This summary is based on the first quarter fiscal 2009 earnings call conducted by ConAgra Foods, Inc. (CAG) on September 18, 2008.
Management:
Chief Executive Officer: Gary Rodkin
Chief Financial Officer: André Hawaux
President of Commercial, EVP of External Affairs: Rob Sharpe
Vice President of Investor Relations: Chris Klinefelter
Key Investors Issues
- EPS were 94 cents a share compared to 36 cents a share last year.
- Net income rose to $442.4 million from $175.4 million in the year-ago period.
- Revenue climbed 17% to $3.1 billion.
First Quarter Highlights
EPS from continuing operations was 23 cents, including net 4 cents per share of expense from items impacting comparability.
Excluding those items, EPS from continuing operations was 27 cents. Overall sales grew 17%, including 9% sales growth from the Consumer Foods segment, reflecting the company’s recent pricing actions. Prior-year EPS from continuing operations of 27 cents included net 1 cent of income from items impacting comparability.
The Consumer Foods segment posted sales of $1.9 billion and operating profit of $187 million.
- Consumer Foods’ comparable sales growth was 9%, most of which was due to net price increases. Approximately one point of the sales growth reflects having sales of Peter Pan peanut butter and Alexia Foods for the entire first quarter this fiscal year and only part of the first quarter last fiscal year.
- The company implemented a 7% weighted average price increase for this segment on March 24, 2008, and implemented an additional 3% weighted average price increase at the end of the first quarter of fiscal 2009.
- Volumes were essentially flat.
- Comparable sales for priority investment brands, which represent almost 70% of segment sales, increased 9%. This primarily reflects net price increases. Examples of major brands posting strong sales growth include Chef Boyardee, DAVID, Egg Beaters, Hebrew National, Hunt’s, and Orville Redenbacher''s.
- Comparable sales for enabler brands increased 9%, primarily reflecting net price increases. Examples of brands posting strong sales growth include Blue Bonnet, La Choy, Libby’s, and Van Camp’s.
- Operating profit of $187 million was essentially equal to year-ago amounts as reported, and declined 6% on a comparable basis. Advertising and promotion expense increased at a mid single-digit rate. Although the company continued to successfully implement pricing actions and cost-saving initiatives, these were more than offset by input cost inflation, particularly in cooking oils, tablespreads, and Banquet frozen foods. Overall inflation was greater than $190 million. Due to a combination of recent price increases, innovation, an expected moderation of input cost increases, as well as the achievement of supply chain and SG&A cost savings, the company expects the segment to post strong operating profit growth for the full fiscal year despite potential negative volume impact from price increases. The company expects the improvement to be concentrated in the second half of the fiscal year.
Sales for the Commercial Foods segment were $1.2 billion, 32% ahead of last year, as all major operations posted sales growth.
- Sales for the milling operations increased due to the pass-through of higher wheat costs as well as improved product mix. Sales for Lamb Weston specialty potato and appetizer operations grew primarily due to increased prices and the acquisition of Watts Brothers Farms. This recent acquisition contributed approximately 2 points of sales growth to the overall segment this quarter. Sales for Gilroy Foods & Flavors showed solid sales growth, driven by volume growth across major product lines and new customer business with foodservice and industrial accounts.
- Segment operating profit was $133 million, 10% ahead of the year-ago amount, with all major operations posting growth due to strong sales results and a focus on efficiencies. Segment operating profit includes an approximate $5 million gain from an asset sale within Gilroy Foods & Flavors. Excluding this gain, segment operating profit was approximately $127 million, above year-ago amounts.
- The company uses hedging activities to manage the risk in its plans for the cost of various commodity inputs and to a lesser extent foreign exchange. To improve the transparency of operating results, the company now utilizes a new methodology for presenting derivative gains and losses. This methodology temporarily classifies mark-to-market gains and losses as unallocated Corporate expense. The company later transfers the gains or losses to segment operating profit when the underlying commodity being hedged is expensed in cost of goods sold for the applicable operating segment.
- This methodology creates a timing difference between the initial recognition of the derivative gain or loss in unallocated Corporate expense and its later recognition in the operating segments; the company will therefore treat those amounts temporarily classified in unallocated Corporate expense as items impacting comparability until later reclassified into results of operating segments. The new methodology reduces volatility in the quarterly segment results due to changing market prices of derivatives used to hedge future input costs.
- This is in contrast to the former methodology which directly recorded quarterly mark-to-market gains and losses in the segment results as a component of cost of goods sold regardless of when the related commodity was utilized in the operations or when the related derivative was liquidated.
- The net hedging loss of $33 million is principally a result of decreases in commodity costs for certain inputs being hedged, primarily corn, soybean oil and natural gas. The company expects that hedging gains and losses will be largely offset over time by actual input costs being higher or lower than planned, or by increases or decreases in values of derivative hedge positions.
Corporate expense was $97 million and $71 million in the year-ago period.
- The year-over-year increase is primarily due to a $33 million pretax mark-to-market hedge loss temporarily classified in unallocated Corporate expense. This loss will later be transferred to segment operating profit when the underlying commodity being hedged is expensed in cost of goods sold for the applicable operating segment. Excluding this hedge loss, corporate expense was $64 million, below year-ago amounts, reflecting the company’s successful focus on SG&A cost controls.
- Equity method investment earnings were $1 million, down from $10 million in the year-ago period, primarily reflecting higher input costs for an international specialty potato joint venture.
- Net interest expense was $50 million and $55 million in the year-ago period. Current-quarter amounts include income on the note receivable held in connection with the recent divestiture of the Trading & Merchandising operations.
- The effective tax rate for continuing operations was 38%. Going forward, the company expects an effective tax rate of approximately 35% for continuing operations, excluding items impacting comparability.
Dividends paid totaled $92 million versus $89 million last year.
- Capital expenditures from continuing operations for property, plant, and equipment were $106 million compared with $150 million in the year-ago period.
- Depreciation and amortization expense from continuing operations was approximately $76 million for the quarter; this compares with a total of $72 million in the year-ago period.
- On June 23, 2008, the company completed the divestiture of its Trading & Merchandising operations. The purchase price was approximately $2.8 billion, net of transaction costs and subject to post-closing adjustments, which included before-tax proceeds of approximately $2.3 billion of cash and $550 million (face value) of payment-in-kind debt securities.
- The company applied $900 million toward share repurchases in an accelerated stock repurchase program. Under the program, the company repurchased approximately 38.4 million shares during the quarter and will complete the program later in the fiscal year.
The company also used the proceeds to reduce its commercial paper balances by approximately $1.1 billion.
