ConAgra Foods : Reports Fiscal 2014 Fourth Quarter EPS; Non-Cash Impairment Charges Recognized With No Impact on Comparable EPS; Exceeds Operating Cash Flow and Debt Reduction Goals; Commitment to Strong Dividend Reaffirmed

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.

Hedging Activities – This language primarily relates to operations other than the company’s milling operations or significant financing activities.

Hedge gains and losses are 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 net of these activities resulted in $14 million of favorable impact in the current quarter and $37 million of unfavorable impact in the year-ago period. The company identifies these amounts as items impacting comparability.

Other Items

• Unallocated Corporate amounts were $65 million of expense in the current quarter and $181 million of expense in the year-ago period, as reported. After adjusting for $3 million of net expense in the current quarter, and $88 million of net expense in the year-ago period from items impacting comparability, current quarter expense of $62 million declined from $93 million in the year-ago period. The comparable decline largely reflects lower incentives, lower pension expense, and efficiency initiatives.
• Equity method investment earnings were $12 million for the current quarter and $5 million in the year-ago period. The increase reflects improved results for Lamb Weston’s European potato joint venture. In future periods, earnings associated with the company’s interest in Ardent Mills will be reported in equity method investment earnings.
• Net interest expense was $93 million in the current quarter and $102 million in the year-ago period, reflecting debt reduction.

Capital Items

• During the quarter, the company repaid significant amounts of debt, resulting in more than $600 million of debt reduction for the fiscal year. The company plans to reduce debt by approximately $1 billion in fiscal 2015, using a combination of operating cash and net proceeds received from the formation of Ardent Mills. Once the fiscal 2015 goal is achieved, the company will have repaid approximately $2 billion of debt since the acquisition of Ralcorp in fiscal 2013.
• Dividends for the current quarter totaled $105 million versus $104 million in the year-ago period, reflecting an increase in shares outstanding.
• The company did not repurchase any shares of common stock during the quarter.
• For the current quarter, capital expenditures for property, plant and equipment were $131 million, compared with $163 million in the year-ago period. Depreciation and amortization expense was approximately $156 million for the fiscal fourth quarter; this compares with a total of $145 million in the year-ago period.
• Shortly after the end of the quarter, the company contributed its milling operations into Ardent Mills, a milling joint venture. In connection with the formation of this venture and the divestiture of three mills, ConAgra Foods received approximately $530 million of cash, net of estimated tax, and a 44% interest in Ardent Mills. In the first quarter of fiscal 2015, the company intends to adopt a new accounting standard that is expected to result in reclassifying the milling operations as discontinued operations, which will change the presentation of prior periods. ConAgra Foods’ portion of Ardent Mills profits will be reflected pretax within equity method investment earnings. ConAgra Foods expects to earn approximately $0.07-$0.09 less per diluted share in fiscal 2015 from Ardent Mills (including the benefit of lower interest expense from allocating Ardent-related proceeds toward debt reduction) than it earned in fiscal 2014 from its milling operations, on a comparable basis.

Outlook

The company expects fiscal 2015 EPS to reflect a mid-single digit rate of growth over the comparable fiscal 2014 EPS of $2.17. Fiscal 2016 and 2017 EPS is expected to show a high-single digit rate of annual EPS growth as the company benefits from a stronger underlying business, sizeable synergies, good productivity and efficiencies, and lower interest expense. Other long-term goals are unchanged.

