Pinnacle Foods Reports Second Quarter Fiscal 2017 Results

Company Maintains Full Year Guidance at Low End of Range

PARSIPPANY, N.J.July 27, 2017 (GLOBE NEWSWIRE) -- Pinnacle Foods Inc. (NYSE:PF) today reported its financial results for the second quarter ended June 25, 2017 and reaffirmed its full-year guidance at the low end of its range.    

Diluted earnings per share in the second quarter of 2017, including items affecting comparability, decreased to $0.16, versus $0.39 in the year-ago period. Excluding items affecting comparability, Adjusted Diluted EPS advanced 26% to $0.53, compared to $0.42 in the year-ago period.

Net sales in the second quarter of 2017 decreased 1.6% versus year-ago, largely due to a 2.6% unfavorable impact associated with the second quarter 2017 business exit, including the recall, of certain Aunt Jemima retail and foodservice frozen breakfast products (the AJ exit), as well as a 0.9% unfavorable impact associated with both the Boulder UK business wind-down and SKU rationalization program implemented in the second half of 2016. Taken together, these factors more than offset strong underlying net sales growth of 1.9% in the quarter.  In-market performance remained very strong, with retail consumption versus year-ago up 3.6% (or 4.5%, excluding Aunt Jemima) and market share advancing 0.7 share points, marking the Company’s 13th consecutive quarter of share growth versus year-ago.

Commenting on the results, Pinnacle Foods Chief Executive Officer Mark Clouse stated, “We continued to deliver strong underlying business fundamentals in the quarter. Our retail consumption and market share advanced significantly, supported by on-trend innovation, and we continued to deliver robust productivity and strong synergy capture, while aggressively managing expenses. This past quarter we made a number of strategic decisions, including exiting a low-margin business and accelerating into 2017 a number of investments in our manufacturing network that are consistent with our long-term strategic plan and that best position us for the future.  While these discrete decisions impacted the quarter and the year, they are largely completed and mostly covered by the strong fundamentals and the benefits of lower taxes and interest expense.  Importantly, the discrete items serve as tailwinds for 2018, enabling us to regain much of their impact next year and maintain the gross margin target we established for 2019.”

Second Quarter Consolidated Results

Net sales in the second quarter of 2017 declined 1.6% to $744.6 million, compared to net sales of $756.4 million in the year-ago period.  This performance reflected underlying business strength, more than offset by the AJ exit and aforementioned Boulder impacts totaling 3.5%. The underlying net sales growth of 1.9% in the quarter was driven by higher volume/mix of 3.3%, including the benefit of the later Easter holiday, partially offset by lower net realized pricing of 1.3%, including the impact of higher new product introductory expenses, and unfavorable foreign currency translation of 0.1%.

Gross profit in the second quarter of 2017 declined to $164.4 million, or 22.1% of net sales, compared to gross profit of $221.2 million, or 29.2% of net sales, in the prior-year period, meaningfully impacted by items affecting comparability.  Also impacting gross profit performance in the quarter were the discrete impacts of the AJ exit, totaling approximately $16 million, and the acceleration into 2017 of strategic manufacturing investments, totaling approximately $5 million.  These factors more than offset underlying business strength, driven by very strong productivity performance and the realization of acquisition synergies, partially offset by inflation.

Adjusted Gross Profit in the quarter declined to $203.8 million, or 27.4% of net sales, compared to $218.6 million, or 28.9% of net sales, in the year-ago period.  This performance included the unfavorable margin impact of slightly more than 200 basis points resulting from the aforementioned discrete items.

Earnings before interest and taxes (EBIT) in the second quarter of 2017 decreased to $44.0 million, compared to EBIT of $107.8 million in the year-ago period, including the unfavorable impact of items affecting comparability.  Also impacting the performance was the lower Adjusted Gross Profit, including the aforementioned $21 million of discrete costs, partially offset by favorable timing of marketing spending and lower overhead expenses resulting from synergy capture and aggressive cost management.  Adjusted EBIT in the second quarter, including the discrete costs, decreased 0.5% to $114.2 million, compared to $114.8 million in the year-ago period.

