Should You Buy CAG Stock?

 

Conagra Brands, Inc. (NYSE: CAG) reported results for the third quarter of fiscal year 2021, which ended on February 28, 2021. 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

   -- Third quarter net sales increased 8.5%; organic net sales increased 9.7%, 
      which is above the Company's guidance range. 
 
   -- Operating margin increased 193 basis points to 16.2%; adjusted operating 
      margin increased 31 basis points to 16.0%, which is in-line with the 
      Company's guidance range. 
 
   -- Diluted earnings per share from continuing operations (EPS) for the third 
      quarter grew 38.1% to $0.58, and adjusted EPS grew 25.5% to $0.59, which 
      is in-line with the Company's guidance range. 
 
   -- During the third quarter, the Company repurchased approximately 8.8 
      million shares of its common stock for $298 million. 
 
   -- The Company is providing guidance for the fourth quarter of fiscal 2021: 
 
   -- Organic net sales growth is expected in the range of (10)% to (12)% 
 
   -- Adjusted operating margin is expected in the range of 14% to 15% 
 
   -- Adjusted EPS is expected in the range of $0.49 to $0.55 
 
   -- The Company is reaffirming its fiscal 2022 guidance.

CEO Perspective

Sean Connolly, president and chief executive officer of Conagra Brands, commented, “We have made significant investments in our business over the past five-plus years, modernizing our products to generate consumer demand. Our strong third-quarter results benefited from these investments. We continued to invest in the business during the quarter, with a focus on ensuring our products are available both online and in stores, as we aim to maximize consumer acquisition during this period of heightened demand.”

He continued, “We remain confident that each of our retail domains — frozen, snacks, and staples – is well-positioned to sustain the benefits of the eat-at-home habits consumers have developed during the COVID-19 pandemic. Our 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. We further demonstrated this confidence by repurchasing nearly $300 million of our common stock this quarter, which came after we raised our quarterly dividend 29% earlier this fiscal year.”

Total Company Third Quarter Results

In the quarter, net sales increased 8.5% to $2.8 billion. The growth in reported net sales primarily reflects:

   -- a 1.2% net decrease from the divestitures of the Lender's bagel business, 
      the H.K. Anderson business, and the Peter Pan peanut butter business, and 
      the exit of the private label peanut butter business (collectively, the 
      Sold Businesses); and 
 
   -- a 9.7% increase in organic net sales.

The 9.7% increase in organic net sales was driven by a 6.1% increase in volume and a favorable price/mix impact of 3.6%. The volume increase was primarily driven by continued elevated at-home food consumption as a result of the COVID-19 pandemic, which benefitted the Company’s retail segments. This increase was partially offset by the pandemic’s negative impact on the Foodservice segment as well as a temporary supply chain disruption related to a winter storm near the end of the quarter. The price/mix favorability was primarily driven by favorable mix, lower promotional activity, and inflation-justified pricing in Foodservice.

Gross profit increased 10.8% to $758 million in the quarter, and adjusted gross profit increased 8.9% to $761 million. Gross margin increased 58 basis points to 27.4% in the quarter, and adjusted gross margin increased 12 basis points to 27.5%. The net sales increase, together with 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, and the lost profit from the Sold Businesses.

Selling, general, and administrative expense (SG&A), which includes advertising and promotional expense (A&P), decreased 3.2% to $310 million in the quarter. Adjusted SG&A, which excludes A&P, increased 5.2% to $244 million, primarily as a result of higher incentive compensation, as well as higher commissions expense as a result of increased sales compared to the prior-year period. This expense was slightly offset by favorability from synergies and COVID-19-related savings, such as reduced travel expense.

A&P for the quarter increased 11.8% to $73 million, driven primarily by higher eCommerce investments.

Net interest expense was $101 million in the quarter. Compared to the prior-year period, net interest expense decreased 14.5% or $17 million, driven primarily by lower levels of debt outstanding.

