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ConAgra Foods Reports Strong Third-Quarter EPS Driven by Continued Significant Profit Growth for Consumer Foods Segment; Fiscal Year EPS on Track

Friday 26. March 2010 - Diluted EPS from continuing operations of $0.50 as reported, and $0.44 excluding items impacting comparability; up 16% as reported and up 10% on a comparable basis.

Third Quarter Highlights (vs. year-ago amounts):

Diluted EPS from continuing operations of $0.50 as reported, and $0.44 excluding items impacting comparability; up 16% as reported and up 10% on a comparable basis.

Consumer Foods’ sales increased 2% and unit volumes increased 3%.

Consumer Foods’ operating profits increased 25% as reported and 19% on a comparable basis.

Commercial Foods’ operating profits increased 6%.

Fiscal 2010 diluted EPS from continuing operations, excluding items impacting comparability, remains on track to approach $1.73.

ConAgra Foods, Inc., (NYSE: CAG) one of North America’s leading packaged food companies, today reported results for the fiscal 2010 third quarter ended Feb. 28, 2010. Diluted EPS from continuing operations was $0.50 compared with $0.43 a year ago. Current quarter results include $0.06 per diluted share of benefit, while prior-year amounts included $0.03 of net benefit, from items impacting comparability. Diluted EPS from continuing operations on a comparable basis was $0.44, up 10% from comparable amounts in the year-ago period.

Items impacting comparability in the current year and prior year are summarized toward the end of this release.

Gary Rodkin, ConAgra Foods’ chief executive officer, commented, “We are pleased to report another good quarter where comparable EPS growth was primarily driven by profit improvement for our Consumer Foods segment. The continued momentum in our sales, innovation, marketing, and cost-savings initiatives is generating the second-half results we expected. As we discussed in our recent presentation to the Consumer Analyst Group of New York, we are confident that our strong business foundation has positioned us for sustainable profitable growth.”

Consumer Foods Segment (65% of Year-to-date sales)

Branded and non-branded food sold in retail and foodservice channels.

The Consumer Foods segment posted sales of $2,034 million and operating profit of $306 million for the quarter. Sales increased 2% and unit volumes increased 3%, reflecting the benefit of ongoing innovation, marketing, and customer service initiatives. Foreign exchange favorably impacted sales growth by 1%. Sales growth was slower than unit volume growth due to slotting and couponing connected with new product launches, as well as lower prices for cooking oil and related items due to the pass-through of lower cooking oil costs.

Large brands that posted sales growth include Banquet, Chef Boyardee, Hunt’s, Marie Callender’s, PAM, and others.
More brand details can be found in the Q&A document accompanying this release.
Operating profit of $306 million was 25% ahead of last year’s $245 million; current-quarter amounts include a gain of approximately $14 million from the sale of the Luck’s brand. Excluding this gain, current-quarter segment operating profit was $292 million, up 19%. The strong year-over-year profit improvement reflects a more favorable input cost environment, strong productivity savings, and good sales results. These factors enabled a $12 million increase in advertising and promotion investment during the quarter. Due to progress with the ongoing recovery of the Slim Jim business, the company notes that year-over-year differences in sales and profits for that product line did not significantly impact the segment’s sales or operating profit comparisons for the third quarter. See page 8 for a Regulation G reconciliation of operating profit.

Commercial Foods Segment (35% of Year-to-date sales)

Specialty potato, dehydrated vegetable, seasonings, blends, flavors, and milled grain products sold to foodservice and commercial channels worldwide.

Fiscal third quarter sales for the Commercial Foodssegment were $1,062 million, 6% below last year’s $1,134 million; the decrease was driven by lower flour milling sales that reflect the pass-through impact of lower underlying wheat costs. Segment operating profit was $149 million, 6% above last year’s $141 million. Lamb Weston profits improved on a modest increase in sales, reflecting the positive impacts of higher prices necessitated by increased input costs, as well as plant efficiencies and improved mix. Lamb Weston’s sales and profit growth continued to be negatively impacted by difficult food service industry conditions. Flour milling profits remained strong, reflecting continued excellent operational efficiencies and favorable wheat market conditions; as expected, current-quarter milling profits were below the very strong amounts earned in the year-ago period. Profits for the rest of the segment were marginally above year-ago amounts.

