Conagra Brands Reports Strong Second Quarter Results

CHICAGO, Jan. 7, 2021 /PRNewswire/ -- Today Conagra Brands, Inc. (NYSE: CAG) reported results for the second quarter of fiscal year 2021, which ended on November 29, 2020. All comparisons are against the prior-year fiscal period, unless otherwise noted.  Certain terms used in this release, including "Organic net sales," "EBITDA," and certain "adjusted" results, are defined under the section entitled "Definitions."  See page 5 for more information.

Highlights

• Second quarter net sales increased 6.2%, and organic net sales increased 8.1%, with significant growth in each of the Company's three retail segments on both a reported and an organic basis.
• Total Company operating margin increased 250 basis points to 17.7%, and adjusted operating margin increased 250 basis points to 19.6%.
• Diluted earnings per share from continuing operations (EPS) for the second quarter grew 45.3% to $0.77, and adjusted EPS grew 28.6% to $0.81.
• From the close of the Pinnacle Foods acquisition through the end of the second quarter, the Company has reduced its gross debt by $2.3 billion; this reduction in debt, together with strong earnings, enabled the Company to achieve its targeted Net Leverage Ratio ahead of schedule.
• The Company is providing guidance for the third quarter of fiscal 2021:
• Organic net sales growth is expected in the range of +6% to +8%
• Adjusted operating margin is expected in the range of 16.0% to 16.5%
• Adjusted EPS is expected in the range of $0.56 to $0.60
• The Company is reaffirming its fiscal 2022 guidance, which does not yet include the impact of the pending sale of the Peter Pan peanut butter business.

CEO Perspective
Sean Connolly, president and chief executive officer of Conagra Brands, commented, "Our second quarter results reflect strong performance across the business and outstanding execution delivered by employees across the company.  We exceeded expectations on net sales, profitability, and de-leveraging while continuing to invest in the business.  We have continued to selectively invest in production capacity and marketing support to increase the availability and awareness of our products to maximize long-term brand health."

He continued, "We remain confident that Conagra Brands is well-positioned to capture the benefits of the shifting consumer behavior, many of which we believe will continue well into the future.  The continued business momentum, coupled with our disciplined approach to investment, reinforce our confidence in the long-term potential of the business and our ability to create sustained value for our shareholders."

Total Company Second Quarter Results
In the quarter, net sales increased 6.2% to $3.0 billion.  The growth in reported net sales primarily reflects:

• a 1.7% net decrease from the divestitures of the Direct Store Delivery (DSD) snacks business, the Lender's bagel business, the H.K. Anderson business, and the exit of the private label peanut butter business (collectively, the Sold Businesses);
• a 0.2% net decrease due to foreign exchange; and
• a 8.1% increase in organic net sales.

The 8.1% increase in organic net sales was driven by a 6.6% increase in volume and a favorable price/mix impact of 1.5%.  The volume increase was primarily driven by consumers increasing their at-home food consumption as a result of the COVID-19 pandemic, which benefitted the Company's retail segments but negatively impacted the Foodservice segment.  The price/mix favorability was primarily driven by favorable sales mix.

Gross profit increased 11.4% to $889 million in the quarter, and adjusted gross profit increased 11.4% to $895 million.  Gross margin increased 139 basis points to 29.7% in the quarter, and adjusted gross margin increased 139 basis points to 29.9%.  The net sales increase, together with very strong supply chain realized productivity, favorable margin mix, cost synergies associated with the Pinnacle Foods acquisition, and fixed cost leverage combined to more than offset input cost inflation, higher transportation costs, COVID-19-related expenses, the impact of foreign exchange, and lost profit from the Sold Businesses.

