FOR IMMEDIATE RELEASE
CONAGRA FOODS REPORTS PRELIMINARY THIRD-QUARTER RESULTS
THIRD-QUARTER FISCAL 2005 OVERVIEW:
o Preliminary third-quarter fiscal 2005 diluted EPS is $0.31.
>> The $0.31 includes $0.03 of net expense from items affecting
comparability as detailed toward the end of this release.
o Third-quarter fiscal 2005 sales were $3.6 billion, slightly ahead of last
year.
o Operating profit posted a year-over-year decline, largely reflecting
increased input costs and challenges in the packaged meat operations.
Manufacturing network changes, and to a lesser extent business process
changes connected with Project Nucleus, resulted in transitional disruption
which also negatively impacted quarterly profits; those changes are part of
long-term profit-enhancing initiatives.
o During the quarter, the company discovered errors in previously reported
amounts related to income tax matters. None of the errors relate to the
operating performance of the company's segments. As soon as possible, the
company will restate historical results to correct the errors; on a
preliminary basis, the errors are estimated to reduce after tax profits
principally in fiscal 2003 and fiscal 2004 in the range of $150 million to
$200 million in aggregate, and there will be corresponding cash payments in
connection with those errors. The company plans to provide revised
comparative financial information at the time of its 10-Q filing. Because
the company is still in the process of determining the amount of the
errors, it considers the results in this release preliminary.
OMAHA, Neb., March 24, 2005 -- ConAgra Foods Inc. (NYSE: CAG), one of North
America's leading packaged food companies, today reported results for the fiscal
2005 third quarter, ended Feb. 27, 2005. Sales for the quarter were $3.6
billion, up 1%. Current quarter income from continuing operations before income
tax was $314 million, equal to last year. Preliminary diluted EPS was $0.31 for
the quarter.
Bruce Rohde, ConAgra Foods chairman and chief executive officer, commented, "Our
company dealt with several changes and challenges during the quarter that
negatively impacted performance. Two of these challenges - manufacturing network
changes and the organization's transition to new business processes as part of
Project Nucleus - are short-term in nature. These challenges occurred while
implementing significant improvements and are part of our long-term
profit-enhancing initiatives. Our most significant challenge - increased input
costs in our retail packaged meats business - has impacted us for several
consecutive quarters, and we are taking specific actions to address the
problems. These actions include implementing more effective price increases and
SKU rationalization efforts."
Rohde continued, "The short-term challenges connected to manufacturing and the
organization's transition to Project Nucleus are mostly resolved, and are not
expected to impact the fourth quarter as they did in the third quarter. While we
consider the short-term challenges to be a natural outcome of implementing
significant changes, we still need to improve our overall execution and more
effectively anticipate and deal with our operational issues. The momentum we
built in the last half of fiscal 2004 and the first half of fiscal 2005 was
interrupted this quarter, but we expect to get back on track over the next few
quarters as we work through the current challenges and as we continue to focus
on our fundamentals to improve margins and returns over time. This includes
generating consumer preference for our products, operating more efficiently,
strengthening customer service, and prudent capital deployment."
Project Nucleus is the company's information-based business process initiative
that is systematically linking sales, marketing, logistics, manufacturing
functions, and customer interfaces across ConAgra Foods.
Current Quarter Operating Challenges
The company notes that it made progress during the quarter growing a variety of
brands and products, reducing certain operating expenses, and retiring debt, but
also faced significant operating challenges, including:
o Substantially lower margins in the packaged meat operations, mostly driven
by increased input costs without sufficient offsetting price increases.
Input costs which were expected to improve during the quarter became worse
for key protein inputs. The company is addressing these challenges with
margin-enhancing actions including price increases and a SKU
rationalization program to simplify operations and increase efficiencies.
o Manufacturing challenges resulting from installing new equipment, as well
as consolidating and transferring production across plant locations, at a
time when the company experienced peak demand for some products. This
resulted in a lower sales realization rate because the company could not
fill all customer orders for some very popular and higher-margin products
that are in increasing demand, such as Banquet Crock-Pot Classics, Egg
Beaters, Hebrew National, Reddi-wip, and Slim Jim. This has largely been
corrected, and will impact the fourth quarter to a lesser degree than it
did in the third quarter.
o Minor disruption was experienced while implementing Project Nucleus.
Project Nucleus is being implemented over several fiscal years, and the
company passed a significant milestone on Dec. 1, 2004, when the
order-to-cash functions for most of the retail and foodservice operations
were transitioned to this system. Significant improvements in customer
service levels were made as the quarter progressed.