With regard to specific fiscal 2015 assumptions, the company expects:

• Consumer Foods volume to sequentially improve throughout fiscal 2015.
• Commercial Foods to show good sales and profit growth; its results will be restated to reflect the reclassification of milling results to discontinued operations.
• Private Brands profits to grow modestly over fiscal 2014 amounts, although down year-over-year in the first half of the fiscal year due to pricing concessions yet to be lapped. Private Brands sales are expected to increase modestly for the fiscal year.
• Strong productivity as well as synergies related to the Ralcorp acquisition. Together these are expected to be approximately $350 - $375 million for the entire company in fiscal 2015, which should more than offset the expected 2-3% inflation planned for fiscal 2015. Segment expectations described above reflect these amounts.
• More than $50 million of Selling, General & Administrative (“SG&A”) savings generated by efficiency initiatives.
• Higher incentives.
• $30 million of lower interest expense resulting from the fiscal 2014 debt repayment.
• The benefit of an extra week in fiscal 2015 versus fiscal 2014.
• To earn $0.07-$0.09 per share less from Ardent Mills (and related capital allocation) than it earned from the milling operations last fiscal year.
• To generate at least $1.6-$1.7 billion of operating cash flow, and to repay approximately $1 billion of debt from a combination of operating cash flow and net proceeds received from the formation of Ardent Mills.
• With regard to the mid-single digit EPS growth expected in fiscal 2015, the company currently expects the EPS growth to be concentrated in the second half of the fiscal year. The company currently expects comparable EPS in the fiscal 2015 first quarter to be slightly below comparable year-ago amounts.

Major Items Impacting Fourth-quarter Fiscal 2014 EPS Comparability

Included in the $(0.76) diluted loss per share from continuing operations for the fourth quarter of fiscal 2014 (EPS amounts rounded and after tax):

• Approximately $1.47 per diluted share of expense, or $681 million pretax, a substantial portion of which is not tax deductible, from impairment charges and the corresponding impact on diluted share count. Approximately $605 million of this is classified within the Private Brands segment (SG&A), $73 million is classified within the Consumer Foods segment (SG&A), and $3 million is classified as unallocated Corporate expense.
• Approximately $0.13 per diluted share benefit, or $91 million pretax, from selling three flour mills prior to the formation of Ardent Mills. This gain is classified within the Commercial Foods segment (SG&A).
• Approximately $0.08 per diluted share of expense, or $58 million pretax, resulting from restructuring, transaction, and integration costs. $18 million is classified within the Consumer Foods segment (SG&A), $5 million is classified within the Commercial Foods segment (SG&A), $12 million is classified within the Private Brands segment (SG&A), and $23 million is classified within unallocated Corporate expense.
• Approximately $0.06 per diluted share of benefit from unusual tax items, which included favorable tax adjustments resulting from changes in legal structure and state tax filing positions and the resolution of certain foreign income tax matters.
• Approximately $0.02 per diluted share of benefit, or $14 million pretax, from the mark-to-market impact of derivatives used to hedge input costs, temporarily classified in unallocated Corporate expense. Hedge gains and losses are 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.
• Approximately $0.02 per diluted share of benefit, or $10 million pretax, related to historical legal matters, a portion of which is not tax deductible; this is classified within unallocated Corporate expense.
• Approximately $0.01 per diluted share of benefit, or $5 million pretax, resulting from a gain on the sale of a non-operating asset in the Commercial Foods segment (SG&A).

Included in the $0.45 diluted EPS from continuing operations for the fourth quarter of fiscal 2013 (EPS amounts rounded and after tax):

• Approximately $0.10 per diluted share of net expense, or $67 million pretax, resulting from restructuring, integration, and transaction costs (including acquisition-related restructuring). $61 million is within unallocated Corporate expense ($11 million in cost of goods sold, $50 million in SG&A), $4 million is within Consumer Foods (all SG&A), and $2 million is within Private Brands (SG&A).
• Approximately $0.05 per diluted share of net expense, or $37 million pretax, related to the mark-to-market impact of derivatives used to hedge input costs, temporarily classified in unallocated Corporate expense. Hedge gains and losses are 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.
• Approximately $0.03 per diluted share of net benefit, or $22 million pretax, related to historical legal matters, classified within unallocated Corporate expense.
• Approximately $0.02 per diluted share of net expense, or $12 million pretax, related to the year-end re-measurement of certain pensions, as well as the cost of early retirement of debt; this is classified within unallocated Corporate expense.
• Approximately $0.01 per diluted share of acquisition-related tax expense.

