Conagra Brands Reports Solid Second Quarter Results

CHICAGO, Dec. 19, 2019 /PRNewswire/ -- Today Conagra Brands, Inc. (NYSE: CAG) reported results for the second quarter of fiscal year 2020, which ended on November 24, 2019. All comparisons are against the prior-year fiscal period, unless otherwise noted. Certain terms used in this release, including "Organic net sales," "EBITDA," "Free cash flow," and certain "adjusted" results, are defined under the section entitled "Definitions." See page 6 for more information.

Highlights

• Second quarter net sales increased 18.3%; organic net sales increased 1.6%, with positive organic net sales growth in each reporting segment.
• Diluted earnings per share from continuing operations (EPS) was $0.53 in the quarter; adjusted EPS was $0.63, with high single-digit growth in adjusted net income.
• The Company's integration of Pinnacle remained on-track in the quarter, with approximately $42 million of incremental cost synergies realized in the quarter, bringing total cumulative cost synergy realization to $112 million from the closing of the acquisition through the end of the second quarter.
• The Company is updating its total targeted annual cost synergies for the Pinnacle acquisition from $285 million by the end of fiscal 2022 to $305 million by the end of fiscal 2022. The Company expects the additional $20 million of cost synergies to be fully realized in fiscal 2020 and plans to reinvest the additional savings this fiscal year into longer-term sales-driving investments.
• During the quarter, the Company continued to reshape its portfolio by divesting its Direct Store Delivery (DSD) snacks business. Subsequent to quarter end, the Company sold a peanut butter manufacturing facility and began the process of exiting the manufacture and sale of private label peanut butter. The Company is updating its fiscal 2020 guidance primarily to reflect the impacts of these portfolio initiatives.

CEO Perspective
Sean Connolly, president and chief executive officer of Conagra Brands, commented, "Our second quarter results reflect solid execution in applying the Conagra Way playbook across our portfolio. We maintained our strong momentum in frozen and snacks. We also made good progress on our large grocery brands, Hunt's and Chef Boyardee, both of which made sequential improvements. We also continued to make very good progress on the Pinnacle integration, and we remain squarely on-track with our plans to improve key Pinnacle brands."

He continued, "Our expectation for fiscal 2020 remains that first-half investments will result in strong second-half performance. The second-half is when we expect to see the greatest impact from new frozen and snacks innovation, continued smart promotional support in key grocery brands, the ongoing implementation of our Pinnacle action plan, and synergy capture."

Total Company Second Quarter Results
In the quarter, net sales increased 18.3% to $2.8 billion. Reported net sales growth primarily reflects:

• a 19.6% increase from the acquisition of Pinnacle;
• a 2.9% net decrease from the divestitures of the Wesson oil business, the Gelit business, and the DSD snacks business (the "Sold Businesses"); and
• a 1.6% increase in organic net sales.

The 1.6% increase in organic net sales in the quarter was driven by 1.0% volume growth and 0.6% price/mix favorability. Favorable net pricing and mix were partially offset by the Company's continued actions to support its brands with brand-building investments with retailers.

Gross profit increased 17.8% to $798 million in the quarter, and adjusted gross profit increased 14.1% to $804 million. The increases were primarily driven by the net impact of the addition of Pinnacle's gross profit and cost synergies, as well as the benefits of price/mix and supply chain productivity. These benefits were partially offset by a reduction in profit associated with the Sold Businesses, input cost inflation, and increased brand-building investments with retailers. 

Selling, general, and administrative expenses (SG&A), which include advertising and promotional (A&P) expense, decreased 24.1% to $370 million in the quarter. Largely in-line with expectations, adjusted SG&A, which excludes A&P expense, increased 19.6% to $260 million, primarily as a result of additional Pinnacle-related expenses.

A&P expense for the quarter decreased 12.5% to $61 million. An increase in working media investment this quarter was more than offset by reductions in non-working spending, as well as A&P synergies associated with the Pinnacle transaction.

