TreeHouse Foods: Reports Q3/2015 Results

Oak Brook / IL. (thf) TreeHouse Foods reported third quarter earnings of 0.65 USD per fully diluted share compared to 0.47 USD per fully diluted share reported for the third quarter of last year. The Company reported adjusted earnings per share in the third quarter of 0.86 USD compared to 0.89 USD in the third quarter of the prior year, excluding the items described below.

Items Affecting Diluted EPS Comparability

The Company’s 2015 third quarter results included three items that affect the assessment of earnings. The first item is a 0.13 USD per share loss on the foreign currency re-measurement of intercompany notes. The second item is a 0.05 USD per share expense for acquisition, integration and related costs. The final item is a 0.03 USD per share loss on non-cash mark-to-market adjustments.

Third Quarter 2015 Summary

«Third quarter volume/mix declined 4.3 percent on an organic basis, driven by lower volumes in most categories. Once again, we faced a difficult comparison to 2014 when we posted organic volume/mix growth in last year’s third quarter of approximately 4 percent. We continue to be encouraged by the margin progression we are seeing in our legacy product categories. Excluding coffee, we delivered year-over-year margin expansion of 70 basis points, as we carry out our internal efficiency initiatives and maintain focus on our cost structure», said Sam K. Reed, Chairman, President and Chief Executive Officer.

«We made excellent progress at Flagstone Foods in the quarter and are encouraged by the outlook for the remainder of the year. Additionally, while challenges in single serve beverages continue, the category appears to have stabilized. Despite the difficult third quarter, we are seeing some very positive developments as we head into the fourth quarter. In particular, we are continuing to land new customers and we are now seeing nice volume growth», continued Reed.

Adjusted earnings before interest, taxes, depreciation, amortization, and non-cash stock based compensation, or Adjusted Ebitda (a reconciliation to net income, the most directly comparable GAAP (generally accepted accounting principles in the United States) measure, appears on the attached schedule), was 99.8 million USD in the third quarter of 2015, a 3.6 percent decrease compared to the prior year. Adjusted Ebitda was lower this quarter due to competitive pressures in most categories (led by single serve hot beverages) and unfavorable foreign exchange.

Net sales for the third quarter totaled 798.6 million USD compared to 795.7 million USD last year, an increase of 0.4 percent, due to sales from acquisitions as an additional month of Flagstone results were in the third quarter of 2015 and not in 2014. Partially offsetting the increase in net sales was unfavorable volume/mix, foreign exchange and lower pricing. Compared to the third quarter of last year, sales in the third quarter of 2015 for the North American Retail Grocery segment increased 0.9 percent, sales for the Food Away From Home segment decreased 4.1 percent and sales for the Industrial and Export segment increased 1.5 percent.

Reported gross margins were flat at 19.9 percent in the third quarter this year compared to the third quarter of last year. In the third quarter of 2014, cost of sales included 9.6 million USD of acquisition and integration related costs. These costs were insignificant in the third quarter of 2015. After considering these items, gross margins decreased 120 basis points year-over-year due to the impact of a shift in legacy sales mix to lower margin products, reduced profitability associated with single serve hot beverages, unfavorable exchange rates on raw material purchases by the Company’s Canadian operations, lower margin sales from recent acquisitions and reduced pricing. These items more than offset gains from operational efficiencies and favorable input costs.

Selling, distribution, general and administrative expenses decreased 14.1 million USD in the third quarter of 2015, or 14.7 percent, to 81.4 million USD. As a percentage of net sales, these costs decreased from 12.0 percent in the third quarter of 2014, to 10.2 percent in the third quarter of 2015. Included in selling, distribution, general and administrative expenses are approximately 3.0 million USD and 8.9 million USD of acquisition and integration costs for the third quarter of 2015 and 2014, respectively. After considering the net decrease of acquisition and integration costs, selling, distribution, general and administrative expenses as a percent of net sales decreased 110 basis points from last year, due to reduced incentive compensation and other cost saving initiatives.

Amortization expense decreased slightly to 14.9 million USD in the third quarter of 2015, compared to 15.0 million USD in 2014, as the impact of a full quarter of amortization in 2015 from the Flagstone acquisition was offset by other intangible assets being fully amortized.

Other expense was 22.0 million USD for the third quarter of 2015, an increase of 4.8 million USD from 17.2 million USD in the same period last year. Net interest expense increased in the third quarter of 2015 resulting from an increase in average interest rates compared to the prior year. Loss on foreign currency exchange increased due to changes in U.S. and Canadian exchange rates. Additionally, other expense (income), net increased due to non-cash mark-to-market losses on derivative contracts in the third quarter of 2015 compared to gains in the third quarter of 2014.

Income tax expense increased in the third quarter to 11.8 million USD. The Company’s third quarter effective income tax rate decreased to 29.4 percent from the 2014 third quarter rate of 35.4 percent due to acquisition related expenses incurred in the third quarter of 2014 that were not deductible for tax purposes and a decrease in state tax expense.

