ConAgra is chasing steady growth

by Josh Sosland
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When he was named president and chief executive officer of ConAgra Foods, Inc. in 2005, Gary M. Rodkin described a simple but ambitious plan for running ConAgra.

“We will focus on sustainable profit growth through well-defined strategic focus and operational excellence,” he said.

In the nine years that have followed, the sustainable growth Mr. Rodkin has pursued at ConAgra has proven elusive. Frustration culminated with disappointing fourth-quarter financial results in the company’s most recent fiscal year. Two months later, the company announced Mr. Rodkin, who is 62, would retire at the end of fiscal 2015, next May.

Measured by share price performance, ConAgra during Mr. Rodkin’s time at the company has had a mixed track record. Over the nine years, ConAgra Foods shares have climbed 86%, adjusted for dividends, slightly better than a gain of 83% in the S.&P. 500 but lagging industry peers, including General Mills, Inc. (up 168%) and PepsiCo, Inc. (up 111%), companies where Mr. Rodkin spent time earlier in his career and that have experienced their own share of struggles in recent years.

Challenges at ConAgra predate Mr. Rodkin’s tenure at the company. His predecessor, Bruce C. Rohde, spent much of his nine-year tenure in restructuring initiatives aimed at restoring growth at ConAgra to the heady levels of the 1970s and 1980s when the company grew, through acquisitions, into an archipelago of independent companies from its roots in flour milling (the company was renamed ConAgra in 1971 from Nebraska Consolidated Flour Mills).

In the five years before Mr. Rodkin arrived, ConAgra Foods earnings were flat. The company’s net profit was $641.5 million in fiscal 2005 (year ended in May) versus $641.8 in fiscal 2001. During Mr. Rodkin’s tenure, net income peaked at $978 million in fiscal 2009 and was $303.1 million in the most recent year. Results for fiscal 2014 included a $681 million pre-tax charge in the fourth quarter.

“We are disappointed with fiscal 2014 overall, and we have a very focused sense of urgency directed toward improving our results,” Mr. Rodkin said in late June.

In 2008, ConAgra sold its trading and merchandising group in a $2 billion transaction aimed at helping the company avoid commodity cycles. Proceeds were used principally to buy back shares, which boosted earnings per share. But the transaction did not protect ConAgra from economic cycles, and the company has struggled with the economic recession under way at that time and the sluggish subsequent recovery.

Over the last five years, ConAgra Foods has made moves large and small to reposition the company more favorably. Acquisitions have included American Pie, L.L.C. in 2010, a manufacturer of frozen fruit pies, thaw-and-serve pies, fruit cobblers and pie crusts under the licensed Marie Callender’s and Claim Jumper trade names, as well as frozen dinners, pot pies and appetizers under the Claim Jumper trade name. The business was tacked onto ConAgra’s existing Marie Callender’s frozen business, within its Consumer Foods segment. In 2011, ConAgra acquired National Pretzel Co., based in Lancaster, Pa., a baker of private label pretzels in a variety of forms, including rods, sticks, braids and twists for a range of customers.

The company made international moves as well, including taking a majority owner position in Indian food company Agro Tech Foods Ltd. Agro markets food and food ingredients to consumers and institutional customers in India.

Both in size and effort, the largest acquisition completed by ConAgra while Mr. Rodkin was at the company’s helm was the fiscal 2013 purchase of Ralcorp Holdings, Inc. Ralcorp initially rebuffed ConAgra’s advances, but the transaction, once agreed upon, was valued at $6.8 billion.

At the time, Mr. Rodkin said Ralcorp fit well into the company’s five-year “recipe for growth” strategy, announced in the 2012 annual report. Areas of focus in the plan included expansion in adjacencies to the company’s core business, private label and international.

“Ralcorp is already the largest private label food company in the U.S. and is well positioned for future growth,” Mr. Rodkin said. “The acquisition of Ralcorp is a logical and exciting step for ConAgra Foods. Adding Ralcorp provides us with a much larger presence in the attractive and growing private label segment and accelerates our recipe for growth strategy.”

