ConAgra Swings to Profit Ahead of Separation

Completes divestitures of its Spicetec Flavors & Seasonings and JM Swank businesses

c1ConAgra Foods Inc. (NYSE: CAG) announced its Q1 FY17 financial results on September 29th, 2016.

After recently shifting its headquarters to Chicago, Illinois, the packaged food company will separate into two independent pure play companies, ConAgra Brands and Lamb Weston, by December 2016; Q1 FY17 will be the last earnings report under the name “ConAgra Foods”.

In order to align with changes to the organization, the Company will account its results through five segments: Grocery & Snacks, Refrigerated & Frozen, International, Foodservice, and Commercial. The Commercial segment, which mostly consists of the Lamb Weston potato products business and the sale of branded and private label food and ingredients to commercial, foodservice, and restaurant customers, will be spun off later in 2016. Read more about the ConAgra’s financial results below.

Q1 FY17 financial highlights

During Q1 FY17, ConAgra’s net revenue declined 4.6% to $2.67 billion, with sales falling in all five of the company’s business segments, versus $2.79 billion in the year-ago period. The decline in sales was mainly due to lower volumes accrued due to the company’s initiatives to create an improved quality revenue base. The company’s divestitures and unfavorable foreign currency translation lowered sales by roughly 2%. However, these headwinds were partially offset by raised price/mix and improved Lamb Weston sales.

c2While sales of shelf-stable grocery food fell 5%, sales of frozen and refrigerated food fell 8% Y-o-Y compared to the year-ago period. Despite falling sales, operating profit jumped 31%, as ConAgra cut costs amid a massive restructuring initiated by CEO Sean Connolly, who took over the reins in April 2015. The restructuring is aimed at creating a higher-quality revenue base in terms of better food with better branding that can be sold at a higher profit.

During Q1 FY17, ConAgra’s cost of goods sold decreased 7.2% Y-o-Y to $1.94 billion, while selling, general, and administrative (SG&A) expenses fell 30.6% Y-o-Y to $281.5 million. Interest expenses plunged 26.5% to $59 million stemming from lower debt levels.

As a result, ConAgra swung to profits of $186.2 million, or $0.42 per share, versus a loss of $1.15 billion, or $(2.68) per share, for the same period last year. Adjusted earnings were $0.61 per share, beating forecasts of $0.48 per share for the reporting quarter.

ConAgra ended Q1 FY17 with cash and cash equivalents of $794.6 million, lower than $843.5 million recorded in the year-ago period. Senior long-term debt (excluding current portion) was $4.25 billion, down from $4.72 billion as of May 29th, 2016.

During Q1 FY17, ConAgra generated net cash worth $325.9 million from operating activities, up from $93.1 million in the year-ago period. Capital spent on additions of property, plant and equipment totaled $117.4 million, up 15.6% Y-o-Y.

Segmental highlights

Grocery & Snacks: The segment’s Q1 FY17 sales decreased 5% Y-o-Y to $757.2 million. Disciplined pricing and trade promotion practices resulted in price/mix rising 1% while volume declined 6%. c3The segment benefited from supply chain productivity, favorable input costs, and continued SG&A discipline, which drove a 29% increase in operating profit and a 31% increase in adjusted operating profit during the reporting quarter.

Refrigerated & Frozen: The segment’s Q1 FY17 sales decreased 8.1% Y-o-Y to $604.6 million. Price/mix increased 3%, while volume declined 11%, due to the benefit from increased pricing in Banquet frozen entrees and reduction of deep trade and promotion discounts. Operating profit and adjusted operating profit grew 14% during the reporting quarter. Favorable pricing and input costs, and supply chain productivity more than offset decreased sales and the impact of the frozen food product recall.

International: The segment’s Q1 FY17 sales decreased 6% Y-o-Y $194.7 million. ConAgra estimates that the impact of foreign exchange decreased the segment’s net sales by approximately 5%, because of which the segment reported an operating loss of $149 million compared with operating profit of $17 million in the year-ago period.

As result of the segment reorganization in the quarter, significant foreign exchange movements and weaker sales trends have negatively impacted the value of certain businesses on a US dollar basis. c4Adjusted segment operating profit decreased 12% to $15 million during Q1 FY17.

Foodservice: The segment’s Q1 FY17 sales decreased 1% Y-o-Y to $268 million. Operating profit decreased 17% to $22 million from $26 million in the year-ago period, and adjusted operating profit fell 10% to $24 million. The segment was negatively affected by the normalization of egg margins after last year’s avian influenza outbreak.

Commercial: The segment’s Q1 FY17 sales decreased 2% Y-o-Y to $843 million. Lamb Weston’s 4% growth was more than offset by the impact of the divested businesses, which drove a 2% net sales decrease for the segment. Operating profit grew 210% to $346 million, which includes $198 million of gains from the sales of the Spicetec Flavors & Seasonings and JM Swank businesses. Adjusted operating profit grew 33% to $148 million as Lamb Weston’s sales growth and favorable input costs more than offset the impact of the divested businesses.

Other highlights

Separation into two entities: Moving ahead, ConAgra plans to separate into two independent pure play companies, ConAgra Brands and Lamb Weston. The transaction is expected to be structured as a spin-off of the Lamb Weston business, tax free to the Company and its shareholders, during September-December 2016. The separation is expected to result in double-digit comparable Y-o-Y EPS growth due better productivity, price/mix, and cost discipline initiatives underway, as well as lower interest expense.

ConAgra stated that this will be its last earnings release as “ConAgra Foods.” As part of this transition, ConAgra relocated its headquarters to Chicago from Omaha, while maintaining a workforce of 1,200 in Omaha.

c5Acquisition of Frontera Foods: ConAgra acquired Frontera Foods, a Chicago-based gourmet Mexican food company started by chef Rick Bayless, on September 26th, 2016. With the purchase, ConAgra has the Frontera, Red Fork, and Salpica grocery brands under the ConAgra umbrella. However, the purchase excludes the Frontera-branded restaurants such as Frontera Grill, Topolobampo, Lena Brava and Xoco.

Divestitures: The Company completed the divestitures of its Spicetec Flavors & Seasonings business and its JM Swank business, which are part of the Commercial Foods segment, during Q1 FY17. The transactions generated combined net proceeds of approximately $479 million. In February 2016, ConAgra sold its private label business to TreeHouse Foods for $2.7 billion.

Dividends and share repurchases: During the reported quarter, ConAgra paid dividends worth $110 million compared with $107 million in the year-ago period. In addition, the Company repurchased approximately 1.8 million shares for $86 million during the quarter under review.

Guidance for FY17

The Company remains on-track to execute the spin-off of the Lamb Weston business by December 2016. The spin-off will result in two independent, publicly-traded, pure play companies, Conagra Brands and Lamb Weston. Conagra Brands and Lamb Weston have announced their intention to host investor events on October 18th, 2016 and October 13th, 2016, respectively. Each company expects to share more details, including FY17 and longer-term outlooks, growth initiatives, efficiency programs, and capital allocation priorities, at these events.

Stock Performance

c6ConAgra’s stock stood at $47.12, slipping 0.06%, at the close on Thursday, October 6th, 2016, having vacillated between an intraday high of $47.25 and a low of $46.87 during the session. The stock’s trading volume was at 2,323,697 for the day. The Company’s market cap was at $20.69 billion as of Thursday’s close.

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