Diamond taps into key trends - natural, protein snacks

Diamond taps into key trends - natural, protein snacks

Diamond Foods expects to return to profitability in its new financial year, pointing to the benefit of an on-trend product portfolio in the US, improved walnut supply and reduced financial costs.

The US snacks group booked a net loss of $164.7m for the 12 months to the end of July thanks largely to charges related to debt extinguishment, increased walnut costs and a higher tax burden. Adjusted EBITDA totalled $105.1m, up 3.3% on a year earlier.

The company registered progressively narrower losses throughout the year - and its fourth-quarter adjusted earnings beat Wall Street expectations.

Looking ahead, Diamond anticipates earnings will continue to follow an upward trajectory. The group forecast a significant improvement in its bottom-line performance in the coming year. Management guided towards an adjusted EBITDA range of $115-123m and EPS of $0.90-1.10.

According to BB&T Capital Markets analyst Brett Hundley, this prediction could well prove somewhat "conservative" given positive indicators for this year's walnut harvest.

"We view the [2014/2015 outlook] as conservative, given USDA expectations for an 11% increase in walnut production, along with the recapture of new growers by the company itself. We understand the need for conservatism, but ultimately believe that its initial view will prove conservative," he wrote in an investor note.

BB&T estimates put FY2015 EPS in a range of $1.17-1.47. Hundley explained: "We are above EPS guidance, as we hold a more bullish view of 2014 walnut production."

Looking to subsequent years, the company anticipates that this positive earnings evolution will continue through to 2018.

"Over the next three years, 2016 to 2018, we expect non-GAAP EPS growth of 10% to 15% each year," CFO Ray Silcock said during a conference call with analysts. "This outlook does not include any potential impact from repaying debt beyond required amortisations, but rather is based on building cash and maintaining our flexibility. However, we continue to evaluate advancing the timing of debt repayment as an alternative."

Shares in Diamond, which issued its results after the market closed yesterday, were up 8.94% at $29 at 09:59 ET.

According to CEO Brian Driscoll, Diamond is well positioned to drive top-line growth in the US thanks to its on-trend product portfolio.

"We believe that our present portfolio construct, combined with our product innovation emphasis, positions us well for accelerated growth," he told analysts yesterday. "We are presently competing with products addressing the trends in convenient protein, natural, organic, gluten-free and non-GMO."

Over the past year, Diamond built a good head of steam under its brands, which include Kettle Chips and Pop Secret. In the fourth quarter, the group saw sales increase 9.6%, driven by 11.1% growth in snacks and 7.5% growth in nuts.

"This growth was achieved primarily as a result of greater market penetration and merchandising effectiveness as well as higher net price realisation," Driscoll said.

He added Diamond expects to win more shelf space and grow distribution for its new products.

In snacks, recent product launches include Pop Secret ready-to-eat popcorn with a Nickelodeon Teenage Mutant Ninja Turtles license and the company is preparing to roll out three new Kettle flavours - pepper and chillies, roasted garlic and red curry. In a bid to drive further growth and extend its appeal in the natural segment, Diamond is also stretching Kettle into popcorn.

NPD is also central to Diamond's plan to grow nut sales. The company has extended its Emerald business with the launch of  its 100-calorie pack platform. "This is just a beginning for Emerald as we have an exciting innovation pipeline that brings nuts and other ingredients together in delicious new ways," the chief executive said.

While Diamond aims to increase sales through NPD, on the one hand, the company indicated it is open to potential acquisitions, on the other.

"We plan to deepen our participation to new product innovation and via acquisition if the right opportunity presents itself. With that longer-term view of our portfolio, we believe we positioned the business to achieve the EPS growth in the next three years," Driscoll said.

Hundley did ask about Diamond's outlook for its Kettle operations in the UK and the EU. The company has said it is working to turn around its UK business.

"Our sales growth in the fourth quarter in the UK was healthy, as well as our margin profile," Driscoll said. "It was healthy as well in the UK. We had a little bit of a market share hiccup in the quarter as a result of some promotional shifts, timing shifts ... but we still feel very good about the pace and pattern of our turnaround in the UK and in the prospects going forward. Although competitive activity there is quite intense and we're ... keeping a careful eye on that business to make sure we move quickly to respond but more to come on that."

However, the US accounts for the bulk of Diamond's business. And, through a tight focus on maintaining the relevance of its product portfolio, the company appears confident it can continue to grow its consumer appeal.