Discussion of Results

ConAgra Foods will host a conference call at 9:30 a.m. EDT today to discuss the results. Following the company’s remarks, the call will include a question-and-answer session with the investment community. Domestic and international participants may access the conference call toll-free by dialing 1-800-500-0311 and 1-719-325-2118, respectively. No confirmation or pass code is needed. This conference call also can be accessed live on the Internet at http://investor.conagrafoods.com.

A rebroadcast of the conference call will be available after 1 p.m. EDT today. To access the digital replay, a pass code number will be required. Domestic participants should dial 1-888-203-1112, and international participants should dial 1-719-457-0820 and enter pass code 9659870. A rebroadcast also will be available on the company’s website.

In addition, the company has posted a question-and-answer supplement relating to this release at http://investor.conagrafoods.com. To view recent company news, please visit http://media.conagrafoods.com.

ConAgra Foods, Inc., (NYSE: CAG) is one of North America's largest packaged food companies with branded and private branded food found in 99 percent of America’s households, as well as a strong commercial foods business serving restaurants and foodservice operations globally. Consumers can find recognized brands such as Banquet®, Chef Boyardee®, Egg Beaters®, Healthy Choice®, Hebrew National®, Hunt's®, Marie Callender's®, Orville Redenbacher's®, PAM®, Peter Pan®, Reddi-wip®, Slim Jim®, Snack Pack® and many other ConAgra Foods brands, along with food sold by ConAgra Foods under private brand labels, in grocery, convenience, mass merchandise, club and drug stores. Additionally, ConAgra Foods supplies frozen potato and sweet potato products as well as other vegetable, seasoning blends, flavors, and bakery products to commercial and foodservice customers. ConAgra Foods operates ReadySetEat.com, an interactive recipe website that provides consumers with easy dinner recipes and more. For more information, please visit us at www.conagrafoods.com.

Note on Forward-looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and assumptions and are subject to certain risks, uncertainties and changes in circumstances that could cause actual results to differ materially from potential results discussed in the forward-looking statements. These risks and uncertainties include, among other things: ConAgra Foods’ ability to realize the synergies and benefits contemplated by the acquisition of Ralcorp Holdings, Inc. (“Ralcorp”) and its ability to promptly and effectively integrate the business of Ralcorp; ConAgra Foods’ ability to realize the synergies and benefits contemplated by the recently formed joint venture combining the flour milling businesses of ConAgra Foods, Cargill, Incorporated, and CHS Inc.; risks and uncertainties associated with intangible assets, including any future goodwill impairment charges; the availability and prices of raw materials, including any negative effects caused by inflation or adverse weather conditions; the effectiveness of ConAgra Foods’ product pricing, including product innovation, any pricing actions and changes in promotional strategies; the ultimate outcome of litigation, including the lead paint matter; future economic circumstances; industry conditions; ConAgra Foods’ ability to execute its operating and restructuring plans; the success of ConAgra Foods’ cost-savings initiatives, and innovation and marketing investments; the competitive environment; operating efficiencies; the ultimate impact of any ConAgra Foods product recalls; access to capital; actions of governments and regulatory factors affecting ConAgra Foods’ businesses, including the Patient Protection and Affordable Care Act; the amount and timing of repurchases of ConAgra Foods’ common stock and debt, if any; and other risks described in ConAgra Foods’ reports filed with the Securities and Exchange Commission, including its most recent annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. Investors and security holders are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. ConAgra Foods disclaims any obligation to update or revise statements contained in this press release to reflect future events or circumstances or otherwise.

Segment operating profit excludes general corporate expense, equity method investment earnings, and net interest expense. Management believes such amounts are not directly associated with segment performance results for the period. Management believes the presentation of total operating profit for segments facilitates period-to-period comparison of results of segment operations.

Segment operating profit excludes general corporate expense, equity method investment earnings, and net interest expense. Management believes such amounts are not directly associated with segment performance results for the period. Management believes the presentation of total operating profit for segments facilitates period-to-period comparison of results of segment operations.