TreeHouse Foods: Q3-2018 Results Above Guidance

Oak Brook / IL. (thf) TreeHouse Foods Inc. reported third quarter GAAP earnings per fully diluted share of USD 0.10 compared to a GAAP earnings of USD 0.50 reported for the third quarter of 2017. The Company reported adjusted earnings per fully diluted share1 of USD 0.62 in the third quarter of 2018 compared to adjusted earnings per share of USD 0.67 for the third quarter of 2017.

«Our Q3 results represent the third quarter in a row of delivering upon our financial commitments,» said Steve Oakland, Chief Executive Officer and President. «I continue to be impressed by the effort our organization is putting forth to deliver sequential operational progress and improve our business for the long-term. Our TreeHouse 2020 and Structure to Win (SG+A) initiatives and goals, which aim to properly align our cost structure across the business, remain on track as we continue the process of defining how we can best position ourselves to capitalize on private label growth across the food and beverage landscape.»

«I’m pleased with the quality of our results this quarter, as we delivered USD 0.62 in adjusted EPS, despite incurring higher expenses related to the hurricanes,» said Matthew Foulston, EVP and Chief Financial Officer. «Revenue decline in the quarter of 7.5 percent (excluding SKU rationalization impact of 2.3 percent and McCann’s divestiture of 0.2 percent) was slightly greater than anticipated, as favorable pricing of 1.7 percent was offset by volume/mix declines primarily within the Snacks and Meals divisions. Pricing fully covered higher commodity, packaging, and freight costs, and through the end of the third quarter we have more than achieved our full year Structure to Win goal of USD 30 million in savings.»

Outlook

«Our retail partners are passionate and committed to growing their private label presence, and I believe we have a wonderful opportunity to leverage the leadership positions we enjoy in our categories. Meanwhile, we must remain intently focused on outstanding customer service and operational excellence,» continued Mr. Oakland. «Our work to reinvigorate the strategic planning process, to allocate our resources according to our customers’ strategies and to refine our priorities continues to advance, and I look forward to communicating more details around our strategy, portfolio, and vision in December at our Investor Day.»

The Company further narrowed its 2018 guidance for adjusted earnings per fully diluted share to USD 2.05 to USD 2.25 and anticipates fourth quarter earnings in the range of USD 0.88 to USD 1.08 per fully diluted share. TreeHouse noted that while pricing related to Canadian tariffs is in place and will be reflected in the fourth quarter results, the Company does expect some ongoing headwind in the fourth quarter related to the impact of the hurricanes on both the operations and crop sourcing.

The Company is not able to reconcile adjusted earnings per fully diluted share (non-GAAP) to projected reported diluted earnings per share without unreasonable effort due to the inherent uncertainty and difficulty of predicting the occurrence, financial impact, and timing of certain items impacting GAAP results. These items include, but are not limited to, mark-to-market adjustments of derivative contracts, foreign currency exchange on the re-measurement of intercompany notes, or other non-recurring events or transactions that may significantly affect reported GAAP results.

Third Quarter 2018 Financial Results

Net sales for the third quarter of 2018 totalled USD 1,394.0 million compared to USD 1,548.8 million for the same period last year, a decrease of 10.0 percent. The change in net sales from 2017 to 2018 was due to the following:

(unaudited)		Three Months			Nine Months
SKU rationalization		(2.3)	%		(3.1)	%
Volume/mix excluding SKU rationalization		(8.9)			(2.9)
Pricing		1.7			1.4
Product recalls		(0.1)			(0.1)
Divestitures		(0.2)			(1.4)
Foreign currency		(0.2)			0.1
Total change in net sales		(10.0)	%		(6.0)	%

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The change in net sales was driven by the ongoing efforts to simplify and rationalize low margin SKUs, which contributed 2.3 percent to the year-over-year decline, and the divestiture of the McCann’s business in July 2018, which contributed 0.2 percent to the year-over-year decline. Excluding the impact of SKU rationalization and the McCann’s divestiture, net sales decreased 7.5 percent in the third quarter 2018 compared to 2017, driven by the following:

• Volume/mix was unfavorable 8.9 percent year-over-year mostly driven by declines in the Snacks and Meals segments.
• Foreign currency exchange was unfavorable 0.2 percent in the third quarter of 2018 compared to 2017.
• Included in third quarter 2017 net sales was a USD 1.7 million product recall reimbursement, which did not repeat in 2018, contributing a 0.1 percent decrease to the year-over-year change in net sales.
• Pricing was favorable 1.7 percent in the third quarter of 2018 compared to 2017, reflecting pricing actions to cover commodity, packaging, and freight inflation across most product categories.

