Diamond Foods sales dip 10%

Diamond Foods sales dip 10%

Company incurred a $7.5 million charge related to a change in the fair value of the Oaktree warrant liability.

Diamond Foods Inc. (Nasdaq:DMND) ("Diamond") reported financial results for its fiscal 2013 first quarter.

In the first quarter of fiscal 2013, Diamond's GAAP net loss was $10.7 million and GAAP diluted net loss per share was $0.49. Diamond incurred selling, general and administrative ("SG&A") charges of $11.8 million primarily for audit committee investigation, restatement-related expenses, consulting fees, retention, and severance. The Company also incurred a $7.5 million charge related to a change in the fair value of the Oaktree warrant liability. Excluding these charges, Diamond's non-GAAP net income declined 68.0 percent from the first quarter of fiscal 2012 to $5.2 million, and non-GAAP diluted earnings per share declined 66.2 percent from the first quarter of fiscal 2012 to $0.24.

"Our first quarter results reflect some progress against our new brand strategies, but we continue to face headwinds with respect to walnut supply and a highly leveraged balance sheet," said Diamond's Chief Executive Officer Brian J. Driscoll. "Reduced promotional spending on our snack brands and a shift in the timing of advertising spending to later in the year were the largest contributors to improvement in our margins in the first quarter."

Financial review

Net sales during the quarter decreased by 10.1 percent to $258.5 million compared to the same quarter of the prior year. Total retail net sales declined 4.1 percent to $244.8 million and snack net sales declined 2.0 percent year over year to $154.1 million in the quarter, driven by declines in Emerald and to a lesser extent, Kettle, offset by an increase in Pop Secret sales. Non-retail net sales totaled $13.7 million for the quarter compared to $32.2 million in the first quarter of fiscal 2012. The decrease in non-retail sales was mainly due to a lower supply of walnuts.

Gross profit as a percentage of net sales was 22.7 percent for the first quarter of fiscal 2013 as compared to 21.3 percent for the same quarter in the prior year. Gross profit as a percentage of net sales in the 2013 first quarter reflects improvement in net price realization and a focus on reducing lower performing SKUs.

SG&A expense was $38.2 million during the first quarter of 2013, compared to $29.5 million in the same quarter in the prior year. Included in the first quarter are $11.8 million of certain SG&A expenses related primarily to audit committee investigation, restatement related expenses, consulting fees, retention, and severance. Excluding these expenses, non-GAAP adjusted SG&A was $26.4 million or 10.2 percent of net sales as compared to 9.5 percent in the prior year period.

Advertising expense was $9.0 million during the first quarter of fiscal 2013, compared to $12.7 million in the same quarter in the prior year. The reduction in advertising expenses was due to a shift in timing of advertising program spending from the first quarter into the remaining quarters of the fiscal year.

The Company recognized a $7.5 million loss on the Oaktree warrant in the quarter, primarily due to an increase in the Company's stock price at October 31, 2012 as compared to July 31, 2012.

Net interest expense was $13.9 million in the first quarter of fiscal 2013 compared to $5.8 million in the same quarter in the prior year. The increase was primarily due to the interest rate increase on the Secured Credit Agreement and the new Oaktree debt.

On a non-GAAP basis, the Company recorded a tax expense of $3.0 million in the first quarter of fiscal 2013, based on pre-tax non-GAAP income of $8.2 million. The non-GAAP tax expense reflects a federal and state blended rate applied to the non-GAAP pre-tax income for the quarter. On a GAAP basis, the effective tax rate was negative 6.1% for the first quarter of fiscal 2013.

Capital expenditures were $2.9 million for the first quarter of fiscal 2013.

Adjusted EBITDA was $31.0 million in the first quarter of fiscal 2013 compared to $29.8 million in the same quarter in the prior year. Please refer to the 'Reconciliation of US GAAP net income (loss) to Adjusted
EBITDA' table for a reconciliation of non-GAAP information.

As of October 31, 2012, on a GAAP basis, net debt outstanding was $596.9 million.

Cash and availability on Diamond's bank revolving line of credit on December 14, 2012 was approximately $95 million.

Brand performance

In the most recent 12-week Nielsen tracking period, which ended November 24, 2012, retail sales results reflect Diamond's recent changes in brand strategy direction. For both Emerald and Kettle brands, Diamond has reduced trade promotion spend to improve net price realization and leverage brand equity rather than use discounting as a means to drive sales. While Emerald snack nuts and Kettle Brand potato chips experienced retail sales declines and lost share as a result of planned reductions in promotional spending, non-promoted sales for both brands outpaced non-promoted category growth. Emerald Breakfast on the go! and Pop Secret outgrew their respective categories and gained share. Diamond of California culinary sales declined primarily due to volume declines following price increases, which resulted in lost share in the category. Diamond's U.S. Nielsen retail scanner performance along with category data for the 12-week period ended November 24, 2012 (U.S. Expanded All Outlets Combined) compared to the similar prior year period was as follows:

 

 
 

Brand YoY

Category YoY

Market Share

Diamond Non-Promoted

 

Change

Change

Change

YOY Change

Emerald snack nuts

-16.7%

+5.5%

-150 basis points

+29.8%

Emerald Breakfast on the go!

+21.9%

+1.1%

+20 basis points

N/A

Pop Secret

+8.7%

-1.3%

+210 basis points

+18.1%

Kettle U.S.

-11.5%

+3.9%

-40 basis points

+7.6%

Diamond of California

-7.4%

+5.8%

-350 basis points

-3.5%

 

 

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