ConAgra Posts Decent Q3 Results

Consumer Foods’ comparable sales growth was 5%, reflecting 10% contribution from pricing and mix, partially offset by a 4% decline in unit volume and a 1% negative impact from foreign exchange.

27/03/09 ConAgra Foods, Inc., has said that overall sales grew 6% in Q3. Diluted EPS from continuing operations was $0.43 for the quarter, an increase of 26% from prior-year levels of $0.34. Excluding $0.03 per diluted share of net benefit in the current quarter from items impacting comparability, diluted EPS from continuing operations in the current quarter was $0.40, an increase of 18% from $0.34 in the year-ago period. Items impacting comparability in the current year and prior year are summarized toward the end of this release.

Gary Rodkin, ConAgra Foods’ chief executive officer, said, “I am pleased that Consumer Foods profits grew over prior-year amounts and that we are positioned for even more improvement from that segment in the fiscal fourth quarter. Given our recent new product introductions, moderating inflation and strong cost savings, the foundation for this segment is much stronger than in recent years.”

He continued, “We expected the slight decline in Commercial Foods profits given the exceptionally high profits generated in the year-ago period by capitalizing on opportunities in the turbulent wheat markets. We are confident in the strength of our underlying Commercial Foods operations and the ability of our management to navigate the current challenging economic conditions. We expect both of our operating segments to perform well in the fourth quarter and for supply chain savings and SG&A efficiencies to continue to be strong, resulting in fiscal 2009 EPS of slightly above $1.50, excluding items impacting comparability.”

The Consumer Foods segment posted sales of $2,014 million and operating profit of $245 million in the fiscal third quarter, and $1,921 million of sales and $218 million of operating profit in the year-ago period.

Consumer Foods’ comparable sales growth was 5%, reflecting 10% contribution from pricing and mix, partially offset by a 4% decline in unit volume and a 1% negative impact from foreign exchange. A significant portion of the volume decline was attributable to two brands, ACT II popcorn and Peter Pan peanut butter, as well as mix improvement efforts in the foodservice operations. The drop in ACT II volume reflected the intentional elimination of some very low-margin business in favor of more focus behind higher-margin Orville Redenbacher’s popcorn. The decrease in Peter Pan peanut butter reflected extremely high promotional activity as part of the brand’s reintroduction in the year-ago period, as well as the negative impact on the category stemming from a recent recall by another company.

The frozen products started shipping on Feb. 9, 2009, and the company expects to reach its targeted distribution for these items by the middle of the fiscal fourth quarter.

Consumer Foods’ comparable operating profit increased 6% over prior year amounts to $245 million. Input cost inflation was approximately $140 million, which was significant, although less intense than in recent quarters. Inflation was partially offset by higher-than-planned supply chain savings as well as lower SG&A expense. Marketing expense increased, partly in connection with the new products introduced during the quarter.

The company expects stronger comparable year-over-year operating profit improvement for this segment in the fiscal fourth quarter primarily due to an expected moderation of inflation, favorable cost savings trends, new product traction in the marketplace, the ongoing transformation of the frozen foods operations, and the benefit of an extra week.

For the fiscal third quarter, sales for the Commercial Foods segment were $1,121 million, 8% ahead of year-ago amounts, primarily reflecting higher sales at Lamb Weston and, to a lesser extent, at ConAgra Mills. Segment operating profit was $140 million for the quarter, 3% below year-ago amounts. The modest operating profit decline reflects a difficult comparison with exceptionally high milling profits in the year-ago period generated by abnormal wheat market volatility. Overall operating profit performance during the quarter reflected continued strong performance by ConAgra Mills, although profits for those operations were below the exceptionally high amounts earned a year ago. The segment’s operating profit performance also reflects a more modest rate of growth from Lamb Weston and a decline at Gilroy Food and Flavors, largely the result of challenging market conditions for foodservice and industrial customers.

The company expects the segment to post strong operating profit results in the fiscal fourth quarter given momentum in the milling operations, expectations for continued solid top-line performance at Lamb Weston, and the benefit of an extra week.

The company uses hedging activities to manage the risk in its plans for the cost of various commodity inputs and, to a lesser extent, foreign exchange. To improve the transparency of segment operating results, the company began utilizing a new methodology for presenting derivative gains and losses in the first quarter of fiscal 2009. This methodology temporarily classifies mark-to-market gains and losses as unallocated Corporate expense. The company later transfers the gains or losses to segment operating profit when the underlying item being hedged is expensed in cost of goods sold for the applicable operating segment. Prior-year amounts utilized a different methodology, which immediately classified the hedge gain or loss in the segment operating results regardless of when the underlying item was expensed. Prior-year fiscal third-quarter results include $21 million of net derivative gains ($14 million in Consumer Foods and $7 million in Commercial Foods other than the milling operations). This change in methodology was discussed in detail in the company’s first-quarter fiscal 2009 earnings release dated Sept. 18, 2008.

For the fiscal third quarter, $46 million of previously reported mark-to-market losses held as unallocated Corporate expense was reclassified as operating segment expense: $29 million to the Consumer Foods segment and $17 million to the Commercial Foods segment. Separately, unallocated Corporate expense increased by $11 million due to additional mark-to-market losses during the quarter, temporarily classified as unallocated Corporate expense until reclassification to operating segments at a later date. This quarter’s net $35 million benefit to unallocated Corporate expense ($46 million of benefit from reclassifying mark-to-market losses to other segments, partially offset by $11 million of additional mark-to-market losses) is listed as an item impacting comparability.