Parsippany / NJ. (pf) Pinnacle Foods Inc. reported its financial results for the third quarter ended September 25, 2016 and increased its full-year guidance to the high end of its previous range. The improved outlook for the year reflects solid base business performance and the continued strength of the Boulder Brands acquisition.
Diluted earnings per share in the third quarter of 2016 increased 7.3 percent to 0.44 USD, compared to 0.41 USD in the third quarter of 2015. Excluding items affecting comparability1, Adjusted diluted earnings per share advanced 15.2 percent to 0.53 USD, compared to 0.46 USD in the year-ago period.
Net sales in the third quarter of 2016 increased 19.3 percent versus year-ago, largely reflecting the benefit of the Boulder Brands acquisition, which contributed approximately 121 million USD in the quarter, and continued growth of North America Retail, which is comprised of the Birds Eye Frozen and Duncan Hines Grocery segments. Market share for North America Retail expanded 60 basis points in the quarter versus year-ago, marking Pinnacle’s tenth consecutive quarter of share growth.
Commenting on the results, Pinnacle Foods Chief Executive Officer Mark Clouse stated, «The third quarter was another good one for us, particularly given the strong year-ago performance we were lapping. We maintained our momentum in North America Retail, fueled by the continued strength of our Frozen segment, while Boulder Brands also delivered another strong quarter. Our focus on improving gross margin continued to be evident in our results, with our Q3 adjusted margin again advancing significantly. We believe our fourth quarter plans position us well as we approach year-end and, as a result, we have increased our Adjusted diluted EPS for 2016 to the high end of our previous range».
Third Quarter Consolidated Results
Net sales in the third quarter of 2016 increased 19.3 percent to 758.8 million USD, compared to net sales of 636.3 million USD in the year-ago period. This growth reflected a 19.0 percent benefit from the Boulder Brands acquisition, as well as higher net price realization of 0.2 percent and increased volume/mix of 0.1 percent.
North America Retail net sales increased 0.8 percent to 558.5 million USD in the third quarter of 2016, compared to 554.1 million USD in the third quarter of 2015, reflecting increased volume/mix of 0.5 percent and higher net price realization of 0.3 percent.
Gross profit in the third quarter of 2016 increased 29.3 percent versus year-ago to 228.7 million USD, or 30.1 percent of net sales, compared to gross profit of 176.9 million USD, or 27.8 percent of net sales, in the prior-year period. This strong performance primarily reflected the benefit of the Boulder Brands acquisition, as well as strong productivity, improved mix and the favorable impact versus year-ago of items affecting comparability, principally hedging gains in 2016. Partially offsetting these positive drivers were input cost inflation and investment in new Birds Eye stand-up packaging. Excluding items affecting comparability, Adjusted gross profit advanced 24.2 percent to 229.1 million USD and, as a percentage of net sales, Adjusted gross profit margin expanded by approximately 120 basis points to 30.2 percent.
Earnings before interest and taxes (Ebit) in the third quarter of 2016 increased 20.9 percent to 118.3 million USD, compared to Ebit of 97.8 million USD in the year-ago period. This performance largely reflected the strong growth in gross profit, partially offset by higher selling, general and administrative expenses due to the inclusion of Boulder Brands. Also impacting the comparison was the negative impact of items affecting comparability, most notably an 11.2 million USD non-cash impairment charge to write down the carrying value of the Celeste, Aunt Jemima and Snyder of Berlin tradenames and acquisition-related integration expenses. Excluding items affecting comparability, Adjusted Ebit in the third quarter increased 24.6 percent to 134.6 million USD, compared to 108.0 million USD in the year-ago period.
Adjusted Ebitda in the third quarter of 2016 grew 23.3 percent to 161.6 million USD, compared to 131.1 million USD in the prior year. Adjusted Ebitda is a Non-GAAP measure defined herein under «Non-GAAP Financial Measures», and is reconciled to net earnings in the tables that accompany this release.
Net interest expense for the quarter increased to 36.4 million USD, compared to 22.3 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 impacts of the previously-communicated 25-basis-point interest rate step-up on pre-Boulder term loans and the one-time cost of 0.6 million USD associated with the re-pricing during the quarter of the Boulder Brands term loan.
Net earnings in the third quarter increased 8.8 percent to 52.4 million USD, compared with 48.1 million USD in the year-ago period. Excluding items affecting comparability, Adjusted net earnings increased 15.0 percent to 62.8 million USD, compared to 54.6 million USD in the year-ago period.
Net cash provided by operating activities totalled 75 million USD in the third quarter of 2016, compared to 86 million USD in the prior year quarter. On a fiscal year-to-date basis, net cash provided by operating activities increased 29 million USD to 240 million USD, compared to 211 million USD in the year-ago period.
Third Quarter Segment Results
Birds Eye Frozen: Net sales for the Birds Eye Frozen segment increased 4.1 percent to 308.9 million USD in the third quarter of 2016, compared to 296.7 million USD in the year-ago period, reflecting higher volume/mix of 3.8 percent and increased net price realization of 0.3 percent.
