Conagra: Outlines New Strategic Direction

Omaha / NE. (caf) ConAgra Foods Inc., one of North America´s leading food companies, reported results for the fiscal 2015 fourth quarter ended May 31, 2015. Highlights:

Diluted EPS from continuing operations of 0.47 USD per share as reported, versus a loss of (0.95) USD a year ago. After adjusting for items impacting comparability, diluted EPS of 0.59 USD this quarter was ahead of 0.55 USD a year ago, as expected. An extra week in the fourth quarter of fiscal 2015 favourably impacted current-quarter amounts.
Consumer Foods and Commercial Foods posted operating profit growth after adjusting for items impacting comparability, and including the benefit of the extra week.
Private Brands posted an operating profit decline after adjusting for items impacting comparability, and including the benefit of the extra week.
The company repaid approximately 1.1 billion USD of debt in fiscal 2015, resulting in cumulative debt reduction of approximately 2.1 billion USD since the completion of the Ralcorp transaction, which exceeded the 2.0 billion USD goal.
The company plans to exit the Private Brands operations.
The company’s new plans for creating long-term value center on a more aggressive approach to cost reduction, growing consumer brands (Consumer Foods segment) and Lamb Weston (within the Commercial Foods segment), as well as balanced capital allocation. Details to be shared at an investor event later this year.

CEO Perspective

Sean Connolly, chief executive officer of ConAgra Foods, said, «With fiscal year 2015 now behind us, we are now pursuing a different plan to maximize value for our shareholders. Our new plan will center on a more aggressive approach to driving margin improvement through SG+A reductions, supply chain efficiencies and other projects. It also sharpens our focus on growing our Consumer Foods and Commercial Foods segments. We expect to continually refine our portfolio with prudent divestitures and acquisitions, and there will be a strong emphasis on deploying capital in ways that benefit shareholders».

He continued, «As I have intensely studied the situation in our Private Brands operations over the last few months, it has become clear that the time and energy the company is devoting to the Private Brands turnaround represent a suboptimal use of our resources. To prevent further distraction, we are pursuing the divestiture of our Private Brands operations. Because the outcome of our strategic review for the Private Brands operations will influence our long-term financial outlook, we will wait until this process is complete before sharing long-term financial commitments. We expect to offer operating details of our plans as well as long-term financial expectations at an investor event later this year».

«The underlying objective of the new strategic direction we are sharing today is long-term shareholder value creation. While we have a high degree of conviction in our plans, we also acknowledge that markets and opportunities change over time. For this reason, our management team and our board of directors approach long-term plans in a practical and flexible manner. If we are convinced that some other set of opportunities, or some other course of action, improves our outlook or will better reward shareholders, we will adapt our plans accordingly».

Overall Quarterly Results

For the fiscal 2015 fourth quarter ended May 31, 2015, diluted earnings per share from continuing operations were 0.47 USD, versus a diluted loss per share of (0.95) USD as reported for the fiscal 2014 fourth quarter. After adjusting for items impacting comparability, comparable diluted EPS was 0.59 USD this quarter and 0.55 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 304 million USD, as reported. Including the benefit of the extra week, sales increased four percent as reported (rounded), with volume up five percent, one percent favourable impact from price/mix, and one percent unfavourable impact of foreign exchange. The company estimates that the extra week favourably impacted sales and volume by approximately seven percent for the quarter. The company increased prices in some categories to cover commodity costs, and continues to make progress with efficiencies in trade spending.

After adjusting for the benefit of the extra week, brands posting sales growth for the quarter.
The company continues to make good progress in fast growing channels.

Operating profit of 304 million USD was significantly above 176 million USD a year-ago as reported. After adjusting for 15 million USD of net expense in the current quarter and 91 million USD of net expense in the year-ago period from items impacting comparability, and including the benefit of the extra week, current quarter operating profit of 319 million USD increased 20 percent over comparable year-ago amounts. In addition to the benefit of the extra week, the comparable operating profit growth reflects productivity which more than offset higher protein and packaging costs, favourable mix, and the benefit of pricing and trade spend efficiencies. Strong operating margins enabled a seven million USD increase in advertising and promotion expense (an increase of 13 percent), and offset approximately 14 million USD unfavourable impact of foreign exchange.

