CONAGRA BRANDS REPORTS THIRD QUARTER RESULTS

CHICAGO, April 7, 2022 /PRNewswire/ -- Today Conagra Brands, Inc. (NYSE: CAG) reported results for the third quarter of fiscal year 2022, which ended on February 27, 2022. All comparisons are against the prior-year fiscal period, unless otherwise noted. Certain terms used in this release, including "Organic net sales," "EBITDA," "Two-year compounded annualized," and certain "adjusted" results, are defined under the section entitled "Definitions." See page 6 for more information.

Highlights

• Third quarter net sales increased 5.1%; organic net sales increased 6.0%. On a two-year compounded annualized basis, third quarter net sales increased 6.8% and organic net sales increased 7.8%.
• Operating margin decreased 387 basis points to 12.3%; adjusted operating margin decreased 230 basis points to 13.7%.
• Diluted earnings per share (EPS) for the third quarter decreased 22.4% to $0.45, and adjusted EPS decreased 1.7% to $0.58. On a two-year compounded annualized basis, third quarter EPS increased 3.5% and adjusted EPS increased 11.1%.
• The company is updating its fiscal 2022 guidance, and providing fourth quarter guidance, to reflect expectations for continued top line strength, higher cost of goods sold inflation, and the timing of additional pricing actions.
• The company's updated fiscal 2022 guidance is as follows:
• Organic net sales growth is expected to be approximately +4% versus prior guidance of approximately +3%
• Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 16% versus prior guidance of approximately 14%
• Adjusted operating margin is expected to be approximately 14.5% versus prior guidance of approximately 15.5%
• Adjusted EPS is expected to be approximately $2.35, versus prior guidance of approximately $2.50
• Pro Forma FY22 adjusted diluted EPS is estimated at approximately $2.65, excluding the impact of the FY22 lag between inflation and in-market pricing
• The company's Fiscal 2022 fourth quarter guidance is as follows:
• Organic net sales growth is expected to be approximately +7%
• Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 16%
• Adjusted operating margin is expected to be approximately 15.5%
• Adjusted EPS is expected to be approximately $0.64

CEO Perspective
Sean Connolly, president and chief executive officer of Conagra Brands, commented, "Our business delivered another quarter of strong net sales growth as our brands continued to resonate with consumers. Our focus on strategic innovation and our intentional approach to investment helped us capture share across each of our domains – frozen, snacks, and staples. The team's dedication to executing our Conagra Way playbook has continued to pay dividends in the face of a challenging external landscape."

He continued, "We experienced higher-than-expected cost pressures as the third quarter progressed and expect those pressures to continue into the fourth quarter, particularly in certain frozen, refrigerated, and snacks businesses. In response, we have taken steps to implement additional inflation-driven pricing actions. We will begin to see the benefits of these actions in the first quarter of fiscal 2023. Consumer demand has remained strong in the face of our pricing actions to date, but there will continue to be a lag between the timing of the incremental inflation and the benefits of our mitigating actions."

Total Company Third Quarter Results
In the quarter, net sales increased 5.1% to $2.9 billion. The increase in net sales primarily reflects:

• a 0.8% net decrease from the divestitures of the Peter Pan peanut butter business and the Egg Beaters business (collectively, the Sold Businesses);
• a 0.1% decrease from the unfavorable impact of foreign exchange; and
• a 6.0% increase in organic net sales.

The 6.0% increase in organic net sales was driven by a 8.6% improvement in price/mix, which was partially offset by a 2.6% decrease in volume. Price/mix was driven the company's inflation-driven pricing actions that were reflected in the marketplace throughout the quarter and favorable brand mix. The volume decrease was primarily a result of the elasticity impact from inflation-driven pricing actions; however, the elasticity impact was favorable to expectations.

Gross profit decreased 8.1% to $697 million in the quarter, and adjusted gross profit decreased 7.9% to $701 million. Third quarter gross profit benefited from higher organic net sales, supply chain realized productivity, lower COVID-19 pandemic-related expenses, and cost synergies associated with the Pinnacle Foods acquisition. These benefits, however, were not enough to offset the impacts of cost of goods sold inflation of 15.4%, the lost profit from the Sold Businesses, and elevated supply chain operating costs. Gross margin decreased 344 basis points to 23.9% in the quarter, and adjusted gross margin decreased 342 basis points to 24.1%.

