Parsippany / NJ. (pf) Pinnacle Foods Inc. reported its financial results for the first quarter ended April 01, 2018 and reaffirmed its guidance for Adjusted diluted earnings per share (EPS) for the year.
Diluted EPS in the first quarter of 2018, including items affecting comparability1, increased to USD 0.48 versus USD 0.19 in the year-ago period. Excluding items affecting comparability, Adjusted diluted EPS advanced 14.0 percent to USD 0.57, compared to USD 0.50 in the year-ago period.
Net sales in the first quarter of 2018 advanced 1.7 percent versus year-ago (excluding the AJ Exit2, net sales expanded 4.3 percent), led by growth in the Company’s Frozen segment. In-market performance3 was also robust, with retail consumption growing 3.5 percent in the quarter (5.1 percent excluding Aunt Jemima) and market share advancing 0.4 share points versus year-ago, marking the Company’s 16th consecutive quarter of share growth.
Commenting on the results, Pinnacle Foods Chief Executive Officer Mark Clouse stated, «Our start to 2018 was very much in-line with our expectations, with Adjusted diluted EPS growth of 14 percent in the quarter. The exceptionally strong retail consumption and market share performance that we have experienced over the past several quarters has continued into 2018. This translated to robust net sales growth in the first quarter, with the Frozen segment up an impressive 7.5 percent. Looking forward, we expect gross margin growth starting in Q2 and continuing over the balance of the year and we continue to have conviction in our EPS guidance for the year, which would represent our sixth consecutive year of outpacing our long-term algorithm and delivering significant shareholder value.»
(1) Adjusted financial metrics used throughout this release exclude items affecting comparability and are non-GAAP measures.
(2) Aunt Jemima exit, including the Recall, of certain retail and foodservice breakfast products (the AJ Exit), initiated in May 2017.
(3) In-market performance (retail consumption; market share) based on Pinnacle’s IRI custom category definitions, period ending April 01, 2018.
First Quarter Consolidated Results
Net sales in the first quarter of 2018 increased 1.7 percent to USD 778.8 million, compared to net sales of USD 766.1 million in the year-ago period. Strong underlying growth was driven by volume/mix of 2.7 percent, net price realization of 0.7 percent and favorable foreign currency translation of 0.1 percent. The earlier timing of Easter added an additional 0.8 percent of growth. Partially offsetting these growth drivers was the impact of the AJ Exit, which negatively impacted the quarter by 2.6 percent.
Gross profit in the first quarter of 2018 decreased 2.0 percent versus year-ago to USD 206.4 million, or 26.5 percent of net sales, compared to gross profit of USD 210.6 million, or 27.5 percent of net sales, in the prior year period. This performance reflected the favorable impact versus year-ago of items affecting comparability, along with productivity and the impact of higher net sales. More than offsetting these growth drivers were input cost inflation, which was primarily driven by higher transportation costs, and higher outsourcing costs related to innovation. Adjusted gross profit declined 3.1 percent to USD 211.2 million and, as a percentage of net sales, Adjusted gross profit margin declined approximately 130 basis points to 27.1 percent, essentially in-line with expectations.
Earnings before interest and taxes (Ebit) advanced 4.0 percent to USD 115.7 million, or 14.9 percent of net sales, compared to USD 111.2 million, or 14.5 percent of net sales, in the prior year period. This performance largely reflected the lower operating expenses in the first quarter of 2018, resulting from the planned phasing of marketing and advertising spending to align with innovation launches, as well as items affecting comparability in the prior year period. Adjusted Ebit increased 1.0 percent to USD 121.6 million, or 15.6 percent of net sales, compared to USD 120.5 million, or 15.7 percent of net sales, in the year ago period.
Net interest expense for the first quarter of 2018 decreased to USD 41.7 million, compared to USD 80.7 million in the year-ago period, driven by items affecting comparability in the year-ago period associated with the term loan refinancing as well as the lower outstanding debt balance in 2018. Adjusted net interest expense in the first quarter declined 1.6 percent to USD 30.8 million, compared to USD 31.3 million in the prior year period.
