Conagra Brands — First Quarter Fiscal 2027 Earnings Summary

Financial Performance

• Reported net sales decreased 1.4% to $2.6 billion; organic net sales decreased 1.1%.
• Reported diluted earnings per share (EPS) increased 5.9% to $0.36; adjusted diluted EPS increased 5.1% to $0.41.
• Reported operating margin was 10.3%; adjusted operating margin was 11.5%.
• Gross profit decreased 3.4% to $619 million; adjusted gross profit decreased 3.9% to $619 million.
• Gross margin decreased 50 basis points to 23.8%; adjusted gross margin decreased 62 basis points to 23.8%.
• Selling, general, and administrative (SG&A) expense increased 4.4% to $350 million; adjusted SG&A decreased 3.7% to $321 million.
• Net income increased 6.0% to $174 million; adjusted net income increased 4.3% to $197 million.
• Adjusted EBITDA increased 2.4% to $451 million.
• Net interest expense was $92 million, a 2.1% decrease from the prior year.
• Effective tax rate was 25.2% compared to 43.1% in the prior year; adjusted effective tax rate was 24.8% compared to 25.0%.
• Net cash used in operating activities was $4 million compared to $121 million generated in the prior year.
• Free cash flow was ($128) million, a decrease of $102 million compared to the prior year.
• Weighted average diluted share count was 480 million shares.

Guidance and Future Outlook

• Reaffirmed fiscal 2027 guidance for organic net sales change of (3)% to (1)% compared to fiscal 2026.
• Reaffirmed fiscal 2027 guidance for adjusted operating margin between 10.0% and 10.5%.
• Reaffirmed fiscal 2027 guidance for adjusted EPS between $1.40 and $1.50.
• Key assumptions for guidance include: equity earnings contribution of approximately $140 million; pension income of approximately $25 million; interest expense of approximately $360 million; adjusted effective tax rate of approximately 24%; capital expenditures of approximately $550 million; free cash flow conversion of greater than 90%; and net leverage ratio at fiscal year end of approximately 4.0x.

Business Segments and Product Lines

• Grocery & Snacks: Net sales decreased 2.6% to $1.1 billion; organic net sales decreased 2.0%. Operating profit decreased 21.5% to $205 million; adjusted operating profit decreased 7.2% to $205 million.
• Refrigerated & Frozen: Net sales decreased 2.1% to $1.1 billion; organic net sales decreased 1.6%. Operating profit decreased 9.6% to $102 million; adjusted operating profit decreased 13.0% to $100 million.
• International: Net sales increased 2.7% to $218 million; organic net sales increased 0.9%. Operating profit decreased 7.9% to $34 million; adjusted operating profit decreased 8.6% to $34 million.
• Foodservice: Net sales increased 3.2% to $273 million; organic net sales increased 3.3%. Operating profit and adjusted operating profit increased 11.4% to $31 million.
• The company gained dollar share in categories including frozen vegetables, pudding, chili, frozen breakfast, hot dogs, and frozen desserts.

Market and Competitive Landscape

• The company gained dollar share in specific product categories despite a challenging operating environment.
• Volume decreases in Grocery & Snacks (-5.4%) and Refrigerated & Frozen (-0.1%) were partially offset by price/mix increases in Grocery & Snacks (+3.4%) and International (+1.6%).
• Foodservice volume increased 2.5%, benefiting approximately 150 basis points from the timing of customer orders relative to the prior year third quarter.

Risks and Challenges

• Organic net sales declines were driven by volume decreases and cost of goods sold inflation.
• Operating leverage was unfavorable in several segments.
• Higher advertising and promotional (A&P) investment impacted adjusted SG&A and segment profitability.
• Legacy legal matters increased SG&A expenses.
• Unfavorable foreign exchange rates impacted the International segment.
• Free cash flow was negatively impacted by lower operating profit and higher litigation payments.

Management Commentary and Tone

• CEO John Brase described the quarter as a "solid start" with top line results largely in line with expectations and profit ahead of expectations.
• Management noted progress on priorities including restoring margins, increasing investment, reducing complexity, and rebalancing capital allocation.
• Management stated they remain on track to deliver the year and are reaffirming fiscal 2027 guidance.

Other Key Points

• The company paid a dividend of $0.35 per share in the quarter.
• Net debt ended the quarter at $7.4 billion, a 2.5% reduction from the prior year period.
• The net leverage ratio was 3.99x at the end of the quarter.
• Equity method investment earnings increased 71.8% to $50 million, driven by favorable market conditions and management of wheat market volatility in the Ardent Mills joint venture.
• The company realized pension and postretirement non-service income of $6 million.
• Capital expenditures were $124 million compared to $147 million in the prior year period.
• Dividends paid were approximately flat to the prior year at $168 million.