Selling, general, and administrative expense (SG&A), which includes advertising and promotional expense (A&P), increased 9.2% to $338 million in the quarter primarily due to an impairment on businesses held for sale. Adjusted SG&A, which excludes A&P, decreased 3.3% to $237 million driven by decreased incentive and deferred compensation.

A&P for the quarter decreased 11.5% to $65 million, driven primarily by reduced broadcast media investments.

Net interest expense was $95 million in the quarter. Compared to the prior-year period, net interest expense decreased 6.1% or $6 million, primarily due to a lower weighted average interest rate on outstanding debt.

The average diluted share count decreased 1.1% compared to the prior-year period to 482 million shares, driven by the company's share repurchase activity in prior quarters.

In the quarter, net income attributable to Conagra Brands decreased 22.4% to $218 million, or $0.45 per diluted share. Adjusted net income attributable to Conagra Brands decreased 3.1% to $279 million, or $0.58 per diluted share, in the quarter. The decreases were driven primarily by the decrease in gross profit.

Adjusted EBITDA, which includes equity method investment earnings and pension and postretirement non-service income, decreased 2.4% to $553 million in the quarter, primarily driven by the decrease in adjusted gross profit, partially offset by a strong performance from the company's Ardent Mills joint venture.

Grocery & Snacks Segment Third Quarter Results
Net sales for the Grocery & Snacks segment increased 6.2% to $1.2 billion in the quarter reflecting:

• a 0.8% decrease from the impact of the Sold Businesses; and
• a 7.0% increase in organic net sales.

On an organic net sales basis, price/mix increased 8.8% and volume decreased 1.8%. Price/mix was primarily driven by favorability in inflation-driven pricing coupled with favorable brand mix. The volume decline was primarily due to the elasticity impact from inflation-driven pricing actions. In the quarter, the company gained share in staples categories such as beans and syrup, and in snacking categories, including popcorn and meat snacks.

Operating profit for the segment decreased 20.2% to $232 million in the quarter primarily related to a prior year gain from the divestiture of the Peter Pan business. Adjusted operating profit decreased 2.7% to $238 million, primarily driven by cost of goods inflation, elevated supply chain operating costs, and the lost profit from the Sold Businesses. These negative impacts were partially offset by higher organic net sales, supply chain realized productivity, lower COVID-19 pandemic-related expenses, and cost synergies associated with the Pinnacle Foods acquisition.

Refrigerated & Frozen Segment Third Quarter Results
Net sales for the Refrigerated & Frozen segment increased 2.9% to $1.2 billion in the quarter reflecting:

• a 1.0% decrease from the impact of the Sold Businesses; and
• a 3.9% increase in organic net sales.

On an organic net sales basis, price mix increased 8.4% and volume decreased 4.5%. The price/mix increase was driven by favorability in inflation-driven pricing and favorable brand mix. The volume decline was primarily due to the elasticity impact from inflation-driven pricing actions coupled with supply constraints. In the quarter, the company gained share in categories such as frozen single serve meals, frozen multi serve meals, and frozen desserts.

Operating profit for the segment decreased 26.4% to $158 million in the quarter. Adjusted operating profit decreased 20.6% to $176 million primarily due to cost of goods sold inflation, elevated supply chain operating costs, and the lost profit from the Sold Businesses. These impacts were partially offset by the benefits of supply chain realized productivity, higher organic net sales, lower COVID-19 pandemic-related expenses, and cost synergies associated with the Pinnacle Foods acquisition.

International Segment Third Quarter Results
Net sales for the International segment increased 0.1% to $241 million in the quarter reflecting:

• a 0.1% decrease from the impact of the Sold Businesses,
• a 0.8% decrease from the unfavorable impact of foreign exchange; and
• a 1.0% increase in organic net sales.

On an organic net sales basis, price/mix increased 8.0% and volume decreased 7.0%. The price/mix increase was driven by inflation-driven pricing and favorable product mix. Volume decreased primarily due to the elasticity impact from inflation-driven pricing actions.   

Operating profit for the segment increased 7.1% to $30 million in the quarter. Adjusted operating profit increased 7.7% to $30 million as the benefits from supply chain realized productivity, higher organic net sales, and favorable foreign exchange more than offset the negative impacts of cost of goods sold inflation.

Foodservice Segment Third Quarter Results
Net sales for the Foodservice segment increased 18.9% to $235 million in the quarter reflecting an 18.9% increase in organic net sales.

On an organic net sales basis, volume increased 10.5% as restaurant traffic continued to improve from the impacts of the COVID-19 pandemic, partially offset by the elasticity impact from inflation-driven pricing actions. Price/mix was favorable at 8.4% in the quarter driven by inflation-driven pricing and favorable product mix.

