CHICAGO — Emphasizing profit margins versus volume is central to Sean M. Connolly’s 2020 vision for Conagra Brands, Inc. The strategy that helped the company achieve profitable growth and market share gains in its frozen meals and snacks businesses is being applied to some of the weaker brands in the Pinnacle Foods portfolio, which Conagra acquired last year.
“We’re applying our value-over-volume playbook to the legacy Pinnacle portfolio, and we’ve made important progress strengthening the foundation of the business and repositioning Pinnacle’s leadership brands for profitable growth,” said Mr. Connolly, president and chief executive officer of Conagra Brands, during a Sept. 26 earnings call. “Looking ahead, we remain confident that our second-half results will reflect stronger growth than the first half.”
Net income attributable to Conagra Brands in the first quarter ended Aug. 25 totaled $173.8 million, equal to 36c per share on the common stock, down 2.5% from $178.2 million, or 45c per share, in the prior-year period. Adjusted net income attributable to the company increased 13% to $210 million, driven by the addition of Pinnacle Foods’ operating profit and cost synergies, which partially was offset by higher interest expense, the impact of divestitures and lower earnings in the Ardent Mills joint venture with Cargill and CHS.
Net sales for the quarter were $2,390.7 million, up 30% from $1,834.4 million. Excluding the acquisition of Pinnacle Foods and other items affecting comparability, net sales declined 1.7%.
The company experienced unplanned softness in the International and Foodservice segments and planned sales declines in the Hunt’s and Chef Boyardee businesses during the quarter that contributed to the organic net sales decline.
The application of the value-over-volume strategy to the Wish-Bone, Duncan Hines and Birds Eye brands has been a key priority for Conagra following the acquisition.
“As you heard before, value over volume is a disciplined approach to growth that acknowledges not all volume is created equal and consumer demands are always evolving,” Mr. Connolly said. “The approach dictates that we consistently apply rigor to portfolio management. Value over volume involves eliminating weaker s.k.u.s (stock-keeping units) in advance of the launch of higher performing new products and the associated brand-building investments. It also involves renovating the core and getting the fundamentals right. These fundamentals include pricing, promotion, assortment, distribution, product quality and packaging.”
Actions taken to reinvigorate the Wish-Bone salad dressings business have included fixing service challenges, updating labels and upgrading the product quality.
“We’ve stabilized the business; in fact, we grew it in Q1,” Mr. Connolly said. “Overall, we had a solid first quarter on legacy Pinnacle. We’ve made good progress in strengthening the foundation across the portfolio and look forward to continued improvement in the back half of the year as we begin to benefit from the new innovations.”
During the quarter, Grocery & Snacks segment operating profit decreased 15% to $152 million on net sales of $978 million, which were up 27% from the year-ago quarter. Excluding the addition of Pinnacle and the divestment of the Wesson oil business, organic net sales declined 3.7%. Slim Jim, David, Bigs, Angie’s Boomchickapop and Act II brands drove growth in the segment.
Operating profit for the Refrigerated & Frozen segment increased 63% to $156 million, while sales grew 51% to $959 million. Excluding the addition of Pinnacle and the divestment of the Gelit Italian frozen pasta business, organic net sales increased 1.5%. Solid performance across Banquet, Healthy Choice, P.F. Chang’s, Reddi-wip and Sandwich Bros. brands contributed to growth.
“We plan to build upon our category-leading position in frozen by introducing our strongest innovation slate to date throughout the balance of fiscal 2020,” Mr. Connolly said. “We’ve been strategically tailoring our products to fit the needs of today’s busy consumers by providing them with premium, nutritious ingredients and increasing sustainability all at affordable price points.
“Birds Eye is expected to benefit meaningfully from these efforts. We expect Birds Eye performance to accelerate in the second half as we see the impacts of our recently launched innovation slate as well as upcoming new product introductions, including spiralized zucchini. As one of the largest brands in frozen vegetables, we’re confident that Birds Eye is well positioned to capitalize on contemporary forms and trending flavors.”
International segment operating profit eased 34% to $25 million on net sales of $204 million, up 5.5% from the year before. Excluding the addition of Pinnacle, the divestitures of Wesson oil and the Canadian Del Monte businesses and the unfavorable impact of foreign currency exchange, organic net sales declined 3%.
Foodservice operating profit increased 13% to $31 million, as segment net sales increased 6.3% to $250 million. Excluding the addition of Pinnacle and the divestiture of Wesson oil and the sale of a Trenton, Mo., production facility, organic net sales decreased 3.2%.
On Sept. 11, Conagra announced it had entered into a definitive agreement to sell its direct-store delivery snacks business to Utz Quality Foods, L.L.C. The transaction includes the Tim’s Cascade Snacks, Hawaiian Snacks, Erin’s, Snyder’s of Berlin and Husman’s brands. Financial terms were not disclosed. The transaction is expected to close before the end of the calendar year.