Pinnacle Foods Inc. Reports Fiscal Q3 Results with Strong Growth in Earnings

13 Nov 2014 --- Pinnacle Foods Inc. reported its financial results for the third quarter ended September 28, 2014 and tightened its EPS guidance range for the year. Net sales in the quarter increased 9% versus the third quarter last year, due to the benefit of the Wish-Bone acquisition and growth of the base business.

Net earnings and diluted earnings per share advanced approximately 17%, on a pro forma basis excluding items affecting comparability, which are defined and reconciled in the tables that accompany this release.

Net sales for North America Retail, which is comprised of the Birds Eye Frozen and Duncan Hines Grocery segments, increased approximately 10% versus year-ago, driven by Wish-Bone and strength across the Company's Leadership Brand portfolio.  Excluding the benefit of Wish-Bone, net sales for North America Retail increased approximately 1%, and Pinnacle's composite market share for the quarter increased versus year-ago.

Diluted earnings per share increased to $1.16 in the third quarter of 2014, compared to $0.35 in the year-ago period.  Excluding items affecting comparability, on a pro forma basis, diluted earnings per share advanced 17% to $0.41, compared to diluted earnings per share of $0.35 in the year-ago period.

Commenting on the results, Pinnacle Foods Chief Executive Officer Bob Gamgort stated, "We continue to execute well, delivering another quarter of volume and market share growth.  Our gross margin performance remained solid, despite higher-than-anticipated inflation and a highly competitive pricing environment, due to improved mix and robust productivity.   Our strong cash flow performance enabled us to pay down debt, as we continue to focus rigorously on allocating our capital to drive long-term shareholder value."

The Company generated exceptional cash flow during the quarter, including both strong cash flow from operations and the benefit of a $163 million fee associated with the termination of its merger agreement with The Hillshire Brands Company.   The fee, net of expenses, along with cash on hand, was used to reduce indebtedness by $200 million.  This debt reduction, combined with the Company's ongoing strong cash flow performance, enabled Pinnacle to achieve a net leverage ratio of 4.21x, resulting in a 25 basis point interest rate step-down on its term loans, effective immediately.  On an annualized basis, the interest rate step-down reduces interest expense by approximately $5 million.   

Third Quarter Consolidated Results

Net sales in the third quarter of 2014 increased 9.0% to $624.0 million, compared to net sales of $572.5 million in the third quarter of 2013.  This performance reflected a 7.9% benefit from the Wish-Bone acquisition and a 2.5% increase from higher volume/mix, partially offset by lower net price realization of 1.2%, including a 0.4% unfavorable impact from a prior year insurance recovery.  Also impacting the net sales comparison was unfavorable foreign currency translation of 0.2%.

North America Retail net sales increased 9.6% to $528.6 million in the third quarter of 2014, compared to net sales of $482.2 million in the year-ago period.  This performance reflected a 9.1% benefit from the Wish-Bone acquisition and a 2.1% increase from higher volume/mix, partially offset by lower net realized price of 1.4%, including a 0.5% unfavorable impact from the year-ago insurance recovery.  Also impacting the net sales comparison was unfavorable foreign currency translation of 0.2%.

Gross profit increased 4.1% to $163.9 million, or 26.3% of net sales, in the third quarter of 2014, compared to gross profit of $157.4 million, or 27.5% of net sales, in the year-ago period.  Excluding items affecting comparability, gross profit advanced 9.1% to $171.0 million and, as a percentage of net sales, gross profit was even with year-ago at 27.4%.  This performance reflected improved productivity and favorable product mix, offset by the impacts of input cost inflation and lower net price realization, including the unfavorable impact of approximately 40 basis points related to the prior year insurance recovery.

Earnings before interest and taxes (EBIT) advanced significantly to $246.6 million in the third quarter of 2014, compared to $84.9 million in the third quarter of 2013, primarily driven by the benefit of the Hillshire termination fee.  Excluding the termination fee and other items affecting comparability, EBIT on a pro forma basis increased approximately 19% to $101.9 million in the third quarter of 2014, compared to $85.9 million in the year-ago period, primarily reflecting the growth in gross profit and lower administrative expenses, partially offset by higher consumer marketing.

Adjusted EBITDA advanced 15.5% to $122.0 million in the third quarter of 2014, compared to $105.6 million in the third quarter of 2013.  Adjusted EBITDA is a Non-GAAP measure defined below under "Non-GAAP Financial Measures," and is reconciled to net earnings in the tables that accompany this release.

Net interest expense for the quarter, on a pro forma basis excluding items affecting comparability, increased 29% to $24.8 million, driven by debt incurred with the Wish-Bone acquisition.  On the same basis, the effective tax rate for the quarter declined to 38.2%, compared to 38.8% in the year-ago period.

Net earnings in the third quarter advanced to $136.0 million, compared to $40.7 million in the year-ago period, largely reflecting the benefit of the aforementioned termination fee.  Excluding items affecting comparability, on a pro forma basis, net earnings for the third quarter increased approximately 17% to $47.6 million, compared to net earnings of $40.8 million in the year-ago period.

