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Pinnacle Foods (PF) Q2 Earnings Up Y/Y Despite Freight Costs

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Pinnacle Foods Inc. posted mixed results for second-quarter 2018, as the bottom line grew year over year, whereas the top line slipped and delivered a negative surprise.

Q2 Highlights

Adjusted earnings came in at 59 cents per share that came in line with Zacks Consensus Estimate and improved 11.3% year over year. This was backed by enhanced adjusted EBIT as well as lower adjusted effective tax rate (ETR). Markedly, adjusted ETR was 23.3% in the second quarter, down from 26.2% in the year-ago period.

Pinnacle Foods Inc. Price, Consensus and EPS Surprise
 

Pinnacle Foods Inc. Price, Consensus and EPS Surprise | Pinnacle Foods Inc. Quote

Net sales of $741.8 million fell short of the consensus mark of $750 million and slipped 0.4% from the prior-year quarter. Excluding the impact of unfavorable timing of Easter, net sales climbed 1.1% on the back of continued strength in Frozen and Boulder units. However, this was partly offset by weakness in the Grocery and Specialty segments.

Driven by these factors, Pinnacle Foods’ in-market consumption rose 0.9% in the quarter, while composite market share was in line with the year-ago period figure.

Moving on, adjusted gross profit for the quarter came in at $212.6 million, up 4.6% from the prior-year quarter. Further, adjusted gross margin expanded nearly 140 basis points (bps) to 28.7% despite input cost inflation — mainly driven by transportation costs and escalated outsourcing costs associated with innovation.

Adjusted earnings before interest and taxes (EBIT) went up by 5.7% to $120.7 million in the quarter, gaining from improved gross profit.

Segment Results

Frozen: Sales increased 4.3% in the quarter to $308.5 million on account of favorable volume/mix, improved net price realization, positive currency impacts and net gains from lapping Aunt Jemima’s (AJ) exit. This was somewhat countered by unfavorable Easter timing. Well, performance of the Frozen segment strongly benefitted from Birds Eye vegetable business, which helped drive the segment’s in-market performance. Notably, growth in the Frozen unit was fueled by a 4.3% rise in retail consumption spending, which was largely backed by a 9.5% growth at Birds Eye.

Apart from Birds Eye, Frozen segment’s sales were driven by strong seafood business, partly offset by soft sales of frozen meals, which is a highly competitive category. Adjusted EBIT in the segment surged 32.2% to $50.3 million.

Grocery: Sales tumbled 7% to $256.6 million on account of unfavorable volume/mix and Easter timing, somewhat cushioned by enhanced net price realization. Declines at Duncan Hines baking business and Wish-Bone salad dressings were mainly responsible for the soft sales, though it was partly compensated by strength in Vlasic pickles and the Armour canned meat business.

Also, these factors led the grocery unit retail consumption to decline, which resulted in a 0.2 point market share loss. Adjusted EBIT for the segment plunged 16.7% to $52.5 million.

Boulder: Sales jumped 4.5% to $98.9 million, fueled by favorable volume/mix and higher net price realization. Strong performance of the Gardein and Earth Balance businesses also benefited the quarter, though weak sales of the gluten free portfolio was a hurdle. Nevertheless, retail consumption remained sturdy, owing to growth in Gardein and Earth Balance businesses along with consumption growth of Udi’s bread. Adjusted EBIT for the segment totaled $16.5 million, improving 4.5% from the prior-year quarter.

Specialty Foods: Sales dipped 0.3% to $77.7 million due to negative impacts of the AJ exit. Excluding this impact, sales grew 2.4% on the back of improved volume/mix, partly countered by lower net price realization. However, the segment’s adjusted EBIT came in at $9.6 million, which more than doubled on a year-over-year basis.

Other Financial Aspects

Pinnacle Foods ended the quarter with cash and cash equivalents of $80.4 million, long-term debt of $2,703.9 and total equity of $2,431.5 million.

Pinnacle Foods’ net cash flow from operating activities during the first half of 2018 was $214.8 million, while the company incurred capital expenditure of $60.3 million. During the second quarter, capital expenditures totaled $24.5 million, with free cash flow amounting to $69 million.

Guidance

Despite operating in a tough landscape (mainly due to freight cost inflation), Pinnacle Foods’ results came in line with management’s expectations. Although the company expects freight cost to remain high, it remains confident of delivering bottom-line growth in 2018.

That said, the company continues to expect adjusted earnings per share for 2018 in the range of $2.85-$2.95. Considering the guidance at mid-point, the bottom line represents growth of 16% from 2017’s 52-week adjusted earnings per share of $2.50. The Zacks Consensus Estimate is currently pegged at $2.90 for 2018.



Further, Pinnacle Foods remains encouraged about its potential takeover by Conagra Brands (CAG - Free Report) , which was announced in June. Cost synergies and brand strength from the combined portfolio reflects solid growth prospects. Notably, this Zacks Rank #2 (Buy) stock has returned 15.3% in the past six months, against the industry’s fall of 3.2%. 

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Chef’s Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 22%, carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

B&G Foods (BGS - Free Report) , with a Zacks Rank #2, delivered positive earnings surprise in the last reported quarter and gained about 26% in the past three months.

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