Oak Brook / IL. (thf) TreeHouse Foods Inc. reported fourth quarter GAAP earnings per diluted share from continuing operations of USD 0.27 compared to a GAAP loss per diluted share from continuing operations of USD (0.08) reported for the fourth quarter of 2018. The Company had adjusted earnings per diluted share from continuing operations [1] of USD 1.10 in the fourth quarter of 2019 compared to USD 1.00 in the fourth quarter of 2018.
“Our 2019 results demonstrated great progress. It’s important to recognize how much we accomplished in the past year – we provided consistently excellent service for our customers; we designed and stood up our commercial organization; we completed the majority of non-core asset sales; and we made great strides toward building our TreeHouse culture,” said Steve Oakland, Chief Executive Officer and President.
“Our efforts to improve business profitability are reflected in the full year 2019 results, as adjusted Ebit margin [1] expanded 90 basis points to 6.2 percent, despite revenue that was 6.5 percent lower,” said Bill Kelley, EVP and Chief Financial Officer. “Adjusted earnings per share growth of 21 percent to USD 2.39 demonstrates the hard work we have invested in continuous improvement, ongoing expense discipline, pricing execution, and debt reduction. Although underperformance in our Broth business drove a volume shortfall in the fourth quarter, we remain encouraged by our year-over-year profitability improvement across the company.”
[1] Adjusted earnings per diluted share from continuing operations, adjusted Ebit margin from continuing operations, adjusted Ebitda from continuing operations, organic net sales, and adjusted Ebitdas from continuing operations are Non-GAAP financial measures. See “Comparison of Adjusted Information to GAAP Information” for the definition of the Non-GAAP measures, information concerning certain items affecting comparability, and reconciliations of the Non-GAAP measures to the most directly comparable GAAP measure.
Outlook
“We continue to focus on our strategic goals in 2020,” continued Oakland. “This year, we will continue to drive the organization toward growth and improved profitability. While our pivot to growth is taking longer than originally anticipated due to the carryover impact of business that was lost last year, we believe we have the right plans in place to demonstrate consistent delivery of top line growth in the back half of 2020.”
The following are TreeHouse’s 2020 guidance ranges on a continuing operations basis:
- Adjusted earnings per diluted share from continuing operations of USD 2.40 to USD 2.65
- Net sales between USD 4.10 to USD 4.40 billion
- First half 2020 revenue expected to decline 3 percent to 5 percent due to approximately USD 175 – USD 200 million in revenue loss from the prior year that will carry over into 2020
- Second half 2020 revenue is anticipated to accelerate to 2 percent to 3 percent growth driven by innovation and new business wins in Meal Solutions and Baked Goods
- Adjusted earnings before interest, taxes, depreciation and amortization (“Ebitda”) from continuing operations [1] between USD 480 to USD 510 million
- Net interest expense between USD 93 and USD 97 million
- Effective tax rate of 22 percent to 24 percent
- Diluted weighted average shares outstanding of approximately 57 million shares
- Free cash flow of USD 250 to USD 300 million, with the priority for cash proceeds to reduce debt
In regard to the first quarter of 2020, the Company expects adjusted earnings per share in the range of USD 0.20 to USD 0.30 per diluted share from continuing operations and net sales in the range of USD 0.98 to USD 1.02 billion.
The Company is not able to reconcile prospective adjusted earnings per diluted share from continuing operations and prospective adjusted Ebitda (Non-GAAP) to the most comparable GAAP financial measure 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.
Fourth Quarter 2019 Financial Results
Net sales for the fourth quarter of 2019 totaled USD 1,139.5 million compared to USD 1,193.5 million for the same period last year, a decrease of 4.5 percent. The change in net sales from 2018 to 2019 was due to the following:
| Three Months | Twelve Months | |||||||||
| (unaudited) | Percent | Percentage Change in Pounds | Percent | Percentage Change in Pounds | ||||||
| Volume/mix excluding SKU rationalization | (4.0) | % | (5.1) | % | (5.6) | % | (7.2) | % | ||
| Pricing | 0.2 | – | 0.6 | – | ||||||
| Change in organic net sales [1] | (3.8) | % | (5.1) | % | (5.0) | % | (7.2) | % | ||
| SKU rationalization | (0.7) | (0.6) | (1.3) | (1.3) | ||||||
| Divestiture | – | – | (0.1) | (0.1) | ||||||
| Foreign currency | – | – | (0.1) | – | ||||||
| Total change in net sales | (4.5) | % | (5.7) | % | (6.5) | % | (8.6) | % | ||
.
Organic net sales decreased 3.8 percent in the fourth quarter of 2019 compared to the fourth quarter of 2018 driven by:
- Volume/mix was unfavorable 4.0 percent year-over-year due to decreases in all segments with the most significant decline in Meal Solutions, primarily due to lost distribution.
- Pricing was favorable 0.2 percent in the fourth quarter of 2019 compared to 2018, reflecting pricing actions to recover commodity, packaging, and freight inflation.
