R&FF: How is your approach to mergers and acquisitions different than, say, two or three years ago?
Richardson: There are two or three fundamental differences. The first involves how you evaluate the operating performance of a target company. Because of volatile commodity and input costs, it’s more difficult to peel back operating performance attributes to understand the company’s true economic profit.
Let’s say we’re looking at a commodity vegetable business that’s doing well. We would look to see if there are underlying government subsidy or support programs that directly or indirectly impact the business. We also would want to evaluate supply issues, land values, market shortages and even foreign exports supported by a weak dollar. The goal is still to determine the true sustainable economic value of the company. This effort includes consideration of improved margins through operating synergies of the proposed business combination.
Although this may be a traditional M&A valuation process, the degree of difficulty has been increased as the operating performance is likely clouded because of [commodity and input] dynamics sweeping through the industry.
R&FF:: What else has changed?
Richardson: Regardless of whether you’re talking about a retail brand or a business with a strong foodservice portfolio, the ability to price has been completely exposed. The underlying value proposition is revealed through margin maintenance or lack thereof. Recent extreme inflation conditions have created a “no-place-to-hide” scenario. During such a period of high inflation, any business is going to take it in the chops, however these conditions provide additional valuation insights.
Another critical change involves the use of financial leverage. It’s more complicated considering what the banks and credit markets have done to us. You may not be able to complete a straightforward cash purchase. Instead, it might require an earn-out situation, seller financing or puts and options to perhaps purchase the company later in the future.
R&FF: In what other ways does the present economy affect your work?
Richardson: Margin management is 10 times more difficult. We’re looking at costs for frying oils, packaging, natural gas and other inputs. You also see what farmers are doing to try and ensure returns on their crops. All in all, we’ve seen an unprecedented increase in raw product costs - already north of 30 percent and as high as 50 percent in some regions.
In the papers you read that input prices ought to be down compared to last year but not everything is coming down and some prices are still going up. We generally set pricing once a year for our key customers and we want to be competitive - providing good value with consistent high quality. Input prices have been extremely unpredictable making it hard to manage pricing expectations and margins on all your products.
R&FF:: What about forecasting?
Richardson: It’s hard to do. Forecasting for the long term - meaning even just two or three years - has become difficult. With the creation of government mandates for crop use and biofuel production, the whole market is impacted.
As part of a publicly held company, we’re forecasting and projecting costs on a weekly basis. However, when you look at supply-and-demand conditions you see that we no longer have normal economic cycles. Government intervention has really turned the ag world upside down. Moreover, it invited commodity speculation and hedge fund activity and - as a result - normal supply-and-demand principles appear to have been set aside.
Will we see the normal supply-and-demand cycle? As hedge funds and speculators sell their positions, it will change back - but still everything is different when you consider changes in land and water availability. In any event, the degree of change [to normal forecasting considerations] has been amplified.
R&FF:: Looking back on the past year and half, what are you most proud of?
Richardson: I’m proud of how [ConAgra Foods Lamb Weston President] Jeff DeLapp’s team has embraced the dynamic conditions. We have a great business with a history of innovation. We’re providing good quality products and service levels.
Everybody took this [challenging economic period] well. Our attitude is like one of a college football team that’s looking forward to genuinely proving itself and playing in a national championship. We’ve had some very good years by all standards and this industry challenge has actually brought out a new level of energy and a can-do attitude. I’m glad to be a part of a great team; a team that truly enjoys working together.
We never expected to see potato prices take the increases they have taken, yet the team did not panic. Rather, we have faced the prospects of expanding our farming operations.
Throughout this challenging period, we’ve been able to demonstrate the strength of our brand. We’ve been determined to maintain our quality and service levels and never let any customer run out of products. Meanwhile, I’m glad to say that our innovation pipeline is full and we’re ready to expand our offering of products that support health and wellness.
CONAGRA LAMB WESTON: An in-depth discussion with David Richardson, chief financial officer
January 9, 2009