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TreeHouse Foods' (THS) Prudent Buyouts Help Navigate Challenges

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TreeHouse Foods, Inc. (THS - Free Report) has been battling supply-chain headwinds. The company has been bearing the brunt of macroeconomic challenges stemming from inflationary pressures and general economic concerns among consumers.  Apart from this, TreeHouse Foods has been incurring high operating expenses. However, the company’s TMOS initiatives and focus on refining its portfolio have been offering respite.

Hurdles on THS’ Path

In the fourth quarter of 2023, TreeHouse Foods’ sales declined 4.8% to $910.8 million due to the adverse volume/mix in the company’s retail business. This stemmed from supply-chain hurdles at one of the company’s broth facilities and in its pretzels and cookies categories. Planned distribution exits, mainly in the in-store bakery and coffee categories, also led to the sales decline.

Additionally, the gross margin of 16.7% contracted 1.6 percentage points from the year-ago quarter’s figure, mainly due to supply-chain hurdles, adverse fixed cost absorption due to soft volumes and elevated costs related to the maintenance of labor and manufacturing plants.

The prevailing macroeconomic hurdles have led to a decrease in overall category volumes. From a macro standpoint, management stated that it witnessed a decline in overall food and beverage consumption volumes over the past year (as of the fourth-quarter earnings call). The company does not expect any significant changes in the consumption landscape in the near future. Consequently, management does not anticipate a return to historical consumption patterns in 2024. These dynamics are likely to impact sales.

Management expects its first-half results to be hurt by its broth business. The company usually encounters lower sales during the first half of the year, with the second quarter marking its lowest volume period due to seasonal factors. Conversely, it typically observes higher sales in the second half of the year, particularly during the seasonally robust fourth-quarter period. Additionally, considering the limitations in the first half due to the broth facility, THS anticipates sales and adjusted EBITDA performance for 2024 to be more heavily weighted toward the second half compared to its historical pattern.

For the first quarter of 2024, net sales are projected in the range of $780-$810 million, which indicates a decline of nearly 7% at the midpoint. Management expects organic volume and mix to be down in the mid-single digits in the quarter, mainly due to capacity constraints at one of its broth facilities, along with deflationary pricing. That said, recent buyouts are likely to have a low-single-digit positive impact.

TMOS Initiatives Aid

The company remains committed to implementing TMOS and other supply-chain initiatives aimed at enhancing execution and margin performance. These endeavors have contributed to enhanced execution and margin performance, resulting in a 130-basis point expansion in the adjusted gross margin in 2023.

The ongoing advancements in these supply chain initiatives are expected to further bolster margins in the years ahead.  Furthermore, the company is in the initial stage of its procurement savings plan and remains on track to achieve gross supply chain savings of nearly $250 million through 2027, supporting its long-term growth operations.

Food Players Focused on Refining Portfolio

TreeHouse Foods has been focused on expanding its product offerings through acquisitions. In January 2024, THS bought Bick's pickles, Habitant pickled beets, Woodman's horseradish and McLarens pickled onions brands from The J.M. Smucker. In June 2023, TreeHouse Foods completed the acquisition of Farmer Brothers Company's Northlake, TX, coffee facility and non-Direct Store Delivery coffee business (known as Direct Ship). In April 2023, the company added seasoned pretzel capabilities to its portfolio. In December 2020, the company acquired the majority of Riviana Foods’ U.S.-branded pasta portfolio.

Several other food players have resorted to acquisitions to strengthen their portfolio. Hershey (HSY - Free Report) signed an agreement to acquire two production facilities from Weaver Popcorn Manufacturing in April 2023. The addition of Dot’s Pretzels (December 2021) has also been a perfect match for Hershey’s growing salty snacking portfolio. HSY’s acquisition of Lily's (June 2021) is also a significant addition to its portfolio.

Tyson Foods (TSN - Free Report) is another food player benefiting from buyouts. TSN acquired Williams Sausage Company in May 2023 to solidify its product portfolio and manufacturing capacity. The addition of Keystone Foods (November 2018) goes in tandem with Tyson Foods’ domestic and international growth strategy.

McCormick (MKC - Free Report) has strategically increased its presence through acquisitions to grow its portfolio. In December 2020, McCormick bought a 100% stake in FONA International, LLC and some of its affiliates. In November 2020, MKC also completed the acquisition of the parent company of Cholula Hot Sauce — a premium Mexico-based hot sauce brand. The buyout of Cholula accelerates McCormick’s growth potential across the condiment platform and widens the product portfolio in the hot sauce category.

Wrapping Up

While TreeHouse Foods expects its first-half results to be hurt by its broth business, it remains confident about its long-term position due to its relevant growth investments. It also expects sales and adjusted EBITDA for 2024 to be more skewed toward the second half. For 2024, TreeHouse Foods expects net sales in the band of $3.43-$3.5 billion, which indicates growth of nearly flat to 2% from the 2023 level.

Management expects organic volume and mix to be slightly positive in the year, offset by modest pricing deflation. However, gains from the recent acquisitions are likely to positively impact the volume and mix. For 2024, adjusted EBITDA from continuing operations is likely to be in the band of $360-$390 million in 2024 compared with the $365.9 million reported in 2023.

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