Milling & Baking News - February 18, 2014 - 21

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ConAgra Foods shares slide on
lowered earnings outlook
OMAHA, NEB. - Shares of ConAgra
Foods, Inc. tumbled as much as 8% in
trading on Feb. 11 after the company
cut its fiscal 2014 adjusted profit forecast
and lowered its expectations for fiscal
2015. The company's share price hit a
52-week low of $28.60 at mid-morning
before finishing at $29.08 for the day.
ConAgra said it now expects fiscal
2014 adjusted earnings per share between $2.22 and $2.25, down from its
prior guidance of $2.34 to $2.38. The
company said the revision primarily
reflects a longer-than-expected timeframe to restore its Private Brands
business to planned levels of operating
profit. ConAgra completed its acquisition of Ralcorp Holdings, Inc. in January 2013 for approximately $6.8 billion,
including the assumption of debt. The
combined company has 36,000 employees and annual sales of about $18
billion, including $4.5 billion in combined annual private brand sales.
"To state the obvious, we are disappointed that this is necessary, and we
share your frustration that we have
not had our previous forecast," Gary
Rodkin, chief executive officer, said
during a Feb. 11 conference call with
analysts. "Our organization is entirely
focused on course correct.
"To cut to the chase, our biggest issue is that the private brands operations are taking longer to fix than we
thought. And that is weighing on the
results. As a result, the contributions
from that business are coming in lighter than we planned."
Mr. Rodkin made it clear, though,
that ConAgra views the challenges
as near-term issues only and remains
fully confident in the company's Private Brands strategy and the growth
opportunities resulting from the acquisition of Ralcorp.
"When we bought Ralcorp, a little
over a year ago, that business had just
begun restructuring," he explained.
"You have heard us talk about this before. The disruption from that restructuring impacted sales course coverage
and customer service in several plant
locations. On top of that, pricing decisions have been made across a number
of categories that weren't aligned with
market conditions. These factors have
combined to create more bid situations
than we anticipated in our first year of
ownership. We did not fully appreciate
the extent of the issues right away, and
we have simply not been able to move
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fast enough to stabilize the business in
the face of those executional problems."
Mr. Rodkin said ConAgra had to
make pricing concessions to prevent
further volume erosion, a move that adversely affected margins, but he noted
the company has worked "intensely"
to address them across all
fronts.
"First, we have made
the necessary organizational changes to improve clarity and customer conductivity," he
said. "We established
category line managers and gave them
full p. and l. focus, and structured
the sales force so that private brands
representatives are part from each
customer team. These organizational
changes took some time and are now
gaining traction.
"Second, we have been aggressively
addressing a supply chain of customer
service issues with additional resources, and these are gradually improving.
We have also started realizing the synergies we have committed to, and we
remain on track to deliver $300 million
by the end of FY17.
"Third, we have started price adjustments to widen the gap with
branded items where it makes sense to
do so, but changes like these take time
because of the complexity involved.
Pricing changes do not usually show
up on the shelf immediately. In fact,
there can be a pricing delay of several
months depending on the category."
ConAgra also said the downward
revision reflects weaker-than-expected
volumes in the Consumer Foods segment, primarily for a few key brands,
as well as margin pressures in the
Commercial Foods segment driven by
customer mix challenges and poorerthan-expected potato crop quality.
While not wanting to diminish the
progress ConAgra has made with
some of its brands, Mr. Rodkin indicated a short list of brands, including Orville Redenbacher's, Healthy Choice
and Chef Boyardee, have pulled down
overall volumes.
"While there are overall macro challenges for the struggling consumer, and
continually changing customer plans in
inventory levels, which also make for
obvious headwinds, our strategy to improve these brands takes into account
much more than that," he said. "The
strategy will change for these brands as

Financial Results

we enter FY15. We will concentrate resources on winning share among core
consumers who are highly engaged
in their categories. This is very different from the broader-based marketing
initiatives and has been ineffective in
terms of penetrating new consumer
segments. We look for these to improve
in FY15, and we will say more about
that as we get closer to that time."
In the Commercial Foods segment,
Mr. Rodkin said ConAgra
lost a major food service
distribution customer last
summer and has struggled
to maintain its pace of
margin recovery in the aftermath.
"Adding to that, is the
fact that the recent potato crop, which
came in last fall, has been below expected
quality, and from an efficiency and yield
standpoint, is the worst we have seen in
a number of years," he said. "This is not
the norm in our primary growing region,
and it impacts our margins because weak
quality potatoes do not process as well as
high-quality ones, so we do not get the
manufacturing efficiencies in our plant
that we would normally expect. Performance will get better in FY15."
Other financial details provided by
ConAgra included:
* Original plans called for the former Ralcorp assets to contribute approximately 25c to e.p.s. in fiscal 2014,
and the company now estimates that
number to be approximately 20c.
* The company previously had
expected volumes for the Consumer
Foods segment to decline 1% to 2% in
the second half of fiscal 2014. That decline is now likely to be 3% to 4%.
* The company now anticipates operating cash flow to be approximately $1.4
billion in fiscal 2014, down from earlier
estimates. The company continues to
expect to repay $1.5 billion of debt by
the end of fiscal 2015. This amount excludes the approximate $400 million of
cash proceeds expected to be received in
connection with the Ardent Mills transaction. That amount also is expected to
be deployed toward debt reduction.
* The company currently expects
the fiscal 2015 e.p.s. growth rate to be
less than the double-digit target previously communicated.
* The company still projects doubledigit comparable e.p.s. growth in fiscal
2016 and 2017 based partly on its rich
synergy pipeline resulting from integrating Ralcorp. Estimates for synergies
related to the Ralcorp acquisition are
unchanged at $300 million by the end of
fiscal 2017. MBN
Milling & Baking News February 18, 2014 / 21

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Milling & Baking News - February 18, 2014

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