Operating profit for the segment decreased 63.9% to $5 million and adjusted operating profit increased 14.8% to $15 million in the quarter as the benefits of higher organic net sales and favorable supply chain realized productivity more than offset the impacts of cost of goods sold inflation and elevated supply chain operating costs.

Other Third Quarter Items
Corporate expenses decreased 32.9% to $65 million in the quarter primarily from lapping incremental expenses related to the extinguishment of debt in the prior year period. Adjusted corporate expense decreased 6.2% to $60 million in the quarter driven by decreased incentive and deferred compensation.

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

In the quarter, equity method investment earnings were $48 million. The $27 million increase was primarily driven by favorable market conditions for the Ardent Mills joint venture, and the venture's effective management through recent volatility in the wheat markets.

In the quarter, the effective tax rate was 33.4% compared to 26.5% in the prior-year period. The adjusted effective tax rate was 24.4% compared to 23.9% in the prior-year period.

In the quarter, the company paid a dividend of $0.3125 per share.

Outlook
The company is updating its fiscal 2022 guidance, and providing fourth quarter guidance, to reflect expectations for continued top line strength, higher cost of goods sold inflation, and the timing effect of additional pricing actions.

The company previously shared its expectations that consumer demand for its retail products would remain elevated versus historical levels throughout fiscal 2022, as consumers have developed new habits during the COVID-19 pandemic. Given the trends to date, including stronger-than-expected consumer demand and lower-than-anticipated elasticities of demand, as well as additional planned pricing actions, organic net sales growth is now expected to be higher than previously anticipated.

The company also continues to experience elevated cost of goods sold inflation, the rate of which was higher than expected during the third quarter of fiscal 2022. The company has taken, and plans to continue taking, a variety of actions to counteract the impact of this inflation, including incremental pricing actions and cost savings measures. Due to the nature of the timing lag associated with announcing and implementing incremental pricing actions, the benefits associated with the actions are not expected to fully offset the incremental input cost headwinds within fiscal 2022.

The company's updated fiscal 2022 guidance is as follows:

• Organic net sales growth is expected to be approximately +4% versus prior guidance of approximately +3%
• Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 16% versus prior guidance of approximately 14%
• Adjusted operating margin is expected to be approximately 14.5% versus prior guidance of approximately 15.5%
• Adjusted EPS is expected to be approximately $2.35, versus prior guidance of approximately $2.50

The company's Fiscal 2022 fourth quarter guidance is as follows:

• Organic net sales growth is expected to be approximately +7%
• Gross inflation (input cost inflation before the impacts of hedging and other sourcing benefits) is expected to be approximately 16%
• Adjusted operating margin is expected to be approximately 15.5%
• Adjusted EPS is expected to be approximately $0.64

The above guidance is the company's best estimate of its expected financial performance in fiscal 2022. The company's ultimate fiscal 2022 performance will be highly dependent on factors including, without limitation:

• how consumers purchase food as foodservice establishments continue to reopen and people continue to return to in-office work and in-person school;
• the cost of goods sold inflation the company experiences;
• consumers' response to inflation-driven price increases; and
• the ability of the end-to-end supply chain to continue to operate effectively as the COVID-19 pandemic and world events continue to evolve.

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 $0.45 EPS for the third quarter of fiscal 2022 (EPS amounts are rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.

• Approximately $0.02 per diluted share of net expense related to restructuring plans
• Approximately $0.06 per diluted share of net expense related to impairment on businesses held for sale
• Approximately $0.05 per diluted share of net expense related to unusual tax items

The following are included in the $0.58 EPS for the third quarter of fiscal 2021 (EPS amounts are rounded and after tax). Please see the reconciliation schedules at the end of this release for additional details.

• Approximately $0.02 per diluted share of net expense related to restructuring plans
• 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 $0.04 per diluted share of net expense related to the early extinguishment of debt
• Approximately $0.01 per diluted share of net expense related to consulting fees on tax matters
• Approximately $0.01 per diluted share of net expense due to legal matters

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.

References to two-year compounded annualized numbers are calculated as: ([(1 + current year period's growth rate) * (1 + prior year period's growth rate)] ^ 0.5) – 1.

Please note that certain prior year amounts have been reclassified to conform with current year presentation.

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 6945305. 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 7, 2023.

