US: Mixed results from Smart Balance

By Katy Askew | 9 November 2012

  • EPS down 50%
  • Sales up 41%, boosted by acquisitions
  • Operating income up 56%
  •  

US natural food group Smart Balance has booked a drop in third-quarter earnings, despite higher sales and operating profit. 

Third quarter earnings per share halved during the period, dropping from US$0.06 per share to $0.03 per share. The company attributed the decline to higher interest, depreciation, amorotization and stock-based compensation expense. 

However, during the period Smart Balance delivered a 41% rise in net sales, which rose to $101.3m, on organic sales gains of 11%. Gains were driven by the group’s acquisition of the Udi, Glutino and Earth’s Balance brands as the company expands in the gluten-free sector. 

The company also said operating income increased 55.7% to $15.1m. 

Chief executive Stephen Hughes said that the result was "in line" with expectations. He added that the integration of Udi, which was acquired in July, is "well on its way". 

"Since adding these brands to our portfolio, retailers have accepted an incremental 400 Udi's and Glutino items and it is clear that they are highly-motivated to address the needs to gluten-free consumers," he said.

Show the press release

Smart Balance Announces 2012 Third Quarter Results

Company Delivers 41% Reported & 11% Organic Net Sales Growth in the Quarter;

Organic Cash Operating Income Increases 23% to $15.1 Million;

Reiterates 2012 & 2013 Outlook

PARAMUS, N.J., Nov. 8, 2012 (GLOBE NEWSWIRE) -- Smart Balance, Inc. (Nasdaq:SMBL) today announced its financial results for the third quarter ended September 30, 2012. For the third quarter of 2012, net sales increased 41.4% to $101.3 million, and cash operating income increased 55.7% to $15.1 million. Organic net sales increased 11.1% and organic cash operating income increased 22.5%. Earnings per share were $0.03, versus $0.06 last year, excluding certain items. Earnings per share were impacted by higher interest, depreciation, amortization and stock-based compensation expense, when compared to last year.

The Company reiterated its outlook for 2012 and 2013. For 2012, the Company continues to expect net sales in the $360 million to $370 million range, gross margins in the 42% to 44% range, and cash operating income in the $53 million to $55 million range. For 2013, the Company continues to expect net sales to be in the range of $440 million to $450 million and cash operating income to be in the range of $70 million to $75 million.

Commenting on the results, Chairman and Chief Executive Officer Stephen Hughes stated, "Beginning with our third quarter report we established two business segments – Natural and Smart Balance. Overall, our results were in-line with our expectations. In the quarter, our Natural segment, which includes the Udi's, Glutino and Earth Balance brands, represented more than half of our total net sales and reported strong organic net sales increases of 42.0%, consistent with our consumption growth of 44.5% across these brands. While our Smart Balance segment, which includes spreads, milk and grocery, reported a net sales decline, we managed to increase brand profit margin for this segment. Excluding the expenses related to the launch of our Smart Balance Spreadable Butter, Smart Balance delivered slightly higher profitability as compared to last year."

Commenting further on the recent Udi's acquisition, Mr. Hughes said, "We are well on our way to integrating Udi's with our other Natural brands – Glutino & Earth Balance. Since the acquisition on July 2nd, our teams have been working extraordinarily well together and have made great strides in combining our sales and marketing efforts. The growth in the gluten-free market and the potential for the combination of Udi's and Glutino is a very powerful proposition in our efforts to make gluten-free products more available on retail shelves. Since adding these brands to our portfolio, retailers have accepted an incremental 400 Udi's & Glutino items and it is clear that they are highly motivated to address the needs of gluten-free consumers." 

2012 Third Quarter Results

Total Company net sales in the third quarter of 2012 increased 41.4% to $101.3 million, compared to net sales of $71.7 million in the third quarter of 2011. This performance primarily reflected the impact from the acquisitions of Udi's and Glutino, which closed on July 2, 2012 and August 3, 2011, respectively.  As a result, while Glutino and Udi's are included in the results for the third quarter of 2012, only Glutino is included for two months in the third quarter of 2011.  Organic net sales, which assumes the Company owned Udi's and Glutino for the entire third quarter of 2011, increased 11.1% in the third quarter of 2012 compared to the third quarter of 2011. 

