Costs related to the acquisition of store-brand food manufacturer Ralcorp knocked ConAgra Foods’ profits down 57 percent in the third quarter, the Omaha packaged food maker reported Wednesday, but executives reaffirmed their faith in Ralcorp’s long-term contributions to the bottom line.
Despite some softening in the store-brand foods market, Chief Executive Officer Gary Rodkin said, “This short-term flattening on private brands is exactly that; the long-term trajectory is very strong.”
ConAgra research shows that 74 percent of consumers are more open to buying private-label foods than they were two years ago, and store brands are evolving, with some competing for share with “top-tier” branded foods. Rodkin said store brands have just half the market penetration in the U.S. that they have in some European countries, and he sees a “big runway ahead” for growth.
The acquisition of the St. Louis private-label foods business closed Jan. 29 and contributed to ConAgra revenue for just 27 days in the quarter. Total ConAgra sales grew 13 percent to $3.85 billion, including $292 million from Ralcorp. Sales grew in both ConAgra’s commercial and consumer foods divisions.
ConAgra reported net income of $120 million, for earnings per share of 29 cents, compared with $280 million, or 68 cents per share, in the third quarter of 2012. Adjusted for items affecting comparability, ConAgra said earnings per share were 55 cents, compared with 53 cents the year before.
Rodkin told analysts that demand for private label food is “here to stay,” and though he expects some “bumps and bruises” integrating the Ralcorp business, “we’re confident it will serve our shareholders well.”
ConAgra on Wednesday reaffirmed expectations for full-year adjusted earnings per share of $2.15, including an approximately 5-cent benefit from Ralcorp. The company will issue a dividend of 25 cents per share on May 31.
Rodkin said the company is still in the early stages of incorporating Ralcorp, focusing on pricing adjustments, organizational structure and finding supply chain efficiencies.
“They ran a very successful model, just a different one,” he said.
ConAgra isn’t concerned with year-over-year comparisons of Ralcorp earnings, Chief Financial Officer John Gehring said.
“We expect to manage the Ralcorp business differently,” he said.
Gehring said Ralcorp was historically more focused on acquisitions than on growing sales of existing products. “We really need to orient the business and the leaders of the business toward organic, sustainable growth,” he said.
ConAgra in March informed Ralcorp employees it intends to maintain its workforce in St. Louis, where the former corporate headquarters employs around 500, the St. Louis Post-Dispatch reported.
Ralcorp CEO Kevin Hunt, however, does not have a long-term future with the company. Hunt received a notice of involuntary termination and has agreed to work for ConAgra as a consultant for one year following the date of the merger, according to filings with the Securities and Exchange Commission. He will receive a $1 million consulting fee paid in quarterly installments.
Other top Ralcorp executives have signed retention agreements, including Vice President and Chief Financial Officer Scott Monette, Ralcorp Food Group President Richard Koulouris, and Ralcorp Frozen Bakery Products President Charles Huber. If they meet certain terms of the agreements, the men are eligible to receive cash retention payments of up to $637,502 for Monette, $840,000 for Koulouris and $810,000 for Huber.
In its Commercial Foods business, ConAgra’s profit was up 11 percent to $167 million on sales of $1.26 billion, due in part to productivity and market conditions in the company’s milling operations.
In Consumer Foods, ConAgra saw a 7 percent sales increase to $2.3 billion despite a 3 percent volume decline, thanks to acquisitions and price increases. Operating profit fell 14 percent to $284 million. The company expects volume to improve in the fourth quarter, with pricing more comparable to the year-ago quarter.
A marketing investment is also expected to start to pay off. ConAgra spent more on Consumer Foods marketing in the third quarter, increasing spending by 33 percent, or $37 million.
JPMorgan Chase analyst Ken Goldman told executives that’s unusual.
“You’re sort of bucking the trend here,” he said. “Some of the other consumer food companies have cut their advertising spending as a percent of sales and you’re going the opposite way.”
Rodkin said the decision to seek stronger long-term sales was a “conscious trade-off” that reduced earnings per share by 4 cents for the quarter.
Division President Andre Hawaux said the extra marketing money was spent in four areas: “Doubling down” on brands like Pam and Reddi-wip that have growing sales; promoting new products like Orville Redenbacher ready-to-eat popcorn; and expanding the footprint of regional brands like Ro-Tel diced chilies.
The lion’s share of the money, Hawaux said, went to cross-platform “shopper marketing,” or in-store marketing.
“Really good marketers in our space do that,” he said.
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