'Discrete items' undermine Pinnacle Foods' third quarter

by Keith Nunes
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Aunt Jemima frozen waffles, Pinnacle Foods
The Aunt Jemima recall initiated in May affected Pinnacle Foods during the quarter.
 

PARSIPPANY, N.J. — The third quarter of fiscal 2017 may be considered a busier quarter than normal for the management of Pinnacle Foods, Inc. In addition to managing the company’s normal day-to-day business, executives had to deal with the fallout from two major hurricanes, the lasting effects of the Aunt Jemima recall the company initiated in May, and the slower-than-expected start-up of one of its manufacturing plants. Each issue affected the company’s performance during the quarter.

Management estimated “discrete items” like the recall and the plant-start-up cost the company approximately $7 million during the quarter. On top of those issues, hurricanes Harvey and Irma led to delayed shipment of frozen products to the affected regions of the country and hindered the performance of the company’s frozen food business.

Once the discrete items are stripped away, the company had a strong quarter, said Mark Clouse, chief executive officer.

Mark Clouse, Pinnacle Foods
Mark Clouse, c.e.o. of Pinnacle Foods

“Starting with our top line, our net sales were up a strong 3.1% excluding the discrete items and residual Boulder impacts as well as the estimated impact of the hurricanes,” he said Oct. 26 during a conference call with investment analysts. “In the food industry environment increasingly struggling to find growth, we are pleased with our strong underlying top-line performance.  In-market performance was even stronger with our consumption versus year ago up 3.5% in the quarter and an even more impressive 5.2%, excluding Aunt Jemima. This exceptionally strong performance reflected growth across all three retail segments.”

Net income for the quarter ended Sept. 24 totaled $46,581,000, equal to 39c per share on the common stock, down from $52,353,000 in the same period a year ago.

Wish-bone dressing, Pinnacle Foods
Pinnacle is seeking a way to strengthen its Wish-Bone business.
 

Sales for the quarter were $749,814,000, down from $758,821,000 the previous year. 

In the company’s largest business unit, Frozen Foods, sales fell 4.1% to $301.4 million. Both the Aunt Jemima recall and the hurricanes were cited as reasons and management noted there should be a positive swing during the fourth quarter.

“ … Our Frozen shipments in October, excluding Aunt Jemima, are estimated to be up approximately 5% versus year ago, and we expect a strong Q4 for the segment,” Mr. Clouse said. “In terms of market share, performance for the Frozen segment advanced 0.6 share point in the quarter driven by Birds Eye Vegetables, which advanced 2.1 share points on consumption growth of almost 13% and Birds Eye meals, which advanced 1.3 points on consumption growth of 8%.”

Duncan-Hines Perfect Size for 1, Pinnacle Foods
Duncan Hines baking products experienced sales growth fueled by the launch of Perfect Size for 1.
 

Sales rose 4.4% to $270.4 million for Pinnacle’s Grocery business. 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, according to the company.

“Strengthening Wish-Bone will require a more balanced attack, including focusing on base business improvement and strengthening the brand’s core equity in the Italian segment as well as through innovation, such as our healthy oils platform,” Mr. Clouse said.

Sales in the Boulder business unit rose 9.3% to $101 million during the quarter.

Evol, Gardein, Earth Balance, Boulder Brands, Pinnacle Foods
Gardein, Earth Balance and Evol drove sales for Pinnacle Foods' Boulder business.
 

“Driving the underlying net sales growth for this segment were double-digit increases for Gardein, Earth Balance and Evol,” Mr. Clouse said. “Gardein strength reflects the benefits of our new Hagerstown facility and higher marketing spending now that we have the capacity to support demand. The strength of Evol reflected continued distribution expansion, while Earth Balance continued to benefit from the growing interest among consumers for plant-based offerings.

“Net sales for Udi’s, on the other hand, declined due to a proliferation of new competitive entrants into the gluten-free bread category, which continues to enjoy double-digit growth. We continue to believe that the single biggest opportunity for Udi’s is eliminating the compromise for gluten-free, which we believe can dramatically change the relevance and usage of gluten-free items. Udi’s has developed and is readying for launch early next year a new gluten-free bread product that is tested at parity with regular brand, with a broader set of no compromise offerings in the pipeline.”

Despite the challenges, management maintained its guidance for the fiscal year of adjusted earnings per share in the range of $2.55 to $2.60. 
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