TreeHouse Foods: Reports First Quarter 2016 Results

Oak Brook / IL. (thf) TreeHouse Foods reported a first quarter GAAP loss of 0.06 USD per fully diluted share compared to earnings of 0.41 USD per fully diluted share reported for the first quarter of last year. The Company reported adjusted earnings per share in the first quarter of 0.48 USD compared to 0.59 USD in the first quarter of the prior year, excluding the items described below.

The Company’s 2016 first quarter results included four items noted below that, in management’s judgment, affect the assessment of earnings. The first item was a 0.51 USD per share expense for acquisition, integration, and related costs. The second item was a 0.06 USD per share expense for mark-to-market adjustments. The third item was a 0.05 USD per share expense for restructuring and facility consolidation costs. The final item was a 0.08 USD per share gain on the foreign currency re-measurement of intercompany notes.

Items affecting diluted EPS comparability	Q1/2016		Q1/2015
	(unaudited)		(unaudited)
Diluted EPS per GAAP	USD (0.06)		USD 0.41
Acquisition, integration, and related costs	0.51		0.02
Mark-to-market adjustments	0.06		–
Restructuring/facility consolidation costs	0.05		–
Foreign currency (gain) loss on re-measurement of intercompany notes	(0.08)		0.16
Adjusted EPS	USD 0.48		USD 0.59

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«We delivered sequential progress in the first quarter and are off to a solid start, despite the ongoing challenges of a stagnant retail landscape», said Sam K. Reed, Chairman, President and Chief Executive Officer. «In the first quarter, growth in retail single-serve coffee and broad gains in snacks led our combined Bay Valley Foods and TreeHouse Private Brands organization, while our cold season products such as non-dairy creamers, hot cereal, and soup were negatively affected by the unseasonably warm weather».

«I am very pleased with the progress our teams are making integrating the Private Brands business, and our sense of functional unity is growing», continued Reed. «Our Private Brands team is already making great progress in customer service improvements and is starting to regain lost distribution that resulted from past service issues. Our integration activities are on track and on budget as a result of the strong collaboration of our teams during the transition».

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 125.2 million USD in the first quarter of 2016, a 48.2 percent increase compared to the same period in the prior year. The increase in Adjusted Ebitda this quarter was driven by the inclusion of operating income from the acquisition of the private brands operations (Private Brands) of ConAgra Foods Inc., operating efficiencies, and favorable commodity costs, partially offset by unfavorable Canadian foreign exchange and lower legacy volumes.

Net sales for the first quarter totaled 1’270.2 million USD compared to 783.1 million USD last year, an increase of 62.2 percent, due to the inclusion of business from the Private Brands acquisition, partially offset by lower volume/mix, primarily in the Industrial and Export segment, and unfavorable Canadian foreign exchange. Compared to the first quarter of last year, sales in the first quarter of 2016 for the North American Retail Grocery segment increased 72.1 percent; sales for the Food Away From Home segment increased 27.5 percent; and sales for the Industrial and Export segment increased 35.0 percent.

Reported gross margins were 17.7 percent in the first quarter of 2016 compared to 19.5 percent in the first quarter of the prior year.  The decrease in gross margin as a percent of net sales was primarily due to lower margin business from the Private Brands acquisition, which contributed 130 bps toward the decline. The remaining decline was primarily due to the unfavorable impact of Canadian foreign exchange partially offset by operational efficiencies and favorable input costs.

Selling, distribution, general and administrative expenses increased 89.9 million USD in the first quarter of 2016, or 99.7 percent, to 180.1 million USD. As a percentage of net sales, these costs increased from 11.5 percent in the first quarter of 2015 to 14.2 percent in the first quarter of 2016. Included in selling, distribution, general and administrative expenses are approximately 33.0 million USD and 0.7 million USD of acquisition and integration costs for the first quarters of 2016 and 2015, respectively. After considering the impact of acquisition and integration costs in each year, selling, distribution, general and administrative expenses as a percent of net sales increased marginally to 11.6 percent of net sales in the first quarter of 2016, compared to 11.4 percent in the first quarter of 2015, due to duplicative operating costs associated with the Private Brands acquisition and general growth of the business.

Amortization expense increased to 23.8 million USD in the first quarter of 2016, compared to 15.3 million USD in 2015, due entirely to the Private Brands acquisition.

Other operating expense increased by 1.5 million USD in the first quarter of 2016, compared to 2015. The increase was due to higher costs associated with restructurings, as the Company announced the closure of the City of Industry, California facility in the fourth quarter of 2015 and began to incur charges related to the closure.

Other expense was 23.7 million USD for the first quarter of 2016, an increase of 2.8 million USD from 20.9 million USD in the same period last year. Net interest expense increased in the first quarter of 2016 versus the prior year due to higher debt levels and higher average interest rates resulting from financing the Private Brands acquisition. The Company recorded a gain on foreign currency exchange of 4.1 million USD in the first quarter of 2016 compared to a loss on foreign currency exchange of 11.4 million USD in the prior year due to changes in Canadian exchange rates. Additionally, the change in other expense (income), net was primarily due to non-cash mark-to-market losses on derivative contracts in the first quarter of 2016 compared to gains in the first quarter of 2015.