Net interest expense for the quarter decreased to $28.5 million, compared to $35.5 million in the year-ago period, driven by the term loan refinancing the Company completed in February 2017, including the reduction of outstanding indebtedness.

The effective tax rate (ETR) for the second quarter of 2017 was a negative 19.9%, compared to 36.7% in the year-ago period, driven by items affecting comparability.  The Adjusted ETR for the quarter was 26.2% compared to 37.0% in the year-ago period, largely reflecting the benefits in the second quarter of 2017 of the new accounting standard for stock-based compensation and favorable state tax legislation.

Net earnings in the second quarter decreased to $18.6 million, or $0.16 per diluted share, compared to $45.8 million, or $0.39 per diluted share, in the year-ago period, meaningfully impacted by items affecting comparability.  Adjusted Net Earnings in the second quarter increased approximately 26% versus year-ago to $63.2 million, or $0.53 per diluted share, compared to $50.0 million, or $0.42 per diluted share, even after giving effect to the discrete costs.

Net cash provided by operating activities totaled $57 million in the second quarter of 2017, compared to $88 million in the prior year quarter.  For the first six months, net cash provided by operating activities totaled $120 million, compared to $165 million in the year-ago period, largely reflecting the working capital build associated with the Company’s robust innovation agenda in 2017 and the cash impact of the AJ exit.

Second Quarter Segment Results

Frozen
Net sales for the Frozen segment increased 2.5% to $295.9 million in the second quarter of 2017, compared to $288.8 million in the year-ago period, despite the negative impact of 4.0% resulting from the AJ exit.  Also contributing to the performance was volume/mix growth of 9.2%, reflecting strength of recently-launched innovation and the benefit of the later Easter in 2017, partially offset by lower net price realization of 2.4% and unfavorable foreign currency translation of 0.3%.

Net sales performance in the Frozen segment was fueled by double-digit growth of both Birds Eye vegetables and Birds Eye meals, including the launch of five new innovation platforms in the quarter—namely Birds Eye Veggie Made Pasta, Birds Eye Veggie Made Mashed, Birds Eye Superfood Blends, Birds Eye Organic and Disney-themed Birds Eye Voila!.  Partially offsetting the growth of the Birds Eye franchise in the quarter was the aforementioned AJ exit and lower sales of the Canadian business.

In-market performance for the segment continued to be very strong, with retail consumption advancing 2.1% (or 3.9%, excluding Aunt Jemima) in a category composite that was up 1.5%.  This strong consumption performance drove market share for the segment up 0.4 share points, with Birds Eye vegetables and Birds Eye meals posting share gains of 0.9 points and 1.2 points, respectively.

EBIT for the Frozen segment was a loss of $12.3 million in the second quarter of 2017, compared to EBIT of $45.8 million in the year-ago period, largely reflecting the negative impact of items affecting comparability.  Also impacting the performance were discrete costs totaling approximately $10 million associated with the AJ exit and the acceleration into 2017 of strategic manufacturing investments totaling approximately $3 million, as well as inflation, partially offset by strong productivity performance and favorable timing of marketing spending.  Adjusted EBIT in the second quarter, including the $13 million of discrete costs, declined 14.4% to $38.1 million, compared to $44.5 million in the year-ago period.

Grocery 
Net sales for the Grocery segment decreased 1.8% to $276.1 million in the second quarter of 2017, compared to $281.0 million in the year-ago period. This performance reflected lower net price realization of 2.1%, including the impact of higher new product introductory costs versus year-ago, partially offset by higher volume/mix of 0.3%.

The Duncan Hines brand registered a double-digit net sales increase in the quarter, fueled by the recent launch of Perfect Size for 1, an ultra-convenient, single-serve baking solution made with real, simple ingredients that are baked in a mug, in the microwave, in one minute. This growth was more than offset by declines for Vlasic pickles and Wish-Bone dressings.

In-market performance for the Grocery segment was strong, with retail consumption versus year-ago up approximately 5%, in a category composite that was essentially even with year-ago.  Market share for the quarter advanced 0.5 share points versus year-ago, driven by a share gain of 5.9 points for Duncan Hines baking products and, to a lesser extent, share growth for Armour canned meat, partially offset by Vlasic pickles and Wish-Bone salad dressings, both of which experienced aggressive competitive pricing pressure.