Net interest expense was $121 million in the quarter. Compared to the prior-year period, net interest expense increased $41 million on a reported basis and $47 million on an adjusted basis. The increase was driven by higher levels of debt outstanding as a result of the net debt issued in connection with the Pinnacle acquisition.

Conagra Brands' 488 million average diluted shares outstanding as of quarter end is an increase of 67 million shares versus the prior-year period. The increase was primarily driven by the shares issued in connection with the Pinnacle acquisition.

In the quarter, net income attributable to Conagra Brands increased 98.0% to $261 million, or $0.53 per diluted share. Adjusted net income attributable to Conagra Brands increased 8.3% to $306 million, or $0.63 per diluted share in the quarter. The increase in adjusted net income attributable to Conagra Brands was driven primarily by the addition of Pinnacle's operating profit, the benefits of cost synergies, and the increase in organic net sales. These benefits were partially offset by higher interest expense and the removal of profit from the Sold Businesses. The decrease in adjusted EPS in the quarter was primarily driven by the increase in average diluted shares outstanding, partially offset by the increase in adjusted net income.

Adjusted EBITDA, which includes equity method investment earnings and pension and postretirement non-service income, increased 17.2% to $610 million in the quarter.

Grocery & Snacks Segment Second Quarter Results
Net sales for the Grocery & Snacks segment increased 14.2% to $1.1 billion in the quarter, with the acquisition of Pinnacle adding 16.9% of the net sales growth and the divestiture of the Wesson oil and DSD snacks businesses subtracting 3.6%. Organic net sales increased 0.9%. On an organic net sales basis, volume increased 2.1% during the quarter, and price/mix decreased 1.2%. The segment continued to benefit from the snacks business, with successful innovation and momentum in brands such as Slim Jim, Snack Pack, Swiss Miss, Angie's BOOMCHICKAPOP, and Act II. The Hunt's tomatoes and Chef Boyardee businesses showed sequential in-market improvement, after each brand responded to competitive dynamics. The action plans for Wishbone and Duncan Hines remain on-track.

Operating profit for the segment increased 20.1% to $264 million in the quarter. Adjusted operating profit increased 16.7% to $273 million, primarily driven by the addition of Pinnacle's profit and the benefits of cost synergies, realized productivity, and organic net sales growth. These benefits were partially offset by the impacts of higher input costs and the loss of profit from the divestiture of the Wesson oil and DSD snacks businesses.

Refrigerated & Frozen Segment Second Quarter Results
Net sales for the Refrigerated & Frozen segment increased 28.8% to $1.2 billion in the quarter, with the acquisition of Pinnacle adding 28.1% of the net sales growth and the divestiture of the Gelit business subtracting 1.7%. Organic net sales increased 2.4%. On an organic net sales basis, volume increased 0.5% and price/mix increased 1.9%. The segment benefited from organic net sales growth across multiple brands, including Birds Eye, Healthy Choice, Marie Callender's, and P.F. Chang's Home Menu. The segment's recently-launched innovations, including those within the Healthy Choice Power Bowls line and Marie Callender's brand, as well as second-half launches, are expected to benefit the segment's second-half organic net sales growth rate as they build in-market distribution and velocity.

Operating profit for the segment increased 19.5% to $187 million in the quarter, and adjusted operating profit increased 29.6% to $216 million. The increases were primarily driven by the addition of Pinnacle's profit and the benefit of cost synergies and realized productivity improvements, which more than offset higher input costs.

International Segment Second Quarter Results
Net sales for the International segment increased 7.3% to $234 million in the quarter reflecting:

• an 8.6% increase from the acquisition of Pinnacle,
• a 2.6% decrease from the divestiture of the Wesson oil business,
• a 0.5% decrease from the unfavorable impact of foreign exchange, and
• a 1.8% increase in organic net sales.