Commercial Foods Segment

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

Sales for the Commercial Foods segment were 1.2 billion USD and operating profit was 154 million USD, as reported, ahead of prior year amounts. The company estimates that the extra week favourably impacted sales and volume by approximately seven percent. Sales for Lamb Weston’s potato operations grew, although international sales were impacted by the West Coast port labor dispute as well as challenges facing quick-serve customers in key Asian markets. The West Coast port dispute was settled in late February 2015, and Lamb Weston’s international shipments have been gradually improving; the company expects to reach normal shipment levels in the first half of fiscal 2016. Sales for the rest of the segment grew.

After adjusting for items impacting comparability, current quarter operating profit increased three percent, reflecting the benefit of the extra week. Lamb Weston comparable profits grew modestly, largely reflecting good domestic performance and efficiencies from good raw potato crop quality. Profits for the rest of the businesses in the segment grew modestly.

Private Brands

Private brand food items sold in domestic markets.

As reported, sales for the Private Brands segment were one billion USD, down slightly. The company estimates that the extra week favourably impacted sales and volume by approximately seven percent.

The segment posted an operating loss of (25 million) USD, as reported, due to impairment and restructuring charges. After adjusting for 56 million USD of net expense from items impacting comparability in the current quarter, and 618 million USD of expense from items impacting comparability in year-ago period amounts (mostly impairment charges), comparable operating profit declined 30 percent, which includes the benefit of the extra week.

Higher commodity costs negatively impacted profits, as did lower volumes. Ongoing margin management initiatives are expected to improve profitability. The company has implemented a reorganization, and is highly focused on improving execution; this should strengthen customer relationships and volume performance gradually over time.

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 favourable impact in the current quarter and 14 million USD of favourable impact 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 62 million USD of expense in the current quarter and 61 million USD of expense in the year-ago period. Current-quarter amounts include 19 million USD of hedge-related benefit and 16 million USD of net expense from other items impacting comparability (seven million USD of the 16 million USD of expense relates to mark-to-market pension adjustments). Year-ago period amounts include 14 million USD of hedge-related benefit and 16 million USD of expense related to other items impacting comparability. Excluding these amounts, unallocated Corporate expense was 65 million USD for the current quarter and 59 million USD in the year-ago period.
Equity method investment earnings were 30 million USD for the current quarter and twelve million USD in the year-ago period; the year-over-year increase mostly reflects the inclusion of profits for the company’s Ardent Mills joint venture (which are not in year-ago amounts due to the timing of the transaction). The operations of the former ConAgra Mills business for the fourth quarter of 2014 are included in results of discontinued operations.
Net interest expense was 89 million USD in the current quarter and 93 million USD in the year-ago period; the decrease reflects lower debt resulting from debt repayment.

Capital Items

The company repaid approximately 1.1 billion USD of debt this fiscal year, resulting in cumulative debt repayment of 2.1 billion USD since the completion of the Ralcorp transaction in fiscal 2013.
Dividends for the quarter totalled 107 million USD versus 105 million USD in the year-ago period, reflecting an increase in shares outstanding.
The company repurchased approximately 332’000 shares of common stock during the quarter for approximately twelve million USD.
For the current quarter, capital expenditures for property, plant and equipment were 154 million USD, compared with 117 million USD in the year-ago period. Depreciation and amortization expense was approximately 149 million USD for the fiscal fourth quarter; this compares with a total of 150 million USD in the year-ago period.

Outlook

The company will offer details on full-year fiscal 2016 expected EPS, as well as long-term financial guidance, at an investor event likely to be scheduled for the fall of 2015. This event will be scheduled after the company completes its assessment of strategic alternatives for the Private Brands operations, and determines SG+A reduction targets and investment needs for the remainder of the company.