Net income for the third quarter of 2015 totaled 28.4 million USD compared to 19.9 million USD in the previous year.

Fully diluted shares outstanding for the third quarter of 2015 increased to approximately 43.7 million shares compared to 42.0 million shares in the third quarter of 2014, primarily as a result of the equity offering completed on July 22, 2014, which financed, in part, the Flagstone acquisition.

Segment Results

• North American Retail Grocery – This segment sells branded and private label products to customers within the United States and Canada. These products include non-dairy powdered creamers; sweeteners; condensed, ready to serve and powdered soups, broths and gravies; refrigerated and shelf stable salad dressings and sauces; pickles and related products; Mexican and other sauces; jams and pie fillings; aseptic products; liquid non-dairy creamer; powdered drinks; single serve hot beverages; specialty teas; hot and cold cereals; baking and mix powders; macaroni and cheese; skillet dinners; and snack nuts, trail mixes, dried fruit and other wholesome snacks.
• Food Away From Home – This segment sells non-dairy powdered creamers; sweeteners; pickles and related products; Mexican and other sauces; refrigerated and shelf stable dressings; aseptic products; hot cereals; powdered drinks; and single serve hot beverages to foodservice customers, including restaurant chains and food distribution companies, within the United States and Canada.
• Industrial and Export – This segment includes the Company’s co-pack business and sales to industrial customers for use in industrial applications, including products for repackaging in portion control packages and for use as ingredients by other food manufacturers. This segment sells non-dairy powdered creamer; baking and mix powders; pickles and related products; refrigerated and shelf stable salad dressings; Mexican sauces; aseptic products; soup and infant feeding products; hot cereals; powdered drinks; single serve hot beverages; specialty teas; and nuts. Export sales are primarily to industrial customers outside of North America.

The direct operating income for the Company’s segments is determined by deducting manufacturing costs from net sales and also deducting direct operating costs, such as freight to customers, commissions, and direct selling and marketing expenses. Indirect sales and administrative expenses, including restructuring charges and other corporate costs, are not allocated to the business segments as these costs are managed at the corporate level.

North American Retail Grocery net sales for the third quarter of 2015 increased 0.9 percent to 597.8 million USD from 592.4 million USD during the same quarter of the previous year, driven by a 9.9 percent increase from acquisitions, partially offset by a 6.5 percent decrease in volume/mix and a 2.5 percent unfavorable impact from foreign exchange. During the third quarter, the Company experienced lower volumes from competitive pressures in a majority of its categories, led by single serve beverages, resulting in a negative volume/mix. Direct operating income margin in the third quarter increased to 14.0 percent in 2015 from 13.9 percent in 2014. Included in third quarter 2014 results was 8.8 million USD of acquisition and integration costs. These costs were insignificant in the third quarter of 2015. After considering these costs, direct operating income margin would have decreased 140 basis points due to a shift in sales mix to lower margin products, reduced profitability associated with single serve hot beverages, and the impact of unfavorable foreign exchange.

Food Away From Home net sales for the third quarter of 2015 decreased 4.1 percent to 94.6 million USD from 98.7 million USD during the same quarter of the previous year, primarily due to volume/mix decreases of 2.9 percent and the unfavorable impact of foreign exchange, partially offset by increased pricing. The Company posted a volume increase in the quarter in the Mexican and pasta sauces category that was more than offset by reductions in volumes of most other categories, reflecting increased competition. Direct operating income margin in the third quarter increased to 13.6 percent in 2015 from 12.5 percent in 2014 due to favorable input costs.

Industrial and Export net sales for the third quarter increased 1.5 percent to 106.3 million USD from 104.7 million USD during the same quarter last year, largely driven by a 7.2 percent increase in volume/mix, partially offset by unfavorable foreign exchange and reduced pricing. The volume/mix increase was primarily driven by the pickles and infant feeding products, while beverages (primarily single serve hot beverages) and soup products showed volume/mix declines. Direct operating income margin in the third quarter decreased to 15.2 percent in 2015, from 16.0 percent in 2014. Included in the third quarter of 2014 were 0.4 million USD of acquisition and integration costs that did not recur in 2015. After considering the decline in acquisition and integration costs year-over-year, direct operating income margin decreased 110 basis points from last year, primarily due to a shift in sales mix resulting from competitive pressures, primarily in single serve hot beverages.

Outlook

«Today we are reaffirming our full year adjusted earnings per share guidance of 3.00 USD to 3.15 USD», said Reed. «We see tremendous opportunity as we approach next year, as we integrate and welcome the ConAgra private brands business to TreeHouse. We are creating a company with nearly seven billion USD in revenue and approximately 700 million USD in Ebitda, whose size and scale will be unmatched in the private label food and beverage space. Along the way, we will remain steadfast to our mission to support our customers in their efforts to build their corporate brands and delight consumers by delivering value without compromise», Reed said (Image: pixabay.com).