Selling, general, and administrative expense (SG&A), which includes advertising and promotional expense (A&P), decreased 3.3% to $358 million in the quarter.  Adjusted SG&A, which excludes A&P, decreased 6.2% to $244 million, primarily as a result of cost synergies associated with the Pinnacle Foods acquisition as well as temporarily reduced spending as employees worked from home and business travel was reduced.  A&P for the quarter increased 4.7% to $64 million, driven primarily by higher eCommerce investments. 

Net interest expense was $108 million in the quarter.  Compared to the prior-year period, net interest expense decreased 11.3% or $14 million, driven by lower levels of debt outstanding.

The Company's 491 million average diluted shares outstanding in the quarter was an increase of 0.5% versus the prior-year period.

In the quarter, net income attributable to Conagra Brands increased 45.4% to $379 million, or $0.77 per diluted share.  Adjusted net income attributable to Conagra Brands increased 29.5% to $396 million, or $0.81 per diluted share, in the quarter.  The increases were driven primarily by the increase in gross profit and reduction in SG&A.  The increase in adjusted EPS in the quarter was primarily driven by the increase in adjusted net income attributable to Conagra Brands, slightly offset by higher average diluted shares outstanding.

Adjusted EBITDA, which includes equity method investment earnings and pension and postretirement non-service income, increased 16.7% to $712 million in the quarter, primarily driven by the previously mentioned increase in adjusted gross profit and decrease in adjusted SG&A.

Grocery & Snacks Segment Second Quarter Results
Net sales for the Grocery & Snacks segment increased 12.5% to $1.3 billion in the quarter reflecting:

• a 2.8% decrease from the impact of the Sold Businesses; and
• a 15.3% increase in organic net sales.

On an organic net sales basis, volume increased 13.6% and price/mix increased 1.7%.  Volume benefited from increased at-home eating as a result of the COVID-19 pandemic and replenishment of customer inventory levels.  The increase in price/mix was primarily driven by favorable mix.  Many grocery and snack brands experienced strong organic sales growth in the quarter, including snack brands Orville Redenbacher's, Act II, Swiss Miss, Snack Pack, and Duncan Hines and staples brands such as RO*TEL, Libby's, Chef Boyardee, PAM, Hunt's, and Armour Star.

Operating profit for the segment increased 19.9% to $316 million in the quarter.  Adjusted operating profit increased 16.8% to $319 million, primarily driven by organic net sales growth, very strong supply chain realized productivity, and cost synergies associated with the Pinnacle Foods acquisition.  These benefits were partially offset by the impacts of input cost inflation, higher transportation costs, COVID-19-related expenses, and the lost profit from the Sold Businesses.

Refrigerated & Frozen Segment Second Quarter Results
Net sales for the Refrigerated & Frozen segment increased 6.8% to $1.2 billion in the quarter reflecting:

• a 1.0% decrease from the impact of the Sold Businesses; and
• a 7.8% increase in organic net sales.

On an organic net sales basis, volume increased 6.4% and price/mix increased 1.4%.  Volume benefited from increased at-home eating as a result of the COVID-19 pandemic.  The price/mix increase was primarily driven by lower promotion levels.  Many brands, including P.F. Chang's Home Menu, Reddi-wip, Hebrew National, Hungry-Man, Gardein, Marie Callender's, and Birds Eye experienced strong organic net sales growth in the quarter. 

Operating profit for the segment increased 41.1% to $264 million in the quarter.  Adjusted operating profit increased 25.6% to $272 million as the benefits of higher organic net sales, very strong supply chain realized productivity, and cost synergies associated with the Pinnacle Foods acquisition more than offset the impacts of input cost inflation, higher transportation costs, COVID-19-related expenses, and lost profit from the Sold Businesses.

International Segment Second Quarter Results
Net sales for the International segment increased 6.6% to $250 million in the quarter reflecting:

• a 2.5% decrease from the unfavorable impact of foreign exchange; and
• a 9.1% increase in organic net sales.

On an organic net sales basis, volume increased 6.4% and price/mix increased 2.7%.  During the quarter, the segment benefited from elevated demand related to the impacts of the COVID-19 pandemic, and experienced strong growth in both Canada and Mexico.