The effective tax rate (ETR) for the first quarter of 2018 declined to 23.1 percent, compared to 24.1 percent in the year-ago period, primarily reflecting the impact of U.S. tax reform enacted in December 2017, partially offset by the change in the amount of the windfall benefit from equity based compensation in 2018 as compared to 2017. The Adjusted ETR for the first quarter declined to 24.3 percent, compared to 32.5 percent in the prior year.
Net earnings in the first quarter of 2018 increased to USD 56.9 million or USD 0.48 per diluted share, compared to USD 23.1 million, or USD 0.19 per diluted share, in 2017. This performance was almost entirely driven by the negative impact of items affecting comparability in the year-ago period and, to a lesser extent, the lower ETR. Adjusted net earnings advanced 14.3 percent to USD 68.8 million, reflecting the lower Adjusted ETR and the higher Adjusted Ebit, compared to USD 60.2 million in the year-ago period, and Adjusted diluted EPS increased 14.0 percent to USD 0.57, compared to USD 0.50 in the first quarter of 2017.
Net cash provided by operating activities increased to USD 121.6 million in the first quarter of 2018, compared to USD 63.0 million in the year-ago period, primarily reflecting higher net earnings, the negative impact in the prior year period associated with the cash settlement of hedges associated with the 2017 debt refinancing and favorable working capital.
First Quarter Segment Results
Net sales for the Frozen segment advanced 7.5 percent in the first quarter of 2018 to USD 344.9 million, compared to USD 320.9 million in the year-ago period. This strong growth reflected favorable volume/mix of 5.7 percent, net price realization of 2.5 percent and favorable foreign currency translation of 0.3 percent. The earlier timing of Easter added an additional 1.6 percent of growth. Partially offsetting these drivers was a 2.6 percent headwind from the AJ Exit.
Driving the strong net sales growth in the Frozen segment was a double-digit increase in the Birds Eye franchise, which was fueled by solid performance from core Birds Eye offerings as well as growth from the Veggie Made innovation platform that was launched in 2017 and is currently expanding into Veggie Made broccoli and cauliflower fries and tots as well as additional Veggie Made pasta offerings. Also contributing to the top-line growth in the segment were the seafood and Canadian businesses. Partially offsetting this growth was lower net sales of Celeste pizza.
In-market performance for the Frozen segment remained very strong in the first quarter, with retail consumption advancing 4.3 percent (or 7.4 percent, excluding Aunt Jemima). Driving this retail consumption growth was Birds Eye vegetables, which advanced 12.2 percent, Birds Eye meals which were up 2.9 percent and the seafood and Lenders businesses. Market share for the segment advanced 0.6 points, led by the Birds Eye franchise.
Ebit for the Frozen segment increased 5.5 percent to USD 53.7 million in the first quarter of 2018, compared to USD 50.9 million in 2017, largely reflecting the higher net sales, productivity and lower marketing and advertising spending due to planned phasing, partially offset by input cost inflation, primarily related to higher transportation costs, higher outsourcing costs and the unfavorable impact of items affecting comparability in the current-year period. Adjusted Ebit increased 11.8 percent to USD 58.0 million in the quarter, compared to USD 51.9 million in the year-ago period.
Net sales for the Grocery segment increased 0.6 percent to USD 261.0 million in the first quarter of 2018, compared to USD 259.4 million in the year-ago period. This performance reflects favorable volume/mix of 0.6 percent and the earlier timing of Easter, which added 0.3 percent of growth to the segment in the quarter. This performance was partially offset by unfavorable net price realization of 0.3 percent.
The net sales performance in the quarter reflected strength in Vlasic pickles, Armour canned meat, Nalley’s chili and, to a lesser extent, Duncan Hines baking products, which was lapping a period of particularly high growth in 2017. Partially offsetting this growth were declines in Wish-Bone and, to a lesser extent, the syrups business.
Retail consumption for the Grocery segment in the quarter grew 0.4 percent, driven by Vlasic pickles, Duncan Hines baking products, Armour canned meat and the syrups business, and was partially offset by lower retail consumption of Wish-Bone salad dressings. Market share in the quarter for the Grocery segment was essentially flat versus the prior-year period.
