ConAgra Foods Earnings Call Nuggets: Ralcorp Synergies and Organic Growth

ConAgra Foods (NYSE:CAG) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Ralcorp Synergies

Andrew Lazar – Barclays Capital: Just two questions from me. First one would be on the Ralcorp synergies. You’ve raised those to $300 million through 2017. If some of that is expected to fall in ’14, I guess why is the net accretion for the year still $0.25? I guess either the Ralcorp base EBIT is expected to be a bit lower than you thought or maybe you are just being somewhat conservative. So I guess in other words, do you still expect the $400 million in Ralcorp EBIT that you discussed at CAGNY?

John Gehring – EVP and CFO: Andrew, this is John. Let me try to take those pieces. First of all, I think on the synergies, I do think a large portion of the additional synergies are going to take. So I’d say we’re probably going to get a little bit more benefit in FY ’14. I would say related to our expectations about the base EBIT for Ralcorp, I’d say those are still in line with what we’ve talked about earlier, approximately $400 million, then – is there some conservatism in their? I think the straightforward answer is, yeah, there probably is a little bit of contingency in our plans. I think everybody can appreciate that we’re just starting out the first full year of ownership with the process of changing the organization. So, I think it’s only prudent that we plan for some disruption as we move the organization around.

Andrew Lazar – Barclays Capital: Then Gary, you mentioned a lot of the top to top conversations that you’ve been having with key retail customers, I guess there’s been some chatter out there that maybe certain customers are more concerned with having a company like yourself with scale now across branded and private label and looking to forward that in some way or separating the way you come to customers and I guess it’s not unlike you’ve had some frankly much more encouraging conversations at a lot of key customers, so, maybe you could just put some of that in perspective to see if what I’m talking about is even something that you’ve been hearing?

Gary Rodkin – CEO: Yeah, happy to Andrew. What you mentioned about fear or concern about scale, we’ve heard it a couple of times, but it’s very scattered. I wouldn’t say that its prevalent and the way that we’ve addressed that is really talking about, you’re able to as a customer really leverage a lot of the smaller suppliers to do a lot of kind of special projects that bigger guys might not see as being very efficient in their supply chain, and what we’ve talked about is let’s think very holistically that we’re willing to do some of those one-offs because the pot in terms of the total business opportunities are so much greater, that works extremely well virtually every time we have that discussion. I’d say what we feel best about coming out of those discussions is the understanding that it’s going to take a little time, but that we are going to get the sales structure in a much better place.

Our vision is to have one ConAgra point person at the head of each of customer and then the organization splits underneath that. So, knowing that there’s going to be one ConAgra with dedicated resources to the branded side and dedicated resources to the private brand side and more resources than we have today on the private branded side is very welcome and the second is, they are extremely excited about our innovation capabilities that we’ve demonstrated on the consumer side of the business that they have seen, and they are very excited about the opportunity to leverage that on the private brand side and in fact we have some of those big customers coming to Omaha, already scheduled, just to work through that.


Organic Growth

David Driscoll – Citigroup: First thing I’d just like to say is, after I think 10 quarters of negative volumes in Consumer Foods it feels great to see a plus 3 on that figure. So, congratulations on that. Nice job in establishing some momentum there. My questions are going to go to Ralcorp. The first one, and I think maybe most important is the $300 million of synergies, if I do my math right guys, that would suggest something like $0.46 of share benefit over the course of the period which I think goes through 2017. Said differently, it looks to me like it’s about a contribution of 5 percentage points to EPS, each and every year, if I just kind of allocated it equally and maybe the question that I’d like you to respond to is, if your guidance in ’15, ’16, and ’17 is for about 10% growth, it sounds to me like you get half of it simply from the realization of synergies and that would mean that the other half, just five points of it comes from all of the rest of your operations. So, the first question is, do I have the math right, and the second question is, it seems like that component of the organic growth is really achievable, maybe I would use the word conservative?

Chris Klinefelter – VP, IR: David, this is Chris. So, the thing that I would offer on that is, I think your general logic is right; we’re assuming mid-single-digit performance in the base business and the aggregate contribution and the synergies is largely what you’re saying. The other thing to mention about the reason that we’re signing up for a mid-single-digit performance in the base business is, as you’ve heard us talk about our capital allocation priority, particularly during the early years of (indiscernible) historic debt reductions. So, in our prior EPS long-term goal is kind of (6) to (8). We did have a point or two from allocating capital that we don’t have. So, with that, yes, the rest of your math works…

Gary Rodkin – CEO: Yeah, and David, what I would say is having been in this industry for ever, being able to starting with the year that we just finished, being able to commit to five straight years of double-digit EPS growth, while still staying committed to strong dividend, is pretty compelling. So, we plan with the appropriate level of risk management, and I think we’re quite pleased where we are.

David Driscoll – Citigroup: Makes sense. If I could just ask one more question on RAH, so the sales in the quarter would annualize out at something like $3.85 billion. You gave guidance just a moment ago in the script of, I think, $4.2 billion in sales for F ’14. Can you talk a little bit about how quickly this changes, like what we should be expecting within this number to see such a – I mean, I think that’s a quality improvement right there over the current run rate, but how fast does it take before we start to see those actions show up in results?

John Gehring – EVP and CFO: Yeah, so, David, this is John. A couple of things to keep in mind. There is a fair amount of seasonality in this business. So I think to take any three-month period and multiply it by four probably doesn’t land you necessarily in the right place. A lot of seasonality in particular in the fall – is particularly in the fall where we have strength. So, the other thing I’d say is, there have been some areas – there’s some softness in some of the categories. There’s also some business that we’ve walked away from or collectively we walked away from or have some co-packing things that were in the base, which accounts for some of the softness right now. I would expect in terms of the impact that that our changes are going to have on reversing some of the trends. I think that’s going to be more in the back half of our fiscal year. It’s going to take us time to – not that we’re not working on things right now, but I think to really fully deploy our capabilities, to fully align our sales teams against this business and really start have an impact with customers is probably going to be late in the fiscal year second half.