EBIT for the Grocery segment increased 15.0% to $61.9 million in the second quarter of 2017, compared to $53.8 million in the second quarter of 2016, reflecting productivity savings, realized synergies from the Boulder Brands acquisition and the positive impact versus year-ago of items affecting comparability, partially offset by inflation.  Adjusted EBIT increased 13.8% to $63.1 million, compared to $55.4 million in the year-ago period.

Boulder 
Net sales for the Boulder segment of $94.7 million in the second quarter of 2017 were even with year-ago. This performance reflected volume/mix growth of 4.9% and favorable net price realization of 2.8%, offset by a 3.4% decline from the wind-down of the Boulder UK operations and a 4.3% impact from the SKU rationalization program.

Driving the net sales performance were double-digit increases for gardeinEarth Balance and Evol, despite the impact of the SKU rationalization program, offset by the UK business wind-down and lower sales for Udi’s due, in part, to the SKU rationalization program.

EBIT for the Boulder segment more than doubled to $12.2 million in the second quarter of 2017, compared to $5.8 million in the second quarter of 2016.  This performance reflected the benefits of acquisition synergies and productivity, as well as the favorable impact versus year-ago of items affecting comparability.  Partially offsetting these factors were input cost inflation and discrete costs associated with the acceleration into 2017 of strategic manufacturing investments totaling approximately $2 million.  Adjusted EBIT for the second quarter of 2017, including the discrete costs, increased 30.3% to $15.8 million, compared to $12.1 million in the year-ago period.

Specialty 
Net sales for the Specialty segment declined 15.1% to $78.0 million in the second quarter of 2017, compared to $91.9 million in the year-ago period, reflecting an 8.9% decline from the AJ exit, as well as lower volume/mix of 6.8% largely due to the impact of the previously-disclosed gardein private label business exit and lower sales of foodservice.  Partially offsetting these factors was higher net price realization of 0.6%.

EBIT for the Specialty segment was a loss of $10.6 million in the second quarter of 2017, compared to EBIT of $7.0 million in the second quarter of 2016, largely reflecting the negative impact versus year-ago of items affecting comparability, as well as the impacts of the discrete costs related to the AJ exit, totaling approximately $6 million, and inflation. These factors were partially offset by productivity savings, realized synergies from the Boulder Brands acquisition and the benefit of higher net price realization.  Adjusted EBIT, including the $6 million of discrete costs, declined 39.5% to $4.4 million, compared to $7.3 million in the year-ago period.

Outlook for the Balance of the Year
Forecasted Adjusted Diluted EPS metrics provided below 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 maintained its guidance for Adjusted Diluted EPS for 2017 in a range of $2.55 to $2.60, and now expects to be at the low end of the range, reflecting the inclusion of the full-year impact of the discrete items.  This outlook represents growth versus year-ago approaching 19% and includes the following assumptions:

  • The benefit of the 53rd week is expected to add approximately 1% to net sales and $0.03 to Adjusted Diluted EPS for the year. This impact will benefit the fourth quarter of 2017.
  • Input cost inflation for the year continues to be estimated in the range of 2.5% to 3.0%.
  • Productivity for the year is now estimated to be at the top or slightly ahead of the Company’s 3.5% to 4.0% of cost of products sold range, excluding Boulder Brands acquisition synergies of at least $15 million that will benefit both gross margin and SG&A overhead.
  • Adjusted Net Interest Expense is now forecasted to be slightly below $123 million.
  • Adjusted ETR for the year, including the benefit of the new accounting standard for stock-based compensation, is now estimated in the range of 33.0% to 33.4%, with the second half ETR significantly higher than the first half. 
  • The strategic investments that impacted the second quarter are also expected to impact the balance of the year, primarily the third quarter, by $0.05.
  • The weighted average diluted share count for the year continues to be estimated at approximately 120 million shares, with the second half higher than the first half.
  • Capital expenditures for the year remain estimated in the range of $115 million to $125 million.

