Overview of company operations.
Fiscal year 2012 was a challenging year because of continuing frugal behavior. Consumers are still very value conscious. They are sticking to a list and keeping inventories at home at a minimum.
Commodity inflation in the first 3 quarters of fiscal year 2012 was 11 percent. It declined to 6 percent in Q4. Most of the 6 percent inflation was in the proteins. Conagra expects cost inflation of 4 to 6 percent in fiscal year 2013. It has a number of cost savings features to help it battle cost inflation, but it will raise prices if it sees margins getting compressed.
Conagra has a 5 percent decline in volume in the Consumer Products segment and 2 percentage points was driven by the Banquet brand. Banquet is the largest volume brand in Conagra's Consumer Foods segment. The decrease in volume occurred after Conagra raised prices on the Banquet brand as a result of commodity inflation and the price crossed $1.00.
Marie Callender's had year-over-year growth in the multi-family meals and double digit growth in desserts. Single serve meals grew by 10 percent in sales and volume in Q4.
Healthy Choice also gained in market share and net sales in Q4, even though prices increased. Healthy Choice Top Chef flavors have done well. Conagra will be shipping Healthy Choice baked entrees and Greek frozen yogurt next week.
Conagra is looking for acquisitions that have upside organic growth. In Q4, Conagra completed the acquisition of Del Monte Canada for $186 million. Conagra acquired Odom's Tennessee Pride for $95 million to add to its breakfast offerings. It also acquired the pita chip business of Kangaroo brands for $48 million, which allows it to put pita chips in the deli section under the Kangaroo label and in the snack aisle under private label. Conagra expects the acquisitions to be accretive to profits and, over time accretive to margins.
Conagra's private label business is doing well. The nutrtion and snack bar business has seen rapid growth. Conagra would like to expand its private label business through acquisitions and organic growth.
In Commercial Foods, sales increased by 7 percent and most of the growth was due to Lamb Western potato operations. A lot of growth in Lamb Western is coming from emerging markets.
Going forward, Conagra believes it will increase earnings in fiscal year 2013 because: (1) it will have the benefit of the acquisitions completed in 2012; (2) it has ongoing momemtum from Lamb Western, (3) it expects margins in Consumer Foods to benefit as a result of better margin management and lower cost inflation, and (4) it expects better volume trends in Consumer Foods in the second half of 2013 due to better innovation and the lapping of price increases. It will be having consumer promotions in 2013 to promote its new products.
Financials.
Conagra has changed its accouting methods for its pension accounting. The biggest of the changes is mark to market accounting. When interest rates are low, pension liabilities increase, resulting in extra expense. Under the old accounting, the expense was amortized. Under the new accounting, the expense recognized at the end of the year. The change was made to better reflect the financials of the company's operations. Conagra is very comfortable with its pension funding level, which is approximately 83 percent.
Sales in the Consumer Foods segment grew 6 percent due to acquisitions. Organic sales increased slightly as 6 percent price increases were partially offset by 5 percent volume declines and a 1 percent loss on foreign exchange. Operating profit grew 7 percent, mostly from margin improvement from pricing and cost savings. Gross margins also increased in Consumer Foods. Conagra expects sales in the Consumer Foods segment to grow in the high single digits in fiscal year 2013, two-thirds of which will come from acquisitions.
Sales in Commercial Foods grew 7 percent. Lamb Weston had double digit profit growth, driven by increased volumes and prices. Conagra expects modest revenue growth for Commercial Foods in fiscal year 2013.
Earnings per share on a comparable basis increased by 9 percent to $.51/share in Q4. This includes a $.02 benefit from the pension change. Comparable EPS for fiscal year 2012 is $1.84. Conagra expects 6 to 8 percent EPS growth in fiscal year 2013.
Conagra ended Q4 with $103 million in cash and $40 million in commercial paper borrowings. Cash has decreased over the last few quarters, but that is because Conagra is putting it to work. In fiscal year 2012, Conagra spent $1 billion for share repurchases and acquisitions.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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