The average diluted share count decreased 0.2% compared to the prior-year period to 488 million, driven by the Company’s share repurchase activity. Compared to the second quarter of fiscal 2021, the average diluted share count decreased 0.7%.

In the quarter, net income attributable to Conagra Brands increased 37.8% to $281 million, or $0.58 per diluted share. Adjusted net income attributable to Conagra Brands increased 24.1% to $287 million, or $0.59 per diluted share, in the quarter. The increases were driven primarily by the increase in gross profit.

Adjusted EBITDA, which includes equity method investment earnings and pension and postretirement non-service income, increased 9.9% to $566 million in the quarter, primarily driven by the increase in adjusted gross profit.

Grocery & Snacks Segment Third Quarter Results

Net sales for the Grocery & Snacks segment increased 10.8% to $1.1 billion in the quarter reflecting:

   -- a 2.3% decrease from the impact of the Sold Businesses; and 
 
   -- a 13.1% increase in organic net sales.

On an organic net sales basis, volume increased 9.4% and price/mix increased 3.7%. Volume benefited from continued elevated at-home food consumption as a result of the COVID-19 pandemic. The increase in price/mix was primarily driven by reduced promotional activity and favorable mix. Many snacks and staples brands experienced strong organic net sales growth in the quarter, including snack brands Orville Redenbacher’s, Act II, Swiss Miss, Snack Pack, and Slim Jim as well as staples brands Chef Boyardee, Libby’s, PAM, Hunt’s, and Armour Star.

Operating profit for the segment increased 45.6% to $290 million in the quarter. Adjusted operating profit increased 16.4% to $245 million, primarily driven by organic net sales growth, supply chain realized productivity, favorable margin mix, cost synergies associated with the Pinnacle Foods acquisition, and fixed cost leverage. These benefits were partially offset by the impacts of input cost inflation, higher transportation costs, COVID-19-related expenses, higher SG&A, and lost profit from the Sold Businesses.

Refrigerated & Frozen Segment Third Quarter Results

Net sales for the Refrigerated & Frozen segment increased 11.7% to $1.2 billion in the quarter reflecting:

   -- a 0.4% decrease from the impact of the Sold Businesses; and 
 
   -- a 12.1% increase in organic net sales.

On an organic net sales basis, volume increased 7.8% and price/mix increased 4.3%. Volume benefited from continued elevated at-home food consumption as a result of the COVID-19 pandemic. The price/mix increase was primarily driven by favorable mix and lower promotional activity. Marie Callender’s, Birds Eye, Banquet, P.F. Chang’s Home Menu, and Reddi-wip were among the brands with the strongest organic sales growth in the quarter.

Operating profit for the segment increased 12.5% to $215 million in the quarter. Adjusted operating profit increased 10.0% to $222 million as the benefits of higher organic net sales, supply chain realized productivity, favorable margin mix, fixed cost leverage, 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, increased A&P investments, and lost profit from the Sold Businesses.

International Segment Third Quarter Results

Net sales for the International segment increased 9.0% to $241 million in the quarter reflecting:

   -- a 0.5% decrease from the impact of the Sold Businesses, 
 
   -- a 0.3% decrease from the unfavorable impact of foreign exchange; and 
 
   -- a 9.8% increase in organic net sales.

On an organic net sales basis, volume increased 6.7% and price/mix increased 3.1%. During the quarter, the segment benefited from elevated demand related to the impacts of the COVID-19 pandemic, and experienced strong growth in each of its regions across snacks, staples, and frozen. The price/mix increase was driven by inflation-justified pricing and favorable mix.

Operating profit for the segment increased 24.7% to $28 million in the quarter. Adjusted operating profit increased 24.7% to $28 million as the benefits from the increase in organic net sales, supply chain realized productivity, fixed cost leverage, and favorable product mix were partially offset by the impacts of higher input costs, higher transportation costs, and foreign exchange.