Supply Chain and Asset Base Improvements
As part of the company's initiatives to build long-term strength in its supply
chain and focus on its highest-opportunity assets, the company has decided to
close certain facilities and divest some non-core manufacturing plants and
businesses. These actions resulted in non-cash charges during the quarter, which
are identified in the applicable portions of this release. The charges related
to supply chain and asset base improvements are part of the items impacting
earnings comparability.
Retail Products Segment (58% of total sales)
For the quarter, sales for the Retail Products segment were $2.1 billion, down
1% from last year. Volumes declined 3%, and average net pricing increased 2% as
necessitated by increased input costs. The segment's volume decline largely
reflects lower order fill rates during the previously described manufacturing
changes. Also relevant to the quarterly volume decline is that the company opted
not to participate in various seasonal promotions during this transitional
period, and chose to promote at later dates when the return on promotional
investment is expected to be higher.
Although there were challenges during the quarter, several brands posted strong
sales performance as a result of ongoing sales and marketing initiatives
intended to strengthen brand equity, expand distribution of the company's most
promising products, successfully develop new products, and improve returns on
marketing investments:
o Sales for the company's top 30 brands as a group, which represent more than
80% of total segment sales, grew 3% during the quarter.
>> Brands posting sales gains include: ACT II, Banquet, Blue Bonnet, Chef
Boyardee, Cook's, Eckrich, Egg Beaters, Hunt's, Kid Cuisine, Manwich,
Marie Callender's, Orville Redenbacher's, PAM, Parkay, Snack Pack, and
Van Camp's. Many of these brands have posted several successive
quarters of solid sales growth.
o Sales for the new product Banquet Crock-Pot Classics, a complete frozen
meal designed specifically for Crock Pots(TM), remain strong and are on
track to approach $100 million of sales annually.
Retail Products segment operating profit was $303 million in the current
quarter, below the $329 million reported last year. A $10 million brand
impairment charge in the current quarter, a $17 million benefit from favorable
legal settlements in the current quarter, and $8 million of expense in the
year-ago period related to implementing efficiency initiatives impact
comparability of results. The overall segment performance this quarter reflects
modest profit growth for some operations which was more than offset by:
o Weak results for operations that include packaged meats, driven by
significantly increased pork and other input costs, as well as a less
profitable product mix in those operations due to the operating issues
previously described. Profits for these operations were very low, and were
more than $45 million, or $0.05 per share, below last year's comparable
amounts. The company is implementing additional price increases and product
modifications to boost the profitability of the packaged meat operations;
these operations should also benefit from the company's broader SKU
rationalization program.
o The company made changes to its manufacturing network, and implemented the
order-to-cash portion of Project Nucleus, as part of long-term
profit-enhancing initiatives. As previously described, these initiatives
caused some disruption during the quarter. The combination of the
disruption and strategic decisions to defer promotions impacted the broader
Retail Products portfolio volumes, mix, absorption, and order fulfillment
costs.
Increased input and packaging costs negatively impacted the entire segment, but
did so most significantly in the packaged meat operations. Some operations
within the segment posted improved profitability, but the gains were more than
offset by the previously mentioned operating issues.
Over the long term, the company is focused on brand-building and operating
efficiency initiatives that are expected to drive profit margin expansion for
this segment.
Foodservice Products Segment (25% of total sales)
Sales for the Foodservice Products segment were $886 million for the third
quarter, 1% above last year. Segment operating profit was $33 million in the
current quarter, down from $70 million in the year-ago period. The operating
profit decline reflects $33 million of costs resulting from an impairment charge
related to strategic changes in the culinary products manufacturing network, as
well as fire damage at a specialty potato products facility. Also impacting
year-over-year comparability is $16 million of expense in the year-ago period
related to implementing efficiency initiatives.
Adjusting for items that impact year-over-year comparability, the current
quarter segment operating performance showed mixed results. Sales and profits
for specialty potato products increased due to strong volumes, but sales and
profits for culinary products declined due to the operating issues previously
described. Due to tariff-related market dynamics, sales and profits for seafood
products were below year-ago levels.
Food Ingredients Segment (17% of total sales)
During the quarter, sales for the Food Ingredients segment increased 9% over
last year to $608 million, and operating profit increased 10% over last year to
$60 million. The strong sales and operating profit performance largely reflects
a favorable environment for trading and merchandising operations. Current
quarter operating profit includes $22 million of profit growth from trading and
merchandising energy, grains, fertilizer, and other inputs and commodities,
which more than offset a $15 million impairment charge related to strategic
changes to the manufacturing network. The segment operating profit growth also
reflects strong performance from grain-based food ingredients due to higher
volumes and improved market conditions. Difficult cost environment and
competitive conditions continued to negatively impact the performance of
dehydrated onion, garlic, capsicums, and vegetable products.
