TreeHouse Foods: Reports Second Quarter 2022 Results

Oak Brook / IL. (thf) TreeHouse Foods Inc. reported net sales of USD 1.20 billion which increased 19.4 percent compared to the second quarter of 2021. Net loss from continuing operations of USD (30.6) million compared to USD (5.2) million for the second quarter of 2021. Adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) from continuing operations was USD 66.5 million in the second quarter of 2022 compared to USD 92.6 million in the second quarter of 2021.

«I’m incredibly proud of our TreeHouse team as we delivered strong top-line results, reflecting the impact of our pricing and our ability to capture incremental volume in Snacking + Beverages,» said Steve Oakland, CEO and President. «The value proposition of private label is becoming increasingly important as consumers navigate this inflationary environment. In addition, the breadth of the retail landscape, improved quality and assortment, and our customers’ strategic commitment to private label are driving trial and share gains. Our unwavering focus on the customer over the last several years positions us well to build on this momentum to drive growth and profitability.»

«Our second quarter performance was very much in line with expectations,» said Patrick O’Donnell, Interim CFO and Chief Accounting Officer. «We are encouraged by robust demand for private label food and beverage and we are working diligently to improve service and execute pricing to recover inflation. Despite ongoing challenges related to labor and materials availability, we continue to make gradual progress toward improving profitability and believe we are on track to deliver our full-year guidance.»

Outlook

TreeHouse updated its guidance for fiscal 2022 as follows:

• Raised net sales growth to mid-to-high teens, primarily driven by pricing actions to recover inflation, and low single digit volume growth, as strengthening private label demand will be offset in part by labor and material availability.
• Reaffirmed adjusted Ebitda of USD 385 to USD 415 million, up approximately 5 percent year-over-year at the midpoint. The cadence of earnings is expected to be weighted toward the second half of the year, as we expect the impact of labor and supply chain disruption on our profitability and volume to be most prominent in the first half.

With regard to the cadence for the remainder of the year:

• TreeHouse expects between 50 and 100 basis points of sequential improvement in adjusted Ebitda margin in the third quarter.
• The Company has continued to work collaboratively with its customers to communicate and implement additional pricing to recover further inflation. These pricing actions will be effective late in the third quarter.
• TreeHouse believes the labor and supply chain environment will continue to be challenging in the back half of the year. Service levels will remain pressured as the Company’s efforts and investment to mitigate disruption are expected to drive gradual progress.
• Fourth quarter adjusted Ebitda margin improvement is expected to be driven by additional pricing, peak seasonality, and continued efforts to mitigate labor and supply chain disruption.

Second Quarter 2022 Financial Results

Net Sales – Net sales for the second quarter of 2022 totaled USD 1,197.6 million compared to USD 1,003.2 million for the same period last year, an increase of USD 194.4 million, or 19.4 percent.

The net sales increase of 19.4 percent was primarily driven by favorable pricing to partially recover commodity and freight cost inflation and increased volume within the Snacking + Beverages segment due to growing demand in private label as the consumer seeks lower priced alternatives in the inflationary environment. This was partially offset by labor and supply chain disruption, which constrained our ability to service demand.

Gross Profit – Gross profit as a percentage of net sales was 13.5 percent in the second quarter of 2022, compared to 16.6 percent in the second quarter of 2021, a decrease of 3.1 percentage points. The decrease is primarily due to incremental costs related to labor and supply chain disruption and inbound freight costs and commodity inflation, which was partially offset by favorable pricing actions to recover inflation. The declines were partially offset by favorable category mix, favorable fixed cost overhead absorption due to higher volume, and lower costs for purchases of personal protective equipment for employees and additional sanitation measures.

Total Operating Expenses – Total operating expenses were USD 183.6 million in the second quarter of 2022 compared to USD 162.0 million in the second quarter of 2021, an increase of USD 21.6 million. The increase is primarily attributable to professional fees of USD 19.5 million in connection with its portfolio optimization strategy and higher outbound freight costs of USD 12.6 million due to freight cost inflation and lower utilization of full truck load shipments due to supply chain disruption. This was partially offset by lower spend in our strategic growth initiatives and other restructuring programs, which consisted mostly of lower severance and professional fees, and lower integration costs associated with the 2020 pasta acquisition.

