Pinnacle Foods Inc. Reports Q4 and Full Year 2016 Results
Provides Outlook for another Strong Year and Raises Guidance for 2017
Full Year 2016 Highlights
- Grew net sales 17.8%, driven by the Boulder Brands acquisition and continued strong growth of the Frozen segment – particularly the Birds Eye franchise.
- Expanded gross margin by 140 basis points versus year-ago and Adjusted gross margin by 120 basis points.
- Closed and fully integrated the Boulder Brands acquisition and significantly over-delivered the earnings contribution anticipated at the time of the transaction.
Achieved productivity savings of 4.0% of cost of goods sold and Boulder acquisition synergies of
Drove Adjusted diluted EPS in excess of initial guidance and at the top of the Company’s recently increased guidance range of
$2.14 to $2.15.
Generated free cash flow of
$387 millionand improved total net leverage ratio to 4.19x at year-end.
- Significantly outpaced retail category performance for the fifth consecutive year, growing composite market share for the Company’s legacy retail businesses (i.e., excluding the Boulder Brands acquisition) by 0.7 points to 19.8%.
Commenting on the results,
Full Year Fiscal 2016 Results
Consolidated net sales for the year increased 17.8% to
Gross profit for the year increased 23.7% to
Earnings before interest and taxes (EBIT) increased 12.9% to
Adjusted EBITDA grew 21.2% to
Net interest expense for the year increased to
The effective tax rate (ETR) for the year was 38.0%, compared to 36.8% in the year-ago period, largely reflecting the higher tax structure of Boulder Brands and related items affecting comparability. Excluding these items, the ETR for the year was 36.6%, even with the prior year.
Net earnings for the year decreased to
Net cash provided by operating activities totaled
Full Year Segment Results
Earlier this month, Pinnacle announced that it had realigned its segment reporting, following the completion of the integration of the Boulder Brands acquisition. The four new segments, which mirror the manner in which the businesses are managed, are Frozen, Grocery, Boulder and Specialty. The Boulder Brands acquisition added the Udi's, Glutino, Smart Balance, Earth Balance and EVOL brands to the Company's portfolio, as well as complementary foodservice, private label and Canadian businesses. The new segment structure aligns each of these businesses with related Pinnacle businesses into four new reportable segments.
In connection with the announcement, the Company provided historical results under the new structure for full year fiscal 2014, quarterly and full year fiscal 2015 and the first three quarters of fiscal 2016, and this press release provides results for the fourth quarter and full year fiscal 2016. The historical information, and details regarding the composition of each segment, was filed in a Current Report on Form 8-K with the
Net sales for the Frozen segment advanced 5.6% to
The Birds Eye franchise and, to a lesser extent, Hungry-Man drove the performance of the segment, fueled by both core business strength and successful innovation that were supported by double-digit growth in retail distribution for the year. New varieties behind the Birds Eye Flavor Full, Birds Eye Protein Blends and Birds Eye
Hungry-Man strength was driven by the expansion of the Hungry-Man Selects line, with the introduction of 10 new varieties during the year. Partially offsetting the growth of Birds Eye and Hungry-Man were lower sales of the seafood business, Aunt Jemima breakfast products and Lender’s bagels.
EBIT for the Frozen segment increased 10.2% to
Net sales for the Grocery segment increased 6.3% to
The addition of the Smart Balance brand to the portfolio and the continued strength of Armour canned meat, were partially offset by lower sales of
EBIT for the Grocery segment advanced approximately 12.8% to
Net sales for the Boulder segment increased to
EBIT for the Boulder segment was
Net sales for the Specialty segment increased 4.3% to
The addition of the Boulder Brands private label and foodservice businesses into the segment, along with growth of gardein private label and foodservice, more than offset the decline of private label canned meat, which was pressured during the year from a heightened competitive bidding environment for the USDA stew business.
EBIT for the Specialty segment decreased approximately 6.1% to
Fourth Quarter Results
Net sales in the fourth quarter of 2016 increased 18.8% to
Gross profit in the fourth quarter of 2016 increased 20.1% to
EBIT in the fourth quarter of 2016 increased 16.6% to
Net interest expense for the quarter totaled
Net earnings in the fourth quarter increased 11.3% to
Net cash provided by operating activities totaled
Fourth Quarter Segment Results
Net sales for the Frozen segment advanced 7.8% to
The strong growth in the Frozen segment was again fueled by the Birds Eye franchise, primarily driven by the core vegetable business, as well as continued benefits of innovation and distribution expansion across the franchise. Also posting growth in the fourth quarter was the Company’s business in
EBIT for the Frozen segment increased approximately 12.8% to
Net sales for the Grocery segment increased 7.1% to
Performance in the quarter reflected the addition of the Smart Balance brand, continued strength of Armour canned meat and growth of Log Cabin syrup. These growth drivers were partially offset by lower sales of Duncan Hines baking products and Nalley’s chili.
EBIT for the Grocery segment advanced approximately 19.5% to
Net sales for the Boulder segment increased to
EBIT for the Boulder segment was
Net sales for the Specialty segment increased 4.1% to
EBIT for the Specialty segment decreased approximately 4.1% to
Outlook for 2017
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 raised its guidance for Adjusted diluted EPS for 2017 to a range of
The impact of the later Easter in 2017 is expected to shift approximately 2% of net sales and approximately
$0.01of Adjusted diluted EPS from the first quarter to the second quarter. The Frozen segment and, to a lesser extent, the Grocery segment are expected to be most affected by this shift, due to the seasonal nature of those portfolios.
Three extra weeks of Boulder Brands ownership added
$22 millionin net sales across the four segments and about $0.01in Adjusted diluted EPS in the month of January.
The benefit of the 53rd week to the entire Company, including Boulder Brands, is expected to add approximately 1% to net sales and
$0.03to Adjusted diluted EPS for the year. This impact will benefit the fourth quarter.
- Input cost inflation for the year is estimated in the range of 2.5% to 3.0%.
Productivity for the year is estimated in the range of 3.5% to 4.0% of cost of products sold, excluding Boulder Brands acquisition synergies of approximately
$15 millionthat will benefit both gross margin and SG&A overhead costs.
Net interest expense, excluding items affecting comparability, is currently forecasted to decline to approximately
$123 million, pending the Company’s final review of non-cash deferred financing charges associated with its recent term loan refinancing. This forecast reflects the benefits of the refinancing and related subsequent termination of the Company’s interest rate swap contracts with new ones at favorable rates.
- The ETR for the year, including the expected benefit from the new accounting standard for stock-based compensation, is estimated at approximately 35.0%, with minimal impact expected in the first quarter and a meaningful benefit expected in the second quarter, due to the first-ever vesting of awards in the Company’s long-term equity incentive plan established following the IPO.
- The weighted average diluted share count for the year is expected to approach 120 million shares, with the second half of the year higher than the first half.
Capital expenditures for the full year are expected to be in the range of
$120 million to $130 million.
Non-GAAP Financial Measures
Pinnacle uses the following non-GAAP financial measures as defined by the
- 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 interest expense, net
- Adjusted net earnings
- Adjusted diluted earnings per share
- Adjusted effective income tax rate
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.
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 Interest Expense, Net
Adjusted interest expense, net is provided to assist the reader by eliminating charges which result from refinancing activities or unusual transactions. Management believes that the Adjusted 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 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 also host a conference call on
Pinnacle Foods Contact
Sr. Vice President, Investor Relations
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