ConAgra Foods Reports Strong Fourth-Quarter EPS Growth & Good Consumer Foods Segment Volume Performance

28 Jun 2013 --- ConAgra Foods, Inc., one of North America’s leading food companies, reported results for the fiscal 2013 fourth quarter ended May 26, 2013. Diluted EPS from continuing operations was $0.45 for the fiscal fourth quarter, up significantly from $(0.21) in the year-ago period.

Excluding $0.15 per diluted share of net expense in the current quarter, and $0.72 of net expense in the year-ago period, from items impacting comparability, current-quarter diluted EPS from continuing operations of $0.60 was 18% above the comparable $0.51 earned in the year-ago period.

Diluted EPS from continuing operations for the full fiscal 2013 was $1.85 as reported, up 65% over the $1.12 earned in fiscal 2012; after adjusting for items impacting comparability in the current and prior year, fiscal 2013 diluted EPS from continuing operations was $2.16, up 17% over $1.84 earned last fiscal year. Items impacting comparability in fiscal 2013 and fiscal 2012 are summarized toward the end of this release and reconciled for Regulation G purposes on page 12.

Gary Rodkin, ConAgra Foods’ chief executive officer, said, “We are pleased to have driven a 17% increase in comparable EPS for fiscal 2013, and to have posted comparable year-over-year Consumer Foods volume growth in the fiscal fourth quarter as planned. We provided our current view of our strong near-term and long-term EPS growth potential, taking into account an increase in expected synergies from the recent Ralcorp transaction, as well as the benefit of our ongoing innovation, marketing, and margin management initiatives. We are confident in our strategy and our ability to execute it. After the strong fiscal 2013 performance from the Commercial Foods segment, we will be dealing with some profit headwinds related to that segment in fiscal 2014, and we expect to manage through these and still post very good EPS growth for the fiscal year. As we look to the longer term, given the opportunities ahead of us, we expect to grow comparable EPS by at least 10% per year from fiscal 2015-2017; this is expected to result in five consecutive years of double-digit EPS growth, and EPS in excess of $3.00 per share in fiscal 2017.”

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

The Consumer Foods segment posted sales of $2.3 billion and operating profit of $291 million for the fourth quarter, as reported. Sales increased 7%, reflecting 5% contribution from acquisitions, 3% organic volume growth, and (1%) unfavorable impact from a combination of price/mix.

- Brands posting sales growth for the quarter include Banquet, Hebrew National, Hunt’s, Marie Callender’s, Orville Redenbacher’s, PAM, Peter Pan, Ro*Tel, Rosarita, Wolf, and others. More brand details are in the Q&A document accompanying this release.
- In the fourth quarter, the company lapped the significant pricing taken last fiscal year in response to severe input cost inflation. This, along with the marketing investments made in recent quarters, favorably impacted the fourth-quarter volume performance.

Operating profit of $291 million increased 8% from $270 million in the year-ago period, as reported. After adjusting for $4 million of net expense in the current period, and $18 million of net expense in the year-ago period, from items impacting comparability, current-quarter operating profit of $295 million increased 3% over $288 million in the year-ago period. The comparable profit growth reflects the segment’s overall sales growth, strong cost savings which more than offset minimal input cost inflation, increased incentives, and an increase in marketing investment. As previously mentioned, the marketing increase is part of the company’s commitment to investing in its brands for the long term.

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 $1.3 billion, 4% above year-ago period amounts. Segment operating profit was $156 million, 13% above year-ago period amounts.

All major product lines posted sales growth. The segment’s strong profit growth in the quarter was largely the result of good performance for the flour milling operations, which increased volumes, drove favorable price/mix, and posted strong results for grain and byproduct merchandising. While the Lamb Weston potato operations posted good sales and profit performance domestically, softness in key Asian markets continued to weigh on international results, driving a modest operating profit decline for Lamb Weston overall.

For this segment in fiscal 2014, 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 were announced on March 5, 2013. While the company expects approximately $0.03 of EPS dilution shortly after the formation of the venture, over the long term, the venture’s profit growth is expected to be accretive to ConAgra Foods’ EPS. Pertaining to the Lamb Weston potato operations, a major foodservice customer did not renew a sizeable amount of potato business, and this will negatively impact segment profits in fiscal 2014. The company expects to gradually reallocate that production and service capacity to other customers. The company currently estimates that fiscal 2014 diluted EPS will be negatively impacted by approximately $0.06-$0.07 due to this transition at Lamb Weston.

Ralcorp

Ralcorp businesses contributed a total of $962 million in sales and $108 million of operating profit in the fiscal fourth quarter as reported. After adjusting for $2 million of net expense from items impacting comparability, operating profit was $110 million for the quarter, resulting in contribution for the full fiscal year which was in line with previously communicated goals. The company currently reports Ralcorp results within two new segments: Ralcorp Food Group and Ralcorp Frozen Bakery Products, listed as such in the segment detail later in this document.

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 $37 million of unfavorable impact in the current quarter and $53 million of unfavorable impact in the year-ago period. The company identifies these amounts as items impacting comparability.

