Diamond Foods reports fiscal Q2 net loss of US$15.1M, compared to year-ago earnings of US$10.1M; net sales flat at US$220.6M

Nevin Barich

SAN FRANCISCO , March 11, 2014 (press release) – Diamond Foods, Inc. (DMND) ("Diamond") today reported financial results for its fiscal 2014 second quarter and six months ended January 31, 2014.

Second Quarter Fiscal 2014 Highlights

Net sales were approximately flat year-over-year at $220.6 million

Snacks sales increased 10.8% to $116.8 million and Nuts sales decreased 10.1% to $103.8 million

Gross margin was 25.4% compared to 22.9%

Net loss was $15.1 million and non-GAAP net income was $2.6 million

Adjusted EBITDA increased 24.4% to $28.6 million

Year-to-Date Fiscal 2014 Highlights

Net sales decreased 5.0% to $455.2 million

Snacks sales increased 5.9% to $229.3 million and Nuts sales decreased 14.0% to $225.9 million

Gross margin was 25.0% compared to 22.8%

Net loss was $57.2 million and non-GAAP net income was $7.6 million

Adjusted EBITDA increased 6.9% to $57.7 million

(All comparisons above are to the second quarter and first six months of fiscal year 2013. Non-GAAP financial measures are reconciled in the tables below)

"Overall we are pleased with our second quarter performance. Our consolidated gross margin improved 250 basis points reflecting strong sales growth and gross margin expansion in our Snacks segment. These results, however, were weighed down by lower sales and gross margin compression in the Nuts segment due to higher tree nut costs," said Brian Driscoll, President and CEO. "While we expect to face further headwinds in the Nuts segment in the second half of fiscal 2014, our team remains focused on the execution of our multi-year turnaround strategy and we are confident that we are taking the right steps to position our business for long-term sustainable growth."

Second Quarter Fiscal 2014

Net sales were comparable to the prior year at $220.6 million and gross profit as a percent of net sales was 25.4% compared to 22.9% last year.

Net loss was $15.1 million, or a loss of $0.68 per share on a fully diluted basis. During the quarter, Diamond incurred an $8.7 million charge for the mark to market adjustment related to shares issuable in connection with the settlement of the securities class action lawsuit and a $7.0 million charge related to a change in the fair value of the Oaktree warrant liability. Excluding these charges, non-GAAP net income for the second quarter was $2.6 million and non-GAAP fully diluted earnings per share was $0.09. Adjusted EBITDA was $28.6 million compared to $22.9 million in the prior year period. Adjusted EBITDA is a non-GAAP financial measure. Please refer to the tables in this press release for a reconciliation of all non-GAAP financial measures.

Year-to-Date Fiscal 2014

Net sales for the first six months of fiscal 2014 decreased 5.0% to $455.2 million compared to $479.3 million in the first half of last year, and gross profit as a percent of net sales was 25.0% compared to 22.8% last year.

Net loss was $57.2 million, or a loss of $2.60 per share on a fully diluted basis. Excluding certain charges, non-GAAP net income for the first six months of fiscal 2014 was $7.6 million and non-GAAP fully diluted earnings per share was $0.26. Adjusted EBITDA was $57.7 million, compared to $54.0 million last year. Adjusted EBITDA is a non-GAAP financial measure. Please refer to the tables in this press release for a reconciliation of all non-GAAP financial measures.

As of January 31, 2014, net debt outstanding was $551.8 million, including the Oaktree debt at its carrying value. Cash and availability on Diamond's bank revolving line of credit on January 31, 2014 was approximately $74.4 million.

Subsequent to the end of the second quarter, on February 19, 2014, the Company refinanced its debt capital structure. The Company issued $230 million of 7.000% Senior Notes due 2019 and entered into a $415 million 4.5 year syndicated secured Term Loan Facility. The proceeds from these offerings, in addition to the net proceeds from the exercise by Oaktree Capital Management, L.P. ("Oaktree") of its warrants, were used to prepay outstanding indebtedness under the Company's existing credit facility and to redeem its senior unsecured notes due 2020 held by Oaktree, including a prepayment premium, fees, expenses and original issue discount in connection with the refinancing.

The Company also closed a $125 million syndicated secured ABL Credit Facility. The ABL has a 4.5 year term, during which the Company may make aggregate drawings not to exceed the lesser of $125 million and an amount equal to the borrowing base specified in the ABL Credit Facility. The ABL Credit Facility may be used to finance working capital and the ongoing general corporate needs of the Company.

In addition to significantly reducing the Company's interest expense, this debt restructuring will also increase liquidity.

Segment Review

The Company has two reportable segments: Snacks and Nuts. The Snacks segment includes products sold under the Kettle U.S., Kettle U.K. and Pop Secret brands. The Nuts segment includes products sold under the Diamond of California and Emerald brands.

Snacks Segment: Net sales during the second quarter increased 10.8% to $116.8 million compared to prior year period. Gross profit during the second quarter was $42.5 million, 36.4% of net sales, compared to $34.8 million, 33.0% of net sales, in the prior year period.

Net sales during the first six months of fiscal 2014 were $229.3 million, a 5.9% increase compared to the first half of last year. Gross profit during the first six months of fiscal 2014 was $82.0 million, 35.7% of net sales, compared to $73.1 million, 33.8% of sales, in the prior year period.

Nuts Segment: Net sales during the second quarter decreased 10.1% to $103.8 million compared to the prior year period. Gross profit during the second quarter was $13.4 million, 12.9% of net sales, compared to $15.7 million, 13.6% of net sales, in the prior year period.

Net sales during the first six months of fiscal 2014 decreased 14.0% to $225.9 million compared to the prior year period. Gross profit during the first six months of fiscal 2014 was $31.9 million, 14.1% of net sales, compared to $36.0 million, 13.7% of net sales, in the prior year period.

Outlook

Despite continued headwinds associated with tree nut commodity costs in the second half of fiscal 2014 that will adversely impact the Nuts segment, the Company expects to realize an increase in Adjusted EBITDA year-over-year.

Conference Call

The Company will host a conference call with members of the executive management team to discuss these results with additional comments and details. The conference call is scheduled to begin today at 4:30 p.m. ET. To participate on the live call, listeners in North America may dial (877) 440-5803 and international listeners may dial (719) 325-4806.

In addition, the call will be broadcast live over the Internet hosted at the "Investor Relations" section of the Company's website at http://www.diamondfoods.com and will be archived online through March 25, 2014. A telephonic playback will be available from 7:30 p.m. ET, March 11, 2014, through March 25, 2014. North America listeners may dial (877) 870-5176 and international listeners may dial (858) 384-5517; the passcode is 3392096.

About Diamond Foods

Diamond Foods is an innovative packaged food company focused on building and energizing brands including Kettle(R) Chips, Emerald(R) snack nuts, Pop Secret(R) popcorn, and Diamond of California(R) nuts. Diamond's products are distributed in a wide range of stores where snacks and culinary nuts are sold. For more information, visit the Company's corporate web site: http://www.diamondfoods.com.

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