Pilgrim's Pride Stock Sale, Equity Method Investments, and Assets Related to
Swift Foods
o During the quarter, ConAgra Foods sold 10 million shares of Pilgrim's Pride
Corporation (NYSE:PPC) common stock for more than $280 million, resulting
in a pretax gain of approximately $186 million. That gain is classified on
the company's income statement as Gain on sale of Pilgrim's Pride
Corporation common stock. ConAgra Foods acquired these shares in the fall
of 2003 in connection with the divestiture of its chicken-processing
operations to Pilgrim's Pride. ConAgra Foods still owns 15.4 million shares
of Pilgrim's Pride common stock that are subject to resale restrictions;
ConAgra Foods may sell these shares at appropriate times in accordance with
these restrictions.
o Equity method investment loss from various investments for the current
quarter was $64 million, reflecting impairment charges totaling $71 million
for revised estimates of value for two joint ventures. For the same quarter
last year, equity method investment earnings were $2 million.
o During the quarter the company substantially completed the liquidation of
the cattle-feeding assets related to the financing it provided Swift Foods.
The company received net proceeds of $121 million during the quarter,
bringing the total to $267 million. The company expects to receive the
remainder of the proceeds from the liquidation of the cattle-feeding assets
over the next several weeks, after which the company will have fully
recovered the financing provided.
Other Capital Resource Matters and Corporate Expense
o During the quarter, the company retired $600 million of 7.5% senior debt
due September 2005. Retiring the debt resulted in a charge of approximately
$22 million, which is classified as corporate expense.
o Corporate expense totaled $136 million for the quarter. That amount
includes the $22 million charge for retiring $600 million of debt, as well
as a $22 million addition to its legal reserve in connection with
previously disclosed SEC matters. Corporate expense was $79 million for the
comparable quarter last year.
o For the quarter, capital expenditures for property, plant, and equipment
totaled $97 million compared with $89 million last year; the increase over
last year is due principally to additional investment to update strategic
information systems for the future. Depreciation and amortization expense
was approximately $91 million for the quarter versus $88 million a year
ago. Dividends paid totaled $140 million versus $138 million last year. Net
interest expense for the quarter was $68 million compared with $62 million
last year.
Preliminary Third-Quarter Income Taxes
The preliminary effective tax rate for the quarter was 49%, much higher than
usual, largely reflecting the fact that two items are not deductible for tax
purposes:
o A significant impairment charge reported within Equity Method
Investment Loss, and
o Most of the current quarter increase to the legal reserves associated
with previously disclosed SEC matters.
Outlook
Fourth quarter fiscal 2005: The company currently expects fourth-quarter EPS to
modestly exceed third-quarter EPS, excluding amounts that impact comparability.
The company notes the gradual nature of improvement for the operating challenges
described in this release, as well as uncertainty regarding the longevity of the
unusually favorable business environment for the trading and merchandising
operations within the Food Ingredients segment.
Longer Term: The company is focused on improving margins and returns on capital
over the long term with its multi-year marketing, operations, and information
systems initiatives as detailed in the company's fiscal 2004 annual report. The
company expects operating trends to improve over the next few quarters as it:
o Continues to improve the manufacturing network and gain experience
with Project Nucleus,
o Increases prices to cover increased input and packaging costs, most
notably for its packaged meats business, but for other products as
well,
o Becomes more efficient throughout its supply chain, and
o Implements its SKU reduction program that will remove relatively
low-margin and low-volume products and focus sales efforts and
manufacturing capacity on higher-margin and higher-volume products.
Errors Related to Accounting for Income Taxes
During fiscal 2005, the company has been systematically conducting rigorous
reviews of financial controls as part of its Sarbanes-Oxley 404 certification
process and in connection with pending tax audits, as well as part of
operational improvement efforts by new financial management. Those reviews have
led to the discovery of errors related to accounting for income taxes in
previously reported amounts. The reviews have been productive and helpful in
addressing the errors and control weaknesses. To address the errors discovered
as a part of this process, and as announced in its Form 8-K filed with the SEC
today, the company will restate financial statements for the periods covered in
its Form 10-K for the fiscal year ended May 30, 2004 and the Form 10-Q's for the
first two quarters of fiscal 2005. The restatement is not expected to impact
previously reported revenue or income from continuing operations before income
taxes, but it is expected to increase tax expense, and therefore reduce
after-tax profits, principally in fiscal 2003 and 2004. Based on information as
of this date, the company's preliminary estimate of the increased tax expense is
in the range of $150 million to $200 million for the relevant periods. There
will also be corresponding cash payments for taxes in connection with the
errors.
