Pinnacle Foods Reports Strong Second Quarter Results and Raises Guidance for the Year

Parsippany / NJ. (pf) Pinnacle Foods Inc. reported strong financial results for the second quarter ended June 26, 2016 and raised its guidance for the year. Strength of both the base business and the Boulder Brands acquisition fueled the results in the quarter, with Boulder Brands tracking ahead of expectations.

Diluted earnings per share in the second quarter of 2016 totaled 0.39 USD, compared to 0.37 USD in the year-ago quarter, an increase of 5.4 percent. Excluding items affecting comparability1, Adjusted diluted earnings per share increased 16.7 percent to 0.42 USD, compared to 0.36 USD in the year-ago period.

Net sales in the second quarter of 2016 increased 19.7 percent versus year-ago, largely reflecting the benefits of the Boulder Brands acquisition, which contributed 123 million USD in the quarter, and growth of 1.6 percent from North America Retail, which is comprised of the Birds Eye Frozen and Duncan Hines Grocery segments. Market share for North America Retail expanded 70 basis points versus year-ago in the quarter, marking the 9th consecutive quarter of share growth versus year-ago.

Commenting on the results, Pinnacle Foods Chief Executive Officer Mark Clouse stated, «We are pleased with our results in the second quarter, which reflected strong base business performance, including the benefit of innovation, as well as Boulder Brands results that exceeded expectations. Meaningful, broad-based gross margin expansion drove a double-digit increase in Adjusted diluted EPS for the quarter, fueling our confidence in the increased outlook we’re providing for the year».

Second Quarter Consolidated Results

Net sales in the second quarter of 2016 increased 19.7 percent to 756.4 million USD, compared to net sales of 631.7 million USD in the year-ago period. This growth reflected a 19.4 percent benefit from the Boulder Brands acquisition and net price realization of 1.3 percent, partially offset by lower volume/mix of 0.9 percent and unfavorable foreign currency translation of 0.1 percent.

North America Retail net sales increased 1.6 percent to 555.6 million USD in the second quarter of 2016, compared to 546.9 million USD in the second quarter of 2015, reflecting higher net price realization of 1.4 percent and favorable volume/mix of 0.3 percent, partially offset by unfavorable foreign currency translation of 0.1 percent.

Gross profit in the second quarter of 2016 increased 30.8 percent versus year-ago to 221.2 million USD, or 29.2 percent of net sales, compared to gross profit of 169.1 million USD, or 26.8 percent of net sales, in the prior-year period. This performance primarily reflected the benefits on the base business of strong productivity, favorable net price realization and improved mix, as well as the Boulder Brands acquisition and the impact of items affecting comparability. Partially offsetting these positive drivers was modest input cost inflation. Excluding items affecting comparability, Adjusted gross profit advanced 31.4 percent to 218.6 million USD and, as a percentage of net sales, Adjusted gross profit margin expanded by approximately 260 basis points to 28.9 percent.

Earnings before interest and taxes (Ebit) in the second quarter of 2016 increased 20.0 percent to 107.8 million USD, compared to Ebit of 89.8 million USD in the year-ago period, despite a double-digit increase in marketing investment driven by the base business and the inclusion of Boulder Brands. This strong Ebit performance was driven by the growth in both net sales and gross margin in the second quarter, partially offset by the impact of items affecting comparability, particularly acquisition-related integration expenses. Excluding items affecting comparability, Adjusted Ebit in the second quarter increased 31.9 percent to 114.8 million USD, compared to 87.0 million USD in the year-ago period.

Adjusted Ebitda in the second quarter of 2016 grew 29.5 percent to 141.5 million USD, compared to 109.3 million USD in the second quarter of 2015.

Net interest expense for the quarter increased 59.9 percent to 35.5 million USD, compared to 22.2 million USD in the year-ago period, largely driven by additional debt issued to finance the Boulder Brands acquisition and, to a lesser extent, the impact of the previously-communicated 25-basis-point interest rate step-up on pre-Boulder term loans. The effective tax rate for the quarter increased to 36.7 percent, compared to 35.4 percent in the year-ago period, mostly driven by the higher tax structure of Boulder Brands and the impact of items affecting comparability, particularly related to the Boulder Brands acquisition. Excluding items affecting comparability, the Adjusted effective tax rate increased to 37.0 percent, compared to 35.3 percent in the year-ago period.

Net earnings in the second quarter increased 4.8 percent to 45.8 million USD, or 0.39 USD per diluted share, compared with 43.7 million USD, or 0.37 USD per diluted share, in the year-ago period. Excluding items affecting comparability, Adjusted net earnings increased 19.2 percent to 50.0 million USD, compared to 41.9 million USD in the year-ago period, while Adjusted diluted earnings per share advanced 16.7 percent to 0.42 USD, compared with 0.36 USD in the year-ago period.

Net cash provided by operating activities totaled 88 million USD in the second quarter of 2016, compared to 53 million USD in the prior year quarter. For the first six months, net cash provided by operating activities increased 41 million USD to 165 million USD, compared to 124 million USD in the year-ago period.

Second Quarter Segment Results

Birds Eye Frozen: Net sales for the Birds Eye Frozen segment increased 6.1 percent to 285.2 million USD in the second quarter of 2016, compared to 268.9 million USD in the year-ago period, reflecting higher volume/mix of 3.6 percent and increased net price realization of 2.5 percent, despite higher new product introductory expenses.

