Pinnacle Foods Reports Third Quarter Fiscal 2017 Results

PARSIPPANY, N.J., Oct. 26, 2017 (GLOBE NEWSWIRE) -- Pinnacle Foods Inc. (NYSE:PF) today reported its financial results for the third quarter ended September 24, 2017 and reaffirmed its full-year guidance for Adjusted diluted earnings per share.     

Diluted EPS in the third quarter of 2017, including items affecting comparability¹, decreased to $0.39, versus $0.44 in the year-ago period. Excluding items affecting comparability, Adjusted diluted EPS advanced 9.4% to $0.58, compared to $0.53 in the year-ago period.

Net sales in the third quarter of 2017 decreased 1.2% versus year-ago, reflecting strong underlying top-line growth of 3.1%.  This performance was more than offset by the anticipated, unfavorable discrete impacts totaling 3.6% from both the second quarter 2017 Aunt Jemima exit² and the residual impact of the 2016 Boulder UK business wind-down and SKU rationalization program.  Also impacting the net sales in the quarter was the unfavorable impact estimated at approximately 0.7% of Hurricanes Harvey and Irma.

In-market performance³ remained very strong in the third quarter, with retail consumption versus year-ago up 3.5% (or 5.2%, excluding Aunt Jemima) and market share advancing 0.7 share points, marking the Company’s 14^th consecutive quarter of share growth versus year-ago.

Commenting on the results, Pinnacle Foods Chief Executive Officer Mark Clouse stated, “Our results in the quarter continued to reflect strong in-market performance and our ongoing ability to navigate challenges to deliver very strong bottom-line results.  For both the quarter and year-to-date periods, all three retail segments posted consumption and market share growth, and our Adjusted EPS through Q3 is up almost 20%.  As we move into Q4 and with the discrete costs of the AJ Exit and related strategic manufacturing investments now largely behind us, we expect our financial results to strengthen, with Adjusted gross margin for the full year of 2017 even with year-ago.  In addition, we continue on track to achieve our long-term margin target for 2019 and beyond, as we continue to execute our network optimization strategy.”

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1} Adjusted financial metrics used throughout this release exclude items affecting comparability and are non-GAAP measures. Please see reconciliation to GAAP measures in the financial tables that accompany this release.  
² Aunt Jemima exit, including the recall, of certain retail and foodservice breakfast products (the AJ Exit).  
³ In-market performance (retail consumption; market share) based on Pinnacle’s IRI custom category definitions, period ending 10/1/17. 

Third Quarter Consolidated Results
Net sales in the third quarter of 2017 declined 1.2% to $749.8 million, compared to net sales of $758.8 million in the year-ago period.  Strong underlying sales growth of 3.1% was driven by volume/mix growth of 2.5%, net price realization of 0.5% and favorable foreign currency translation of 0.1%.  These growth drivers were more than offset by the AJ Exit of 2.8%, the residual Boulder impacts totaling 0.8% and the estimated hurricanes impact of 0.7%, the latter of which will have some positive net sales effect in the fourth quarter of 2017.   

Gross profit in the third quarter of 2017 declined to $219.3 million, or 29.2% of net sales, compared to gross profit of $228.7 million, or 30.1% of net sales, in the prior-year period, including the benefit versus year-ago of items affecting comparability.  This performance reflected discrete costs totaling $15 million from the AJ Exit and accelerated manufacturing investments initiated in the second quarter of 2017, as well as a negative hurricane impact of approximately $4 million.  Offsetting these factors were the benefits of the strong underlying net sales growth and continued strong productivity.

Adjusted gross profit in the quarter declined 5.4%, or 130 basis points, to $216.7 million, or 28.9% of net sales, compared to $229.1 million, or 30.2% of net sales, in the year-ago period.  The 2017 performance included the aforementioned discrete costs and hurricane impacts, which reduced gross profit by approximately $19 million, or 150 basis points.