The chart below highlights net sales, gross profit, and brand profit (calculated as gross profit less marketing, selling and royalty expense (income)) for the third quarters of 2012 and 2011, by segment: 

Segment Results – Third Quarter

$ in Millions 2012 Margin 2011 Margin

Net Sales:        

Natural $52.4   $17.4  

Smart Balance 48.9   54.3  

$101.3   $71.7  

Gross Profit (ex-Purchase Accounting²)        

Natural $21.3 40.6% $6.9 39.7%

Smart Balance 22.0 45.0% 24.1 44.4%

$43.3 42.7% $31.0 43.2%

Brand Profit (ex-Purchase Accounting²)        

Natural $13.6 26.0% $5.0 28.7%

Smart Balance 12.7 26.0% 13.2 24.3%

$26.3 26.0% $18.2 25.4%

Net sales for the Company's Natural segment (Udi's, Glutino and Earth Balance brands) increased 201.6% to $52.4 million in the third quarter of 2012 compared to $17.4 million in the third quarter of 2011. Organic net sales for the Natural segment increased 42.0% in the quarter. The Company's gluten-free brands – Udi's and Glutino – reported organic net sales growth over 50% in total in the quarter, which was driven by an acceleration in distribution gains from both Udi's and Glutino and continued strength in gluten-free category growth. The Company's Earth Balance portfolio registered a net sales gain of 11.5% versus a year-ago. Earth Balance growth in the quarter was negatively impacted by the timing of promotions. Earth Balance's consumption growth of 25.6%, however, remained strong in the third quarter and sales in October were back in line with consumption.   

Net sales for the Company's Smart Balance segment declined 9.8% to $48.9 million in the third quarter of 2012 compared to $54.3 million in the third quarter of 2011. This segment was negatively impacted by the winding down of Bestlife® spreads and Smart® Balance Butter Blends, as the Company repositioned its focus on premium spreads and spreadable butter within the spreads category. Despite the difficult environment for spreads, the Company's premium spreads and spreadable butter products outperformed the competition and gained share in its category. Net sales of the Company's Smart Balance® Spreads and Spreadable Butter businesses, when combined, declined 6.1% in the quarter. The positive impact from the introduction of Smart Balance® Spreadable Butter was offset by lower volume in its core spreads business, caused by higher promotional activity from competitors and an unfavorable price-gap to commodity butter. Net sales of the Company's Smart Balance grocery products decreased 6.1% versus the year-ago third quarter, impacted by increased pricing and promotion pressure in the cooking oil category. 

Net sales of Smart Balance® milk increased 16.4% in the third quarter. This increase was mainly attributable to an improvement in efficiency and effectiveness of trade promotions with retailers compared to the third quarter of 2011. In addition, the Company reported lower slotting related to milk in the third quarter of 2012, compared to the same period last year.  

While the Natural segment and Smart Balance segment each reported an increase in gross margins, the mix shift to Natural resulted in lower gross margins, overall.   Excluding certain adjustments to cost of goods sold, gross profit in the third quarter of 2012 was $43.3 million, or 42.7% of net sales, compared to $31.0 million, or 43.2% of net sales in the third quarter of 2011. Excluded in the aforementioned cost of goods in the third quarter of 2012 was a $0.9 million charge related to the Udi's acquisition to reflect the estimated fair value of finished goods inventory acquired. Excluded in the aforementioned cost of goods in the third quarter of 2011 was a $0.8 million charge related to the Glutino acquisition to reflect the estimated fair value of finished goods inventory acquired. 

Brand Profit, excluding the purchase accounting charges mentioned above, for the Company's Natural segment, increased to $13.6 million in the third quarter of 2012 from $5.0 million in last year's quarter. The significant increase is primarily related to the Udi's acquisition in the quarter, as it contributed approximately $6.1 million to brand profit.

Brand Profit for the Company's Smart Balance segment decreased modestly to $12.7 million in the third quarter of 2012 from $13.2 million in the previous year's quarter primarily due to investment costs related to Spreadable Butter. Excluding these investment costs, Smart Balance segment brand profit increased modestly in the quarter.

Reconciliation of Operating Income to Cash Operating Income – Third Quarter

$ in Millions 2012 2011

Operating Income (Loss) ($0.5) $2.1

Less certain non-recurring items affecting Operating Income (Loss)    

Stock-based compensation charge related to restructuring 1.8 --

Restructuring, acquisition and integration-related costs 5.7 2.6

Purchase accounting adjustment 0.9 0.8

Class action lawsuit -- 1.1

Non-GAAP Operating Income (Loss) 7.9 6.6

Less non-cash items affecting Operating Income (Loss):    