Ebit for the Grocery segment declined 4.0 percent to USD 49.7 million, compared to USD 51.8 million in the year-ago period, primarily reflecting higher inflation, particularly transportation, and product mix, partially offset by productivity and higher net sales. Adjusted Ebit decreased 4.3 percent to USD 50.5 million, compared to USD 52.8 million in the year-ago period.
Net sales for the Boulder segment increased 0.5 percent to USD 97.8 million in the first quarter of 2018, compared to USD 97.3 million in 2017. This performance reflects favorable volume/mix of 3.1 percent partially offset by unfavorable net price realization of 2.6 percent.
The net sales performance for the Boulder segment reflected the continued strength of the Gardein business along with growth of Earth Balance. Partially offsetting this growth were lower net sales of Evol and Udi’s.
In-market performance of the Boulder segment continued to be very strong, with retail consumption up 8.8 percent, driven by solid growth of Gardein and Earth Balance, which grew consumption in the quarter 56.9 percent and 22.0 percent, respectively, and was partially offset by Evol and, to a lesser extent, Udi’s, which improved sequentially over the course of the first quarter. Market share for the segment was essentially flat in the quarter.
Ebit for the Boulder segment increased to USD 11.9 million in the first quarter of 2018, compared to USD 6.7 million in the prior year period, primarily reflecting the favorable impact of items affecting comparability versus the year-ago period as well as productivity, partially offset by input cost inflation. Adjusted Ebit decreased 4.2 percent to USD 12.6 million, compared to USD 13.2 million in 2017.
Net sales for the Specialty segment declined 15.0 percent to USD 75.2 million in the first quarter of 2018, compared to USD 88.5 million in 2017, largely reflecting a 13.1 percent net sales decline from the AJ Exit and lower volume/mix of 2.1 percent. Partially offsetting these negative drivers was higher net price realization of 0.2 percent.
Ebit for the Specialty segment declined 7.6 percent to USD 8.2 million in the quarter, compared to USD 8.9 million in the year-ago period. This performance reflected the lower net sales and input cost inflation, partially offset by productivity and the favorable impact of items affecting comparability. Adjusted Ebit declined 14.2 percent in the quarter to USD 8.3 million, compared to USD 9.7 million in the year-ago first quarter, including the USD 1.7 million headwind from the AJ Exit in 2018, representing approximately 17 points of growth.
Outlook for 2018
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 reaffirms guidance for 2018 Adjusted diluted EPS in the range of USD 2.85 to USD 2.95. At the guidance mid-point, this outlook represents growth of 16 percent versus the comparable 52-week Adjusted diluted EPS of USD 2.50 in 2017.
The following assumptions are incorporated into the Company’s 2018 guidance:
- Underlying net sales are still expected to grow ahead of category trends, and the benefit of USD 11 million from lapping the AJ Recall will also drive growth. Significantly offsetting these positive drivers are the lapping in 2018 of the 2017 benefits from the 53rd week and the four months of sales from the exited AJ business.
- The impact of lapping the strong Easter in 2017 is expected to be a headwind to net sales in the second quarter of 2018. Both the Frozen and Grocery segments will be affected by this, due to the seasonal nature of those portfolios.
- Approximately two-thirds of the USD 42 million in discrete items that weighed on 2017 gross margin performance are still expected to be tailwinds to 2018 performance.
- The favorable spread between productivity and inflation is still expected to narrow significantly in 2018 versus prior year performances.
- Input cost inflation for the year remains estimated in the range of 3.8 percent to 4.2 percent, although it is now expected at the high-end of the range.
- Productivity for the year, including residual acquisition synergies and some early savings from the network optimization program, is still estimated in the range of 4.0 percent to 4.5 percent of cost of products sold, although it is now estimated at the high-end of the range, with second half productivity higher than the first half.
- Adjusted net interest expense is still forecasted in the range of USD 123 million to USD 126 million, although it is now expected to be at the low-end of the range, linked to our recent refinancing activities.
- The Adjusted ETR for the year, including the impact of U.S. tax reform, is still estimated to improve to a range of 24 percent to 25 percent.
- The weighted average diluted share count for the year is still expected to approach 121 million shares, with the second half of the year higher than the first half.
- Capital expenditures for the full year are still expected in the range of USD 155 million to USD 165 million.