ConAgra Foods: Don't expect an 'overnight fix'

by Keith Nunes
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basket with ConAgra brand foods
ConAgra's new CEO said he sees strength in the breadth of No. 1 and No. 2 brands across so many categories.

OMAHA – The headline on June 30 focused on ConAgra’s announcement that it plans to divest its Private Brands business. A day later, after CEO Sean Connolly explained the company’s strategy going forward, it is clear all options are on the table.

“We will always remain open to any actionable pathway that maximizes value for our shareholders,” Connolly said in a June 30 conference call to discuss ConAgra’s financial results for fiscal 2015. “You should expect us to continuously explore and evaluate alternative pathways thoroughly, analyzing how much value can they really create, how certain is the execution, and how long will they take to come to fruition. If an alternative path emerges that is clearly superior to our base plan, we will alter course.

“Certainly, we acknowledge there’s healthy debate in the market around the question of whether an alternative path should be pursued sooner, or later or ever. The answer to that question, obviously, depends on how actionable and how valuable that alternative path turns out to be.”

One analyst noted that if ConAgra were to divest both its Private Brands and Consumer Foods business units “there’s not much left in Omaha.”

“I am sure you understand from my remarks earlier that our philosophy is to always be proactive and open-minded in evaluating the different paths to creating value,” Connolly said.

The “base plan” the new CEO outlined contains four “pillars,” including the divestiture of the Private Brands business “for greater focus;” to aggressively pursue cost reductions and productivity improvements to drive margin expansion; to grow the company’s Consumer Foods and Lamb Weston businesses; and to maintain a balanced capital allocation philosophy.

“I want to be very clear that the base plan is not an overnight fix,” Connolly said. “There are some things we will fully complete in FY16, but others will be a multi-year effort.”

The strategy behind the divestment of the Private Brands business comes down to resource management, Connolly said.

“While we are taking the right steps to improve our execution and begin restoring this business to previous levels, we believe the better investment of our resources is on other priorities where our capabilities are more mature,” he said.

The second pillar will focus on reducing selling, general and administrative (SG&A) expenses.

“Our approach to this work will be relentless,” Connolly said. “Absolutely everything is on the table … if we find inefficiency we will get it out as fast as possible.”

Banquet and Healthy Choice frozen meals
Two brands ConAgra is focusing on immediately are Banquet and Healthy Choice.

 
The new company CEO highlighted ConAgra’s broad Consumer Foods and Lamb Weston product portfolios and said he sees strength in the breadth of No. 1 and No. 2 brands across so many categories. He also did not discount possible acquisitions in the future.

“We also intend to actively work toward filling in portfolio gaps in critical areas like organic natural and premium gourmet,” Connolly said. “In fact, we believe ConAgra Foods would benefit from further acquisitions in the consumer-branded space, given our scale and emerging capabilities.”

But an interest in acquisitions does not mean other assets may not be sold.

“… We will attack our portfolio in new ways for ConAgra Foods,” Connolly said. “For example, there may be brands that over time could find better homes elsewhere.”

Two brands the company is focusing on immediately are Banquet and Healthy Choice. With Banquet, the goal is to contemporize the brand and improve product quality while with Healthy Choice ConAgra is developing a brand extension called Simply that will have a clean label positioning.

When an analyst noted the frozen category has been in decline since the recession and questioned what Connolly sees in the category, he received a robust response.

“You may recall at Hillshire Brands (Connolly’s previous employer) we had a great frozen business anchored by the great Jimmy Dean brand,” he said. “What I told my investors then is I reject the notion that frozen is a place where you can’t grow and grow profitably. It’s just not grounded in fact.

“The key is, the food’s got to be good. You’ve got to have good quality food. You’ve got to have a proposition that consumers value. I always use the Jimmy Dean example, in my previous life, it’s just — when you have got great food, the consumer has the need state already there, you are going to be successful.”

Another analyst on the call noted that the plan Connolly put forth is similar to a plan articulated by Gary Rodkin, the former CEO of ConAgra, in 2007.

Connolly responded by saying he would be realistic about the industry and the categories in which ConAgra competes.

“… We are absolutely open to divesting elements of our portfolio down the road,” he said. “That’s part of a rigorous portfolio segmentation analysis. I don’t have any additional color to add on that right now, but those are key points.”

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