Versus the year-ago quarter, during which net sales advanced a very strong 15.3 percent, the Frozen segment maintained its momentum, driven by strength of the Birds Eye franchise, gardein and Hungry-Man, each of which registered strong retail consumption and market share growth. Recently-introduced innovation behind the Birds Eye Flavor Full, Birds Eye Protein Blends and Birds Eye Disney-themed platforms, along with new Birds Eye Veggie Made Rice side dishes, just-launched Birds Eye Signature Skillets premium meals and the continued retail expansion of Birds Eye Voila! fueled the performance of the Birds Eye franchise. The gardein brand recorded another exceptionally strong quarter, including retail consumption and market share growth, while the Hungry-Man brand, behind the success of its new Hungry-Man Selects innovation, continued to expand retail consumption and market share. Partially offsetting these growth drivers were lower sales of Aunt Jemima breakfast products, Celeste pizza and Lender’s bagels.
Ebit for the Birds Eye Frozen segment increased 4.3 percent to 54.2 million USD in the third quarter of 2016, compared to 52.0 million USD in the third quarter of 2015, reflecting the benefits of the net sales growth, strong productivity and favorable mix, partially offset by input cost inflation, the conversion to new Birds Eye stand-up packaging and items affecting comparability, including the aforementioned non-cash tradename impairment charge that totalled 10.3 million USD for the segment. Excluding items affecting comparability, Adjusted Ebit advanced 13.5 percent to 65.0 million USD, compared to 57.3 million USD in the year-ago period.
Duncan Hines Grocery: Net sales for the Duncan Hines Grocery segment declined 3.0 percent to 249.5 million USD in the third quarter of 2016, compared to 257.4 million USD in the year-ago period. This performance reflected lower volume/mix of 3.3 percent, partially offset by higher net price realization of 0.3 percent.
Strong growth of Wish-Bone salad dressings, fueled by the recently-launched Wish-Bone E.V.O.O. and Wish-Bone Ristorante Italiano platforms, and continued solid performance of Armour canned meat were more than offset by net sales declines for primarily Vlasic pickles, Log Cabin and Mrs. Butterworth’s syrups and Duncan Hines baking products.
Ebit for the Duncan Hines Grocery segment increased 8.8 percent to 48.1 million USD in the third quarter of 2016, compared to 44.2 million USD in the third quarter of 2015, reflecting strong productivity and items affecting comparability, partially offset by input cost inflation, particularly in corn sweeteners, and the impact of unfavorable mix. Excluding items affecting comparability, Adjusted Ebit decreased 2.5 percent to 47.5 million USD, compared to 48.8 million USD in the year-ago period.
Boulder Brands: Boulder Brands contributed 120.9 million USD in net sales in the third quarter of 2016, including the unfavorable impact during the quarter of Boulder’s SKU rationalization program. Retail consumption, excluding the SKU rationalization impact, continued to advance versus year-ago for the Glutino, Udi’s, Earth Balance and EVOL brands, offset by a decline for Smart Balance.
Ebit for Boulder Brands was 16.1 million USD in the third quarter of 2016, including acquisition-related fees and integration expenses. Excluding these items affecting comparability, Adjusted Ebit for Boulder Brands totalled 21.3 million USD.
Specialty Foods: Net sales for the Specialty Foods segment declined 3.4 percent to 79.4 million USD in the third quarter of 2016, compared to 82.2 million USD in the prior-year quarter, reflecting lower volume/mix of 2.4 percent and lower net price realization of 1.0 percent. This performance reflected the expected decline for the private label canned meat business, which remained under pressure due to a heightened competitive bidding environment for the USDA stew business.
Ebit for the Specialty Foods segment totalled 6.3 million USD in the third quarter of 2016, compared to 7.8 million USD in the third quarter of 2015, largely reflecting the impacts of the net sales decline and the non-cash tradename impairment charge that totalled 0.9 million USD for the segment. Excluding items affecting comparability, Adjusted Ebit was 7.1 million USD, compared to 8.1 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 increased its guidance for Adjusted diluted EPS for 2016 to a range of 2.13 to 2.15 USD, representing the high end of its previous 2.10 to 2.15 USD guidance range. This outlook, which represents growth versus year-ago of 11 percent to 12 percent, includes the assumptions outlined below.
- The outlook for Boulder Brands net sales remains in the range of 460 to 480 million USD, including the impact of the SKU rationalization program.
- Boulder Brands is now expected to contribute approximately 0.08 to 0.09 USD of Adjusted diluted EPS for the year, versus 0.07 to 0.08 USD previously estimated.
- Input cost inflation continues to be forecasted in the range of 2.0 to 2.5 percent for the year.
- Productivity for the year continues to be 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 remains estimated to be modestly above 118 million, with the fourth quarter estimated at approximately 119 million.
- Capital expenditures for the full year are now forecasted in the range of 110 to 120 million USD.
