Conagra Brands, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2024, the 13 weeks ended November 26, 2023; comparative quarter ended November 27, 2022. First-half comparisons cover 26 weeks. Unless otherwise noted, amounts are in millions of dollars.
Business context and results
Conagra is a branded food company with Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice segments. In the quarter, lower sales in the two largest U.S. retail segments outweighed growth in International and Foodservice. Management attributed the declines primarily to weaker consumption and consumer behavior shifts, alongside increased strategic trade investment.
- Quarter: Net sales were $3,208.1, down 3.2%. Net income attributable to Conagra was $286.2, down from $381.9; diluted EPS was $0.60 versus $0.79.
- First half: Net sales were $6,112.1, down 1.7%. Net income attributable to Conagra was $605.9 versus $304.4; diluted EPS was $1.26 versus $0.63. The comparison benefited from substantially higher impairment charges in the prior-year first half.
- Margins: Calculated gross margin was approximately 26.4% for the quarter versus 27.8% a year earlier; first-half gross margin was approximately 27.3% versus 26.4%. Reported total segment operating profit was $543.3 for the quarter, down from $656.1, and $1,069.0 for the first half, versus $718.3. Prior-year first-half segment profit was depressed by major impairments.
- Segments, quarter sales / operating profit: Grocery & Snacks $1,295.1 / $279.2; Refrigerated & Frozen $1,338.5 / $220.2; International $279.6 / $5.9; Foodservice $294.9 / $38.0. Sales and profit declined in the first two segments; International sales rose but profit fell, including a held-for-sale impairment; Foodservice sales and profit increased.
Cash flow, debt, and liquidity
- First-half operating cash flow was $854.6, up from $297.8. Management cited inventory changes, timing of payable payments, and higher distributions from an equity-method investment. Capital expenditures were $214.0; investing cash outflow was $203.9.
- Financing cash outflow was $683.4, including $760.6 of long-term debt repayments, $500.0 of long-term debt issuance, and $324.7 of dividends paid. Cash declined $31.8 to $61.5.
- Long-term debt, including current installments, was $8.51 billion. Commercial paper outstanding was $503.0; notes payable were $559.0. No borrowings were outstanding under the $2.0 billion revolving credit facility. The company reported compliance with its debt covenants.
- Current assets of $3,469.1 were below current liabilities of $3,833.1. Management said available cash, operating cash flows, borrowing facilities, commercial paper, and capital-market access should cover obligations and planned spending for at least 12 months.
- Conagra expects to refinance or otherwise fund $1.00 billion of 4.30% senior notes due May 1, 2024. The company estimated fiscal 2024 capital expenditures of approximately $450 million.
Material changes, outlook, and notable items
- Input-cost inflation was moderate in the first half and is expected to continue for the rest of fiscal 2024. Management expects supply-chain productivity to offset some pressure. It expects volumes to improve over time, but warned that consumer economic pressures and high inflation could continue to weigh on volumes through fiscal 2024. No specific revenue or EPS guidance was provided in the filing text.
- In the quarter, Conagra recorded a $34.2 impairment charge after initiating a plan to sell an International-segment business, expected to be sold within 12 months. It also recorded $14.0 of legal charges and restructuring charges; first-half restructuring charges were $27.9. The first half included a $16.4 net gain on economic hedges recorded in corporate expenses, versus a $1.9 net loss in the prior-year period.
- Interest expense rose to $113.3 for the quarter and $219.3 for the first half, driven by higher weighted-average borrowing rates. The company issued $500.0 of 5.30% senior notes to fund repayment of $500.0 of 0.50% notes and prepaid $250.0 of its term loan.
- After quarter-end, approximately $135 of pension-plan assets were distributed following a voluntary lump-sum settlement offer; the settlement requires a pension remeasurement in the third quarter.
- Legal exposures include a nonfinal jury verdict of $7.1 in a cooking-spray product-liability case, which Conagra is challenging. The filing reports $54.5 accrued for litigation matters and $38.8 for Beatrice-related environmental matters. Management said it did not expect the disclosed matters to materially adversely affect the company, while acknowledging estimates could change.
- Key risks include inflation and commodity, labor, and supply-chain costs; consumer demand; competition; access to financing and deleveraging; product liability and labeling litigation; cybersecurity; and potential impairment of goodwill or intangible assets. Management reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether sales volumes and margins stabilize, particularly in Grocery & Snacks and Refrigerated & Frozen, and whether planned productivity offsets ongoing cost inflation.
- Progress and expected proceeds or other financial effects of the planned International-business sale and related impairment.
- How the $1.00 billion May 2024 maturity is refinanced, and the effects of borrowing rates on interest expense and leverage.
- Whether first-half operating cash-flow improvement is sustainable, given management’s cited working-capital timing and investment distributions.
- Developments in the cooking-spray litigation, environmental contingencies, and the pension-plan remeasurement.