ConAgra Foods Inc., one of North America’s leading packaged food companies, on December 21 reported results for the fiscal 2011 second quarter ended November 28, 2010. Diluted earnings per share (EPS) from continuing operations was $0.45 as reported and on a comparable basis. For the same period a year ago, diluted EPS from continuing operations as reported was $0.53, which included $0.02 of net benefit from items impacting comparability. 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, “Several challenges impacted our results. Difficult market conditions, weaker-than-planned consumer response to promotions, and higher-than-planned inflation weighed on Consumer Foods’ profits despite progress in overall unit market shares and volume. Profitability of our Commercial Foods segment was below expectations primarily due to selling and processing last year’s high-cost, unusually low-quality potato crop. In aggregate, it was a challenging quarter.”
He continued, “Several factors are expected to improve year-over-year operating results in the second half of the fiscal year, despite the challenging environment. Very importantly, we are increasing net pricing on a number of our products given the ongoing acceleration of cost inflation. Some price increases have recently been implemented, and more are under way. We are confident that the net effect of these pricing increases will be positive, despite some potential modest volume decline. Our products will continue to deliver outstanding value to consumers even after these pricing actions. Price increases, along with strong cost savings, lower SG&A, accelerating contribution from innovation and recently acquired businesses, and a good-quality potato crop currently being processed are expected to drive improved year-over-year earnings for the rest of the fiscal year. Although the challenging environment is expected to cause this fiscal year’s anticipated EPS growth to be comparatively modest, the operating foundation of the company continues to be strong, and we are confident in our long-term EPS growth potential.”
Consumer Foods Segment (67 percent of second-quarter sales)
Branded and non-branded food sold in retail and foodservice channels.
The Consumer Foods segment posted sales of $2,104 million and operating profit of $284 million for the second quarter. Sales increased 1% as reported, reflecting a 1% organic volume increase, 3% decline in overall price/mix, and 3% benefit from acquisitions (net of divestitures). The company’s all-outlet unit market share increased for the quarter, while dollar share was largely unchanged in aggregate.
Sales results reflect difficult market conditions and a very competitive environment, which necessitated increased promotional spending. Consumer response to promotions was weaker-than-planned given the challenging economic conditions. The company noted strong sales results for the segment’s frozen business and international markets. Sales for recently acquired and recently introduced products performed well.
- Brands posting sales growth for the quarter included DAVID, Marie Callender’s, PAM, Reddi-wip, Slim Jim, Wesson, Wolf, and others.
- More brand details can be found in the Q&A document accompanying this release.
- Based on accelerating input cost inflation, the company is in the process of implementing pricing increases; despite some potential negative effect on volumes, the company expects the net impact of the pricing increases to improve fiscal 2011 second-half profitability.
Operating profit of $284 million was 14% below $330 million in the year-ago period, as reported. Adjusting for approximately $5 million of restructuring charges in current-quarter results, the comparable year-over-year decline was 13%. The lower profitability reflects the impact of unfavorable price/mix, largely due to promotional spending, as well as inflation that outpaced cost savings. Cost savings during the quarter were in line with expectations, at approximately $80 million, and the company expects to deliver in excess of $275 million of cost savings this fiscal year, with strong savings in the second half.
The company expects the segment’s year-over-year profit performance to improve in the second half of the fiscal year given the price increases under way, strong cost savings, lower SG&A, and accelerating contribution from innovation and recently acquired businesses.
Commercial Foods Segment (33% of second-quarter sales)
Specialty potato, milled grain products, and seasonings, blends, flavors sold to foodservice and commercial channels worldwide.
Sales for the Commercial Foods segment were $1,057 million, 3% above $1,022 million in the year-ago period. The sales increase reflects improved volumes for Lamb Weston specialty potato products, as well as higher selling prices for the flour milling operations necessitated by higher wheat input costs.
Segment operating profit was $126 million, 16% below $151 million in the year-ago period. The operating profit decline reflects weaker margins at Lamb Weston, primarily due to selling and processing last year’s high-cost, unusually poor-quality potato crop. The company also incurred start up costs at the new Delhi, La., sweet potato plant, which began operations during the quarter. The company finished its inventory of the old potato crop, and began processing this year’s new, good-quality potato crop this quarter; fiscal second-half profits for the Lamb Weston specialty potato operations are on track for year-over-year improvement. Although still strong, flour milling profits were down from last year’s high levels, as expected. Profits for the seasonings, blends, and flavors operations were in line with year-ago amounts, as planned.
Hedging Activities – This language primarily relates to operations other than the company’s milling operations.
The company recorded $9 million of net hedging benefit within unallocated Corporate expense in the current quarter, and $6 million of net hedging benefit within unallocated Corporate expense in the year-ago period. The company identifies both of these amounts as items impacting comparability. Those 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.
Other Items
- Corporate expense was $79 million for the quarter and $94 million in the year-ago period. Current-quarter amounts include $9 million due to hedge benefit, and prior-year amounts include $6 million of hedge benefit. Excluding these amounts, Corporate expense was $88 million for the current quarter and $100 million in the year-ago period; the decrease reflects lower incentive compensation expense. The company has maintained a strong focus on overhead cost control. Incentive compensation expense is expected to be lower year-over-year, which will favorably impact EPS growth.
