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TreeHouse (THS) Tops Q2 Earnings, Cuts View on Soft Volumes

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TreeHouse Foods, Inc. (THS - Free Report) posted second-quarter 2017 results wherein adjusted earnings of 51 cents came ahead of the Zacks Consensus Estimate of 49 cents. Although earnings were within management’s guided range of 45–55 cents, the same had declined 15% from the prior-year earnings.

Results for the quarter were hurt by unfavorable market conditions, pricing lag from commodity cost increases and operating inefficiencies related to lower than anticipated volumes. Following the results, the company lowered its full year earnings guidance.

We note shares of this Illinois based company were down over 11% on Aug 3. In fact this Zacks Rank #4 (Sell) stock has decreased 25.9% in the past one year in comparison to the industry’s decline of 6.5%.

Quarter in Detail

Net sales of $1,522.2 million came below the Zacks Consensus Estimate of $1,540 million, witnessing a decline of 1.2% from last year. Sales during the quarter were mainly affected by the divestiture of the SIF (Canned Soup and Infant Feeding) business, resulting in 1.1% of the overall decline. Further, sales decreased due to unfavorable volume/mix, foreign currency fluctuations and pricing. These were partially offset by the gain arising from sunflower seed recalls. We note that sales came below the Zacks Consensus Estimate in three out of the trailing four quarters.

Gross margin was 18.2% in the second quarter, up 100 basis points (bps) from year-ago figure of 17.2%, primarily due to lower cost of sales. Product recalls contributed 1% towards reducing cost of sales.

Adjusted EBITDA decreased 4.1% to $148.5 million, mainly due to unfavorable pricing resulting from competitive pressures, higher commodity and operating costs as well as adverse volume/mix. These were partially offset by cost savings and reduction in variable incentive compensation.

Treehouse Foods, Inc. Price, Consensus and EPS Surprise


Segment Details

The company’s reportable segments are organized by products and are classified into Baked Goods, Beverages, Condiments, Meals, and Snacks.

Baked Goods: Sales from the segment increased 0.4% to $324.3 million. The segment gained 1.3% from favorable volume/mix, partially offset by a 0.7% decline in pricing and 0.2% decline in foreign currency. Direct operating income margin for the segment had declined 80 bps to 10% owing to higher operating costs and non-repeat of a rebate. The decrease was partially offset by lower commodity costs, freight and commission rate and cost savings.

Beverages: Sales increased 15.6% to $246.2 million as a result of favorable volume/mix. This was partially offset by unfavorable pricing and sale of a part of Tetra re-cart broth business, in relation to the divestiture of the SIF business. Direct operating income margin during the quarter had declined 90 bps to 24.5% primarily due to unfavorable pricing and commodities. These were offset by gains from cost savings and favorable volume/mix.

Condiments: Sales for the segment increased 1.3% to $344.9 million as a result of favorable volume/mix, pricing and lower trade spent. It was partially offset by unfavorable foreign exchange. For the quarter, direct operating income margin had declined 190 bps to 10.4% primarily due to higher commodity cost, packaging and operating costs. These were partially offset by cost savings in SG&A.

Meals: Net sales declined 9% to $288.4 million owing to the divestiture of the SIF business, adverse volume/mix primarily in the ready-to-eat cereal category and unfavorable pricing. Direct operating income margin had increased 240 bps to 11.7%. The surge was mainly due to favorable commodity costs, lower depreciation and SG&A cost savings.

Snacks: Net sales from the segment had declined 11.5% to $317 million, owing to adverse volume/mix, exit of low margin co-pack business and low merchandising support from customers. These were partially offset by favorable pricing. Direct operating income margin went down 210 bps to 3.2% due to unfavorable volume/mix, increased commodity costs and slightly unfavorable freight and commission rates.

TreeHouse 2020 Initiative

Along with the second quarter 2017 results, the company announced that it would launch the first phase of the comprehensive strategic multiyear plan, TreeHouse 2020. The plan has been designed to restructure and realign the business as a whole. Alongside of cost savings, the initiative is expected to improve management of the company’s category and customer portfolio along with optimizing supply chain.  The initiative is believed to improve the company’s operating margin by 300 bps by the end of 2020.

The initiative would be carried out through a series of phases in the next several years. The recently announced Phase 1 action would include closure of two manufacturing facilities and downsizing another. Restructuring charges associated with these actions would amount to $44.5 million, of which $29.7 million will be cash and $14.8 million will be non-cash.

2017 Outlook

TreeHouse continues to work diligently in order to improve their operational effectiveness and reduce cost structure. However, considering a difficult retail landscape, which has been negatively impacting the company’s volumes across all divisions, the company lowered its full-year guidance. Adjusted earnings for the full year are now expected in the band of $3.15–$3.30 per share compared to previously anticipated $3.50–$3.70. However, GAAP earnings for the full year are predicted in the range of $1.92–$2.07.

Adjusted earnings for the third quarter are expected in the range of 75–83 cents. The Zacks Consensus Estimate for the third quarter is however pegged higher at 90 cents.

Do Consumer Staples Stocks Interest You? Check These

Investors may consider better ranked stocks from the same sector such as Inter Parfums, Inc. (IPAR - Free Report) , Nu Skin Enterprises, Inc. (NUS - Free Report) and Constellation Brands, Inc. (STZ - Free Report) all carrying a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Inter Parfums has an average positive earnings surprise of 15.6% over the past four quarters. It has a long-term earnings growth rate of 12.3%.

Nu Skin has an average positive earnings surprise of 10.8% % over the past four quarters. It has a long-term earnings growth rate of 8.5%.

Constellation Brands has an average positive earnings surprise of 11.7% over the past four quarters. It has a long-term earnings growth rate of 18.2%.

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