Earnings before interest and taxes (EBIT) in the third quarter of 2017 decreased to $94.1 million, compared to EBIT of $118.3 million in the year-ago period, primarily reflecting the lower gross profit and the unfavorable impact versus year-ago of items affecting comparability, including a $39 million non-cash tradename impairment charge taken in the third quarter of 2017.  Also impacting the results was higher consumer marketing, partially offset by lower overhead expenses resulting from synergy capture, aggressive cost management and lower performance-based compensation.  Adjusted EBIT in the third quarter, including the discrete costs and hurricane impacts, decreased 3.1% to $130.4 million, compared to $134.6 million in the year-ago period.

Net interest expense for the quarter decreased 20.2% to $29.1 million, compared to $36.4 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 third quarter of 2017 was 28.3%, compared to 36.0% in the year-ago period, driven by items affecting comparability, as well as the benefits in the quarter of the new accounting standard for stock-based compensation in 2017 and an adjustment to income tax liabilities, partially offset by unfavorable state tax legislation.  The Adjusted ETR for the quarter was 31.7%, compared to 36.4% in the year-ago period.

Net earnings in the third quarter decreased to $46.6 million, or $0.39 per diluted share, compared to $52.4 million, or $0.44 per diluted share, in the year-ago period, meaningfully impacted by items affecting comparability.  Adjusted Net Earnings in the third quarter, even after giving effect to the discrete costs and hurricane impacts, increased 10.1% versus year-ago to $69.2 million, or $0.58 per diluted share, compared to $62.8 million, or $0.53 per diluted share, in the year-ago period.

Net cash provided by operating activities totaled $58 million in the third quarter of 2017, compared to $75 million in the prior year quarter.  On a fiscal year-to-date basis, net cash provided by operating activities totaled $179 million, compared to $240 million in the year-ago period, largely reflecting higher working capital associated with the Company’s robust innovation agenda in 2017 and the cash impact of the discrete items.

Third Quarter Segment Results

Frozen
Net sales for the Frozen segment decreased 4.1% to $301.4 million in the third quarter of 2017, compared to $314.4 million in the year-ago period, entirely reflecting the combined unfavorable impacts of the AJ Exit of 2.8% and the hurricanes of approximately 1.3%. The flat underlying net sales performance versus year-ago, which reflected delayed shipment timing that is expected to more than reverse in the fourth quarter, was due to favorable net realized pricing of 0.2%, including the negative impact of higher new product introductory costs, and favorable foreign currency translation of 0.3%, offset by lower volume/mix of 0.5%.

The Birds Eye franchise continued to post growth in the quarter, despite the impact of the hurricanes, driven by continued momentum behind recently-launched innovation, while net sales declined in Canada and, to a lesser extent, Hungry-Man entrees.

In-market performance for the segment continued to be very strong, with retail consumption advancing 2.8% (or 6.3%, excluding Aunt Jemima) in a category composite that was up 2.0%.  This strong consumption performance drove market share growth for the segment of 0.6 share points in the quarter, with Birds Eye vegetables share up 2.1 points on consumption growth of almost 13% and Birds Eye meals share up 1.3 points on consumption growth of 8%. 

EBIT for the Frozen segment was $28.2 million in the third quarter of 2017, compared to EBIT of $54.2 million in the year-ago period, largely reflecting the unfavorable impact versus year-ago of items affecting comparability and costs totaling $9 million associated with the AJ Exit and the accelerated manufacturing investments, as well as an estimated $2 million impact of the hurricanes.  Also impacting the performance were input cost inflation and higher marketing spending, partially offset by strong productivity.  Adjusted EBIT in the third quarter, including the $11 million of costs associated with the discrete items and hurricanes, declined 17.7% to $52.5 million, compared to $63.8 million in the year-ago period.

Grocery
Net sales for the Grocery segment increased 4.4% to $270.4 million in the third quarter of 2017, compared to $258.9 million in the year-ago period. This performance reflected strong volume/mix growth of 3.9%, with little overall net impact from the hurricanes, and favorable net price realization of 0.5%.

Strong double-digit net sales growth versus year-ago of Duncan Hines baking products, driven by the first-half launch of Perfect Size for 1, Vlasic pickles, driven by the launch of Purely Pickles, and Armour canned meat, reflecting continued solid growth and a hurricane-related surge in demand, were partially offset by declines for Wish-Bone salad dressings, due to aggressive competitive pricing, Comstock & Wilderness pie fillings and Smart Balance spreads.