On an organic net sales basis, volume increased 1.8% and price/mix was flat. During the quarter, the segment continued to benefit from growth in the snacks and frozen businesses.

Operating profit for the segment increased 17.1% to $26 million in the quarter. Adjusted operating profit decreased 8.3% to $27 million as the divestiture of the Wesson oil business, higher input costs, and the unfavorable impact of foreign exchange more than offset the benefits of organic net sales growth, realized productivity, and the addition of Pinnacle's profit.

Foodservice Segment Second Quarter Results
Net sales for the Foodservice segment increased 6.8% to $276 million in the quarter, with the acquisition of Pinnacle adding 10.4% and the divestiture of the Wesson oil business subtracting 4.4% of net sales growth. Organic net sales increased 0.8%. On an organic net sales basis, price/mix increased 3.6% and volume declined 2.8% in the quarter, driven by continued execution of the segment's value-over-volume strategy as well as inflation-related pricing.

Operating profit increased 11.4% to $38 million in the quarter, primarily driven by the addition of Pinnacle's profit and the benefit of cost synergies, the impacts of organic net sales growth, and supply chain realized productivity improvements. The segment's operating profit results were negatively impacted in the second quarter by higher input costs and the impact of the Wesson oil divestiture.

Other Second Quarter Items
Corporate expenses decreased 64.0% to $88 million in the quarter. Adjusted corporate expenses increased 52.6% to $71 million in the quarter, primarily driven by the inclusion of Pinnacle-related expenses.

Pension and post-retirement non-service income was $11 million in the quarter, an increase of approximately $2 million compared to the prior-year period.

Equity method investment earnings decreased 26.9% to $28 million in the quarter, primarily due to a gain on the sale of an asset in the prior year period. Adjusted equity method investment earnings increased 24.7% to $28 million in the quarter. Favorable market conditions led to improved performance by the Ardent Mills joint venture.

In the quarter, the effective tax rate was 24.3%, and the adjusted effective tax rate was 23.4%.

In the quarter, the Company paid a dividend of $0.2125 per share. 

The Company remains on-schedule with its de-leveraging targets and remains committed to a solid investment grade credit rating. Since completing the Pinnacle acquisition through the end of the second quarter, Conagra Brands has reduced total gross debt by $1.1 billion.

Portfolio Update
As previously disclosed, on October 21, 2019, the Company completed the divestiture of its DSD snacks business. 

On November 25, 2019, after the end of the second quarter, the Company completed the sale of its peanut butter manufacturing facility in Streator, Illinois. The sale was part of a broader initiative to optimize the Company's peanut butter business, which also included the decision to exit the manufacture and sale of private label peanut butter. The Company estimates the annualized impact of the exit from private label peanut butter to be a reduction in net sales of approximately $50 million and no material impact to adjusted operating profit.

Subsequent to the end of the quarter, the Company entered into a definitive agreement to divest its Lender's bagel business, which is part of the Refrigerated & Frozen segment. The transaction is expected to close during the third quarter of fiscal year 2020. Following the closing of the transaction, the expected annualized impact of the divestiture is a reduction of approximately $50 million of net sales and $0.01 of adjusted EPS.

Fiscal 2020 Outlook
The Company is updating its fiscal 2020 guidance primarily to reflect the divestiture of the DSD snacks business and the exit of its private label peanut butter business, the process of which began subsequent to the quarter close. The updated guidance includes the expected results from the Lender's business for the full fiscal year.

Note that organic net sales growth continues to exclude the impact of fiscal 2020's 53^rd week. All other metrics continue to include the impact of the 53^rd week.

The inability to predict the amount and timing of the impacts of foreign exchange, acquisitions, divestitures, and other items impacting comparability makes a detailed reconciliation of these forward-looking non-GAAP financial measures impracticable. Please see the end of this release for more information. 

Items Affecting Comparability of EPS
Included in the $0.53 diluted EPS from continuing operations for the second quarter of fiscal 2020 (EPS amounts rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.

