ConAgra Foods Reports Fiscal 2014 First-Quarter Performance

20 Sep 2013 --- ConAgra Foods, Inc., one of North America’s leading food companies, reported results for the fiscal 2014 first quarter ended Aug. 25, 2013. Diluted EPS from continuing operations was $0.33 as reported for the fiscal first quarter, down 46% from $0.61 in the year-ago period.

Excluding $0.04 per diluted share of net expense in the current quarter, and $0.17 of net benefit in the year-ago period, from items impacting comparability, current-quarter diluted EPS from continuing operations of $0.37 was 16% below the comparable $0.44 earned in the year-ago period. Items impacting comparability are summarized toward the end of this release and reconciled for Regulation G purposes on page 10.

Gary Rodkin, ConAgra Foods’ chief executive officer, said, “Our first-quarter Consumer Foods volumes were lower than planned due to category and customer challenges. We are revising our merchandising and promotion plans to improve our volume, and we have already begun additional SG&A cost management initiatives that should improve EPS performance as the fiscal year progresses. We still expect to post good EPS growth this fiscal year, and we are confident in our long-term EPS growth and cash flow outlook as the sizeable synergies from Ralcorp are achieved over the next few years.”

Consumer Foods Segment
Branded and non-branded food sold in retail and foodservice channels.

The Consumer Foods segment posted sales of approximately $2 billion and operating profit of $186 million, as reported. Sales declined 2% as reported, which includes 2% contribution from acquisitions, a 3% organic volume decline, and a 1% decline in price/mix. The sales performance largely reflects difficult conditions for some of the company’s customers, as well as weak results for some categories (including frozen foods) negatively impacted by competitor promotional activity. Significant slotting and promotion related to new product launches weighed on price/mix; that level of concentrated, up-front investment will not be repeated this fiscal year. The company is in the process of revising its merchandising and promotion to improve volumes as the year progresses.

- Brands posting sales growth for the quarter include ACT II, Egg Beaters, Hunt’s, Reddi-wip, Rosarita, Swiss Miss, Van Camp’s, Wesson, and others. More brand details are in the Q&A document accompanying this release.

Operating profit of $186 million declined 21% from $236 million in the year-ago period, as reported. After adjusting for $2 million of net expense in the current period, and $7 million of net expense in the year-ago period, from items impacting comparability, current-quarter operating profit of $189 million (rounded) decreased 22% from $243 million in the year-ago period. The comparable profit performance reflects the weak sales performance as well as significant marketing investment in support of new product introductions. These new-product-related investments for the quarter totaled $26 million ($16 million of costs netted against sales, and $10 million in marketing classified as SG&A). Cost savings more than offset modest input cost inflation. The company expects operating profit comparisons to improve in the second half of the fiscal year given a more favorable inflation environment, increasing SG&A cost savings, and improved volume.

Commercial Foods Segment
Specialty potato, seasonings, blends, flavors, and milled grain products sold to foodservice and commercial channels worldwide.

Sales for the Commercial Foods segment were $1.26 billion, essentially in line with $1.27 billion a year ago. Segment operating profit was $130 million, 7% below year-ago amounts.

Lamb Weston potato products’ sales and profits were below year-ago amounts, as expected, given that a major foodservice customer did not renew a sizeable amount of potato business. Overall profits for the rest of Lamb Weston grew. Lamb Weston is in the process of expanding its business with other customers, and expects results to improve as the year progresses.

Flour milling operations posted growth in sales and operating profits, reflecting the pass-through of changing wheat costs as well as good product mix and efficiencies.

The company is currently preparing for the formation of Ardent Mills, into which the company expects to contribute its milling operations. The details of that transaction, which is expected to close in the fourth quarter of calendar 2013, were announced on March 5, 2013. While the company expects approximately $0.03 of EPS dilution this fiscal year, as previously discussed, due to the formation of the venture, over the long term, the venture’s profit growth is expected to be accretive to ConAgra Foods’ EPS.

Ralcorp

Ralcorp businesses contributed a total of $942 million in sales and $82 million in operating profit for the fiscal first quarter, as reported. After adjusting for $1 million of net expense from items impacting comparability, operating profit was $83 million for the quarter. Because of the seasonality of Ralcorp sales and profits, contribution in the fiscal first quarter is generally the smallest of the fiscal year. The sales and profit results were slightly less than expected given the difficult retail customer environment. The company continues to expect approximately $0.25 per share of diluted EPS contribution, adjusted for items impacting comparability, this fiscal year from the Ralcorp businesses. The company currently reports Ralcorp results within two segments: Ralcorp Food Group and Ralcorp Frozen Bakery Products, listed as such in the segment detail later in this release.

Hedging Activities – This language primarily relates to operations other than the company’s milling operations.

Hedge gains and losses are 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 $21 million of unfavorable impact in the current quarter and $130 million of favorable impact in the year-ago period. The company identifies these amounts as items impacting comparability.