- Equity method investment earnings were $5 million in the current quarter and $6 million in the year-ago period.
- Net interest expense was $34 million in the current quarter, compared with $41 million in the year-ago period; interest income from the notes receivable held in connection with the divestiture of the Trading & Merchandising operations benefited the current quarter and the year-ago period by $19 million and $20 million, respectively. The year-over-year decline reflects the repayment of debt earlier this fiscal year, and the benefit of interest rate swaps.
- The effective tax rate for continuing operations for the quarter was approximately 34%. The company continues to expect the continuing operations effective tax rate for the full fiscal year 2011 to be approximately 34%, adjusted for items impacting comparability.
Capital Items
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After quarter end, the company received $554 million in cash as payment in full of the principal and interest due on the two outstanding tranches of notes receivable related to the divestiture of the Trading & Merchandising operations in June 2008. The two tranches of notes had been scheduled to mature in June 2011 and June 2012.
- The Board of Directors increased the company’s share repurchase authorization by the amount of the early payment, $554 million.
- Reflecting approximately $100 million of shares repurchased during the second quarter and the recent $554 million authorization increase, the remaining share repurchase authorization is approximately $750 million. The company plans to complete its share repurchase program over the next several quarters, subject to market conditions. Repurchases may be completed through negotiated transactions or open market purchases.
- Given the expected timing of share repurchases, the EPS benefit of the share repurchases is not expected to totally offset the impact of foregone interest income in the second half of the fiscal year. The company therefore expects to have a negative impact of $0.03-$0.04 to EPS in the second half of fiscal 2011 due to these matters. The company does not expect any significant EPS impact in fiscal 2012 related to these capital allocation events.
- Dividends for the quarter totaled $88 million versus $84 million for the year-ago period.
- For the quarter, capital expenditures from continuing operations for property, plant, and equipment were $82 million, compared with $123 million in the year-ago period. Depreciation and amortization expense from continuing operations was approximately $89 million for the quarter; this compares with a total of $81 million in the year-ago period.
Outlook for Fiscal 2011
The company expects fiscal 2011 full-year diluted EPS, adjusted for items impacting comparability, to show a low-single-digit rate of growth over the comparable $1.74 earned in fiscal 2010. This outlook reflects weaker-than-planned first-half EPS and the negative earnings impact related to the early payment of notes receivable. The company’s expectations for improved operating results in the second half of the fiscal year are based on pricing actions under way, strong cost savings, lower SG&A, accelerating contribution from innovation and recently acquired businesses, as well as the benefit of a good-quality potato crop already being processed at Lamb Weston. The company expects year-over-year EPS improvement in the fiscal 2011 third and fourth quarters, with EPS amounts being higher in the fourth quarter than in the third quarter largely due to the timing of price increases. The company expects operating cash flow to be approximately $1.2 billion for the fiscal year.
Major Items Impacting Second-quarter Fiscal 2011 EPS Comparability
Included in the $0.45 diluted EPS from continuing operations for the second quarter of fiscal 2011 (EPS amounts rounded and after tax):
- Approximately $0.01 per diluted share of net benefit, or $9 million pretax, related to the mark-to-market impact of derivatives used to hedge input costs, temporarily classified in unallocated Corporate expense. This will later be reclassified to the operating segments when underlying hedged items are expensed in segment cost of goods sold.
- Approximately $0.01 per diluted share of expense, or $5 million pretax, related to restructuring plans; this expense is classified within the Consumer Foods segment ($4 million COGS, $1 million SG&A).
Included in the $0.53 diluted EPS from continuing operations for the second quarter of fiscal 2010 (EPS amounts rounded and after tax):
- Approximately $0.02 per diluted share of net benefit from a lower-than-planned effective income tax rate.
- Approximately $0.01 per diluted share of net benefit related to the mark-to-market impact of derivatives used to hedge input costs, temporarily classified in unallocated Corporate expense. This expense will later be reclassified to the operating segments when underlying hedged items are expensed in segment cost of goods sold.
- NOTE: When reporting second quarter diluted EPS from continuing operations in fiscal 2010, there was $0.01 of EPS related to the Gilroy Foods & Flavors dehydrated vegetable operations within continuing operations. This business was subsequently divested, and the $0.01 of EPS is now included in discontinued operations. As a result of this reclassification, fiscal 2010 second quarter diluted EPS from continuing operations, excluding items impacting comparability, now rounds to $0.51 instead of the $0.52 as presented in the prior year.
ConAgra Foods is one of North America's leading food companies, with brands in 97 percent of America's households. Consumers find Banquet, Chef Boyardee, Egg Beaters, Healthy Choice, Hebrew National, Hunt's, Marie Callender's, Orville Redenbacher's, PAM, Peter Pan, Reddi-wip, Slim Jim, Snack Pack and many other ConAgra Foods brands in grocery, convenience, mass merchandise and club stores. ConAgra Foods also has a strong business-to-business presence, supplying frozen potato and sweet potato products as well as other vegetable, spice and grain products to a variety of well-known restaurants, foodservice operators and commercial customers.