Non-GAAP Financial Measures
Pinnacle uses the following non-GAAP financial measures as defined by the SEC in its financial communications. These non-GAAP financial measures should be considered as supplements to the GAAP reported measures, should not be considered replacements for, or superior to, the GAAP measures and may not be comparable to similarly named measures used by other companies.

  • Adjusted Gross Profit
  • Adjusted Gross Profit as a % of sales (Adjusted Gross Profit Margin)
  • Adjusted EBITDA
  • Adjusted Earnings Before Interest and Taxes (Adjusted EBIT)
  • Adjusted Net Interest Expense
  • Adjusted Net Earnings
  • Adjusted Diluted Earnings Per Share
  • Adjusted Effective Income Tax Rate (Adjusted ETR)

Adjusted Gross Profit
Pinnacle defines Adjusted Gross Profit as gross profit before accelerated depreciation related to restructuring activities, certain non-cash items, acquisition, merger and other restructuring charges and other adjustments. The Company believes that the presentation of Adjusted Gross Profit is useful to investors in the evaluation of the operating performance of companies in similar industries.  The Company believes this measure is useful to investors because it increases transparency and assists investors in understanding the underlying performance of the Company and in the analysis of ongoing operating trends. In addition, Adjusted Gross Profit is one of the components used to evaluate the performance of Company’s management. Such targets include, but are not limited to, measurement of sales efficiency, productivity measures and recognition of acquisition synergies.

Adjusted EBITDA
Pinnacle defines Adjusted EBITDA as earnings before interest expense, taxes, depreciation and amortization (“EBITDA”), further adjusted to exclude certain non-cash items, non-recurring items and certain other adjustment items permitted in calculating Covenant Compliance EBITDA under the Senior Secured Credit Facility and the indentures governing the Senior Notes. Adjusted EBITDA does not include adjustments for equity-based compensation and certain other adjustments related to acquisitions, both of which are permitted in calculating Covenant Compliance EBITDA.

Management uses Adjusted EBITDA  as a key metric in the evaluation of underlying Company performance, in making financial, operating and planning decisions and, in part, in the determination of cash bonuses for its executive officers and employees. The Company believes this measure is useful to investors because it increases transparency and assists investors in understanding the underlying performance of the Company and in the analysis of ongoing operating trends. Additionally, Pinnacle believes the presentation of Adjusted EBITDA provides investors with useful information, as it is an important component in measuring covenant compliance in accordance with the financial covenants and determining our ability to service debt and meet any payment obligations.  In addition, Pinnacle believes that Adjusted EBITDA is frequently used by analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA measure when reporting their results. The Company has historically reported Adjusted EBITDA to analysts and investors and believes that its continued inclusion provides consistency in financial reporting and enables analysts and investors to perform meaningful comparisons of past, present and future operating results.  Adjusted EBITDA should not be considered as an alternative to operating or net earnings (loss), determined in accordance with GAAP, as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities, determined in accordance with GAAP, as an indicator of cash flows, or as a measure of liquidity.

EBITDA and Adjusted EBITDA do not represent net earnings or (loss) or cash flow from operations as those terms are defined by Generally Accepted Accounting Principles (“GAAP”) and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definitions of Adjusted EBITDA in the Senior Secured Credit Facility and the indentures allow Pinnacle to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net earnings or loss. However, these are expenses that may recur, vary greatly and are difficult to predict. While EBITDA and Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

Adjusted Earnings before Interest and Taxes (Adjusted EBIT)
Adjusted Earnings Before Interest and Taxes is provided because Pinnacle believes it is useful information in understanding our EBIT results by improving the comparability of year-to-year results. Additionally, Adjusted EBIT provides transparent and useful information to management, investors, analysts and other parties in evaluating and assessing the Company and its segments, primary operating results from period to period after removing the impact of unusual, non-operational or restructuring-related activities that affect comparability. Adjusted EBIT is one of the measures management uses for planning and budgeting, monitoring and evaluating financial and operating results and in the analysis of ongoing operating trends.