Income taxes were recorded at an effective rate of 30.0 percent and 30.8 percent for the three months ended March 31, 2016 and 2015, respectively. The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

Net loss for the first quarter of 2016 totaled 3.3 million USD compared to net income of 17.9 million USD in the previous year.

Fully diluted shares outstanding for the first quarter of 2016 increased to approximately 52.7 million shares compared to 43.6 million shares in the first quarter of 2015. The increase is due to the weighted average impact of 13.3 million shares issued on January 26, 2016 in a public offering of the Company’s common stock, with the net proceeds of such offering used to partially fund the Private Brands 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; mayonnaise; pickles and related products; Mexican, barbeque, and other sauces; table and flavored syrups; jams and pie fillings; aseptic products; liquid non-dairy creamer; powdered drinks; single serve hot beverages; specialty teas; ready-to-eat and hot cereals; baking and mix powders; macaroni and cheese; pasta; skillet dinners; in-store bakery products; refrigerated dough; retail griddle waffles, pancakes and French toast; cookies, crackers, pretzels, pita chips, and candy; snack nuts, bars, trail mixes, cereal snack mixes, fruit snacks, dried fruit, and other wholesome snacks.
• Food Away From Home – This segment sells non-dairy powdered creamers; sweeteners; pickles and related products; Mexican, barbeque, and other sauces; table and flavored syrups; refrigerated and shelf stable dressings; mayonnaise; aseptic products; ready-to-eat and hot cereals; pasta; retail bakery products; cookies, crackers, pretzels, and candy; snack nuts; fruit snacks; 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 non-dairy powdered creamer 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 primarily sells non-dairy powdered creamer; baking and mix powders; pickles and related products; refrigerated and shelf stable salad dressings; Mexican and barbeque sauces; aseptic products; soup and infant feeding products; ready-to-eat and hot cereals; powdered drinks; single serve hot beverages; specialty teas; pasta; retail griddle waffles, pancakes, and French toast; cookies, crackers, pretzels, and candy; snack nuts; bars; and other products. 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 first quarter of 2016 increased 72.1 percent to 1’019.3 million USD from 592.4 million USD during the same quarter of the previous year, driven by a 73.5 percent increase due to the Private Brands acquisition, partially offset by a 1.3 percent unfavorable impact from foreign exchange. Volume/mix was relatively flat year-over-year as higher volume/mix of single serve beverages, dressings, tea, and snacks were offset by lower volume/mix in most other product categories due, in part, to unseasonably warm weather.  Direct operating income margin in the first quarter decreased 50 bps to 12.6 percent in 2016 from 13.1 percent in 2015. This decrease is primarily due to lower margin Private Brands business which contributed 80 bps to the decline, and unfavorable foreign exchange, partially offset by operational efficiencies and favorable commodity costs.

Food Away From Home net sales for the first quarter of 2016 increased 27.5 percent to 112.6 million USD from 88.3 million USD during the same quarter of the previous year, driven primarily by a 27.1 percent increase due to the Private Brands acquisition. Volume/mix contributed 0.3 percent to the improvement of net sales as volume/mix increases in the aseptic and hot cereals categories were partially offset by decreases in the pickles and other sauces categories.  Direct operating income margin in the first quarter increased to 14.1 percent in 2016 from 13.6 percent in 2015, primarily due to favorable input costs and operating efficiencies, partially offset by unfavorable Canadian foreign exchange. The addition of the business from the Private Brands acquisition did not significantly impact direct operating income margin.

Industrial and Export net sales for the first quarter of 2016 increased 35.0 percent to 138.3 million USD from 102.5 million USD during the same quarter of the prior year, primarily driven by a 45.9 percent increase from the Private Brands acquisition, partially offset by unfavorable volume/mix and pricing. Volume/mix was lower due to competitive pressures primarily in the single serve beverages and soup and infant feeding categories, partially offset by an increase in pickles and non-dairy creamer.  Direct operating income margin in the first quarter decreased to 15.3 percent in 2016, from 21.0 percent in 2015. The inclusion of lower margin business from the Private Brands acquisition contributed 210 bps to this decline with the remainder of the decrease primarily driven by competitive pressures in the single serve beverages and soup and infant feeding categories.

Outlook

«As we look to the balance of the year, we continue to believe that we have a wealth of opportunities ahead», said Reed. «We are showing very good progress, but we also recognize that we have a great deal of work to do toward building our TreeHouse culture of growth.  The breadth and scope of our private label platform is extraordinary and unmatched in the industry, and we will continue to support our customers and their efforts to build their corporate brands, while offering consumers the best combination of choice and value».

With regard to the second quarter of 2016, the Company expects the second quarter year-over-year earnings comparisons will be challenged, similar to the first quarter, due to the duplicative costs resulting from the Private Brands acquisition and the lower margin structure the new business has compared to the legacy TreeHouse business. Therefore, second quarter adjusted earnings per share is expected to be in the range of 0.50 USD to 0.55 USD per share. In regard to the full year, TreeHouse tightened its full year guidance to a range of 3.00 USD to 3.10 USD in adjusted earnings per share in 2016.