ConAgra Reaps Rewards from Ralcorp Acquisition in Fiscal Third-Quarter 2014, Shifts Focus to Flour Milling

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Researched by Industrial Info Resources (Sugar Land, Texas)--Leading North American food company ConAgra Foods Incorporated (NYSE:CAG) (Omaha, Nebraska) reported solid gains in the third quarter of the company's 2014 fiscal year, as a strong international performance and last year's acquisition of Ralcorp Holdings Incorporated offset weaknesses in the Consumer and Commercial Foods segments. Net income was reported to be $234.3 million, compared with $120 million in fiscal third-quarter 2013.

Total sales stood at $4.39 billion, a 14.5% increase from the same period in fiscal 2013. The bulk of the quarter's gains came from the Private Brands segment, which benefited from the company's acquisition of Ralcorp in late January 2013. (Due to the closing date, Ralcorp had only 27 days' contribution in third-quarter 2013.) According to the company's Web site, the acquisition made ConAgra "the largest private brand packaged food business in North America."

ConAgra's Commercial Foods segment did not fare as well, as the Lamb Weston potato products business continued to suffer from the decision late last fiscal year by a major foodservice customer not to renew its contract. An unexpectedly weak potato crop quality, as well as a shift in the customer mix, negatively affected Lamb Weston's margins. Still, the business saw solid improvement in international markets. Flour milling sales in the Commercial Foods segment were down, but profits improved anyway due to a favorable mix and improvements in efficiency.

The Consumer Foods segment incurred significant volume declines in three of its most recognizable brands: Chef Boyardee, Healthy Choice and Orville Redenbacher's. These problems were offset partly by growth in brands such as Hebrew National, Reddi-wip, Slim Jim and Swiss Miss.

During the quarter, ConAgra incurred $55 million in pre-tax expenses from the settlement of interest rate derivative hedges that were initiated in past years. However, the company benefited from a $52 million pre-tax gain from the mark-to-market impact of derivatives that were used to hedge input costs.

Capital expenditures for property, plant and equipment in third-quarter 2014 were reported to be $139 million, compared with $107 million in the third quarter of the 2013 fiscal year.

Industrial Info is tracking $476 million in active projects involving ConAgra, including the $200 million expansion of a french fries plant in Boardman, Oregon. The project involves the construction of a 192,000-square-foot, state-of-the-art addition, including the installation of a new line to increase the production capacities for french fries and other frozen potato products. Fisher & Sons Incorporated (Burlington, Washington) is serving as general contractor.

"Within the three big brands we're working to turn around--I'm talking about Healthy Choice, Chef Boyardee and Orville Redenbacher's--we have specific action plans under way to stabilize and improve performance through product and packaging changes, focused messaging, and more impactful in-store initiatives," said Gary Rodkin, the chief executive officer of ConAgra foods, in a conference call. "Some of these changes will happen quickly, and others will take place across the next several quarters. We expect to see better performance, in aggregate, across these brands in [fiscal year] 2015."

ConAgra is preparing to form Ardent Mills, a joint venture with Horizon Milling, itself a joint venture between Cargill (Wayzata, Minnesota) and CHS Incorporated (NASDAQ:CHSCP). ConAgra plans to divest its three flour milling facilities to Ardent Mills. The plan was announced in March 2013, with ConAgra and Cargill each holding a 44% stake, and CHS holding 12%. Originally, the deal was to close in the late 2013 calendar year, but executives recently announced that it would instead close in the second quarter of the 2014 calendar year.

"The Ardent joint venture will allow us to take part in financial gains of a more efficient milling business, without the sales volatility of a commodity-oriented business in our base results," Rodkin said. "We view this as a long-term strategic win that will enhance ConAgra Foods' shareholder value over time. Long-term, we expect good accretion from the transaction, making this a financially and strategically sound move. And of course, our biggest strategic move has been to dramatically expand our presence in private brands."

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Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and nine international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.