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TreeHouse Foods, Inc. (THS - Snapshot Report) reported third-quarter 2013 adjusted earnings of 82 cents per share, beating the Zacks Consensus Estimate of 77 cents by 6.5%. Adjusted earnings per share also surpassed the year-ago earnings of 70 cents by 17.1% backed by higher revenues in all its segments.

Adjusted earnings exclude expenses related to the restructuring of the company's soup operations, the closure of the Seaforth, Ontario, Canada salad dressing plant and integration costs related to the acquisition of Associated Brands (completed in Oct 2013).

Revenues and Margins

Total revenue increased 5.4% year over year to $567.2 million owing to acquisitions (Cains Foods and the aseptic cheese and pudding business from Associated Milk Producers Inc.), as well as higher volume and favorable mix. Revenues marginally beat the Zacks Consensus Estimate of $566.0 million.

Reported gross margin declined 70 basis points (bps) to 20.3% in the third quarter due to higher input costs, higher cost of sales from Cains Foods and costs associated with restructurings and facility consolidations. Operating income went down marginally by 0.4% to $41.2 million mainly due to higher selling, distribution, and general and administrative expenses, which were up 6.9% from the year-ago level.

North American Retail Grocery segment

Net revenue for the segment climbed 4.5% year over year to $401.9 million, driven by 2.3% increase in favorable volume/mix and 2.7% gains from the acquisition of Cains Foods. Strong performance in the single service beverage business and Mexican sauces boosted sales of the segment. Direct operating income margin in the reported quarter declined 20 basis points to 15.5% due to higher input costs and the inclusion of higher acquisition cost of Cains Foods, partially offset by lower freight costs. 

Food Away From Home segment

Net revenue for the segment climbed 7.8% year over year to $96.9 million owing to a 12.8% increase from acquisitions and pricing, partially offset by a 5.8% decrease in volume/mix.However, direct operating income margin plummeted 70 bps and came in at 13.4% due to higher input costs and higher cost of sales from the Cains Foods acquisition.

Industrial and Export segment

Net revenue for the segment went up 7.5% year over year to $68.4 million primarily driven by a 5.5% increase from acquisitions and a 2.3% increase in volume/mix. Direct operating income margin in the third quarter also increased 10 basis points to 17.7% due to lower freight costs and a shift in sales mix, partially offset by higher cost of sales from Cains Foods.

2013 Outlook

The company reaffirmed its adjusted earnings per share guidance in the range of $3.07 to $3.12 per share for 2013, including the contribution from the acquisitions of Cains Foods and Associated Brands. The guidance reflects the company’s initiatives to increase its operational efficiencies and cost reduction programs.

Takeover of Associated Brands

On Oct 8, TreeHouse acquired Associated Brands from privately-owned TorQuest Partners LLC and other shareholders for 187 million Canadian dollars (approximately $180 million) in cash. The buyout is expected to expand TreeHouse’s retail presence in private-label dry grocery.

The acquisition is expected to be accretive to 2014 results and will add approximately $200 million of sales and around 14 cents to 16 cents of earnings per share.

Our Take

TreeHouse presently carries a Zacks Rank #2 (Buy). Other food companies worth considering are Omega Protein Corp , Pinnacle Foods Inc. (PF - Snapshot Report) and Boulder Brands Inc (BDBD - Snapshot Report). While Omega Protein carries a Zacks Rank #1 (Strong Buy), Pinnacle Foods and Boulder Brands both hold a Zacks Rank #2 (Buy).

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