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 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 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 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 Brand 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.