Milling & Baking News - July 8, 2014 - 11

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ConAgra c.e.o.: Ralcorp integration
'an intense learning experience'
OMAHA - It's safe to say that the
integration of Ralcorp Holdings
has been a bumpy ride - and executives at ConAgra Foods, Inc. don't
deny the challenges the acquisition
has presented. But those same executives feel confident that the company is putting the right pieces in
place to make the business a positive for Omaha-based ConAgra.
In the fiscal year ended May 25,
the Private Brands unit of ConAgra
Foods sustained a loss of $375 million, which compared with an operating profit of $123.1 million in
fiscal 2013. Net sales, meanwhile,
climbed 132% to $4,195.9 million
from $1,808.2 million.
The shortfall was even more pronounced during the fourth quarter,
when ConAgra sustained a loss of
$573.1 million in its Private Brands
unit, which compared with a profit
of $102.2 million in the same period
a year ago. The majority of the profit shortfall was driven by pricing
concessions, cost challenges associated with the integration of Ralcorp and business transition also
weighed on profit performance.
Gary Rodkin, chief executive officer of ConAgra, told analysts during a June 26 conference call that
the company made significant pricing concessions in the previous 9 to
12 months that combined to drive
down margins.
"Those were significant investments we chose to put into this
business to stabilize customer relationships and preserve a sales
base as we worked through some
customer service and manufacturing issues inherited from the legacy Ralcorp business," Mr. Rodkin
said. "Those were our issues, not
broad, private brand industry challenges."
He said the operating loss also
reflected concentrated costs, as
ConAgra made a handful of integration changes and other transitions. The company has begun the
closure of three plants as part of
its network optimization plan, and
has made significant distribution
center changes and created new
supplier arrangements.
"While there is cost associated
with these moves they create longer-term value," he said. "In other words, this quarter adds some
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costs that progressively lessened
throughout FY15."
Based on the challenges in the
Private Brands segment in fiscal 2014 and the nature of the anticipated recovery from fiscal 2014
earnings levels, the company's
current profit projections for the
Private Brands segment are below
original plans for the next several
years. But Mr. Rodkin said he does

expect profit to improve in the segment in fiscal 2015.
"We're regaining customer confidence, and we're beginning to win
new business with the opportunity
to win more business with better
pricing and an improved mix,"
he said. "We'll also benefit from a
more efficient organization. We believe margins will improve starting
in the second half of FY15 as we lap
our pricing and accelerate our cost
synergies.
"Let me be clear, the profit headwinds and the specific integration
issues that we've been discussing
for a while now are not a result of
owning both a branded and private
label business. The issues reflect
the fact that we've bought a roll-up
company that was beginning a restructuring, and that company was
made up of many parts that weren't
functioning together and needed fixing. We knew there would be work
to do, but underestimated the degree
of difficulty and the amount of time
it would take to course correct.
"We've paid lots of tuition in
terms of learnings. Frankly, we've
been backed on our heels, reacting, and are now in the very early
stages of leveraging our strengths
proactively."
Paul Maass, president of Private
Brands and Commercial Foods,
also spoke of the integration challenges. Like Mr. Rodkin, he feels
ConAgra is weathering the storm.
"When you have a situation
where our customers are really motivated to change suppliers because

Business

we're letting them down on service
and execution issues, you've got to
really pull the price lever to maintain the volumes," Mr. Maass said.
"The good news is we're in a much
more stable position. We have fixed
the service issues and execution issues. That doesn't mean we don't
have a continuous improvement
mindset to always look for better ways to run the business and
improve. But we are much more
stable, and we will drive margin
improvement and top-line growth
here as we go forward."
Mr. Rodkin said ConAgra is
focused on turning the Private
Brands business into one that operates more effectively and has a better, more sustainable marketplace
footing.
"We made a bold transformational move in acquiring Ralcorp
rooted in our continuing strong belief in our Private Brands strategy,"
he said. "It's been an intense learning experience, but in the end, the
insights we've gained will make
us better and stronger over time.
Rebuilding customer trust and
confidence required some difficult
investment choices and trade-offs.
The higher level of customer responsiveness required significant
organizational rewiring.
"We're confident in long-term
growth opportunities for the Private Brands segment. We're confident that our investments, designed to create healthy customer
relationships and preserve a substantial portion of our sales base,
will serve us well for the long term.
"That said, the profit performance for this segment over the
next several years will not be as
strong as we originally expected.
That impacts our overall e.p.s.
commitments, as we indicated in
last week's pre announcement. But
we are committed to getting back
on track and accelerating growth in
FY16 and beyond with productivity, synergies and organic business
expansion."
Mr. Rodkin said ConAgra remains comfortable with its original goals set forth when Ralcorp
was acquired. The company still
expects to generate about $300 million by fiscal 2017 from the Ralcorp
transaction.
"We're confident that we will gradually improve mix, see margin expansion and spend less money and time
on course correcting," he said. MBN
Milling & Baking News July 8, 2014 / 11

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Milling & Baking News - July 8, 2014

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