Other Items
- Unallocated Corporate amounts were $127 million of expense in the current quarter and $43 million of benefit in the year-ago period. Current-quarter amounts include $21 million of unfavorable hedge-related impact and $34 million of net expense from other items impacting comparability (details starting on page 7 of this release). Year-ago period amounts include $130 million of favorable hedge-related impact and $12 million of expense related to other items impacting comparability. Excluding these amounts, unallocated Corporate expense was $72 million for the current quarter and $75 million in the year-ago period.
- Equity method investment earnings were $4 million for the current quarter and $8 million in the year-ago period; the year-over-year decline largely reflects difficult market conditions for a European potato joint venture.
- Net interest expense was $96 million in the current quarter and $49 million in the year-ago period; the increase reflects the incremental interest related to the debt incurred to fund acquisitions, principally Ralcorp.

Capital Items
- Dividends for the current quarter totaled $105 million versus $98 million in the year-ago period.
- The company repurchased approximately 876,000 shares of common stock during the quarter for approximately $31 million, as it deployed proceeds from stock option exercises.
- For the current quarter, capital expenditures for property, plant and equipment were $181 million, compared with $98 million in the year-ago period; $34 million of the increase relates to Ralcorp. The comparable increase reflects several significant planned plant expansions and improvements. Depreciation and amortization expense was approximately $147 million for the fiscal first quarter; this compares with a total of $91 million in the year-ago period. Approximately $50 million of the increase in depreciation and amortization relates to Ralcorp.
- The company recently announced the divestiture of Lightlife, one of ConAgra Foods’ smaller brands and product lines that includes vegetarian-based burgers, hotdogs and other meatless frozen and refrigerated items. The brand, which was part of the Consumer Foods segment, was sold on Sept. 16, after the end of the fiscal first quarter, to Brynwood Partners for an undisclosed amount. Results for Lightlife for the fiscal first quarter and all prior periods are classified as discontinued operations.
- After the quarter-end, the company purchased certain dessert production assets from Harlan Bakeries, a former co-manufacturing partner who made frozen fruit and cream pies as well as pastry shells under the Marie Callender’s and Claim Jumper brand names.
- The company has extended the termination date for its $1.5 billion revolving credit facility by another two years; the facility will now terminate on Sept. 14, 2018.

Outlook

The company currently expects fiscal 2014 diluted EPS, adjusted for items impacting comparability, to be approximately $2.34-$2.38. This reduction from prior estimates reflects the softer-than-planned first quarter EPS, partially offset by additional SG&A cost management initiatives, a more favorable input cost environment, and the expectation for gradually improving Consumer Foods volumes.

Given the gradual nature of the anticipated recovery from the volume challenges, the company expects its fiscal 2014 second-quarter diluted EPS to be in the range of $0.55, adjusted for items impacting comparability. The company therefore expects the full year’s growth in EPS to occur in the second half of the fiscal year.

The company continues to expect approximately $0.25 of EPS contribution from Ralcorp this fiscal year, adjusted for items impacting comparability. The company also continues to expect approximately $0.10 of negative diluted EPS impact from the combination of customer transition issues at Lamb Weston and dilution from the formation of Ardent Mills, as previously discussed. The company notes that within the first-quarter comparable EPS of $0.37, there was approximately $0.04 per share of expense related to supporting new product introductions within the Consumer Foods segment; this expense was planned, and no such level of new-product-related marketing expense will repeat this fiscal year. The company also notes that fiscal first-quarter sales and profit contribution from the Ralcorp business is expected to be the lowest of the fiscal year, reflecting seasonality.

The company’s long-term EPS growth rates, and multi-year synergy goals related to the Ralcorp acquisition, are unchanged from prior estimates. The company expects at least 10% annual comparable EPS growth in fiscal 2015-2017 period, and expects the synergies from the Ralcorp transaction to reach $300 million of annual pretax cost-related synergies by the end of fiscal 2017.

Major Items Impacting First-quarter Fiscal 2014 EPS Comparability

Included in the $0.33 diluted EPS from continuing operations for the first quarter of fiscal 2014 (EPS amounts rounded and after tax):
- Approximately $0.05 per diluted share of net expense, or $37 million pretax, resulting from restructuring, integration, and transaction costs (including acquisition-related restructuring). $34 million of this is classified as unallocated Corporate expense (SG&A), $2 million is classified within the Consumer Foods segment (essentially all SG&A), and $1 million is classified within the Ralcorp Food Group segment (essentially all SG&A).
- Approximately $0.03 per diluted share of net expense, or $21 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 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 $0.05 per diluted share of net benefit related to unusual tax matters, primarily resulting from a change in estimate related to the tax methods used for certain international sales.

Included in the $0.61 diluted EPS from continuing operations for the first quarter of fiscal 2013 (EPS amounts rounded and after tax):
- Approximately $0.20 per diluted share of net benefit, or $130 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 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 $8 million pretax, related to historical legal matters, classified as unallocated Corporate expense. This amount is not tax-deductible.
- Approximately $0.01 per diluted share of net expense, or $4 million pretax, related to restructuring activities designed to improve efficiencies. $3 million of these are in the Consumer Foods segment ($2 million cost of goods sold (COGS) / $1 million SG&A), and $1 million is in unallocated Corporate expense (SG&A).
- Approximately $0.01 per diluted share of net expense, or $7 million pretax, from acquisition and related costs. $4 million is classified within the Consumer Foods segment ($2 million COGS, $2 million in SG&A) and $3 million is classified within unallocated Corporate expense (SG&A).