Total Other Expense (Income) – Total other expense (income) was USD 11.9 million in the second quarter of 2022 compared to USD 10.7 million in the second quarter of 2021, an increase of USD 1.2 million. The increase was primarily due to unfavorable foreign currency exchange rate impacts between the U.S. and Canadian dollar currency during the second quarter of 2022 when compared to the second quarter of 2021 and a higher average interest rate reflecting the year-over-year increase in LIBOR. This was partially offset by favorable non-cash mark-to-market impacts from hedging activities, largely driven by interest rate swaps.

Income Taxes – Income taxes were recognized at an effective rate of 8.9 percent in the second quarter of 2022 compared to 21.2 percent recognized in the second quarter of 2021. The change in the Company’s effective tax rate is primarily driven by the estimated amount of annual pre-tax earnings, a change in the income tax benefit from the release of tax reserves, and withholding taxes accrued in 2022.

Net (Loss) Income from Continuing Operations and Adjusted Ebitda – Net loss from continuing operations for the second quarter of 2022 was USD 30.6 million, compared to USD 5.2 million for the same period of the previous year. Adjusted Ebitda from continuing operations was USD 66.5 million in the second quarter of 2022, a 28.2 percent decrease compared to the second quarter of 2021. The decrease in adjusted Ebitda was primarily due to incremental costs related to labor and supply chain disruption and commodity and freight cost inflation, which was partially offset by favorable pricing actions to recover inflation. The declines were partially offset by favorable category mix and favorable fixed cost overhead absorption due to higher volume.

Discontinued Operations – Net income from discontinued operations decreased USD 12.4 million in the second quarter of 2022 compared to the second quarter of 2021. The decrease is due to the completion of the sale of the Ready-to-eat Cereal business on June 1, 2021.

Net Cash Used In Operating Activities From Continuing Operations – Cash used in operating activities from continuing operations was USD 26.6 million in the first six months of 2022 compared to USD 44.0 million in the first six months of 2021, a decrease in cash used of USD 17.4 million. The decrease was primarily attributable to an increase in cash flow from accounts payable due to improved working capital management, lower incentive compensation paid in the first quarter of 2022 compared to the first quarter of 2021 based on prior year performance, lower cash paid on interest due to debt refinancing in 2021, and an increase in cash flows from the Receivables Sales Program. This was partially offset by lower cash earnings, which reflect the impact of commodity and freight cost inflation. Working capital changes have been impacted by higher sales as a result of price increases in response to commodity and freight cost inflation, which have increased receivables and inventories. The Company’s working capital management emphasis continues to be focused on driving faster collection of receivables and extending vendor terms.

Second Quarter 2022 Segment Results

Meal Preparation: Net sales in the Meal Preparation segment increased USD 118.3 million, or 18.3 percent, in the second quarter of 2022 compared to the second quarter of 2021. The increase in net sales was primarily driven by favorable pricing to partially recover commodity and freight cost inflation. This was partially offset by lower volume due to labor and supply chain constraints.

Direct operating income as a percentage of net sales decreased 2.8 percentage points in the second quarter of 2022 compared to the second quarter of 2021. This decrease was primarily due to incremental costs related to labor and supply chain disruption and freight cost and commodity inflation, which was partially offset by favorable pricing actions to recover inflation. These declines were partially offset by favorable category mix and lower marketing spend.

Snacking + Beverages: Net sales in the Snacking + Beverages segment increased USD 76.1 million, or 21.4 percent, in the second quarter of 2022 compared to the second quarter of 2021. The increase in net sales was primarily driven by favorable pricing to partially recover commodity and freight cost inflation. Increasing private label demand resulted in strong category performance as the consumer seeks lower priced alternatives in the inflationary environment. However, volume growth was partially muted due to labor and supply chain disruption.

Direct operating income as a percentage of net sales decreased 1.4 percentage points in the second quarter of 2022 compared to the second quarter of 2021. The decrease was primarily due to incremental costs related to labor and supply chain disruption and freight cost and commodity inflation, which was partially offset by favorable pricing actions to recover inflation. The decrease was partially offset by favorable volume, category mix, and favorable fixed cost overhead absorption due to higher volume.