TreeHouse Foods, Inc. (THS - Free Report) reported third-quarter 2018 results, wherein both top and bottom lines dropped year over year and the former also fell short of the Zacks Consensus Estimate. Results were hurt by lower sales across all segments and soft margins. Adverse volume/mix, and increased freight and commodity costs continued to pose hurdles, while improved pricing provided some respite.
However, management narrowed its earnings guidance. Shares of TreeHouse lost 3.4% yesterday. In fact, this Zacks Rank #4 (Sell) stock has declined 11.1% this year compared with the industry’s drop of 8.3%.
Quarter in Detail
Adjusted earnings of 62 cents per share declined 7.5% year over year. This could be accountable to lower sales and margins. However, earnings comfortably surpassed the Zacks Consensus Estimate of 55 cents.
Net sales of $1,394 million missed the Zacks Consensus Estimate of $1,442 million and tumbled almost 10% year over year. The downside was attributable to rationalization of low margin SKUs and the divestiture of McCann's business.
Excluding these impacts, sales fell 7.5%, mainly owing to adverse volume/mix, stemming from softness in Meals and Baked Goods units, and foreign currency headwinds. This was somewhat compensated by favorable pricing.
Gross margin was 16.3%, down 50 basis points (bps) from the year-ago quarter due to plant restoration expenses associated with a temporary shutdown of the company’s Snacks plant in Robersonville. Absence of product recall reimbursement in third-quarter of 2018, unlike the same period last year, also impacted gross margin.
Further, gross margin was hurt by adverse volume/mix and escalated operating costs due to unexpected hurricane related expenses, escalated freight costs, increased commodity costs and greater variable incentive compensation. These factors were partly negated by reduced LIFO liquidation expenses and better pricing, which was undertaken to counter higher freight and commodity costs.
Operating expenses, as a percentage of sales, rose 1.1 percentage points to 14.1%, on account of costs related to restructuring plans as well as divestiture, buyouts and integration related expenses. Excluding these factors, operating expenses as a percentage of sales fell 0.1 percentage point, courtesy of Structure to Win savings, lower amortization costs and other cost-saving efforts. These were partly offset by higher variable incentive compensation.
Consequently, adjusted EBITDAS fell 10.5% to $132.5 million, while the adjusted EBITDAS margin was 9.5%.
The company’s reportable segments are organized by products and classified into Baked Goods, Beverages, Condiments, Meals and Snacks.
Baked Goods: Sales from the segment dropped 5.2% to $332.8 million. This resulted from the company’s continued efforts to rationalize SKUs and currency headwinds as well as adverse volume/mix due to heightened competition (mainly in the dough, crackers and cookies categories). This was partly negated by improved pricing.
Direct operating income margin for the segment contracted 280 bps to 10.6%, owing to escalated freight costs that led to higher operating expenses. Also, increased commodity costs and adverse volume/mix dented margin. This was partly cushioned by effective pricing and lower SG&A expenses, stemming from the company’s cost-saving efforts.
Beverages: Sales fell 3.5% to $236.3 million due to efforts to rationalize SKUs, adverse volume/mix and unfavorable pricing, stemming from stiff competition. During the reported quarter, direct operating income margin declined 240 bps to 18.7%, owing to adverse volume/mix and increased operating costs. These were partly compensated by better pricing, reduced freight costs and lower SG&A expenses.
Condiments: Sales for the segment declined 5% to $317.1 million as a result of SKU rationalization efforts, adverse volume/mix stemming from competition and currency headwinds. This was partially offset by improved pricing. Direct operating income margin expanded 530 bps to 15.6%, primarily due to reduced SG&A expenses (backed by cost-saving efforts), better pricing and lower LIFO liquidation related costs.
Meals: Net sales declined almost 11% to $253.7 million, owing to SKU rationalization efforts, impacts from the divestiture of McCann’s business, adverse volume/mix stemming from competition and softness across various categories. However, the decline was partly compensated by improved pricing.
Direct operating income margin rose 40 bps to 11.7%. The growth was mainly due to better pricing and lower operating costs as a result of plant closures and supply-chain optimization efforts. This was partially offset by a rise in SG&A expenses and higher advertising costs.
Snacks: Net sales from the segment plunged 23.6% to $254.1 million due to soft volumes, competition in all categories, impacts from hurricanes and SKU rationalization actions, partly made up by better pricing.
Other Financial Updates
The company concluded the reported quarter with cash and cash equivalents of $52.8 million, long-term debt of $2,333.1 million and shareholders’ equity of $2,189.7 million.
TreeHouse generated cash flow from operating activities of $270.5 million during the first nine months of 2018, while free cash flow amounted to $137.4 million.
The company bought back about 0.3 million shares for $12.6 million in the quarter. It plans to repurchase shares worth $55 million in 2018.
2018 & Q4 Outlook
Management is encouraged about exploiting the opportunities in the significant private label space. The company is focused on efficiently curtailing costs and aligning capacities per consumer needs. Management is on track with the TreeHouse 2020 initiative and its Structure to Win plan.
In fact, in the third quarter, the company generated Structure to Win savings, which exceeded its full-year target of $30 million. The company now expects that 2018 savings from this program can even exceed $55 million, which was the initial exit run-rate target.
Management stated that its pricing initiatives to counter Canadian tariffs are expected to continue yielding in the fourth quarter. In fact, pricing is likely to offset inflation in commodity, freight and packaging costs as well.
All said, TreeHouse Foods now projects earnings of $2.05-$2.25 per share for 2018 compared with the prior guidance of $2.05-$2.35. Moreover, sales are now expected to be near the lower end of the previously guided range of $5.8-$6 billion.
While pricing initiatives are likely to counter Canadian tariffs and other costs, the company expects impacts from hurricanes to weigh on operations and crop sourcing. Also, management expects third-quarter volume trends to linger in the fourth quarter, with Meals and Snacks divisions being exceptionally soft. For the fourth quarter, earnings are envisioned between 88 cents and $1.08 per share.
Check These Solid Food Stocks
Chefs’ Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 19%, carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
McCormick & Company, Inc. (MKC - Free Report) has long-term earnings per share growth rate of 9% and a Zacks Rank #2 (Buy).
Lamb Weston (LW - Free Report) , with a Zacks Rank #2, has long-term earnings per share growth rate of 11%.
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