ConAgra Foods Reports Strong Fiscal 2014 Second-Quarter

20 Dec 2013 --- ConAgra Foods, Inc., one of North America’s leading food companies, today reported results for the fiscal 2014 second quarter ended Nov. 24, 2013. Diluted EPS from continuing operations was $0.54 as reported for the fiscal second quarter, up 4% from $0.52 in the year-ago period.

Gary Rodkin, ConAgra Foods’ chief executive officer, said, “We are pleased that our fiscal second- quarter EPS came in stronger than anticipated. Some of the EPS strength in the fiscal second quarter reflected some volume that we were expecting early in the fiscal third quarter, and we still expect good comparable EPS growth in the second half of fiscal 2014. Challenging industry conditions make us cautious about the near term, and our fiscal 2014 EPS guidance reflects this. Taking our strong second-quarter EPS performance and the industry environment into consideration, we are reaffirming our EPS goal in the range of $2.34-$2.38, adjusted for items impacting comparability.”

The Consumer Foods segment posted sales of approximately $2 billion and operating profit of $289 million, as reported. Sales were essentially flat, reflecting flat volumes and flat price/mix. The sequentially improved volume performance largely reflects changes in customer plans that resulted in replenished retail inventory levels prior to the holiday season. Ralcorp international sales are now part of this segment but not in year-ago amounts because of the date of the acquisition; contribution from this generated 1% favorable benefit to overall segment sales. The impact of foreign exchange negatively impacted segment sales by 1%.
• Brands posting sales growth for the quarter include Hebrew National, Hunt’s, Marie Callender’s, Reddi-wip, Ro*Tel, Rosarita, Slim Jim, Wolf, and others. More brand details are in the Q&A document accompanying this release.
• Over the last few weeks, the company has seen improved consumption trends for some key brands in response to recent merchandising programs.

Operating profit of $289 million was 13% above year-ago amounts as reported. After adjusting for $4 million of net expense in the current quarter and $6 million of net expense in the year-ago period from items impacting comparability, current quarter operating profit of $293 million increased 11% over comparable year-ago amounts. The comparable profit growth reflects manageable inflation, supply chain productivity initiatives, and a strong focus on selling, general, and administrative (SG&A) related efficiencies. Advertising and consumer promotion costs declined year-over-year, reflecting heavy investment a year ago, rebalancing spending to strengthen promotional support, and a focus on productivity.

Some of the sequential volume improvement in the fiscal second quarter reflects business that was expected to occur early in the fiscal third quarter, thus a shift in timing versus earlier plans. Given current business conditions, the company is cautious about near-term volume performance. The company currently expects overall comparable volumes for this segment for the full fiscal year to be down slightly compared with year-ago amounts. The company expects operating profit growth for this segment in the back half of the fiscal year, largely due to a combination of continued manageable inflation, supply chain productivity initiatives, SG&A efficiencies which include a reduction in marketing expense, and, to a lesser extent, the benefit of merchandising programs.

Sales for the Commercial Foods segment were $1.6 billion, up 3% over year-ago amounts as reported. The sales growth reflects $79 million of benefit from acquisitions, specifically Ralcorp foodservice results that are now part of this segment (but not in year-ago amounts because of the date of the acquisition). Segment operating profit was $169 million, 13% below year-ago amounts as reported.

After adjusting for $9 million of net expense in the current quarter for items impacting comparability, current quarter operating profit of $178 million declined 9% on a comparable basis.

Lamb Weston potato products’ profits were below year-ago amounts, as expected, given that a major foodservice customer did not renew a sizeable amount of potato business toward the end of last fiscal year. Lamb Weston continues to expand business with other customers to recover the lost volume. During the quarter, the company fully transitioned to processing the current-year potato crop; the quality is below the level expected, and this will negatively affect manufacturing costs and margins for Lamb Weston over the next few quarters. Lamb Weston expects good but slower-than-planned growth internationally largely because some customers are facing short-term challenges in certain Asian markets.

Flour milling sales decreased, reflecting the pass-through of lower wheat costs, while milling profits were in line with year-ago amounts. Profits for the rest of the segment were in line with year-ago amounts, favorably influenced by $5 million of contribution from the former Ralcorp foodservice operations.

Sales for the Private Brands segment were $1.1 billion in the quarter, up more than $900 million over year-ago amounts. This growth reflects the acquisition of the Ralcorp businesses; most of the former Ralcorp businesses are classified within this segment (and not in year-ago amounts because of the date of the acquisition). Operating profit for this segment was $89 million as reported and $91 million adjusted for items impacting comparability; the increase over prior-year amounts reflects the acquisition. Under the recently implemented organizational structure, the company has combined all of the private brand activities across the company in the Private Brands segment; this positions it for strong customer service and effective leveraging of the company’s infrastructure to support long-term private brand growth opportunities. Early feedback from major customers about the company’s long-term plans and commitment to private brands categories, and the resulting growth potential, has been very good.

The private brands operations are now focused on six major product lines: bars, cereal, condiments, pasta, snacks, and retail bakery. Each product group has a designated general manager with full profit responsibility and cross-functional support designed to drive growth; the company also has focused private brand selling efforts, with a private brand sales leader for each retail customer team. While private brands results so far this fiscal year have not been as strong as planned, these organizational changes, as well as the accompanying focus on improving customer partnerships, ensuring appropriate pricing architecture, and winning new business, are expected to gradually improve results over time. Overall, the former Ralcorp businesses are expected to contribute about $0.25 per share of diluted EPS this fiscal year, adjusted for items impacting comparability. This is in line with original goals, with a significant portion of the profit contribution coming from this new Private Brands segment.

The company continues to expect fiscal 2014 diluted EPS, adjusted for items impacting comparability, to be in the range of $2.34-$2.38. This takes into account the stronger-than-planned fiscal second quarter EPS contribution, as well as caution about the overall business environment, the impact of the quality issues in this year’s potato crop at Lamb Weston, and the gradual nature of the executional improvements underway in the Private Brands segment.

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 the fiscal 2015-2017 period, and expects the Ralcorp transaction to generate $300 million of annual pretax cost-related synergies by the end of fiscal 2017.

Segment Changes Implemented During the Fiscal Second Quarter, 2014

The Consumer Foods segment, which reported approximately $9.0 billion in sales for fiscal 2013 under the prior reporting structure, has been changed as follows:
• It no longer includes results for store brands (reflecting approximately $700 million of revenue in fiscal 2013; store brands are now part of the recently created Private Brands segment),
• It no longer includes results for foodservice sales of retail branded products (reflecting approximately $800 million of revenue in fiscal 2013; foodservice is now part of the Commercial Foods segment), and
• It now includes international sales previously part of the Ralcorp business segment(s) results (owned less than a year, with the international sales from Ralcorp expected to generate approximately $60 million in FY14 sales).

The Commercial Foods segment, which reported sales of approximately $5.2 billion in fiscal 2013 under the prior reporting structure, has been changed as follows:
• It now includes the foodservice results that were previously part of the Consumer Foods segment.
• It now includes the frozen bakery foodservice results that were previously part of the Ralcorp business segment(s) (owned less than a year, with the foodservice sales from Ralcorp expected to generate approximately $300 million in FY14 sales).

The Private Brands segment has been recently created, and includes:
• A significant portion of the results of the former Ralcorp businesses (owned less than a year, and this portion of the former Ralcorp segment is expected to generate $3.7 billion of sales in fiscal 2014);
• The store brands results that were previously part of the Consumer Foods segment.