• Approximately $0.06 per diluted share of net expense related to restructuring
• Approximately $0.05 per diluted share of net expense related to an impairment of the Lender's business, which is now classified as an asset held for sale
• Approximately $0.02 per diluted share of net benefit related to a contract settlement gain
• Approximately $0.01 per diluted share of net expense related to environmental matters
• Approximately $0.01 per diluted share of net tax benefit related to unusual tax items
• Approximately $0.01 per diluted share of negative impact due to rounding

Included in the $0.32 diluted EPS from continuing operations for the second quarter of fiscal 2019 (EPS amounts rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.

• Approximately $0.21 per diluted share of net expense related to restructuring plans
• Approximately $0.18 per diluted share of net expense related to acquisitions and divestitures
• Approximately $0.01 per diluted share of net expense related to the integration of Pinnacle
• Approximately $0.04 per diluted share of net expense related to Pinnacle inventory fair value mark-up adjustment
• Approximately $0.03 per diluted share of net benefit related to the gain on the sale of an asset within the Ardent Mills joint venture
• Approximately $0.06 per diluted share of net tax benefit related to the tax adjustment of valuation allowance associated with the divestiture of the Wesson oil brand
• Approximately $0.01 per diluted share of net tax expense related to unusual tax items
• Approximately $0.01 per diluted share of beneficial impact due to rounding

Definitions
Organic net sales excludes from reported net sales the impacts of foreign exchange, divested businesses and acquisitions, including the Pinnacle acquisition (until the anniversary date of the acquisitions), as well as the impact of any 53^rd week. All references to changes in volume and price/mix throughout this release are on an organic net sales basis.

References to adjusted items throughout this release refer to measures computed in accordance with GAAP less the impact of items impacting comparability. Items impacting comparability are income or expenses (and related tax impacts) that management believes have had, or are likely to have, a significant impact on the earnings of the applicable business segment or on the total corporation for the period in which the item is recognized, and are not indicative of the Company's core operating results. These items thus affect the comparability of underlying results from period to period.

References to earnings before interest, taxes, depreciation, and amortization (EBITDA) refer to net income attributable to Conagra Brands before the impacts of discontinued operations, income tax expense (benefit), interest expense, depreciation, and amortization. References to adjusted EBITDA refer to EBITDA before the impacts of items impacting comparability.

Free cash flow is defined as net cash flow from operating activities from continuing operations less additions to property, plant, and equipment. 

Discussion of Results
Conagra Brands will host a webcast and conference call at 9:30 a.m. Eastern time today to discuss the results. The live audio webcast and presentation slides will be available on www.conagrabrands.com/investor-relations under Events & Presentations. The conference call may be accessed by dialing 1-877-883-0383 for participants in the continental U.S. and 1-412-902-6506 for all other participants and using passcode 6135532. Please dial in 10 to 15 minutes prior to the call start time. Following the Company's remarks, the conference call will include a question-and-answer session with the investment community.

A replay of the webcast will be available on www.conagrabrands.com/investor-relations under Events & Presentations until December 19, 2020.

About Conagra Brands
Conagra Brands, Inc. (NYSE: CAG), headquartered in Chicago, is one of North America's leading branded food companies. Guided by an entrepreneurial spirit, Conagra Brands combines a rich heritage of making great food with a sharpened focus on innovation. The company's portfolio is evolving to satisfy people's changing food preferences. Conagra's iconic brands, such as Birds Eye®, Marie Callender's®, Banquet®, Healthy Choice®, Slim Jim®, Reddi-wip®, and Vlasic®, as well as emerging brands, including Angie's® BOOMCHICKAPOP®, Duke's®, Earth Balance®, Gardein®, and Frontera®, offer choices for every occasion. For more information, visit www.conagrabrands.com.