As previously discussed, the company expects full-year fiscal 2010 Commercial Foods segment operating profit to be in line with fiscal 2009 amounts. Full-year operating profit estimates for the Commercial Foods segment reflect plans that fiscal fourth quarter operating profit will be below year-ago amounts; this is largely driven by the absence of a 53rd week, the impact of a cost allocation process change at Lamb Weston discussed earlier in the year, and the expected continuation of a difficult foodservice environment.

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

The company recorded an immaterial net hedging benefit in unallocated Corporate expense in the current quarter, and $35 million of net hedging benefit in unallocated Corporate expense in the year-ago period. The company identifies the $35 million in prior-year amounts as an item impacting comparability. Hedge amounts are reclassified from unallocated Corporate expense to the operating segments when the underlying commodity being hedged is recognized in segment cost of goods sold.

Other Items

Corporate expense was $89 million for the quarter and $71 million in the year-ago period. Current-quarter amounts include approximately $15 million of benefit from favorable adjustments to environmental-related liabilities, and prior-year amounts included $10 million of net benefit from items impacting comparability. Excluding these amounts, current-quarter Corporate expense was $104 million, and Corporate expense in the year-ago period was $81 million; the comparable year-over-year increase largely reflects higher incentive compensation accruals.
Equity method investment earnings were $3 million, down from $11 million in the year-ago period. The decline reflects difficult market conditions for an international potato joint venture.
Net interest expense was $40 million in the current quarter compared with $42 million in the year-ago period; interest income from the notes receivable held in connection with the divestiture of the Trading & Merchandising operations benefited the current quarter and the year-ago period by approximately $21 million and $22 million, respectively.
The effective tax rate for continuing operations for the quarter was approximately 32%, lower than planned due to favorable audit settlements and other changes in estimates. The benefit from this lower rate is cited as an item impacting comparability. The company expects an effective tax rate of approximately 35% for continuing operations for the full year, excluding items impacting comparability.
Capital Items

During the quarter, the company announced that its Board of Directors authorized a $500 million share repurchase program with no formal expiration date. The company expects this program to span multiple years.
Dividends for the quarter totaled $89 million versus $85 million in the year-ago period, reflecting the impact of a higher dividend rate.
For the quarter, capital expenditures for property, plant, and equipment were $121 million, compared with $100 million in the year-ago period. Depreciation and amortization expense from continuing operations was approximately $84 million for the quarter; this compares with a total of $82 million in the year-ago period.
Full Year EPS On Track

The company continues to expect fiscal 2010 full-year diluted EPS from continuing operations, excluding items impacting comparability, to approach $1.73. To date, the company has earned $1.42 in diluted EPS from continuing operations as reported, and $1.34 in diluted EPS from continuing operations, excluding items impacting comparability.

See page 8 for a Regulation G reconciliation of year-to-date EPS.

Major Items Impacting Third-quarter Fiscal 2010 EPS Comparability

Included in the $0.50 per diluted share of EPS from continuing operations for the third quarter of fiscal 2010 (EPS amounts rounded and after tax):

Approximately $0.02 per diluted share gain resulting from the sale of the Luck’s brand. This $14 million pretax gain is classified within the Selling, General, and Administrative expenses of the Consumer Foods segment.
Approximately $0.02 per diluted share of net benefit, or a $15 million reduction in pretax expense, associated with favorable adjustments to environmental-related liabilities. This is classified within unallocated Corporate expense.
Approximately $0.02 per diluted share of net income tax benefits resulting in a lower-than-planned effective income tax rate.
Included in the $0.43 diluted EPS from continuing operations for the third quarter of fiscal 2009 (EPS amounts rounded and after tax):

Approximately $0.05 per diluted share of net benefit to unallocated Corporate expense resulting from:
Reclassifying $46 million of net losses on derivatives from unallocated Corporate expense to the operating segments, and
Incurring an additional $11 million of net loss on derivatives used to hedge input costs. This expense was reclassified to the operating segments at a later date when underlying items were recognized in segment results.
Approximately $0.03 of net expense, or $25 million pretax, recognized due to a coverage dispute with an insurer. This amount is classified as unallocated Corporate expense.
Approximately $0.01 of net benefit from a lower-than-planned effective income tax rate.