In-market performance for the Grocery segment was strong in the quarter, with retail consumption versus year-ago up 2.3%, in a category composite that was up 0.7%.  Market share for the segment advanced 0.2 points, with double-digit consumption growth and market share gains for both Duncan Hines and Armour.

EBIT for the Grocery segment decreased 6.2% to $51.8 million in the third quarter of 2017, compared to $55.2 million in the third quarter of 2016, reflecting the unfavorable impact versus year-ago of items affecting comparability, along with input cost inflation, higher marketing spending and an estimated $2 million unfavorable hurricanes impact, partially offset by strong productivity, realized synergies from the Boulder Brands acquisition and the benefit of the net sales growth.  Adjusted EBIT in the third quarter, including the $2 million hurricanes impact, increased 4.7% to $58.0 million, compared to $55.4 million in the year-ago period.

Boulder
Net sales for the Boulder segment increased 9.3% to $101.0 million in the third quarter of 2017, compared to $92.4 million in the year-ago period. This performance reflected very strong underlying volume/mix growth of 12.7% and favorable net price realization of 2.6%, partially offset by a 2.9% decline from the wind-down of the Boulder UK operations and a 3.1% impact from the SKU rationalization program.

The net sales performance for the segment reflected strength across the portfolio, with double-digit increases for gardein, Earth 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 advanced meaningfully to $19.1 million in the third quarter of 2017, compared to $7.0 million in the third quarter of 2016.  This performance reflected the benefits of acquisition synergies, productivity and the strong net sales growth, as well as the favorable impact versus year-ago of items affecting comparability.  Partially offsetting these positive drivers were input cost inflation and discrete costs totaling less than $1 million.  Adjusted EBIT for the third quarter of 2017 increased 49% to $18.6 million, compared to $12.5 million in the year-ago period.

Specialty
Net sales for the Specialty segment declined 17.2% to $77.0 million in the third quarter of 2017, compared to $93.0 million in the year-ago period, reflecting a 13.3% net sales decline from the AJ Exit, lower volume/mix of 3.6%, largely due to the impact of the previously-disclosed gardein private label business exit, and lower net price realization of 0.3%.

EBIT for the Specialty segment was $1.0 million in the third quarter of 2017, compared to EBIT of $8.4 million in the third quarter of 2016, largely reflecting the unfavorable impact versus year-ago of items affecting comparability.  Also impacting the performance were input cost inflation and discrete costs totaling $4 million from the AJ Exit and accelerated manufacturing investments, partially offset by productivity.  Adjusted EBIT, including the $4 million of discrete costs, declined 21.3% to $7.3 million, compared to $9.3 million in the year-ago period.

Full Year 2017 Outlook
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 continues to expect to be at the low end of the range, reflecting the inclusion of the full-year impact of the discrete items and hurricanes.  This outlook represents growth versus year-ago approaching 19% and includes the following assumptions:

• The benefit of the 53^rd 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 is now estimated to be approximately 3.0%, reflecting higher than previously-expected transportation expense.
• Productivity for the year is now estimated to slightly exceed 4.0% of cost of products sold, excluding Boulder Brands acquisition synergies of at least $15 million that will benefit both gross margin and SG&A overhead.
• The discrete items that impacted performance through the third quarter are expected to impact fourth quarter Adjusted diluted EPS by approximately $0.03.
• Net interest expense is now forecasted at approximately $121 million.
• Adjusted ETR for the year, including the benefit of the new accounting standard for stock-based compensation, is now estimated to be approximately 32.5%. 
• The weighted average diluted share count for the year continues to be estimated at approximately 120 million shares.
• Capital expenditures for the year are now estimated to be approximately $100 million, excluding the $37.5 million acquisition of the frozen warehouse and packaging facility in Beaver Dam, Wisconsin.

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, October 26, 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 Q3 Earnings Call.  A replay of the call will be available, beginning October 26, 2017 at approximately 12:30 PM (ET) until November 9, 2017, by dialing (855) 859-2056 or (404) 537-3406 and referencing access code 39851241. 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.