Gross profit as a percentage of net sales was 16.3 percent in the third quarter of 2018, compared to 16.8 percent in the third quarter of 2017, a decrease of 0.5 percentage points. Of this decrease, 0.4 percentage points was related to USD 4.7 million of expenses for plant restoration costs related to a temporary shutdown at our Snacks plant in Robersonville, NC in the third quarter of 2018 and USD 3.2 million related to product recall reimbursement in the third quarter of 2017 that did not recur in 2018. This was partially offset by a reduction in expenses associated with restructuring programs to USD 7.2 million in the third quarter of 2018 compared to USD 10.2 million in 2017. The remaining 0.1 percentage point decrease was primarily due to unfavorable volume/mix, higher operating costs, including unanticipated hurricane expenses, higher freight costs, higher commodity costs, and higher variable incentive compensation, partially offset by pricing actions and lower costs resulting from a LIFO liquidation.

Operating expenses decreased USD 5.5 million, or 2.7 percent, in the third quarter of 2018 compared to the third quarter of 2017. Operating expenses as a percentage of net sales increased 1.1 percentage points to 14.1 percent in the third quarter of 2018 from 13.0 percent in the third quarter of 2017. Of this increase, 1.2 percentage points was mostly related to USD 28.4 million of expenses associated with restructuring programs and acquisition, integration, divestiture, and related activities in 2018, compared to USD 14.5 million of expense associated with restructuring programs and acquisition, integration, divestiture, and related costs in 2017. Excluding the impact of these costs, operating expenses as a percentage of net sales declined 0.1 percentage point year-over-year, primarily related to a savings from the Structure to Win initiative and other cost saving measures and a decrease in amortization expense reflecting the impairment of customer related intangible assets in the Snacks segment in the fourth quarter of 2017, partially offset by increased variable incentive compensation.

Total other expenses, which includes interest expense, interest income, loss (income) on foreign currency exchange, and other expense (income), net increased USD 3.2 million compared to the third quarter of 2017, mostly due to expenses associated with tax indemnification, unfavorable fluctuations between the U.S. and Canadian dollar during the respective periods, higher interest rates, and the write-off of USD 0.7 million of deferred debt issuance costs associated with the repurchase of the 2022 Notes and 2024 Notes in the third quarter of 2018. These increased expenses were partially offset by lower interest expense due to lower net debt, lower credit facility pricing from the December 1, 2017 credit agreement amendment, and higher non-cash mark-to-market gains from hedging activities.

Income tax (benefit) expense was a benefit of USD 5.2 million in the third quarter of 2018 compared to an expense of USD 1.3 million for the same period of 2017. The income tax benefit in the third quarter of 2018 was primarily driven by the release of certain tax reserves related to statute expirations of USD 6.7 million. In tandem with recognizing the USD 6.7 million tax benefit, during the third quarter of 2018 the Company wrote off USD 6.7 million of related tax indemnification asset, which was reflected in Other expense (income), net in the Condensed Consolidated Statements of Operations. The remaining fluctuation in the tax provision for the third quarter of 2018 compared to the third quarter of 2017 was primarily a result of the reduction in the U.S. Federal statutory tax rate, an increase in the amount of income tax benefit from the release of certain tax reserves, a reduction in the benefit from foreign tax credits on a year-over-year basis, and the overall impact of discrete items on low third quarter income before taxes. Our 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 income for the third quarter of 2018 was USD 5.4 million, compared to a net income of USD 28.8 million for the same period of the previous year. Adjusted EBITDAS2 was USD 132.5 million in the third quarter of 2018, a 10.5 percent decrease compared to the third quarter of 2017. The decrease in adjusted EBITDAS was primarily due to higher operating costs, unfavorable volume/mix, higher commodity costs, higher variable incentive compensation, partially offset by favorable pricing, lower costs resulting from a LIFO liquidation, and cost saving initiatives.

The Company’s share repurchase program continued in the third quarter with repurchases totaling USD 12.6 million, or 0.3 million shares. The Company plans to repurchase USD 55 million of shares through the plan (total annual cap of USD 150 million) throughout 2018. The extent to which the Company engages in discretionary share repurchases and the timing of such repurchases will depend on market conditions and other factors.