Depreciation and amortization 3.9 2.2

Stock-based compensation expense 3.3 0.9

Cash Operating Income $15.1 $9.7

Excluding certain costs, overall operating income increased to $7.9 million in the third quarter compared to operating income of $6.6 million in the third quarter of 2011. The charges impacting operating income in the third quarter of 2012 include restructuring, acquisition and integration-related costs of $5.7 million, the adjustment to Udi's finished goods inventory of $0.9 million and additional stock-based compensation charges of $1.8 million related to the restructuring.  The charges impacting operating income in the third quarter of 2011 include the adjustment to Glutino's finished goods inventory of $0.8 million and costs associated with the Glutino acquisition of $2.6 million.  In addition, the Company settled a class-action lawsuit relating to the Company's Nucoa® stick margarine product, the sales of which represented less than 1% of the Company's sales, for $1.1 million in 2011.   Third quarter 2012 operating income was impacted by higher depreciation, amortization and stock compensation by approximately $4.1 million when compared to last year's quarter.

Cash operating income increased 55.7% to $15.1 million in the third quarter compared to $9.7 million in the prior year's quarter. Organic cash operating income increased 22.5%. The table below provides a reconciliation of GAAP operating income (loss) to cash operating income, a non-GAAP measure

Reconciliation of Certain Items Affecting Net  Income (Loss) and Earnings (Loss) Per Share (EPS) – Third Quarter

Net Income (Loss) ($ Millions) EPS (Loss) ($ Per Share) 2012 2011 2012 2011

Reported GAAP ($3.7) $1.1 ($0.06) $0.02

Add back certain items:        

Restructuring 1.4 -- 0.02 --

Stock-based compensation charge related to restructuring 0.9 -- 0.01 --

Acquisition and integration-related costs 1.7 2.2 0.03 0.04

Purchase accounting adjustment 0.5 0.7 0.01 0.01

Write-off of deferred loan costs 1.3 -- 0.02 --

Class action lawsuit -- 0.9 -- 0.01

Tax rate adjustment -- (1.4) -- (0.02)

Total certain items 5.8 2.4 0.09 0.04

         

Excluding certain items (Non-GAAP) $2.1 $3.5 $0.03 $0.06

Excluding the items noted above, net income in the third quarter of 2012 was $2.1 million, or $0.03 per share, compared with net income of $3.5 million, or $0.06 per share, in the year-ago quarter. In the third quarter of 2012, net income was impacted by higher interest, depreciation, amortization and stock-based compensation expense when compared to last year by approximately $4.3 million, or $0.07 per share.

 

2012 Outlook

 

The Company reaffirmed its outlook for 2012. For 2012, the Company continues to expect net sales in the range of $360 million to $370 million, gross margin in the 42% to 44% range, and cash operating income in the $53 million to $55 million range. 

In addition, for 2012 the Company continues to expect interest expense to be approximately $14 million and depreciation and amortization to be approximately $14 million. Given the increase in the Company's share price, however, the Company updated its estimate for stock-based compensation expense to be approximately $12.0 million, compared to its previous estimate of $9 million.

2013 Outlook

The Company reiterated its 2013 outlook initially provided on August 2, 2012. For 2013, the Company continues to expect net sales to be in the range of $440 million to $450 million and cash  operating income to be in the range of $70 million to $75 million. 

Commenting on the outlook for 2013, Mr. Hughes stated, "Our priorities for 2013 are to continue on our path of strong sales and profitable growth in our Natural segment, while maintaining strong profitability in the Smart Balance segment."

 

The Company provided the following specifics regarding its outlook for 2013:

  • The Company expects overall net sales growth in 2013 in the 20% to 25% percentage range versus 2012. The Company expects growth to be driven by the inclusion of Udi's on a full year basis and continued growth in Glutino and Earth Balance. Total net sales growth in Natural is estimated to be 45% to 50%. Organic net sales growth in Natural is estimated to be 15% to 20%. In addition, the Company expects the Smart Balance segment to grow in the low single digit range, driven by the benefit of Spreadable Butter. 
  • Gross profit margin for the year is expected to be in the 42% to 44% range as strong growth in the Natural segment will impact overall gross margin. 
  • Stock-based compensation expense is expected to be approximately $7 million in 2013.  
  • Capital expenditures in 2013 are expected to be approximately $13 million. Total depreciation & amortization is expected to be approximately $18 million.
  • Interest expense is estimated to be $19 million, reflecting a full year of increased debt, related interest rates and the amortization of deferred loan costs. 
  • The Company's tax rate is expected to be approximately 40% in 2013.

 

Original source: Smart Balance

Sectors: Bakery, Dairy, Financials

Companies: Smart Balance

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