Note on Forward-looking Statements
This document contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Readers of this document should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this document. These risks, uncertainties, and factors include, among other things: the risk that the cost savings and any other synergies from the acquisition of Pinnacle (the "acquisition") may not be fully realized or may take longer to realize than expected; the risk that the acquisition may not be accretive within the expected timeframe or to the extent anticipated; the risks that the acquisition and related integration will create disruption to the Company and its management and impede the achievement of business plans; the risk that the acquisition will negatively impact the ability to retain and hire key personnel and maintain relationships with customers, suppliers, and other third parties; risks related to our ability to successfully address Pinnacle's business challenges; risks related to our ability to achieve the intended benefits of other recent and pending acquisitions and divestitures; risks associated with general economic and industry conditions; risks associated with our ability to successfully execute our long-term value creation strategies, including those in place for specific brands at Pinnacle before the acquisition; risks related to our ability to deleverage on currently anticipated timelines, and to continue to access capital on acceptable terms or at all; risks related to our ability to execute operating and restructuring plans and achieve targeted operating efficiencies from cost-saving initiatives, related to the acquisition and otherwise, and to benefit from trade optimization programs, related to the acquisition and otherwise; risks related to the effectiveness of our hedging activities and ability to respond to volatility in commodities; risks related to the Company's competitive environment and related market conditions; risks related to our ability to respond to changing consumer preferences and the success of its innovation and marketing investments; risks related to the ultimate impact of any product recalls and litigation, including litigation related to the lead paint and pigment matters, as well as any securities litigation, including securities class action lawsuits; risk associated with actions of governments and regulatory bodies that affect our businesses, including the ultimate impact of new or revised regulations or interpretations; risks related to the availability and prices of raw materials, including any negative effects caused by inflation or weather conditions; risks and uncertainties associated with intangible assets, including any future goodwill or intangible assets impairment charges, related to the acquisition or otherwise; the costs, disruption, and diversion of management's attention due to the integration of the acquisition; and other risks described in our reports filed from time to time with the Securities and Exchange Commission. We caution readers not to place undue reliance on any forward-looking statements included in this document, which speak only as of the date of this document. We undertake no responsibility to update these statements, except as required by law.

Note on Non-GAAP Financial Measures
This document includes certain non-GAAP financial measures, including adjusted EPS, organic net sales, adjusted gross profit, adjusted operating profit, adjusted SG&A, adjusted corporate expenses, adjusted gross margin, adjusted operating margin, adjusted effective tax rate, adjusted net income, adjusted net interest expense, free cash flow, net debt, adjusted equity method investment earnings, and adjusted EBITDA. Management considers GAAP financial measures as well as such non-GAAP financial information in its evaluation of the Company's financial statements and believes these non-GAAP measures provide useful supplemental information to assess the Company's operating performance and financial position. These measures should be viewed in addition to, and not in lieu of, the Company's diluted earnings per share, operating performance and financial measures as calculated in accordance with GAAP.

Certain of these non-GAAP measures, such as organic net sales, adjusted operating margin, adjusted effective tax rate, adjusted net interest expense, adjusted EPS, net debt, and free cash flow, are forward-looking. Historically, the Company has excluded the impact of certain items impacting comparability, such as, but not limited to, restructuring expenses, the impact of the extinguishment of debt, the impact of foreign exchange, the impact of acquisitions and divestitures, hedging gains and losses, impairment charges, the impact of legacy legal contingencies, and the impact of unusual tax items, from the non-GAAP financial measures it presents. Reconciliations of these forward-looking non-GAAP financial measures to the most directly comparable GAAP financial measures are not provided because the Company is unable to provide such reconciliations without unreasonable effort, due to the uncertainty and inherent difficulty of predicting the occurrence and the financial impact of such items impacting comparability and the periods in which such items may be recognized. For the same reasons, the Company is unable to address the probable significance of the unavailable information, which could be material to future results.

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 Company identifies these amounts as items that impact comparability within the discussion of unallocated Corporate results.