The Company’s third quarter 2018 results included certain items noted below that, in management’s judgment, affect the assessment of earnings period-over-period.

Reconciliation of diluted earnings (loss) per share to adjusted diluted earnings per share

(unaudited and each to September 30)		Q3/2018				Q3/2017				9M-2018				9M-2017
Diluted earnings (loss) per share per GAAP		USD	0.10			USD	0.50			USD	(0.87)			USD	0.40
Restructuring programs		0.80				0.35				2.37				0.68
CEO transition costs		–				–				0.23				–
Mark-to-market adjustments		(0.07)				(0.03)				(0.10)				0.01
Foreign currency (gain) loss on re-measurement of intercompany notes		(0.02)				(0.07)				0.03				(0.13)
Product recall reimbursement		–				(0.06)				–				(0.15)
Acquisition, integration, divestiture, and related costs		(0.17)				0.07				(0.15)				1.71
Debt amendment and repurchase activity		0.03				–				0.12				–
Tax indemnification		0.12				–				0.14				–
Plant restoration		0.08				–				0.08				–
Taxes on adjusting items		(0.25)				(0.09)				(0.69)				(0.73)
Dilutive impact of shares 3		–				–				0.01				–
Adjusted diluted EPS		USD	0.62			USD	0.67			USD	1.17			USD	1.79

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Baked Goods: The change in net sales in the Baked Goods segment in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to unfavorable volume/mix due to lost distribution from competitive pressure in the dough, crackers, and cookies categories combined with unfavorable mix, the ongoing efforts to simplify and rationalize low margin SKUs, and unfavorable foreign currency, partially offset by favorable pricing driven by commodity and freight inflation. The change in direct operating income margin in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to higher operating costs (including freight), higher commodity costs (wheat, eggs, and resin), and unfavorable volume/mix, partially offset by favorable pricing and lower selling, general, and administrative expenses from cost saving initiatives.

Beverages: The change in net sales in the Beverages segment in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to the ongoing efforts to simplify and rationalize low margin SKUs and unfavorable volume/mix in creamers, partially offset by category gains in broth. Pricing was unfavorable primarily due to competitive pressure in the single serve beverages category, partially offset by favorable pricing driven by commodity inflation. The change in direct operating income margin in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to a labor dispute and ensuing recovery at a creamer plant that has driven unfavorable volume/mix and higher operating costs, partially offset by lower freight costs due to improvements in logistics efficiency and lower selling, general, and administrative expenses from cost saving initiatives.

Condiments: The change in net sales in the Condiments segment in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to the ongoing efforts to simplify and rationalize low margin SKUs, unfavorable volume/mix due to competitive pressure in the pickles and preserves categories, and unfavorable foreign currency exchange rates, partially offset by favorable pricing driven by commodity inflation. The change in direct operating income margin in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to favorable pricing, lower costs resulting from a LIFO liquidation, and lower selling, general, and administrative expenses from cost saving initiatives.

Meals: The change in net sales in the Meals segment in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to unfavorable volume/mix from competitive pressure (principally in the ready-to-eat cereal, pasta, and dry dinner categories) and category softness (principally in the ready-to-eat cereal category), the ongoing efforts to simplify and rationalize low margin SKUs, and the divestiture of the McCann’s business in July 2018. These decreases were partially offset by favorable pricing driven by commodity and freight inflation. The change in direct operating income margin in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to favorable pricing and lower operating costs from plant closures and supply chain optimization activities, partially offset by an increase in selling, general, and administrative expenses due to advertising investments in the pasta category.

Snacks: The change in net sales in the Snacks segment in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to unfavorable volume from the expected loss of low margin business, competitive pressure in all categories (snack nuts, trail mix, and bars) combined with business interruption resulting from hurricane activity. Sales also decreased due to the ongoing efforts to simplify and rationalize low margin SKUs, partially offset by favorable pricing. The change in direct operating income margin in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to lower volume, higher operating costs, partially attributed to hurricane activity, and higher direct selling, general, and administrative expenses as a percentage of net sales due to the impact of fixed overhead costs that did not decrease proportionately with the decrease in net sales in the quarter, partially offset by Structure to Win savings combined with lower spend due to other cost saving activities.