Conagra reports loss for Q4; Lamb Weston potato products posted sales and profit growth

ConAgra Foods, Inc., (NYSE: CAG) one of North America’s leading food companies, today reported results for the fiscal 2014 fourth quarter ended May 25, 2014. Diluted loss per share from continuing operations was $(0.76) as reported for the fiscal fourth quarter vs. diluted EPS of $0.45 in the year-ago period. After adjusting for items impacting comparability, current-quarter diluted EPS of $0.55 was 8% below the comparable $0.60 earned in the year-ago period. Items impacting comparability are summarized toward the end of this release and reconciled for Regulation G purposes on pages 12-13.

Gary Rodkin, ConAgra Foods’ chief executive officer, said, “We are disappointed with fiscal 2014 overall, and we have a very focused sense of urgency directed toward improving our results. Despite the difficult year, we were able to generate substantial cash, meet our debt reduction commitments, and pay a strong dividend.”

He continued, “Our focus is on improving branded volumes through more effective trade, marketing, and resource allocation, particularly on several large underperforming brands. We expect private brand profitability to strengthen through organic growth, strong synergies, and gradually improving price/mix. Some of the challenges from fiscal 2014 will still be with us in fiscal 2015, although we believe results will gradually improve throughout the fiscal year. Given that, we consider fiscal 2015 to be a year of stabilization and recovery with a mid-single digit rate of EPS growth, which we expect to accelerate in fiscal 2016 and 2017 based on a stronger foundation. Throughout this period, we expect to benefit from strong productivity, robust cost synergies related to the Ralcorp acquisition, and SG&A efficiency and effectiveness initiatives. We will remain focused on growing our top line, continually improving our cost structure, and sound capital allocation.”

Consumer Foods Segment

Branded food items sold worldwide in retail channels.

The Consumer Foods segment posted sales of approximately $1.8 billion for the quarter and operating profit of $177 million as reported. Sales declined 7%, with a 7% volume decrease, 1% favorable price/mix, and a 1% unfavorable impact of foreign exchange.

While several brands posted weak volumes in the quarter, a meaningful portion of the overall volume decline was driven by Healthy Choice, Orville Redenbacher’s and Chef Boyardee (these collectively have annual sales in excess of $1 billion), which have continued to face volume and profit challenges. The company has product and promotion changes, as well as refinements to consumer communication under way, which are expected to gradually improve the volume and profit performance of these brands throughout fiscal 2015. Overall category softness, as well as a shift in the timing of promotions, negatively impacted current quarter volumes.

Operating profit of $177 million was 34% below year ago amounts, as reported. After adjusting for $91 million of expense in the current quarter (principally impairment charges) and $4 million of expense in the year-ago period from items impacting comparability, current quarter operating profit of $268 million was 3% below the comparable $275 million in the year-ago period. Cost savings in excess of inflation, as well as lower advertising and promotion expenses, offset a meaningful portion of the profit shortfall resulting from weak volumes. Regarding fiscal 2015, the company expects branded volume to improve gradually through a focus on faster-growing customer channels, opportunities in international markets, and more effective trade and marketing support.

Commercial Foods Segment

Specialty potato, bakery products, seasonings, blends, flavors, as well as consumer branded and private branded packaged food items, sold to foodservice and commercial channels worldwide.

Sales for the Commercial Foods segment were $1.63 billion, up 1% compared with $1.61 billion in the year-ago period, as reported. Segment operating profit of $281 million was 49% above year-ago period amounts, as reported. After adjusting for $91 million of net benefit in the current quarter primarily related to gains on divesting mills in connection with the formation of the Ardent Mills joint venture, comparable current quarter operating profit of $190 million was 1% above year-ago period amounts.

Lamb Weston potato products posted sales and profit growth largely due to strong international volumes, as well as productivity initiatives that helped offset crop quality challenges. Flour milling sales decreased, reflecting the pass-through of lower wheat costs, and comparable milling profits declined reflecting market conditions.

After the close of the quarter, the Ardent Mills joint venture was formed, and the company contributed its milling operations for a 44% interest in Ardent Mills and cash proceeds. Other Ardent Mills details are discussed under the Capital Items portion of this document.

Private Brands

Private brand food items sold in domestic markets.

Sales for the Private Brands segment were approximately $1 billion in the quarter, in line with year-ago period amounts. The segment posted an operating loss of $573 million, as reported, due to impairment charges. After adjusting for $617 million of net expense from impairment charges and other items impacting comparability, current quarter operating profit of $44 million was $60 million below comparable year-ago period amounts. The significant profit decline reflects pricing concessions made earlier in the year necessitated by competitive bids and customer service issues; higher-than-planned operating costs resulting from business transition also weighed on profits.

While operating profits for the Private Brands segment are expected to remain below prior year amounts for the first half of fiscal 2015 given the pricing concessions, year-over-year performance in the second half of fiscal 2015 is expected to improve. This reflects pricing concessions to be lapped, new business to be added with favorable price/mix, and significant synergies and other operating efficiencies to be realized.

Current projections are for modest sales and profit growth in this segment in fiscal 2015, and for growth to accelerate in fiscals 2016 and 2017. Over the long term, the company remains confident in the growth prospects for its private brands business based on the fundamental appeal to consumers, the strategic importance of private brands to trade customers, and value-added capabilities of the ConAgra Foods’ private brand operations.