Q2 Frozen Sales Up 1% as Pinnacle Posts 9% Overall Growth
Parsippany, New Jersey, USA-headquartered Pinnacle Foods Inc., a diversified food company with a retail brand portfolio that includes Birds Eye, Hungry-Man and Mrs. Paul’s frozen products, reported profitable financial results for the second quarter ended June 29. Net sales increased approximately 9% versus its year-ago performance in the second quarter, primarily reflecting the benefit of the Wish-Bone salad dressing acquisition. Earnings per share advanced 22% on a pro forma basis excluding items affecting comparability.
Net sales for North America Retail, which is comprised of the Birds Eye Frozen and Duncan Hines Grocery segments, rose 11% versus year-ago revenues. GAAP diluted earnings per share increased to $0.30 in the second quarter of 2014, compared to a loss per share of $0.28 in the year-ago period. Excluding items affecting comparability, diluted earnings per share advanced 22% to $0.33, compared to diluted earnings per share of $0.27 in the year-ago period.
Net sales for the Birds Eye Frozen segment increased approximately 1% to $246.2 million in the second quarter, compared to $244.0 million in the year-ago period. The performance was due to a 5% increase from volume/mix, including the Easter-related sales shift for Birds Eye vegetables, partially offset by lower net pricing of 4.1%, largely reflecting the impact of Easter-related promotional spending and trade investments to enhance competitiveness at retail for Birds Eye vegetables and Birds Eye Voila! skillet meals. These two brands drove the net sales growth in the quarter, partially offset by lower purchases of Celeste pizza, Aunt Jemima breakfast products, and Mrs. Paul’s and Van de Kamp’s seafood.
During the quarter, Birds Eye introduced a Birds Eye Steamfresh kale variety and three new varieties of Birds Eye Steamfresh Chef’s Favorites, while Birds Eye Voila! continued the expansion of its Family Size line.
EBIT for the Birds Eye Frozen segment increased approximately 1% to $37.1 million in the second quarter of 2014, compared to $36.5 million in second quarter of 2013. Excluding items affecting comparability, EBIT declined approximately 5%, as the benefits of productivity savings and net sales growth were more than offset by trade investments made during the quarter and higher commodity and logistics costs.
Commenting on overall results, Pinnacle Foods Chief Executive Officer Bob Gamgort stated: "We continue to execute well in an increasingly challenging environment. Our business model has proven to be resilient in a food industry characterized by weak growth and heavier promotional spending. We have been able to strike the right balance between investing in our brands, remaining price competitive and delivering strong earnings growth, and we are pleased that we delivered another quarter of market share growth.”
The company also announced that, subsequent to the end of the second quarter, it reduced indebtedness by $200 million and now expects to achieve a 25 basis point step-down in its term loan interest rate at the end of the fiscal third quarter of 2014, one quarter earlier than previously anticipated. In addition, Pinnacle declared a 12% increase in its quarterly dividend to $0.235 per share, effective with the third quarter dividend to be paid in October.
Outlook for Rest of Year
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. Management continues to expect input cost inflation for 2014 of approximately 2%, productivity in the range of 3-4% of the cost of products sold, and a diluted weighted average share count of 117.2 million. Given the benefits realized in the first half, Pinnacle now anticipates its effective tax rate for the year to be slightly below its previous guidance of 38.9%.
Due to the termination of the company’s merger agreement with Hillshire Brands, Pinnacle received a $163 million termination fee at the beginning of the third quarter of fiscal 2014. The payment, in concert with cash on hand, was used to reduce debt by $200 million. As a result of the debt pay-down and the company’s anticipated ongoing strong cash flow, it is expected that the net leverage ratio at the end of the third quarter will fall below the 4.25x threshold that will trigger a 25 basis point reduction in the interest rate on its term loans. The combination of the debt reduction and expected interest rate step-down would result in net interest expense for 2014 to be slightly below the $100 million previously forecasted. The company plans to reinvest the interest savings in 2014 back into the business.