The company has evaluated the effectiveness of its internal controls over
accounting for income taxes and has determined the accounting errors indicate a
material weakness in internal controls with respect to accounting for income
taxes. The company is taking steps to ensure that the material weakness is
remedied, including hiring a new Vice President of Tax and additional tax
accounting staff, as well as implementing enhanced control processes over
accounting for taxes, including the assistance of third-party professionals.
For more details regarding the company's financial goals, please refer to the
company's Web site, www.conagrafoods.com/investors, and choose the button
titled, "ConAgra Foods Comments on Strategic Direction."
Major Items Affecting Third-Quarter Fiscal 2005 EPS Comparability
Included in preliminary diluted EPS of $0.31 for the third quarter of fiscal
2005 (EPS amounts after tax):
o A gain of $0.22 per diluted share, or $186 million pretax, for the sale of
Pilgrim's Pride Corporation common stock. That is classified as Gain on
sale of Pilgrim's Pride Corporation common stock.
o Expense of $0.13 per diluted share, related to revised estimates of values
for joint venture assets. That is included in Equity Method Investment
Loss, and most of the amount is not tax deductible.
o Expense of $0.04 per diluted share, or $22 million, related to an increase
in legal reserves in connection with the previously disclosed SEC matter.
That is classified as corporate expense, and most of the amount is not tax
deductible.
o Expense of $0.04 per diluted share, or $33 million pretax, related to
impairment charges and fire damage and classified as part of the results
for the Foodservice Products segment.
o Expense of $0.03 per diluted share, or $22 million pretax, related to the
early retirement of debt and classified as corporate expense.
o Benefit of $0.02 per diluted share, or $17 million pretax, related to
favorable legal settlements for the Retail Products segment.
o Expense of $0.02 per diluted share, or $15 million pretax, related to
impairment charges and classified as part of the results for the Food
Ingredients segment.
o Expense of $0.01 per diluted share, or $10 million pretax, related to
impairment charges and classified as part of the results for the Retail
Products segment.
ConAgra Foods Inc. (NYSE: CAG) is one of North America's largest packaged food
companies, serving consumer grocery retailers, as well as restaurants and other
foodservice establishments. Popular ConAgra Foods consumer brands include: ACT
II, Armour, Banquet, Blue Bonnet, Brown 'N Serve, Butterball, Chef Boyardee,
Cook's, Crunch 'n Munch, DAVID, Decker, Eckrich, Egg Beaters, Fleischmann's,
Golden Cuisine, Gulden's, Healthy Choice, Hebrew National, Hunt's, Kid Cuisine,
Knott's Berry Farm, La Choy, Lamb Weston, Libby's, Life Choice, Lightlife, Lunch
Makers, MaMa Rosa's, Manwich, Marie Callender's, Orville Redenbacher's, PAM,
Parkay, Pemmican, Peter Pan, Reddi-wip, Rosarita, Ro*Tel, Slim Jim, Snack Pack,
Swiss Miss, Van Camp's, Wesson, Wolf, and many others. For more information,
please visit us at www.conagrafoods.com.
Discussion of Results
A discussion of the ConAgra Foods third-quarter results will be available today
at 8:30 a.m. EST. To access the discussion, call toll-free at 1-877-447-8217.
International callers should dial 1-706-679-0415. On the Internet, you may
access the discussion at www.conagrafoods.com/investors. No passcode or call
identification number is needed for the call at 8:30 a.m. EST. A digital replay
of the discussion will be available after 10:30 a.m. EST at 1-800-642-1687 and
at 1-706-645-9291 for international callers. The conference identification
number for the digital replay for domestic callers and international callers is
4029057. The company has posted a question-and-answer supplement relating to
this release and an audio archive of management's discussion at
www.conagrafoods.com/investors. See the ConAgra Foods Web site for recent news
at www.conagrafoods.com.
Note on Forward-Looking Statements:
This news release contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
management's current views and assumptions of future events and financial
performance and are subject to uncertainty and changes in circumstances. Readers
of this release should understand that these statements are not guarantees of
performance or results. Many factors could affect the company's actual financial
results and cause them to vary materially from the expectations contained in the
forward-looking statements. These factors include, among other things, future
economic circumstances, industry conditions, company performance and financial
results, availability and prices of raw materials, product pricing, competitive
environment and related market conditions, operating efficiencies, access to
capital, actions of governments and regulatory factors affecting the company's
businesses and other risks described in the company's reports filed with the
Securities and Exchange Commission. The company cautions readers not to place
undue reliance on any forward-looking statements included in this release, which
speak only as of the date made.
