ConAgra Foods, Inc. Reports 8 Percent Decline In Operating Profit

ConAgra Foods, Inc., reported results for the fiscal 2012 second quarter ended Nov. 27, 2011. Diluted EPS from continuing operations was $0.41, including $0.06 per diluted share of net expense from items impacting comparability. Adjusting for those items, diluted EPS from continuing operations was $0.47. For the same period a year ago, diluted EPS from continuing operations as reported and adjusted for items impacting comparability was $0.45.

Gary Rodkin, ConAgra Foods' chief executive officer, said in a prepared statement, "We are pleased with our progress in both operating segments. The quarter's higher-than-planned comparable EPS reflects strong double-digit operating profit growth for our commercial foods segment, which has successfully overcome difficult operating conditions and implemented pricing. We are encouraged by our progress in fighting inflation in the consumer foods segment; volumes for that segment have performed largely as expected given ongoing price increases. The marketplace environment remains difficult due to continuing inflationary pressures and the impact of the current economy on consumers, so we are cautious about business conditions. Our team is managing through these circumstances well by focusing on net price realization, productivity, and appropriate brand support, and we are confident in our ability to deliver our overall EPS and cash flow expectations for the fiscal year."

The consumer foods segment posted sales of $2,178 million for the fiscal second quarter, up 4 percent year-over-year due to price/mix contribution of 5 percent and a 1 percent volume decline.

Brands posting sales growth for the quarter include Banquet, Chef Boyardee, Hunt's, Marie Callender's, Orville Redenbacher's, PAM, Peter Pan, Reddi-wip, Rosarita, Slim Jim, Snack Pack, Swiss Miss, Van Camp's, Wesson, Wolf, and others.

Operating profit of $256 million was 8 percent below last year's $279 million, as reported. Restructuring charges of $15 million in the current quarter and $5 million in the year-ago period are included in reported results; adjusting for these amounts, current quarter operating profit of $271 million was 4 percent below the comparable $284 million in the year-ago period. In terms of operating profit impact, the combination of pricing and strong cost savings almost offset inflation of 10 percent this quarter; marketing investment was slightly higher, as planned.

The company is encouraged by its pricing progress to date, and remains cautious in its near-term outlook for this segment largely due to upwardly revised estimates for near-term inflation and the possibility of further volume impact given ongoing pricing initiatives. Largely reflecting the timing of inflation and marketing investments, the company expects this segment's second-half operating profit growth to occur in the fiscal fourth quarter.

Sales for the commercial foods segment were $1,226 million, 16 percent above year-ago amounts; the growth reflects the pass-through of higher wheat costs in the milling operations as well as price increases at Lamb Weston potato operations necessitated by high operating costs. The segment's sales performance also reflects volume growth for the major product lines.

The segment's operating profit increased 26 percent to $161 million, which was higher than planned. The segment's most significant profit improvement came from the Lamb Weston operations, which benefited from pricing actions taken over the last few months to address input cost inflation; Lamb Weston also benefited from operating efficiencies and volume growth. Sweet potato products for the foodservice channel and Alexia branded products in the retail channel continue to demonstrate momentum, helping drive favorable mix. The milling operations also posted improved profitability due to favorable market conditions, efficiencies and mix.

As previously communicated, the company expects this segment to post improved year-over-year profitability in the second half of the year.

The company recorded $27 million of net hedging loss as unallocated corporate expense in the current quarter, and $9 million of net hedging gain as unallocated corporate expense in the year-ago period. The company identifies 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 (COGS).

Corporate expense was $116 million for the quarter and $74 million in the year-ago period. Current-quarter amounts include $27 million of hedge losses, and year-ago amounts include $9 million of hedge gains. Excluding these amounts, corporate expense was $89 million for the current quarter and $83 million in the year-ago period.

Equity method investment earnings were $12 million for the fiscal second quarter, up from $5 million a year ago. The increase reflects better performance for an international potato joint venture.

Net interest expense was $51 million in the current quarter, compared with $34 million in the year-ago period; interest income from the notes receivable held in connection with the divestiture of the trading and merchandising operations benefited year-ago amounts by $19 million. That note was repaid in December 2010.

The effective tax rate for continuing operations for the quarter was 33 percent. The company expects the effective tax rate for the full fiscal year 2012 to be approximately 34 percent, excluding items impacting comparability.

Shortly after quarter-end, ConAgra Foods closed the following transactions: ConAgra Foods purchased National Pretzel Co., a leading private label pretzel company, furthering ConAgra Foods' product offerings in private label snacks. This fits with the company's previously stated goal of expanding its private label platform. National Pretzel's annual sales approach $200 million. ConAgra Foods paid a cash purchase price of approximately $300 million and will receive significant future cash tax benefits associated with how the transaction was structured. The company expects the EPS contribution from this acquisition to be in the range of $0.04 over the next twelve months, with the contribution increasing as that period progresses.

The company increased its stake in Agro Tech Foods, Limited, of India (ATFL) by purchasing approximately 3.7 percent of ATFL stock from a third party for approximately $10 million in cash. ATFL has demonstrated good sales and earnings growth over the past 5 years and furthers ConAgra Foods' goal of expanding internationally. ConAgra Foods now holds a majority interest in, and will prospectively consolidate the financial statements of, this company. ConAgra Foods estimates that consolidating this entity will add approximately $150 million of sales over the next twelve months to the Consumer Foods segment. After the impact of incremental amortization and adjusting for minority interest, ConAgra Foods expects no substantial comparable near-term EPS impact resulting from consolidating this entity. ConAgra Foods expects to record a gain on the transaction, which will be treated as an item impacting comparability, in the fiscal 2012 third quarter.

During the quarter, the company repaid $343 million of current portion of long-term debt. As a guiding principle of the company's capital allocation activities, ConAgra Foods is committed to an investment grade credit rating and a strong balance sheet.

Dividends for the current quarter totaled $95 million versus $88 million in the year-ago period; the increase reflects a higher dividend rate partially offset by fewer shares outstanding.

The company repurchased approximately 4 million shares of its common stock for approximately $95 million during the quarter. After quarter-end, the Board of Directors increased the share repurchase authorization by $750 million; shares are expected to be repurchased periodically over several years, depending on market conditions and other factors, through open market or privately negotiated transactions, and to be funded by cash generated through operations. After the increase, the total share repurchase authorization outstanding was approximately $780 million.

For the current quarter, capital expenditures from continuing operations for property, plant, and equipment were $65 million, compared with $82 million in the year-ago period. Depreciation and amortization expense from continuing operations was approximately $95 million for the quarter; this compares with a total of $88 million in the year-ago period.

 

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