With regard to first quarter of fiscal 2016, which the company expects to be unaffected by the outcome of the review of strategic alternatives for the Private Brands operations, the company expects EPS, adjusted for items impacting comparability, to be roughly in line with comparable year-ago amounts. With regard to plans for the rest of the company, the company’s new focus will be on:

Productivity, notably within SG+A, but also in terms of supply chain and trade spending. The company sees significant margin potential through these initiatives.
Driving profitable growth in the Consumer Foods segment and at Lamb Weston potato operations (within the Commercial Foods segment). This will involve further portfolio segmentation, and investing behind the highest-potential categories in a disciplined manner. Investment may include marketing, infrastructure, innovation, and acquired businesses. The company expects some additional divestitures as it continues to refine the asset mix.
Balanced capital allocation that includes growing the dividend over time, increasing share repurchases, and having an investment-grade balance sheet.

Financial expectations and operating details regarding the above will be shared as part of the investor event later this year.

Major Items Impacting Fourth-quarter Fiscal 2015 EPS Comparability

Included in the 0.47 USD diluted EPS from continuing operations for the fourth quarter of fiscal 2015 (EPS amounts rounded and after tax). These include references to selling, general, and administrative (SG+A) expense, and cost of goods sold (COGS):

Approximately 0.09 USD per diluted share of net expense, or 45 million USD pre-tax, related to the impairment of goodwill and other intangible assets, a portion of which is not tax deductible. 40 million USD of this is classified within the Private Brands segment (SG+A) and five million USD of this is classified within the Consumer Foods segment (SG+A).
Approximately 0.05 USD per diluted share of net expense, or 35 million USD pre-tax, resulting from restructuring and integration costs. 16 million USD of this is classified within the Private Brands segment (four million USD of COGS / twelve million USD of SG+A), ten million USD is classified within the Consumer Foods segment (six million USD of COGS / four million USD of SG+A), and nine million USD of this is classified as unallocated Corporate expense (SG+A).
Approximately 0.03 USD per diluted share of net benefit, 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 net expense, or seven million USD pre-tax, related to the mark-to-market impact of pension amounts.

Note: The company estimates that the extra week in the fiscal 2015 fourth quarter added approximately 0.04 USD of benefit per diluted share.

Included in the (0.95) USD diluted loss per share from continuing operations for the fourth quarter of fiscal 2014 (EPS amounts rounded and after tax):

Approximately 1.47 USD per diluted share of expense, or 681 million USD pre-tax, a substantial portion of which is not tax deductible, from impairment charges and the corresponding impact on diluted share count. Approximately 605 million USD of this is classified within the Private Brands segment (SG+A), 73 million USD is classified within the Consumer Foods segment (SG+A), and three million USD is classified as unallocated Corporate expense.
Approximately 0.09 USD per diluted share of expense, or 58 million USD pre-tax, resulting from restructuring, transaction, and integration costs. 18 million USD is classified within the Consumer Foods segment (three million USD COGS / 15 million USD SG+A), five million USD is classified within the Commercial Foods segment (SG+A), twelve million USD is classified within the Private Brands segment (nine million USD COGS / three million USD SG+A), and 23 million USD is classified within unallocated Corporate expense.
Approximately 0.06 USD per diluted share of benefit from unusual tax items, which included favourable tax adjustments resulting from changes in legal structure and state tax filing positions and the resolution of certain foreign income tax matters.
Approximately 0.02 USD per diluted share of benefit, or 14 million USD pre-tax, from 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 benefit, or ten million USD pre-tax, related to historical legal matters, a portion of which is not tax deductible; this is classified within unallocated Corporate expense.
Approximately 0.01 USD per diluted share of benefit, or five million USD pre-tax, resulting from a gain on the sale of a non-operating asset in the Commercial Foods segment (SG+A).
Note: in the fourth quarter of fiscal 2014, comparable EPS included approximately 0.05 USD of net contribution from items previously classified within continuing operations (primarily profits from flour milling), which have been reclassified to discontinued operations.