ConAgra shares slide on lower e.p.s. outlook

by Eric Schroeder
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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 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 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&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 poorer-than-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 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 expects 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 expects double-digit 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. For the timeframe after fiscal 2017, estimates for annual sales growth of 3% to 4% and annual e.p.s. growth of 7% to 9%, adjusted for items impacting comparability, are unchanged.
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