Reaping the benefits of the acquisition has taken longer than anticipated. The company issued an earnings warning in June before releasing fourth-quarter results. While challenges faced by ConAgra’s Consumer Foods segment factored into the difficulties, Ralcorp did too. And the outlook for the company’s private label business appeared increasingly shaky, even while ConAgra expressed confidence in the longer term.

Mr. Rodkin described the Ralcorp integration as an “intense learning experience,” though the challenge he described seems to mirror what both he and Mr. Rohde had worked for years to accomplish at ConAgra — unify a company with many moving parts.

“We 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,” he said of Ralcorp.

The fix will not be a simple one.

“Based on the challenges in the Private Brands segment in fiscal 2014 and the gradual 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, despite continued expectations for achievement of strong cost-related synergies in line with original plans,” the company said.

Amid the challenging financial picture, ConAgra has continued to make moves to reshape its portfolio, still following the recipe for growth approach. The company in July 2014 acquired TaiMei Potato Industry Ltd., a potato processor in China, for $92.5 million. The business is included in the company’s Commercial Foods segment, which includes the Lamb Weston potato business. Ten months earlier, ConAgra acquired frozen dessert production assets from Harlan Bakeries for $39.9 million in cash. Harlan has been incorporated into the ConAgra Consumer Foods segment. The company bakes frozen fruit pies, cream pies, pastry shells and loaf cakes. ConAgra has spun off its flour milling business into a joint venture, but continues to hold a stake in the resultant company — Ardent Mills.

Beyond its transactions, ConAgra Foods will need to find success in its existing portfolio, with brands that include Healthy Choice, Chef Boyardee and Hunt’s. Announcing the recipe for growth plan in 2012, Mr. Rodkin said effective innovation, pricing and marketing are the keys. The company has been pursuing what he described as “platform innovation.”

“When I say platform innovation, I mean transformational innovation that serves as a launching pad for more applications using the same fundamental technology,” he said in a February 2012 presentation. “And we really do practice open innovation where we take our knowledge and combine it with the expertise of one of our core partners to create these platforms. Our intent is to innovate with products that have sustainable growth, patent protection, and meaningful impact — products like Healthy Choice Steamers, Orville Redenbacher’s Pop Up Bowl, and Marie Callender’s multi-serve meals with Micro-Rite trays.”

Pricing must be thoughtful in a way that strikes a balance between the company’s need to maintain adequate margins while remaining mindful of the degree to which the consumer is “holding her dollars very closely,” he said. In the case of marketing, clearly communicating a product’s benefits to the consumer is crucial, he said.

At least some progress was seen following the company’s most recent earnings (first quarter fiscal 2015) release, which exceeded analysts’ estimates. Robert Moskow, an analyst with Credit Suisse, raised his price target for ConAgra Foods shares in response to the favorable results.

“Fundamentals and execution improved, and the top-line showed signs of stabilization after a disastrous fiscal 2014,” he said. “But the quality of the results wasn’t so great with the margin structure in Consumer and Private Brands remaining well below historical levels and a $30 million reduction in advertising spending accounting for all of the profit growth in the Consumer division.”

Mr. Moskow said the company still faced a “much tougher task” of returning the private label margins to historical levels and “restoring the big problem brands (Chef, Healthy Choice, and Orville).”

The transition to Mr. Rodkin’s successor will be shepherded by the same individual who oversaw the process when Mr. Rohde departed the company — Steven Goldstone, chairman of the company since 2005. He had high praise for the steps taken during Mr. Rodkin’s time leading the company.

“ConAgra Foods is making good progress on its priorities, and we are confident in the company’s ability to deliver on its fiscal year e.p.s. commitments,” he said. “The board is extremely appreciative of Gary’s leadership, vision and accomplishments over his almost nine years as c.e.o. of ConAgra Foods. Under his stewardship, ConAgra Foods has transformed from a holding company into one unified company, with a well-balanced portfolio of Consumer, Commercial and Private Brand businesses, and strong operating capabilities. To achieve this transformation, Gary made necessary and bold moves with the company’s portfolio and drove significant cultural change throughout the business. We thank him for his hard work and commitment to ConAgra Foods and its 34,000 employees.”
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