Operating profit for the segment increased 49.3% to $40 million in the quarter.  Adjusted operating profit increased 48.4% to $40 million as the increase in organic net sales, together with the benefits from favorable supply chain realized productivity and product mix were partially offset by the impacts of higher input costs and foreign exchange.

Foodservice Segment Second Quarter Results
Net sales for the Foodservice segment decreased 23.1% to $212 million in the quarter reflecting:

• a 1.7% decrease from the impact of the Sold Businesses; and
• a 21.4% decrease in organic net sales.

On an organic net sales basis, volume decreased 25.3% primarily driven by lower restaurant traffic as a result of the COVID-19 pandemic.  Price/mix was favorable at 3.9% in the quarter primarily driven by increased pricing to offset higher input costs.

Operating profit for the segment decreased 41.6% to $22 million in the quarter, as the impacts of lower organic net sales and higher input costs more than offset the impacts of favorable supply chain realized productivity and cost synergies associated with the Pinnacle Foods acquisition.

Other Second Quarter Items
Corporate expenses increased 27.0% to $111 million in the quarter, primarily driven by expenses associated with the early extinguishment of debt.  Adjusted corporate expense decreased 9.2% to $64 million in the quarter, as favorability from synergies and COVID-related savings, such as less travel expense, more than offset slightly higher incentive compensation expense.

Pension and post-retirement non-service income was $14 million in the quarter compared to $11 million of income in the prior-year period.

In the quarter, equity method investment earnings were $23 million.  The 16.7% decrease on a reported basis and the 18.5% decrease on an adjusted basis were primarily driven by less favorable market conditions for the Ardent Mills joint venture.

In the quarter, the effective tax rate was 17.6% compared to 24.3% in the prior-year period, primarily driven by a release of our valuation allowance on capital loss carryforwards as a result of the pending sale of the Peter Pan peanut butter business.  The adjusted effective tax rate was 23.2% compared to 23.4% in the prior-year period.

In the quarter, the Company paid a dividend of $0.2125 per share.  As previously announced, during the second quarter the Company's Board of Directors approved an increase in the quarterly dividend to $0.275 per share of common stock, with such increase effective in the third quarter.

The Company remains committed to a solid investment grade credit rating.  Since the closing of the Pinnacle Foods acquisition through the end of the second quarter of fiscal 2021, the Company has reduced total gross debt by more than $2.3 billion, resulting in total debt of $9.3 billion and net debt of $9.2 billion as of the end of the second quarter of fiscal 2021.  In the last four fiscal quarters ended November 29, 2020, the Company generated $1.1 billion in net income attributable to Conagra Brands and adjusted EBITDA of $2.6 billion.  As of the second quarter of fiscal 2021, the Company's net debt to last twelve month adjusted EBITDA ratio (Net Leverage Ratio) was 3.6x, achieving the 3.5x to 3.6x Net Leverage Ratio target ahead of schedule.

Portfolio Update
On December 7, 2020, the Company entered into a definitive agreement to sell its Peter Pan peanut butter business to Post Holdings, Inc.  The transaction is subject to customary closing conditions and is expected to be completed in the first calendar quarter of 2021.  The business is currently reflected primarily within the Grocery & Snacks segment, and to a lesser extent within the International and Foodservice segments.  The sale is expected to have an annualized impact of reducing net sales by approximately $110 million and adjusted EPS by approximately $0.03.

Outlook
The ultimate impact of the COVID-19 pandemic on the Company's full year fiscal 2021 consolidated results remains uncertain.  The Company continues to expect demand in retail channels to remain elevated and demand in foodservice channels to remain challenged versus historical norms.  However, the degree and timing of changes in retail and foodservice demand levels are difficult to predict with enough certainty to provide a full-year outlook at this time.

