Pinnacle Foods Inc. Reports 1st Quarter Fiscal 2014 Results

PARSIPPANY, N.J., May 14, 2014 /PRNewswire/ -- Pinnacle Foods Inc. (NYSE: PF) today reported its financial results for the first quarter ended March 30, 2014 and reaffirmed its guidance for double-digit EPS growth for the year.

Consolidated net sales in the first quarter ended March 30, 2014 increased 5% versus year-ago, largely reflecting the benefit of the Wish-Bone acquisition, partially offset by the unfavorable impacts of a later Easter in 2014 and a decline in sales at the Company's Specialty Foods division.  Net sales for North America Retail, which is comprised of the Birds Eye Frozen and Duncan Hines Grocery segments, increased 7.6% versus year-ago, fueled by the benefit of Wish-Bone.

GAAP diluted earnings per share increased 21% to $0.35 in the first quarter of 2014, compared to $0.29 in the year-ago period.  Excluding items affecting comparability, on a pro forma basis which is described in the accompanying reconciliation tables, diluted earnings per share advanced approximately 6% to $0.36, compared to diluted earnings per share of $0.34 in the year-ago period.

Commenting on the results, Pinnacle Foods Chief Executive Officer Bob Gamgort stated, "We are pleased with our performance in the quarter and continue to expect 2014 to be another year of double-digit EPS growth.  Our focus on driving margin improvement through productivity and enhanced product mix, while maintaining our lean operating structure and driving strong free cash flow, continued to serve us well during a quarter in which the industry continued to be pressured for growth.  Despite the industry headwinds, we again outpaced the performance of our composite categories, driving another quarter of market share growth."

On May 12, 2014, Pinnacle announced that it signed a definitive agreement for the sale of the Company to Hillshire Brands for a combination of cash and Hillshire common stock.  The transaction, which is subject to customary regulatory and shareholder approvals, is expected to close by the end of September 2014. 

First Quarter Consolidated Results
Net sales in the first quarter of 2014 increased 5.1% to $644.0 million, compared to net sales of $613.0 million in the first quarter of 2013, primarily reflecting a 7.4% benefit from Wish-Bone, partially offset by the impacts of lower volume/mix of 1.2%, lower net pricing of 0.8% related to increased new product introductory costs, and unfavorable foreign currency translation of 0.3%.  The Easter-related shift of sales from the first quarter to the second quarter of 2014 unfavorably impacted the sales comparison by approximately 2%.   

North America Retail net sales increased 7.6% to $559.2 million in the first quarter of 2014, compared to $519.7 million in the year-ago period, reflecting an 8.7% benefit from Wish-Bone and slightly higher volume/mix of 0.1%, including the unfavorable impact of the Easter shift.  Also impacting the comparison were lower net pricing of 0.8% related to higher new product introductory costs and unfavorable foreign currency translation of 0.4%.   

Adjusted EBITDA on a pro forma basis advanced 9.1% to $113.1 million in the first quarter of 2014, compared to $103.7 million in the first quarter of 2013.  This performance reflected the growth in net sales and gross margin expansion of 70 basis points, driven by the combined benefit of productivity and improved product mix in excess of inflation.  Partially offsetting this growth were increased administrative expenses, largely reflecting higher equity-based compensation expense.  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. 

Earnings before interest and taxes (EBIT) advanced approximately 12% versus year-ago to $90.1 million in the first quarter of 2014, compared to $80.7 million in the first quarter of 2013.  Excluding items affecting comparability, EBIT on a pro forma basis increased approximately 10% to $92.7 million in the first quarter of 2014, compared to $84.4 million in the year-ago period.

Net earnings in the first quarter advanced to $40.7 million, or $0.35 per diluted share, compared with net earnings of $24.8 million, or $0.29 per diluted share, in the year-ago period.  Excluding items affecting comparability, on a pro forma basis, net earnings for the first quarter increased approximately 7% to $42.3 million, or $0.36 per diluted share, compared to net earnings of $39.5 million, or $0.34 per diluted share, in the year-ago period.  This performance primarily reflected the growth in EBIT, partially offset by higher interest expense associated with debt assumed to fund the Wish-Bone acquisition.  The unfavorable impact of the Easter shift approximated $0.02 per diluted share in the quarter.

Net cash provided by operating activities advanced significantly in the first quarter of 2014 to $94 million, compared to $68 million in the year-ago period, largely reflecting the growth in Earnings before income taxes.

First Quarter Segment Results

Birds Eye Frozen
Net sales for the Birds Eye Frozen segment increased 0.6% to $294.3 million in the first quarter of 2014, compared to $292.5 million in the year-ago period, reflecting a 0.7% increase from volume/mix, partially offset by lower net pricing of 0.1%. By brand, growth of Birds Eye Voila! skillet meals, Mrs. Paul's  and Van de Kamp's seafood and Hungry-Man entrees, including new Hungry-Man Selects varieties, was partially offset by lower sales of Birds Eye vegetables, due to the later Easter and new product introductory expenses behind new Birds Eye Steamfresh varieties.  

