growth for the fiscal fourth quarter include Slim Jim, Hebrew National, Reddi-wip, Peter Pan, Egg Beater’s, Rosarita, and others.
  • Other brand details are in the written Q+A document accompanying this release.

Segment operating profit was 230 million USD compared with 309 million USD in the year-ago period, as reported for the quarter. After adjusting for items impacting comparability, current quarter comparable operating profit of 290 million USD declined from the 324 million USD earned in the year-ago period. The comparable operating profit decline reflects lower volume, including the impact of the extra week in the year-ago period, as well as the impact of foreign exchange, partially offset by lower SG+A expense. Although comparable operating profit declined for the aforementioned reasons, comparable operating margin continued to expand as a result of good productivity and overall lower commodity input costs, as well as strong SG+A discipline. Advertising increased by 5 million USD, or 8 percent, as the company continued its previously discussed strategy to make targeted investments in high-potential brands.

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, 6 percent below year ago amounts due to the extra week in the year-ago-period, and operating profit was 156 million USD, in line with year-ago amounts, as reported in the fourth quarter of fiscal 2016.

Adjusting for the impact of the extra week in the year-ago period, Lamb Weston continued to perform well globally, with particular strength in key Asian markets. On this same basis of comparison, other parts of the Commercial Foods segment performed in line with year ago results.

During the quarter, the company announced a definitive agreement to sell its Spicetec Flavors + Seasonings business. Shortly after the quarter, the company announced a definitive agreement to sell its JM Swank business. Each of these divestitures is expected to be completed during the first quarter of fiscal 2017. On an annualized basis, these divestitures are expected to remove an estimate of approximately 470 million USD of segment sales and a comparatively modest amount of segment profit. Each divestiture remains subject to customary closing conditions.

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 19 million USD of net benefit in the current quarter and 18 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 414 million USD of expense in the current quarter and 56 million USD of expense in the year-ago period. Current-quarter amounts included 19 million USD of hedge-related benefit, as well as 371 million USD of expense related to other items impacting comparability, the largest of which was a 349 million USD non-cash charge for the year-end re-measurement of pension amounts. Year-ago period amounts included 18 million USD of hedge-related benefit, and 12 million USD of other expense related to other items impacting comparability. Excluding these amounts, unallocated Corporate expense was 62 million USD for the current quarter and 62 million USD in the year-ago period.
  • Equity method investment earnings were 31 million USD for the current quarter and 30 million USD in the year-ago period.
  • Net interest expense was 61 million USD in the current quarter and 88 million USD in the year-ago period, reflecting the impact of debt reduction earlier this fiscal 2016.

Capital Items

  • Dividends paid for the quarter totaled 109 million USD compared with 107 million USD in the year-ago period.
  • The company did not repurchase any shares during the quarter.
  • The company reached agreements to sell its Spicetec Flavors + Seasonings business and its JM Swank business, each of which is part of the Commercial Foods segment. The two transactions are expected to generate combined net proceeds of approximately 479 million USD. These proceeds are expected to be utilized as part of a broader balanced capital allocation plan, which includes debt reduction, an attractive dividend, share repurchases, and acquisitions.
    • The company plans to utilize a portion of its capital loss carryforwards generated from the Private Label divestiture to substantially eliminate income taxes related to these transactions that would otherwise be payable. The associated income tax benefit of approximately 147 million USD has been reflected in the results of discontinued operations for the fourth quarter of fiscal 2016.
  • For the current quarter, capital expenditures for property, plant and equipment relating to continuing operations were 150 million USD, compared with 103 million USD in the year-ago period. Depreciation and amortization expense was approximately 92 million USD for the fiscal fourth quarter compared with a total of 97 million USD in the year-ago period.

Outlook

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

The company plans to report its fiscal 2017 first quarter results in the ordinary course, as a consolidated enterprise, in September 2016. We expect that first quarter fiscal 2017 will show double-digit comparable year-over-year EPS growth due to a continuation of the productivity, price/mix, and cost discipline initiatives underway, as well as lower interest expense.

Please see the Regulation G reconciliation on page 11 of this document for details on EPS from continuing operations.

Major Items Impacting Fourth-quarter Fiscal 2016 EPS Comparability

Included in the (0.07) USD diluted EPS from continuing operations for the fourth quarter of fiscal 2016 (EPS amounts rounded and after tax):

  • Approximately 0.49 USD per diluted share of net expense, or 349 million USD pre-tax, related to the year-end re-measurement of pension amounts. This is all classified within unallocated Corporate expense (all SG+A).
    • As part of a pension accounting methodology adopted in fiscal 2012, the company expenses actuarial gains and losses in excess of the 10 percent corridor annually at the pension measurement date. This has resulted in a large non-cash year-end pension expense for fiscal 2016, resulting primarily from changes in pension accounting assumptions.
  • Approximately 0.07 USD per diluted share of net expense, or 50 million USD pre-tax, related to intangible impairment charges for the Chef Boyardee brand (all Consumer Foods SG+A).
  • Approximately 0.04 USD per diluted share of net expense, or 28 million USD pre-tax, related to restructuring costs and costs related to the planned spin-off of Lamb Weston. Approximately 10 million USD of these costs are classified within the Consumer Foods segment (4 million USD of COGS / 6 million USD of SG+A), and 18 million USD of such costs are classified within unallocated Corporate (all SG+A).
  • Approximately 0.03 USD per diluted share of net gain, or 19 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.
  • Approximately 0.01 USD per diluted share of expense, or 5 million USD pre-tax, associated with a historical lawsuit due to recent developments in certain legal principles at issue in the suit, classified within unallocated Corporate (all SG+A).
  • Approximately 0.01 USD per diluted share of benefit, or 5 million USD pre-tax, from selling certain assets within the Commercial Foods segment (all SG+A).
  • Approximately 0.01 USD per diluted share of expense from adjustments to prior-year tax credits.
  • 0.01 USD impact of rounding.

Included in the 0.54 USD diluted EPS from continuing operations for the fourth quarter of fiscal 2015 (EPS amounts rounded and after tax).

  • Approximately 0.03 USD per diluted share of net benefit, or 18 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.
  • Approximately 0.02 USD per diluted share of net expense, or 15 million USD pre-tax, resulting from restructuring and integration costs. 10 million USD is classified within the Consumer Foods segment (6 million USD of COGS/4 million USD of SG+A), and 5 million USD of this is classified as unallocated Corporate expense (SG+A).
  • Approximately 0.01 USD per diluted share of net expense, or 5 million USD pre-tax, related to the impairment of goodwill and other intangible assets, classified within the Consumer Foods segment (SG+A).
  • Approximately 0.01 USD per diluted share of net expense, or 7 million USD pre-tax, related to the year-end re-measurement of pension amounts.