Net cash provided by operating activities totaled $226.1 million in the third quarter of 2014, compared to $29.6 million in the year-ago quarter.  This performance reflected $75 million of cash flow from operations, due to the Company's ongoing aggressive management of working capital, combined with the net cash benefit of $151 million from the aforementioned termination fee.

Third Quarter Segment Results

Birds Eye Frozen

Net sales for the Birds Eye Frozen segment of $257.4 million in the third quarter of 2014 were essentially even with the year-ago period, reflecting higher volume/mix of 1.8%, offset by lower net realized price of 2.0%, including the 0.7% unfavorable impact from comparison against the aforementioned insurance recovery in the year-ago period. 

Double-digit growth of Birds Eye Voila! skillet meals, due to distribution expansion and the continued momentum of the brand, and strong growth from Hungry-Man, driven by the success of the recently launched Hungry-Man Selects line, was largely offset by lower sales of Aunt Jemima breakfast products, including the impact of lapping the insurance recovery in the year-ago period.  Birds Eye vegetables were down slightly in the quarter due to shipment timing, as retail consumption and market share remained strong.

During the quarter, the Company launched new varieties of Birds Eye Steamfresh and Birds Eye Chef's Favorites, as well as new varieties of Voila! Family Size skillet meals.  The Company also launched Mrs. Paul's and Van de Kamp's crab cakes and invested behind new packaging for Aunt Jemima pancakes and waffles, introducing the first re-sealable bag in the category.

EBIT for the Birds Eye Frozen segment declined approximately 1.5% to $44.3 million in the third quarter of 2014, compared to $45.0 million in third quarter of 2013.  Excluding items affecting comparability, EBIT increased approximately 2.3% to $48.0 million.  This growth in EBIT was despite lapping the $2.7 million impact of the prior year insurance recovery and largely reflected productivity savings and lower marketing expense, partially offset by higher logistics costs and packaging investments.

Duncan Hines Grocery

Net sales for the Duncan Hines Grocery segment advanced approximately 20.9% to $271.2 million in the third quarter of 2014, compared to $224.2 million in the year-ago period, due to a 19.5% benefit from the Wish-Bone acquisition and higher volume/mix of 2.5%, partially offset by lower net realized price of 0.7% and unfavorable foreign currency translation of 0.4%.

The growth in net sales was primarily driven by the Leadership Brands—namely, Wish-Bone salad dressings, Duncan Hines baking products, Vlasic pickles and Log Cabin syrups—as well as growth of the Foundation Brand portfolio, particularly Armour canned meats and Nalley and Brooks chili products.

During the quarter, the Company expanded its Duncan Hines baking mix portfolio, with the launch of several Limited Edition varieties for the fall bake season, including Decadent Pumpkin Spice Cupcake, Decadent Caramel Apple Cupcake and Duncan Hines Autumn Velvets, and also introduced Decadent Red Velvet brownie mix.   The Company also launched a new line of Vlasic Bold & Spicy pickles into regional distribution.

EBIT for the Duncan Hines Grocery segment advanced 14% to $43.6 million in the third quarter of 2014, compared to $38.3 million in the year-ago period.  Excluding items affecting comparability, EBIT advanced approximately 35% to $49.5 million, driven by the net sales growth, including the benefit of Wish-Bone, and productivity savings, partially offset by higher input costs and increased investment in consumer marketing.

Specialty Foods

Net sales for the Specialty Foods segment increased approximately 5.7% to $95.4 million in the third quarter of 2014, compared to $90.3 million in the third quarter of 2013, due to higher volume/mix of 4.8% and a 1.4% benefit from the Wish-Bone foodservice business, partially offset by lower net pricing of 0.5%.  In addition to Wish-Bone, the net sales growth in the quarter was driven by private label canned meat.

EBIT for the Specialty Foods segment increased approximately 24% to $9.9 million in the third quarter of 2014, compared to $8.0 million in the third quarter of 2013.  Excluding items affecting comparability, EBIT advanced approximately 32% to $10.7 million, driven by the growth in net sales and productivity savings, partially offset by higher input costs.

Outlook for the Balance of the Year

The Company continues to expect double-digit growth in adjusted EPS for fiscal 2014 and tightened its guidance range, from $1.70 - $1.75 per diluted share, to $1.71 - $1.74 per diluted share, or growth of 13% to 14% versus year-ago.  This guidance reflects the following assumptions:
- Input cost inflation for the year is now expected to approximate 2.5%, versus the approximately 2% previously expected. This inflation increase largely reflects higher than expected protein and freight costs, the latter driven by constrained trucking capacity in the industry.
- Productivity for the year is now estimated at 3.5% to 4.0% of cost of products sold, representing the higher end of the Company's previous 3.0% to 4.0% guidance range.
- Overhead-related expenses will continue to be aggressively managed and are expected to decline as a percentage of sales for the year.
- The effective tax rate for the year has been reduced to an expected range of 38.2% to 38.4%, reflecting the benefits realized in the first three quarters of 2014.
- Diluted weighted average share count for the year remains estimated at approximately 117 million.

In addition, Pinnacle continues to expect its cash flow performance to remain strong for the balance of the year, with full year cash flow significantly exceeding year-ago, exclusive of the aforementioned termination fee benefit.