Adjusted Net Interest Expense
Adjusted Net Interest Expense is provided to assist the reader by eliminating charges which result from refinancing activities or unusual transactions. Management believes that the Adjusted Net Interest Expense measure is useful information to investors in order to demonstrate a measure of interest expense that is associated with the ordinary course of business operations and that it is more comparable to interest expense in prior periods. Pinnacle uses Adjusted Net Interest Expense to conduct and evaluate its business in order to evaluate the effectiveness of the corporation’s financing strategies and to analyze trends in interest expense, absent the effect of unusual transactions.

Adjusted Net Earnings, Adjusted Effective Income Tax Rate and Adjusted Diluted Earnings per Share
Adjusted Net Earnings, Adjusted Effective Income Tax Rate and the related Adjusted Diluted Earnings per Share metrics are provided to present the reader with the after-tax impact of Adjusted EBIT and Adjusted Interest Expense, net in order to improve the comparability and understanding of the related GAAP measures. Adjusted Net Earnings, Adjusted Effective Tax Rate and Adjusted Diluted Earnings per Share provide transparent and useful information to management, investors, analysts and other parties in evaluating and assessing our primary operating results from period to period after removing the impact of unusual, non-operational or restructuring-related activities that affect comparability. Adjusted Net Earnings, Adjusted Effective Income Tax Rate and Adjusted Diluted Earnings per Share are measures used by management for planning and budgeting, monitoring and evaluating financial and operating results.

Conference Call Information
The Company will host a conference call on Thursday, July 27, 2017 at 9:30 AM (ET) to discuss the results with members of the investment community. Investors and analysts may access the call by dialing (866) 814-1918 within the United States or Canada and (703) 639-1362 internationally and referencing the conference call name:  Pinnacle Foods Q2 Earnings Call.  A replay of the call will be available, beginning July 27, 2017 at approximately 12:30 PM (ET) until August 9, 2017, by dialing (855) 859-2056 or (404) 537-3406 and referencing access code 39846233. Access to a live audio webcast and replay of the event will be available in the Investor Center section of the Company's corporate website, www.pinnaclefoods.com.

Pinnacle Foods Contact
Maria Sceppaguercio
Sr. Vice President, Investor Relations
973-541-8629

About Pinnacle Foods Inc.
Pinnacle Foods Inc. (NYSE:PF) is a leading manufacturer, marketer and distributor of high-quality branded food products with a mission of unleashing brand potential.  With annual sales in excess of $3 billion, our portfolio includes well-known brands competing in frozen, refrigerated and shelf-stable formats, such as Birds Eye, Birds Eye Voila!, Duncan Hines, Earth Balance, EVOL, gardein, Glutino, Hungry-Man, Log Cabin, Udi’s,  Vlasic, and Wish-Bone, along with many others.  The company is headquartered in Parsippany, NJ and has nearly 5,000 employees across the U.S. and Canada.  For more information, please visit www.pinnaclefoods.com.

Forward-Looking Statements
This release may contain statements that predict or forecast future events or results, depend on future events for their accuracy or otherwise contain "forward-looking information." The words "estimates," "expects," "contemplates," "anticipates," "projects," "plans," "intends," "believes," "forecasts," "may," "should," and variations of such words or similar expressions are intended to identify forward-looking statements. These statements are made based on management's current expectations and beliefs concerning future events and various assumptions and are not guarantees of future performance. Actual results may differ materially as a result of various factors, some of which are beyond our control, including but not limited to: general economic and business conditions, deterioration of the credit and capital markets, industry trends, our leverage and changes in our leverage, interest rate changes, changes in our ownership structure, competition, the loss of any of our major customers or suppliers, changes in demand for our products, changes in distribution channels or competitive conditions in the markets where we operate, costs of integrating acquisitions, loss of our intellectual property rights, fluctuations in price and supply of raw materials, seasonality, our reliance on co-packers to meet our manufacturing needs, availability of qualified personnel, changes in the cost of compliance with laws and regulations, including environmental laws and regulations, and the other risks and uncertainties detailed in our filings, including our Form 10-K, with the Securities and Exchange Commission on February 23, 2017. There may be other factors that may cause our actual results to differ materially from the forward-looking statements.  We assume no obligation to update the information contained in this announcement except as required by applicable law.

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