Pinnacle shares plans for Boulder Brands

by Monica Watrous
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Boulder Brands gluten-free products, Udi's gluten-free bread, Evol gluten-free mac and cheese, Glutino gluten-free toaster pastry, Pinnacle Foods
One of Pinnacle Foods’ priorities is streamlining Boulder Brands’ portfolio, which includes the Udi’s, Glutino, Evol and Smart Balance brands.

PARSIPPANY, N.J. — In the six weeks since acquiring Boulder Brands, Pinnacle Foods has identified a number of opportunities for long-term growth in the years ahead. The Parsippany-based parent company of Birds Eye, Duncan Hines and Gardein brands on Jan. 15 completed the transaction, which was valued at approximately $975 million, including approximately $265 in debt. Boulder, Colo.-based Boulder Brands manufactures gluten-free and frozen food products as well as a line of shelf-stable spreads under the Udi’s, Glutino, Evol and Smart Balance brands.

When the deal was struck in November, Pinnacle Foods initially faced pushback from investors, said Bob Gamgort, chief executive officer of Pinnacle Foods.

Bob Gamgort, Pinnacle Foods
Bob Gamgort, c.e.o. of Pinnacle Foods

“I think what clouded the issue a bit was the performance issues that the company had gone through,” Mr. Gamgort said during a Feb. 25 earnings call with financial analysts. “And I would say, the way that we looked at it, we were able to separate the brands and the categories and how great they are, and separate those from the way that they had been managed in the past.

“There were clearly some missteps in the management, and that was very public given that it was a public company. I think that as we've been able to talk about those brands, what our plans are for them, and also just remind people of what our track record is, of taking businesses that have been underperforming and turn them into good businesses, people have gotten more and more confident.”

In the year ahead, Pinnacle Foods’ priorities include streamlining Boulder Brands’ portfolio, realizing benefits of scale in procurement, manufacturing and logistics, and eliminating duplicative costs as well as executing against cost savings opportunities identified by Boulder prior to the acquisition. Pinnacle expects the acquisition to be modestly accretive to 2016 earnings with significant accretion thereafter. Boulder Brands is expected to contribute net sales of $460 million to $480 million in 2016, which reflects 49 weeks of ownership under Pinnacle Foods, as well as the anticipated impact of s.k.u. (stock-keeping units) rationalization.

Further strengthening its confidence in buying Boulder, Pinnacle said it has identified a number of synergy opportunities within the supply chain.

“What is unique about Boulder versus the Pinnacle business is about 40% of that business was co-manufactured,” Mr. Gamgort said. “You can imagine we're taking a look at a lot of opportunities, whether it is to harmonize the co-manufacturing network and/or to repatriate some of that volume into the Pinnacle network. All of those combined are really rich sources of synergies and cost savings that we are excited to get our arms around.”

Gardein meatless options, Pinnacle Foods
Boulder's portfolio is consistent with the Gardein business in its natural and organic channel sales.

From a sales standpoint, Pinnacle said it foresees opportunities to expand Boulder’s brands into conventional grocery as well as leverage its expertise within the natural and organic channel.

“About 20% of the Boulder portfolio was sold in natural and organic channels,” Mr. Gamgort said. “That's consistent with the Gardein business, as well. So we see an opportunity to build sales expertise in that. But on the flip side of it, we see opportunity to greatly expand distribution and merchandising on both the Gardein and the Boulder businesses in traditional customers where the legacy Pinnacle sales organization has been really strong.”

Another priority for Pinnacle Foods is stabilizing Boulder’s Smart Balance spreads business.

“In reality those declines are moderating on their own as you take a look at the latest consumption trends,” Mr. Gamgort said. “But really when you look at that brand in particular, it behaves much more like the foundation brands on the Pinnacle side of the business rather than a fast-growing health and wellness brand that is more in line with the way the Boulder team manages it. I think we will take the playbook from our foundations business and apply it. We've got a lot of ideas of how we can at minimum moderate those declines. But ideally get it stabilization, and that would be all upside to our acquisition model.”

Smart Balance spreads, Pinnacle Foods
Pinnacle Foods also plans to focus on stabilizing Boulder’s Smart Balance spreads business.

For the fiscal year ended Dec. 27, 2015, Pinnacle Foods had net earnings of $212,508,000, equal to $1.83 per share on the common stock, down 14% from $248,418,000, or $2.15 per share, the year before. Net sales were $2,655,792,000, up 2.5% from year-ago sales of $2,591,183,000. The performance reflected strong results in the company’s Birds Eye and Gardein businesses that offset declines in Duncan Hines baking products and Wish-Bone salad dressings.

“To summarize our overall results in 2015, we delivered a strong performance that exceeded our long-term algorithm for the third consecutive year,” Mr. Gamgort said. “Our results reflected a solid core business fueled by market share growth, gross margin expansion and a continued lean overhead structure, which was accelerated by the benefit of acquisition synergies.

“Importantly, we also set the stage for another good year in 2016 with expected e.p.s. growth of 10% at the midpoint of our guidance range, including about a 5c contribution from the Boulder acquisition.”

Net earnings for the fourth quarter were $79,195,000, or 68c per share, up 119% from $36,129,000, or 31c per share, for the prior-year period. Net sales were $722,478,000, up 2.4% from $705,333,000.
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