CHICAGO — “Subpar innovation and executional missteps” led to “highly disappointing” results in Conagra Brands’ newly acquired Pinnacle Foods business, said Sean M. Connolly, president and chief executive officer. But Mr. Connolly noted during a Dec. 20 earnings call that “Pinnacle’s current challenges can and will be fixed.”
“We need to bring our executional capabilities to the Pinnacle business now,” Mr. Connolly said. “We now have a clear understanding of the source of the weakness in the business, and we’ve started to take action.”
Net income attributable to Conagra Brands, Inc. in the second quarter ended Nov. 25 was $131.6 million, equal to 31c per share on the common stock, down 41% from $223.5 million, or 55c, in the prior-year period. Adjusted diluted earnings per share improved 22% over the year-ago quarter, driven by increased operating profit and a lower effective tax rate, according to the company.
Net sales advanced nearly 10% to $2,383.7 million from $2,173.4 million, driven primarily by the acquisition of Pinnacle Foods. Excluding the impacts of foreign exchange, acquisitions and divestitures, organic net sales declined 1.6% in the quarter, which was in line with expectations.
Conagra Brands completed the acquisition of Pinnacle Foods on Oct. 26. The deal was first announced in late June. At the time, the companies said Conagra Brands would pay approximately $10.9 billion for Parsippany, N.J.-based Pinnacle Foods. The combined company was estimated to have sales of approximately $11 billion based on both companies’ fiscal year results.
In the second quarter, Conagra’s legacy business, which excludes Pinnacle Foods, produced results that reflect continued momentum, Mr. Connolly said. Conagra Brands’ refrigerated and frozen and grocery and snack businesses gained share in the quarter behind new product launches and brand building efforts, he added.
Net sales for the Pinnacle segment were below expectations, due to weak demand across the portfolio and the impact of a product recall on Duncan Hines.
Mr. Connolly discussed the missteps that led to market share losses for Pinnacle Foods’ top brands, Birds Eye vegetables, Duncan Hines baking mixes and Wish-Bone salad dressings.
“... Growth stalled on these three key leadership brands in 2018,” he said. “Given this, previous share gains were reversed. Birds Eye, Duncan Hines and Wish-Bone have all suffered sales and distribution losses this past year, and the weakness accounts for the vast majority of Pinnacle’s current challenges.
“So what happened? Simply put, innovation and execution came up short.”
Pinnacle Foods will underdeliver against its pre-acquisition targets, he said.
“On sales, we now estimate the Pinnacle portfolio will end calendar year ‘18 at roughly $3 billion, which is about $160 million, or 5%, below Pinnacle’s target,” Mr. Connolly said. “Approximately $30 million of this miss is driven by our post-close decisions to exit some year-end promotions that we saw as extremely low R.O.I.”
On a brighter note, work done in the recent weeks of integration uncovered opportunities to exceed the company’s initial synergy target for the transaction, he added.
“... I don’t want there to be any doubt,” Mr. Connolly said. “We are as excited as ever to have the Pinnacle family of brands in our portfolio.”
Shares of Conagra Brands on the New York Stock Exchange plummeted more than 16% on Dec. 20 to close at $24.28, down $4.81 from the previous close of $29.09.