ConAgra Foods, Inc.
PRELIMINARY
Preliminary Segment Operating Results
In millions
THIRD QUARTER
-------------------------------------------------------------
13 Weeks
Ended 13 Weeks Ended
-------------------- ------------------ ------------------
February 27, 2005 February 22, 2004 Percent Change
-------------------- ------------------ ------------------
SALES
Retail Products $ 2,076.8 $ 2,091.3 (0.7)%
Foodservice Products 885.6 876.2 1.1%
Food Ingredients 607.5 558.0 8.9%
-------------------- ------------------
Total 3,569.9 3,525.5 1.3%
-------------------- ------------------
OPERATING PROFIT
Retail Products $ 303.1 $ 329.3 (8.0)%
Foodservice Products 33.1 69.7 (52.5)%
Food Ingredients 59.8 54.2 10.3%
-------------------- ------------------
Total operating profit for segments 396.0 453.2 (12.6)%
Reconciliation of total operating profit to income from continuing operations
before income tax
Items excluded from segment operating profit:
Gain on sale of Pilgrim's Pride Corporation
common stock 185.7 - 100.0%
General corporate expense (135.5) (79.2) 71.1%
Interest expense, net (68.1) (61.8) 10.2%
Equity method investment earnings (loss) (64.0) 1.9 #
-------------------- ------------------
Income from continuing operations before income tax
$ 314.1 $ 314.1 -
==================== ==================
# - Denotes a variance of more than 100%.
Segment operating profit excludes general corporate expense, gain on sale
of Pilgrim's Pride Corporation common stock, 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.
ConAgra Foods, Inc.
PRELIMINARY
Preliminary Segment Operating Results
In millions
YEAR-TO-DATE
-------------------------------------------------------------
39 Weeks
Ended 39 Weeks Ended
-------------------- ------------------ ------------------
February 27, 2005 February 22, 2004 Percent Change
-------------------- ------------------ ------------------
SALES
Retail Products $ 6,576.4 $ 6,203.9 6.0%
Foodservice Products 2,729.7 2,712.7 0.6%
Food Ingredients 1,875.6 1,643.1 14.2%
-------------------- ------------------
Total 11,181.7 10,559.7 5.9%
-------------------- ------------------
OPERATING PROFIT
Retail Products $ 886.0 $ 898.6 (1.4)%
Foodservice Products 191.5 231.5 (17.3)%
Food Ingredients 199.1 136.2 46.2%
-------------------- ------------------
Total operating profit for segments 1,276.6 1,266.3 0.8%
Reconciliation of total operating profit to income from continuing operations
before income tax and cumulative effect of changes in accounting
Items excluded from segment operating profit:
Gain on sale of Pilgrim's Pride Corporation
common stock 185.7 - 100.0%
General corporate expense (281.6) (253.5) 11.1%
Interest expense, net (227.3) (195.4) 16.3%
Equity method investment earnings (loss) (34.8) 29.4 #
-------------------- ------------------
Income from continuing operations before income tax and
cumulative effect of changes in accounting $ 918.6 $ 846.8 8.5%
==================== ==================
# - Denotes a variance of more than 100%.
Segment operating profit excludes general corporate expense, gain on sale
of Pilgrim's Pride Corporation common stock, 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.
ConAgra Foods, Inc.
PRELIMINARY
-----------
Preliminary Consolidated Statements of Earnings
In millions, except per share amounts
13 Weeks Ended
------------------------
February 27, 2005
------------------------
Net sales $ 3,569.9
Costs and expenses:
Cost of goods sold 2,803.5
Selling, general and administrative expenses 505.9
Interest expense, net 68.1
Gain on sale of Pilgrim's Pride Corporation common stock 185.7
Equity method investment earnings (loss) (64.0)
------------------------
Income from continuing operations before income taxes 314.1
Preliminary income tax expense 152.6
------------------------
Income from continuing operations 161.5
Loss from discontinued operations, net of tax (1.3)
------------------------
Net income $ 160.2
========================
Preliminary Earnings per share - basic
Income from continuing operations $ 0.31
Income from discontinued operations -
------------------------
Net income $ 0.31
========================
Weighted average shares outstanding 515.7
========================
Preliminary Earnings per share - diluted
Income from continuing operations $ 0.31
Income from discontinued operations -
------------------------
Net income $ 0.31
========================
Weighted average share and share equivalents
outstanding 520.3
========================