Foodservice Segment Third Quarter Results

Net sales for the Foodservice segment decreased 17.2% to $194 million in the quarter reflecting:

   -- a 0.7% decrease from the impact of the Sold Businesses; and 
 
   -- a 16.5% decrease in organic net sales.

On an organic net sales basis, volume decreased 19.5% primarily driven by lower restaurant traffic as a result of the COVID-19 pandemic. Price/mix was favorable at 3.0% in the quarter primarily driven by increased pricing to offset higher input costs.

2021-04-08 11:30:00 GMT Conagra Brands Reports Strong Third Quarter -2-

Operating profit for the segment decreased 53.3% to $13 million in the quarter, as the impacts of lower organic net sales and higher input costs, and COVID-19-related expenses, more than offset the impacts of favorable supply chain realized productivity and cost synergies associated with the Pinnacle Foods acquisition.

Other Third Quarter Items

Corporate expenses increased 28.8% to $97 million in the quarter, primarily driven by expenses associated with the early extinguishment of debt. Adjusted corporate expense increased 5.1% to $63 million in the quarter primarily as a result of higher incentive compensation expense.

Pension and post-retirement non-service income was $14 million in the quarter compared to $16 million of income in the prior-year period.

In the quarter, equity method investment earnings were $22 million. The 104.5% increase on a reported basis and the 93.3% increase on an adjusted basis were primarily driven by favorable market conditions.

In the quarter, the effective tax rate was 26.5% compared to 25.2% in the prior-year period. The adjusted effective tax rate was 23.9% compared to 24.8% in the prior-year period.

In the quarter, the Company paid a dividend of $0.275 per share.

Portfolio Update

As previously disclosed on January 25, 2021, the Company completed the divestiture of the Peter Pan peanut butter business. The business was 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 reported net sales by approximately $110 million and adjusted EPS by approximately $0.03.

Outlook

In the fourth quarter to-date, the Company has seen a sustained increase in demand in its retail segments when compared to pre-COVID-19 demand levels, driven by continued elevate at-home eating as well as the impact of customers beginning to rebuild inventories. The Company has also continued to see reduced demand in its Foodservice segment when compared to pre-COVID-19 demand levels. The Company has begun to experience elevated inflation in cost of goods sold, and COVID-19-related costs have also continued to impact the business. Based on these factors, the Company is providing the following fourth quarter fiscal 2021 guidance:

   -- Organic net sales growth is expected in the range of (10)% to (12)% 
 
   -- Adjusted operating margin is expected in the range of 14% to 15% 
 
   -- Adjusted EPS is expected in the range of $0.49 to $0.55

The Company’s fourth quarter guidance 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 $2.63 to $2.73 
 
   -- Free cash flow conversion (percentage of adjusted net income 3-year 
      average) of 95%+

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 $0.58 EPS for the third 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 $0.01 per diluted share of net benefit related to corporate 
      hedging derivative gains 
 
   -- Approximately $0.06 per diluted share of net benefit related to the gain 
      on divestiture of a business 
 
   -- Approximately $0.02 per diluted share of net expense related to 
      restructuring plans 
 
   -- Approximately $0.04 per diluted share of net expense related to the early 
      extinguishment of debt 
 
   -- Approximately $0.01 per diluted share of net expense related to tax 
      consulting fees 
 
   -- Approximately $0.01 per diluted share of net expense related to legal 
      matters

The following are included in the $0.42 EPS for the third 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 $0.05 per diluted share of net expense related to 
      restructuring plans 
 
   -- Approximately $0.01 per diluted share of net expense related to corporate 
      hedging derivative losses 
 
   -- Approximately $0.01 per diluted share of positive 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 3971008. 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 April 8, 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(R), Marie Callender’s(R), Banquet(R), Healthy Choice(R), Slim Jim(R), Reddi-wip(R), and Vlasic(R), as well as emerging brands, including Angie’s(R) BOOMCHICKAPOP(R), Duke’s(R), Earth Balance(R), Gardein(R), and Frontera(R), offer choices for every occasion. For more information, visit www.conagrabrands.com.


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