Pinnacle Foods, Inc. (PF)

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Pinnacle Foods Inc (PF)

Q4 2013 Earnings Conference Call

March 06, 2014 09:30 pm ET

Executives

Maria Sceppaguercio - SVP, Investor Relations & External Communications

Bob Gamgort - Chief Executive Officer

Craig Steeneck - Chief Financial Officer

Analysts

Andrew Lazar - Barclays

Farah Aslam - Stephens, Inc.

Jonathan Feeney - Janney Capital Markets

Brian Hunt - Wells Fargo

Bryan Spillane - Bank of America

Robert Moskow - Credit Suisse

David Palmer - RBC Capital Markets

Eric Larson - CL King & Associates

Ken Zaslow - Damon Capital

Matthew Grainger - Morgan Stanley

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Pinnacle Foods Incorporated Earnings Call for the Fourth Quarter ended December 29, 2013. This conference is being recorded and there will be a question-and-answer session at the end of the call.

I would now like to introduce your host for today's conference, Pinnacle's Senior Vice President of Investor Relations and External Communications, Ms. Maria Sceppaguercio. Ms. Sceppaguercio, please go ahead.

Maria Sceppaguercio

Thank you, Howard, and good morning, everyone. Thanks for joining us today. Here with me to discuss our results for the quarter and our outlook for fiscal '14, are Pinnacle's CEO, Bob Gamgort; and our CFO, Craig Steeneck. Earlier this morning, we issued our press release for the fourth quarter of 2013. If you haven't received a copy of the release, you can get one on our website at www.pinnaclefoods.com.

As you know, we completed our IPO and subsequent refinancing in the second quarter of 2013. As a result, our GAAP financial results includes of the benefits and one-time expenses of these transactions. Consistent with our reporting in previous quarters and to help you understand how the IPO and refinancing impacted our results in 2013, we have provided in our press release and will discuss here this morning our fourth quarter and full year results on an adjusted pro forma basis.

This adjusted pro forma basis assumes that the IPO occurred on the first day of fiscal '12, and that the refinancing occurred on the first day of fiscal '13 and excludes IPO and refinancing expenses, restructuring related and other items and non-cash stock-based compensation expense, which we collectively refer to as items affecting comparability.

The company believes that the adjusted pro forma basis provides investors with additional insight into our business and operating performance trends. While the exclusion of these items is not in accordance with GAAP, we believe it is the most meaningful comparison and the most appropriate basis for discussion of our performance.

Details of the excluded items are included in the reconciliation tables included in our press release and are discussed in detail in our 10-K which will be filed later today. Also reconciled in our release and 10-K is adjusted EBITDA, which is a non-GAAP measure. We define adjusted EBITDA as GAAP net earnings before interest expense, income taxes, and depreciation and amortization adjusted to exclude items affecting comparability. Other adjusted metrics discussed on the call are calculated using this methodology unless otherwise indicated.

In discussing our results today, we will reference our performance excluding the impact of excluding the impact of the 53rd week, last year which benefitted net sales and diluted EPS in the fourth quarter of '12 by $28 million and $0.02, respectively. We have included in our release and 10-K, the details regarding the impact of the 53rd week in 2012.

On October 1, 2013, we completed the acquisition of Wish-Bone, and as a result, Wish-Bone is included in our financial results in the fourth quarter for the first time. As planned, we fully transitioned the business from Unilever by year end and Wish-Bone is now integrated into Pinnacle's business.

In terms of production, you will recall that Unilever is continuing to manufacture Wish-Bone for us under a co-manufacturing agreement that runs through early '15, while we establish new high speed capacity for the business in our liquid manufacturing facility in St. Elmo, Illinois.

Finally, as outlined in our release this morning, our board recently approved an annual long-term equity incentive plan that builds on the initial founders equity grants awarded in connection with the IPO. Given that this will now be an annual expense for Pinnacle, we will be including it in our adjusted results.

In 2014, this non-cash equity comp expense is expected to total $5.7 million after-tax or $0.05 per diluted share. In 2013, the expense totaled $5.9 million after-tax, or $0.05 per diluted share.

Because of the - now ongoing nature of this expense and to enable comparability with 2014 and beyond, we will no more retreat the 2013 expense as a discrete IPO-related adjustment, which means that beginning with 2014 reporting, our adjusted results for the current and prior year will include this expense. Included in our press release is a table that lays out the expense incurred in 2013 by quarter.

Before turning the call over to Bob, I'd like to remind you that our discussion this morning may include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC.

With that, I'll hand it over to Bob.

Bob Gamgort

Thanks, Maria, and thanks to everyone for joining us today. 2013 was very eventful for Pinnacle, and I am pleased to report that we exceeded our expectations for the year. We grew our North America Retail sales by 2%, excluding the 53rd week impact Maria mentioned earlier, largely driven by the Wish-Bone acquisition and higher volume mix on the base business.

We outpaced the performance of our categories, enabling us to grow our composite share for the year, something we have done in three of the last four years. We accelerated our in-market performance in the fourth quarter growing share on nearly every leadership plan. We expanded our adjusted gross margin by 190 basis points through improved product mix and continued strong productivity delivery and this enabled us to drive double-digit adjusted EBIT growth for the year.

We also meaningfully reduced our leverage profile and interest expense due to the benefits of our IPO and subsequent refinancing. Taken together, these accomplishments drove adjusted diluted EPS growth of approximately 40% to $1.57, which is at the high end of our most recent guidance.

In addition, we enhanced our return to shareholders by initiating a quarterly dividend program in May, which we increased by 17% in the fourth quarter, reflecting our confidence in our core business model and the incremental benefit of the Wish-Bone acquisition. Taking a closer look at our North America Retail business, the 2% net sales growth in 2013 was driven by our higher margin Leadership Brands and the benefit of the Wish-Bone acquisition.

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