EBIT for the Birds Eye Frozen segment declined approximately 4% to $46.7 million in the first quarter of 2014, compared to $48.9 million in first quarter of 2013.  Excluding items affecting comparability, EBIT declined approximately 5% to $47.1 million, largely due to commodity and logistics cost inflation and the impact of the Easter shift, partially offset by productivity and timing of marketing investment. 

Duncan Hines Grocery
Net sales for the Duncan Hines Grocery segment advanced 16.6% to $264.9 million in the first quarter of 2014, compared to $227.2 million in the year-ago period, reflecting a 19.8% benefit from Wish-Bone, partially offset by lower net pricing of 1.8%, a decrease from volume/mix of 0.5% and unfavorable foreign currency translation of 0.9%.  By brand, sales growth from Wish-Bone salad dressings, Armour canned meat and Nalley chili offset sales declines related to Easter timing for Duncan Hines baking products and Vlasic pickles, as well as new product introductory expenses behind our Duncan Hines Velvets and Decadent Salted Caramel Brownies varieties.

EBIT for the Duncan Hines Grocery segment advanced 45% to $42.7 million in the first quarter of 2014, compared to $29.4 million in the year-ago period.  Excluding items affecting comparability, EBIT advanced approximately 41% to $44.8 million, largely due to the benefit of Wish-Bone, favorable commodity prices and productivity, partially offset by the impact of the Easter shift. 

Specialty Foods
Net sales for the Specialty Foods segment declined approximately 9% to $84.9 million in the first quarter of 2014, compared to $93.3 million in the first quarter of 2013, due to lower volume/mix of 8.7% and lower net pricing of        1.0%, partially offset by a 0.6% benefit from the Wish-Bone foodservice business.  For the base business, lower sales of private label canned meat were only partially offset by growth in snacks.

EBIT for the Specialty Foods segment decreased to $7.1 million in the first quarter of 2014, compared to $8.2 million in the first quarter of 2013, primarily reflecting the lower sales of private label canned meat in a heightened competitive bidding environment. 

Fiscal Year 2014 Outlook
The Company reaffirmed its adjusted EPS guidance for fiscal 2014 in the range of $1.70 - $1.75, or growth of 12% to 15% versus year-ago, after giving effect to stock-based compensation expense in both years.  This guidance continues to incorporate the following unchanged assumptions:

• Input cost inflation of approximately 2%;
• Productivity in the range of 3-4% of cost of products sold;
• Interest expense of approximately $100 million;
• An effective tax rate of approximately 38.9%; and
• Diluted weighted average shares of 117.2 million.

Conference Call Information
The Company will host an investor conference call on Wednesday, May 14, 2014 at 9:30AM (ET) to discuss the results of the quarter.  To access the call, investors and analysts can dial (866) 793-1344 in the U.S. and Canada or (703) 639-1315 from outside the U.S. and Canada and reference conference name:  Pinnacle Foods Q1 Earnings Call.  A replay of the call will be available, beginning May 14, 2014 at 1:00 PM (ET) until May 28, 2014, by dialing (888) 266-2081 in the U.S. and Canada or (703) 925-2533 from outside the U.S. and Canada and referencing Access Code 1618983.  Access to a live audio webcast and replay of the event will be available in the Investor Center of the Company's corporate website at www.pinnaclefoods.com.

About Pinnacle Foods Inc.
In more than 85% of American households, consumers reach for Pinnacle Foods brands. Pinnacle Foods is a Top 1000 Company ranked on Fortune Magazine's 2013 Top 1000 companies list. We are a leading producer, marketer and distributor of high-quality branded food products, which have been trusted household names for decades. Headquartered in Parsippany, NJ, our business employs an average of 4,400 employees. We are a leader in the shelf-stable and frozen foods segments and our brands hold the #1 or #2 market position in 10 of the 13 major categories in which they compete. Our Duncan Hines Grocery Division manages brands such as Duncan Hines® baking mixes and frostings, Vlasic® and Vlasic Farmer's Garden® shelf-stable pickles, Wish-Bone® and Western® salad dressings, Mrs. Butterworth's® and Log Cabin® table syrups, Armour® canned meats, Brooks® and Nalley® chili and chili ingredients, Duncan Hines® Comstock® and Wilderness® pie and pastry fruit fillings and Open Pit® barbecue sauces. Our Birds Eye Frozen Division manages brands such as Birds Eye®, Birds Eye Steamfresh®, C&W®, McKenzie's®, and Freshlike® frozen vegetables, Birds Eye Voila!® complete bagged frozen meals, Van de Kamp's® and Mrs. Paul's® frozen prepared seafood, Hungry-Man® frozen dinners and entrees, Aunt Jemima® frozen breakfasts, Lender's® frozen and refrigerated bagels, and Celeste® frozen pizza. Our Specialty Foods Division manages Tim's Cascade Snacks®, Hawaiian® kettle style potato chips, Erin's® popcorn, Snyder of Berlin® and Husman's® snacks in addition to our food service and private label businesses. Further information is available at http://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 substantial 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 Form 10-K filed with the Securities and Exchange Commission on March 6, 2014 and subsequent reports filed with the Securities and Exchange Commission. 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 the presentation.