Other Items

- Unallocated Corporate expense was $174 million in the current quarter and $513 million in the year-ago period. Current-quarter amounts include $37 million of unfavorable hedge-related impact and $51 million of net expense from other items impacting comparability (details starting on page 8 of this release). Year-ago period amounts include $53 million of unfavorable hedge-related impact and $397 million of expense related to pension accounting changes. Excluding these amounts, unallocated Corporate expense was $86 million for the current quarter and $64 million in the year-ago period. The comparable increase largely reflects higher incentive compensation expense and the addition of Ralcorp corporate expense.
- Equity method investment earnings were $5 million for the current quarter and $15 million in the year-ago period; the year-over-year decline largely reflects higher input costs for a European potato joint venture.
- Net interest expense was $102 million in the current quarter and $51 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 $104 million versus $100 million in the year-ago period.
- The company repaid in excess of $400 million toward its goal of $1.5 billion in debt reduction by fiscal 2015; this was in addition to other debt repaid as part of refinancing activities.
- For the current quarter, capital expenditures for property, plant and equipment were $169 million, compared with $98 million in the year-ago period; $24 million of the increase relates to Ralcorp. Depreciation and amortization expense was approximately $146 million for the fiscal fourth quarter; this compares with a total of $95 million in the year-ago period. Approximately $51 million of the increase in depreciation and amortization relates to Ralcorp.

Near-term and Long-term Financial Expectations

- The company currently expects fiscal 2014 diluted EPS, adjusted for items impacting comparability, to be approximately $2.40, reflecting:
- pproximately $0.25 of total diluted EPS benefit from the Ralcorp acquisition, unchanged from prior estimates.
- Low-single-digit organic volume growth and mid-single-digit operating profit growth for the Consumer Foods segment.
- A negative year-over-year impact of approximately $0.06-$0.07 per diluted share related to lost foodservice business and transitioning capacity to serve other customers within the Lamb Weston potato operations (Commercial Foods segment).
- Dilution of approximately $0.03 per diluted share resulting from contributing ConAgra Foods’ milling operations (Commercial Foods segment) into the soon-to-be created company Ardent Mills.
- The company expects its fiscal 2014 fiscal first-quarter diluted EPS to be in line with comparable year-ago amounts due to significant slotting and marketing investments associated with summer 2013 new product introductions, as well as the timing of the impact of the customer transition issues at Lamb Weston. The other quarters of fiscal 2014 are expected to reflect good EPS growth.
- The company currently expects cost-related synergies resulting from the Ralcorp acquisition to reach $300 million of annual pre-tax benefit by fiscal 2017, an increase from prior estimates of $225 million.
- The company expects annual diluted EPS growth of at least 10%, adjusted for items impacting comparability, for fiscal years 2015-2017 as significant cost synergies related to the Ralcorp acquisition materialize. Given the growth throughout this period, comparable EPS is expected to be greater than $3.00 in fiscal 2017.
- After the 2015-2017 period, when the majority of cost-related synergies are realized, the company expects long-term annual diluted EPS growth of 7-9%, adjusted for items impacting comparability, and long-term annual sales growth in the range of 3-4%. The long-term EPS and sales expectations reflect the benefit of ongoing innovation, marketing, margin enhancement initiatives, and capital allocation as well as anticipated benefit from greater participation in the attractive private brand segment. These long-term goals apply for fiscal 2018 and beyond, and are upward revisions from prior long-term targets of 6-8% for comparable annual EPS growth and 3% annual sales growth.
- As part of the integration of Ralcorp, which will continue over the next 24-36 months, the company expects to incur restructuring charges. While the company is not yet in a position to quantify the financial details of the restructuring activities throughout that time period, the cash portion of these charges is not expected to be significant enough to impact the company’s plans for reinvesting in the business or repaying $1.5 billion of debt before the end of fiscal 2015. The restructuring costs will be treated as items impacting comparability for EPS purposes.

Major Items Impacting Fourth-quarter Fiscal 2013 EPS Comparability

Included in the $0.45 diluted EPS from continuing operations for the fourth quarter of fiscal 2013 (EPS amounts rounded and after tax):

- Approximately $0.10 per diluted share of net expense, or $67 million pretax, resulting from restructuring, integration, and transaction costs (including acquisition-related restructuring). $61 million is within unallocated Corporate expense ($11 million in cost of goods sold, “COGS,” $50 million in Selling, General, and Administrative expense, “SG&A”), $4 million is within Consumer Foods (all SG&A), and $2 million is within the Ralcorp results (essentially all within the Ralcorp Food Group, all SG&A).
- Approximately $0.05 per diluted share of net expense, or $37 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 $0.03 per diluted share of net benefit, or $22 million pretax, related to historical legal matters, classified within unallocated Corporate expense.
- Approximately $0.02 per diluted share of net expense, or $12 million pretax, related to the year-end re-measurement of certain pensions, as well as the cost of early retirement of debt; this is classified within unallocated Corporate expense.
- Approximately $0.01 per diluted share of acquisition-related tax expense.

Included in the $(0.21) diluted EPS from continuing operations for the fourth quarter of fiscal 2012 (EPS amounts rounded and after tax):

- Approximately $0.60 per diluted share of net expense, or $397 million pretax, resulting from the pension accounting changes discussed in the fiscal 2012 fourth-quarter earnings release and the associated Q&A. This entire amount is classified as unallocated Corporate expense.
- Approximately $0.08 per diluted share of net expense, or $53 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 $13 million pretax, related to restructuring charges primarily in the Consumer Foods segment ($6 million COGS and $6 million SG&A).
- Approximately $0.01 per diluted share of net expense, or $6 million pretax, resulting from acquisition and related costs, which is classified primarily within the Consumer Foods segment ($2 million COGS, $4 million SG&A).
- Unallocated corporate expense includes $12 million of benefit from historical insurance matters ($7 million of benefit after tax, or $0.02 per diluted share) and $10 million of net expense related to historical legal matters, which is not tax-deductible ($10 million of expense after tax, or $0.02 per diluted share).