The robust net sales growth in the quarter reflected broad-based strength across the portfolio, with continued retail consumption and market share growth for Birds Eye, gardein and, to a lesser extent, Hungry-Man. The Birds Eye franchise was fueled by both existing businesses and the success of recently introduced items behind the Birds Eye Voila!, Birds Eye Flavor Full, Birds Eye Protein Blends and Birds Eye Disney-themed platforms. The gardein brand registered another quarter of exceptionally strong growth, with retail consumption and market share advancing on the strength of recent innovation and a double-digit increase in retail velocity. Hungry-Man growth in the quarter reflected the benefit of recent innovation and a significant increase in retail distribution.

Ebit for the Birds Eye Frozen segment increased 23.2 percent to 46.8 million USD in the second quarter of 2016, compared to 38.0 million USD in the second quarter of 2015, reflecting the benefits of the net sales growth and productivity savings, partially offset by very modest input cost inflation, a double-digit increase in marketing investment and items affecting comparability, particularly unrealized mark-to-market impacts. Excluding items affecting comparability, Adjusted Ebit advanced 24.5 percent to 45.4 million USD, compared to 36.5 million USD in the year-ago period.

Duncan Hines Grocery: Net sales for the Duncan Hines Grocery segment declined 2.7 percent to 270.5 million USD in the second quarter of 2016, compared to 278.0 million USD in the year-ago period. This performance reflected lower volume/mix of 2.9 percent and unfavorable foreign currency translation of 0.3 percent, partially offset by increased net price realization of 0.5 percent.

Net sales of Duncan Hines baking products, while down modestly versus year-ago in the quarter, strengthened sequentially versus the first quarter, reflecting improved volume performance across the baking portfolio and the continued benefit of the new Duncan Hines Perfect Size platform. In addition, Duncan Hines market share expanded 50 basis points in the second quarter and is up modestly for the first half, with retail consumption and market share trends improving as the quarter progressed. Wish-Bone salad dressings net sales continued to be pressured by ongoing category weakness and new product introductory expenses, with trends improving significantly during the quarter as retail distribution built behind the launches of Wish-Bone E.V.O.O. and Wish-Bone Ristorante Italiano. Net sales for the segment’s Canadian business declined in the quarter, while its Armour canned meat brand posted continued growth.

Ebit for the Duncan Hines Grocery segment increased 2.4 percent to 52.3 million USD in the second quarter of 2016, compared to 51.0 million USD in the second quarter of 2015, reflecting strong productivity and items affecting comparability, particularly unrealized mark-to-market impacts. Partially offsetting these factors were the sales decline, modest input cost inflation and a double-digit increase in marketing investment, primarily behind Wish-Bone. Excluding items affecting comparability, Adjusted Ebit increased 1.2 percent to 50.7 million USD, compared to 50.1 million USD in the year-ago period.

Boulder Brands: Boulder Brands contributed 122.6 million USD in net sales in the second quarter of 2016. Retail consumption continued to advance versus year-ago for the Glutino, Udi’s, Earth Balance and EVOL brands, offset by a moderating decline for Smart Balance.

Ebit for Boulder Brands was 7.0 million USD in the second quarter of 2016, including acquisition-related fees and integration expenses. Excluding these items affecting comparibility, Adjusted Ebit for Boulder Brands totaled 17.2 million USD.

Specialty Foods: Net sales for the Specialty Foods segment declined 7.9 percent to 78.1 million USD in the second quarter of 2016, compared to 84.9 million USD in the prior-year quarter, reflecting lower volume/mix of 8.2 percent, partially offset by higher net price realization of 0.3 percent. Driving the expected decline in volume/mix for the quarter were lower sales of private label canned meat, due to a heightened competitive bidding environment for USDA stew business and the impact of the Company’s focus on driving the higher-return segments of its portfolio, while continuing to optimize Specialty costs.

Ebit for the Specialty Foods segment totaled 6.3 million USD in the second quarter of 2016, compared to 7.6 million USD in the second quarter of 2015, largely reflecting the impact of the net sales decline. Excluding items affecting comparability, Adjusted Ebit declined 15.7 percent to 6.1 million USD, compared to 7.3 million USD in the year-ago period.

Outlook for the Balance of the Year

Forecasted Adjusted diluted EPS metrics provided below for Pinnacle and Boulder Brands are non-GAAP measures. The Company does not provide guidance for the most directly comparable GAAP measure, diluted EPS, and we similarly cannot provide a reconciliation between our forecasted Adjusted diluted EPS and diluted EPS metrics without unreasonable effort due to the unavailability of reliable estimates for certain items, such as non-cash gains or losses resulting from mark-to-market adjustments of hedging activities and foreign currency impacts. These items are not within our control and may vary greatly between periods and could significantly impact future financial results.

The Company raised its guidance for Adjusted diluted EPS for 2016 to a range of 2.10 USD to 2.15 USD, versus its previous range of 2.08 USD to 2.13 USD, while also providing flexibility to strengthen investment spending in the second half of the year to remain fully competitive. This revised outlook, which represents growth versus year-ago of 9 percent to 12 percent, includes the assumptions outlined below.

• Boulder Brands is now expected to contribute approximately 0.07 USD to 0.08 USD of Adjusted diluted EPS for the year, versus the previous guidance of approximately 0.05 USD.
• The input cost inflation outlook has improved to be at the low end of the Company’s 2 percent to 3 percent guidance range for the year.
• Productivity for the year remains estimated in the range of 3.5 percent to 4.0 percent of cost of products sold, including Boulder Brands organic cost savings but excluding acquisition synergies.
• Interest expense for the year continues to be estimated at approximately 140 million USD.
• The weighted average diluted share count for the year is now estimated to be modestly above 118 million.
• Capital expenditures for the full year are now expected in the range of 115 million USD to 125 million USD.