In the third quarter to-date, the Company has seen a sustained increase in demand in its retail segments.  The Company has also continued to see reduced demand in its Foodservice segment when compared to pre-COVID-19 demand levels.  COVID-19-related costs have also continued to impact the business.  Based on these factors, the Company is providing the following third quarter fiscal 2021 guidance:

• Organic net sales growth of +6% to +8%
• Adjusted operating margin of 16.0% to 16.5%
• Adjusted EPS of $0.56 to $0.60

The Company's third quarter guidance does not yet include any impacts from the pending sale of the Peter Pan peanut butter business.  It also continues to assume that the end-to-end supply chain operates effectively during this period of heightened demand.

The Company is reaffirming its fiscal 2022 guidance of:

• Organic net sales growth (3-year CAGR ending fiscal 2022) of +1% to +2%
• Adjusted operating margin of 18% to 19%
• Adjusted EPS of $2.66 to $2.76
• Free cash flow conversion (percentage of adjusted net income 3-year average) of 95+

The Company's fiscal 2022 guidance does not yet include the impact of the pending sale of the Peter Pan peanut butter business.  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 forward-looking non-GAAP financial measures impracticable.  Please see the end of this release for more information.

Items Affecting Comparability of EPS
The following are included in the $0.77 EPS for the second quarter of fiscal 2021 (EPS amounts rounded and after tax).  Please see the reconciliation schedules at the end of this release for additional details.

• Approximately $0.03 per diluted share of net expense related to restructuring plans
• Approximately $0.01 per diluted share of net benefit related to corporate hedging derivative gains
• Approximately $0.01 per diluted share of net benefit related to the gain on divestiture of a business
• Approximately $0.07 per diluted share of net expense related to the early extinguishment of debt
• Approximately $0.05 per diluted share of net benefit related to a release of a valuation allowance on our capital loss carryforward
• Approximately $0.01 per diluted share of negative impact due to rounding

The following are included in the $0.53 EPS 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 plans
• Approximately $0.05 per diluted share of net expense related to an impairment of the Lender's bagel business
• 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 benefit related to unusual tax items
• Approximately $0.01 per diluted share of negative impact due to rounding

Definitions
Organic net sales excludes, from reported net sales, the impacts of foreign exchange, divested businesses and 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.

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 U.S. and 1-412-902-6506 for all other participants and using passcode 6391339. 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 January 7, 2022.

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 Foods Inc. (the Pinnacle acquisition) may not be fully realized or may take longer to realize than expected; the risk that the Pinnacle acquisition may not be accretive within the expected timeframe or to the extent anticipated; the risks that the Pinnacle acquisition and related integration will create disruption to the Company and its management and impede the achievement of business plans; risks related to our ability to achieve the intended benefits of other recent and pending acquisitions and divestitures; including the pending divestiture of the Peter Pan peanut butter business; risks related to the timing to complete a potential divestiture of the Peter Pan peanut butter business; risks related to the ability and timing to obtain required regulatory approvals and satisfy other closing conditions for the divestiture of the Peter Pan peanut butter business; risks associated with general economic and industry conditions; risks associated with our ability to successfully execute our long-term value creation strategies; 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, and to benefit from trade optimization programs; 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 our 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 impact of the coronavirus (COVID-19) pandemic on our business, suppliers, consumers, customers and employees; risks related to the availability and prices of raw materials, including any negative effects caused by inflation,  weather conditions or health pandemics; disruptions or inefficiencies in our supply chain and/or operations, including from the COVID-19 pandemic; risks associated with actions by our customers, including changes in distribution and purchasing terms; risks and uncertainties associated with intangible assets, including any future goodwill or intangible assets impairment charges; 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 report, which speak only as of the date of this report. 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 attributable to Conagra Brands, free cash flow, net debt, adjusted equity method investment earnings, net leverage ratio, 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 EPS, adjusted net income, free cash flow, net debt, and net leverage ratio 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.