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®, Marie Callender's®, Banquet®, Healthy Choice®, Slim Jim®, Reddi-wip®, and Vlasic®, as well as emerging brands, including Angie's® BOOMCHICKAPOP®, Duke's®, Earth Balance®, Gardein®, and Frontera®, offer choices for every occasion. For more information, visit www.conagrabrands.com.

Note on Forward-Looking Statements
This document contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Readers of this document should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this document. These risks, uncertainties, and factors include, among other things: the risk that the cost savings and any other synergies from the acquisition of Pinnacle Foods Inc. (the Pinnacle acquisition) may not be fully realized or may take longer to realize than expected; the risk that the Pinnacle acquisition may not be accretive within the expected timeframe or to the extent anticipated; the risks that the Pinnacle acquisition and related integration will create disruption to the Company and its management and impede the achievement of business plans; risks related to our ability to achieve the intended benefits of other recent acquisitions and divestitures; risks associated with general economic and industry conditions; risks associated with our ability to successfully execute our long-term value creation strategies; risks related to our ability to deleverage on currently anticipated timelines, and to continue to access capital on acceptable terms or at all; risks related to our ability to execute operating and restructuring plans and achieve targeted operating efficiencies from cost-saving initiatives, and to benefit from trade optimization programs; risks related to the effectiveness of our hedging activities and ability to respond to volatility in commodities; risks related to the Company's competitive environment and related market conditions; risks related to our ability to respond to changing consumer preferences and the success of our innovation and marketing investments; risks related to the ultimate impact of any product recalls and litigation, including litigation related to the lead paint and pigment matters, as well as any securities litigation, including securities class action lawsuits; risk associated with actions of governments and regulatory bodies that affect our businesses, including the ultimate impact of new or revised regulations or interpretations; risks related to the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers and employees; risks related to our forecasts of consumer eat-at-home habits as the impacts of the COVID-19 pandemic abate; risks related to the availability and prices of supply chain resources, including raw materials, packaging, and transportation including any negative effects caused by changes in inflation rates, weather conditions, or health pandemics; disruptions or inefficiencies in our supply chain and/or operations, including from the COVID-19 pandemic; risks related to disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine; risks associated with actions by our customers, including changes in distribution and purchasing terms; risks and uncertainties associated with intangible assets, including any future goodwill or intangible assets impairment charges; risks related to a material failure in or breach of our or our vendors' information technology systems; the amount and timing of future dividends, which remain subject to Board approval and depend on market and other conditions; and other risks described in our reports filed from time to time with the Securities and Exchange Commission. We caution readers not to place undue reliance on any forward-looking statements included in this document, which speak only as of the date of this document. We undertake no responsibility to update these statements, except as required by law.

Note on Non-GAAP Financial Measures
This document includes certain non-GAAP financial measures, including adjusted EPS, organic net sales, adjusted gross profit, adjusted operating profit, adjusted SG&A, adjusted corporate expenses, adjusted gross margin, adjusted operating margin, adjusted effective tax rate, adjusted net income attributable to Conagra Brands, two-year compounded annualized organic net sales, two-year compounded annualized adjusted EPS, two-year compounded annualized operating profit, net debt, net leverage ratio, and adjusted EBITDA. Management considers GAAP financial measures as well as such non-GAAP financial information in its evaluation of the Company's financial statements and believes these non-GAAP measures provide useful supplemental information to assess the Company's operating performance and financial position. These measures should be viewed in addition to, and not in lieu of, the Company's diluted earnings per share, operating performance and financial measures as calculated in accordance with GAAP.

Certain of these non-GAAP measures, such as organic net sales, adjusted operating margin, and adjusted EPS, are forward-looking.  Historically, the Company has excluded the impact of certain items impacting comparability, such as, but not limited to, restructuring expenses, the impact of the extinguishment of debt, the impact of foreign exchange, the impact of acquisitions and divestitures, hedging gains and losses, impairment charges, the impact of legacy legal contingencies, and the impact of unusual tax items, from the non-GAAP financial measures it presents.  Reconciliations of these forward-looking non-GAAP financial measures to the most directly comparable GAAP financial measures are not provided because the Company is unable to provide such reconciliations without unreasonable effort, due to the uncertainty and inherent difficulty of predicting the occurrence and the financial impact of such items impacting comparability and the periods in which such items may be recognized.  For the same reasons, the Company is unable to address the probable significance of the unavailable information, which could be material to future results.

Hedge gains and losses are generally aggregated, and net 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. The Company identifies these amounts as items that impact comparability within the discussion of unallocated Corporate results.