TreeHouse Foods: Reports Q2-2023 Financial Results

Oak Brook / IL. (thf) TreeHouse Foods Inc. reported financial results for Q2-2023. Financial highlights:

• Net sales of USD 843.6 million exceeded guidance expectations and increased by 4.1 percent versus the prior year.
• Net income from continuing operations of USD 21.7 million compares to net loss from continuing operations of USD (27.3) million in the prior year. Adjusted Ebitda from continuing operations of USD 76.4 million was at the high-end of the Company’s guidance range and increased by USD 23.3 million versus the prior year.
• Earnings (loss) per diluted share from continuing operations of USD 0.38 compares to USD (0.49) in the prior year. Adjusted earnings per diluted share from continuing operations of USD 0.42 compares to USD 0.05 in the prior year.
• TreeHouse raised its full year net sales outlook to 7.5 percent to 9.5 percent year-over-year growth, primarily reflecting the impact of the coffee acquisition, and narrowed its full year adjusted Ebitda outlook to USD 360 to USD 370 million.

«The transformative actions that we’ve taken have more strongly positioned TreeHouse in higher-growth, higher-margin categories and are reflected in our second quarter and first half results,» said Steve Oakland, Chairman, CEO and President. «We continue to leverage our position as a private brand powerhouse in snacking and beverages and remain focused on improved execution, which enabled us to deliver better-than-expected net sales and a nearly 44 percent increase in adjusted Ebitda from continuing operations, which was at the high end of our guidance. Looking forward, we expect to continue to benefit from our more focused portfolio, higher service levels and our strategic investments in capabilities, including our recently completed coffee acquisition. With favorable industry trends and a clear strategy, we are confident in achieving our near- and long-term financial goals and see a long runway for continued growth and value creation.»

Second Quarter 2023 Financial Results

Net Sales: Net sales for the second quarter of 2023 totaled USD 843.6 million compared to USD 810.2 million for the same period last year, an increase of USD 33.4 million, or 4.1 percent. The change in net sales from 2022 to 2023 was due to the following:

(unaudited)		Q2-2023		H1-2023
Pricing		11.2 %		13.9 %
Volume/mix		(7.2)		(3.9)
Total change in organic net sales		4.0 %		10.0 %
Acquisition		0.3		0.1
Foreign currency		(0.2)		(0.3)
Total change in net sales		4.1 %		9.8 %

The net sales increase of 4.1 percent was primarily driven by favorable pricing to recover commodity inflation. This was partially offset by decreased volume as a result of the Company’s ability to fulfill certain customer orders earlier than planned in the first quarter of 2023 due to service improvements. Additionally, declines in food and beverage consumption trends, the exit of lower margin business, and distribution losses contributed to the decrease.

Gross Profit: Gross profit as a percentage of net sales was 15.7 percent in the second quarter of 2023, compared to 13.7 percent in the second quarter of 2022, an increase of 2.0 percentage points. The increase is primarily due to the Company’s pricing actions to recover commodity and freight inflation experienced in prior periods. This was partially offset by increased costs to invest in the supply chain to improve service levels, which included increased costs for labor and manufacturing plant maintenance.

Total Operating Expenses: Total operating expenses were USD 103.3 million in the second quarter of 2023 compared to USD 136.7 million in the second quarter of 2022, a decrease of USD 33.4 million. The decrease is primarily due to USD 11.9 million of TSA income, lower professional fees for strategic growth initiatives, lower retention bonus expense, and lower freight costs.

Total Other (Income) Expense: Total other expense of USD 6.1 million in the second quarter of 2022 decreased by USD 7.2 million to be total other income of USD 1.1 million in the second quarter of 2023. The decrease was primarily due to USD 10.7 million of interest income received from the Company’s Note Receivable and favorable currency exchange rate impacts between the U.S. and Canada. This was partially offset by rising interest rates, which led to interest expense, higher costs with selling receivables in the Company’s Receivables Sales Program, and higher costs in our pension plans. Additionally, offsetting was a less favorable change in 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 29.1 percent in the second quarter of 2023 compared to 14.2 percent recognized in the second quarter of 2022. The change in the Company’s effective tax rate is primarily driven by the estimated amount of annual pre-tax earnings.

Net Income (Loss) from Continuing Operations and Adjusted Ebitda: Net income from continuing operations for the second quarter of 2023 was USD 21.7 million, compared to net loss from continuing operations of USD 27.3 million for the same period of the previous year. Adjusted Ebitda from continuing operations was USD 76.4 million in the second quarter of 2023, compared to USD 53.1 million in the second quarter of 2022, an increase of USD 23.3 million. The increase is primarily due to the Company’s pricing actions to recover commodity and freight inflation experienced in prior periods and lower freight costs. This was partially offset by increased costs to invest in the supply chain to improve service levels, which included increased costs for labor and manufacturing plant maintenance.

Discontinued Operations: Net income (loss) from discontinued operations was USD 1.6 million of income in the second quarter of 2023 compared to a USD 2.1 million loss in the second quarter of 2022, an increase of USD 3.7 million. The increase is primarily a result of the divestiture of a significant portion of the Meal Preparation business on October 3, 2022 and a favorable loss on disposal adjustment of USD 1.0 million during the first quarter of 2023 as the purchase price was finalized.

Net Cash Used in Operating Activities from Continuing Operations: Net cash used in operating activities from continuing operations was USD 49.8 million in the first six months of 2023 compared to USD 70.7 million in the first six months of 2022, a decrease in cash used of USD 20.9 million. The cash flow improvement was primarily attributable to higher cash earnings reflecting the Company’s pricing actions to recover commodity and freight inflation experienced in prior periods. This was partially offset by a decrease in cash flows from the Receivables Sales Program and payment timing in accounts payable.

Outlook

TreeHouse updated its previously-issued full year 2023 guidance:

• Net sales growth is now expected to be 7.5 percent to 9.5 percent year-over-year, which represents a range of USD 3.71 to USD 3.78 billion.
  • The increase primarily reflects the volume from the acquisition of the Northlake, Texas coffee facility that closed in June 2023.
• The Company narrowed its adjusted Ebitda range to USD 360 to USD 370 million, up approximately 27 percent year-over-year at the midpoint.
• Net interest expense is now expected to be USD 27 million to USD 32 million, due to increased usage of the Revolving Credit Facility to fund the aforementioned coffee acquisition and investment in inventory to service customers.

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

• TreeHouse expects third quarter revenue in the range of USD 950 to USD 970 million, representing approximately 10 percent year-over-year growth at the midpoint, primarily driven by volume/mix, including the volume from the coffee acquisition.
• The Company anticipates third quarter adjusted Ebitda in the range of USD 81 to USD 89 million, representing approximately 11 percent year-over-year growth at the midpoint.
• Full year adjusted Ebitda guidance reflects the following expectations for the fourth quarter:
  • Sequential and year-over-year improvement in gross margin primarily driven by TMOS and supply chain savings initiatives.
  • Approximately USD 5 million to USD 7 million in temporary operating expenses in the fourth quarter resulting from the expected wind down of substantial portions of the transition services agreement related to the Meal Preparation divestiture.