Non-GAAP Financial Measures
Pinnacle Foods Inc. uses the following non-GAAP financial measures as defined by the Securities and Exchange Commission in our financial communications. These non-GAAP financial measures should be considered in addition to the GAAP reported measures, should not be considered replacements for the GAAP measures and may not be comparable to similarly named measures used by other companies.

• North America Retail Net Sales
• Adjusted Gross Profit
• Adjusted EBITDA
• Adjusted Earnings before Interest and Taxes (Adjusted EBIT)
• Adjusted interest expense, net
• Adjusted net earnings
• Adjusted earnings per share

North America Retail Net Sales
North America Retail Net Sales is the sum of the net sales of the Birds Eye Frozen segment and the net sales of the Duncan Hines Grocery segment. We refer to this to measure net sales performance of our retail focused branded business in contrast to our Specialty Foods segment where over the last several years we have de-emphasized certain low margin foodservice and private label businesses.

Items Impacting Gross Profit and Earnings

Adjusted Gross Profit

Adjusted gross profit is defined as gross profit before accelerated depreciation related to restructuring activities, certain non-cash items, acquisition, merger and other restructuring charges and other adjustments. We believe that the presentation of Adjusted gross profit is useful to investors because it is consistent with our definition of Adjusted EBITDA (defined below), a measure frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. In addition, we also use targets based on Adjusted gross profit as one of the components used to evaluate our management's performance.

Adjusted EBITDA

The Company's metric of Adjusted EBITDA, which is used in creating targets for the bonus and equity portions of our compensation plans, is substantially equivalent to Covenant Compliance EBITDA under our debt agreements.

Pinnacle believes that 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 engage in certain transactions in compliance with our debt facilities and it is a metric used internally by our Board of Directors and senior management.

You should not consider Adjusted EBITDA as an alternative to operating or net earnings (loss), determined in accordance with GAAP, as an indicator of Pinnacle's operating performance, or 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.

Adjusted EBITDA is defined as earnings (loss) 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.

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 us 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.

Our ability to comply with the financial covenants and engage in certain transactions in compliance with our debt agreements in future periods will depend on events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants in the future could result in a default under, or an inability to undertake  certain activities in compliance with, the Senior Secured Credit Facility and the indentures governing the Senior Notes, at which time the lenders could elect to declare all amounts outstanding under the Senior Secured Credit Facility to be immediately due and payable. Any such acceleration would also result in a default under the indentures governing the Senior Notes.

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.

Adjusted Interest Expense, Net

Adjusted interest expense, net is provided to assist the reader by eliminating mark to market adjustments and the charges which result from refinancing activities.

Adjusted Net Earnings

Adjusted Earnings Per Share

Adjusted net earnings and the related adjusted earnings per share are provided to present the reader with the aftertax impact of Adjusted EBIT and Adjusted interest expense, net in order to improve the comparability and understanding of the related GAAP measures.

(1) Excludes Wish-Bone pre-acquisition earnings and anticipated synergies which are included in calculating Covenant compliance.
(2) Represents plant integration and restructuring charges ($1.6MM), employee severance ($0.4MM), and other acquisition related expenses ($0.2MM).
(3) Represents unrealized mark-to-market losses ($0.4MM) resulting from hedging activities.

(1) Excludes Wish-Bone pre-acquisition earnings and anticipated synergies which are included in calculating Covenant compliance.
(2) Reflects Adjusted Statement of Operations amounts, assuming IPO and 2013 Refinancing occurred on the first day of Fiscal 2013.
(3) Represents restructuring charges related to plant closures ($1.9MM), principally our Millsboro, Delaware facility, consulting and business optimization expenses related to the expansion of retail headquarter direct sales coverage ($1.6MM), IPO related expenses ($0.3MM), and employee severance ($0.2MM).
(4) Represents unrealized mark-to-market gains ($0.4MM) resulting from hedging activities.
(5) Represents management/advisory fees and expenses paid to an affiliate of Blackstone ($0.7MM).

SOURCE Pinnacle Foods Inc.

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