Our efforts to simplify and rationalize low margin SKUs from our product portfolio contributed 0.7 percent to the overall year-over-year decline in net sales, primarily within our Baked Goods segment.
Gross profit as a percentage of net sales was 19.8 percent in the fourth quarter of 2019, compared to 21.1 percent in the fourth quarter of 2018, a decrease of 1.3 percentage points. The decrease is primarily due to unfavorable volume/mix due to lost distribution and higher period expense associated with a change in regulatory compliance, partially offset by lower restructuring program expenses.
Total operating expenses as a percentage of net sales were 17.0 percent in the fourth quarter of 2019 compared to 16.6 percent in the fourth quarter of 2018, an increase of 0.4 percentage points. The increase is primarily attributable to the non-cash impairment charge of USD 41.1 million related to the announced sale of the Fridley, Minnesota and Lodi, California In-Store Bakery facilities. This increase was partially offset by lower restructuring program expenses and the associated cost savings, lower freight costs due to increased market capacity and a reduction in spot market usage, and lower variable incentive compensation.
Total other expense decreased by USD 43.9 million to USD 12.0 million in the fourth quarter of 2019 compared to USD 55.9 million in the fourth quarter of 2018. The decrease is primarily related to non-cash mark-to-market income from hedging activities in the fourth quarter of 2019 compared to mark-to-market expense in the fourth quarter of 2018, driven by interest rate swaps. Favorable fluctuations in currency exchange rates between the U.S. and Canadian Dollar during the respective periods and lower interest expense driven by lower net debt and the year-over-year reduction in LIBOR also contributed to the decrease in total other expense.
The Company’s fourth quarter 2019 effective income tax rate was 23.1 percent compared to (51.7) percent in the fourth quarter of 2018. The change in the rate year-over-year is primarily due to the overall impact of discrete items on low fourth quarter income before taxes in 2018 compared to 2019 and the revaluation of attributes and income tax receivables acquired in previous acquisitions.
Net income from continuing operations for the fourth quarter of 2019 was USD 15.3 million, compared to net loss from continuing operations of USD 4.4 million for the same period of the previous year. Adjusted Ebitdas [1] was USD 161.1 million in the fourth quarter of 2019, an increase of 4.9 percent compared to the fourth quarter of 2018. The increase in adjusted Ebitdas was primarily due to cost savings from TreeHouse 2020 and Structure to Win initiatives, lower freight costs due to increased market capacity and a reduction in spot market usage, and lower variable incentive compensation, partially offset by lower volume.
Net income from discontinued operations of USD 0.2 million increased USD 9.7 million in the fourth quarter of 2019 compared to the fourth quarter of 2018. The increase is driven by the timing of the Snacks division and RTE Cereal divestitures.
Our cash provided by operating activities from continuing operations was USD 263.9 million in 2019 compared to USD 472.1 million in 2018, a decrease of USD 208.2 million. The decrease is primarily attributable to lower accounts payable and higher incentive compensation payments partially offset by lower receivables due to higher use of the receivables sales program. Accounts payable decreased largely due to the settlement of payables retained as part of the divestiture of the Snacks division. The Company’s working capital management emphasis continues to be focused on reducing inventory, driving faster collection of receivables, and extending vendor terms.
The Company’s three and twelve months 2019 and 2018 results included certain items noted below that, in management’s judgment, affect the assessment of earnings period-over-period.
Reconciliation of diluted income (loss) per share from continuing operations to adjusted diluted earnings per share from continuing operations
| Three Months Ended December 31, | Twelve Months Ended December 31, | |||||||||||||||
| (unaudited) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Diluted income (loss) per share from continuing operations (GAAP) | USD | 0.27 | USD | (0.08) | USD | (1.96) | USD | (0.83) | ||||||||
| Impairment | 0.72 | – | 2.28 | – | ||||||||||||
| Restructuring programs | 0.27 | 0.82 | 1.87 | 2.95 | ||||||||||||
| Mark-to-market adjustments | (0.12) | 0.50 | 0.83 | 0.40 | ||||||||||||
| Litigation matter | – | – | 0.44 | – | ||||||||||||
| Change in regulatory requirements | 0.16 | – | 0.26 | – | ||||||||||||
| Multiemployer pension plan withdrawal | 0.01 | – | 0.08 | – | ||||||||||||
| Executive management transition | 0.05 | – | 0.05 | 0.23 | ||||||||||||
| Tax indemnification | – | (0.09) | 0.02 | (0.04) | ||||||||||||
| Acquisition, integration, divestiture, and related costs | 0.01 | 0.01 | 0.01 | (0.24) | ||||||||||||
| Product recall | – | – | 0.01 | – | ||||||||||||
| Foreign currency (gain) loss on re-measurement of intercompany notes | (0.04) | 0.08 | (0.09) | 0.11 | ||||||||||||
| Debt amendment and repurchase activity | – | – | – | 0.12 | ||||||||||||
| Taxes on adjusting items | (0.23) | (0.25) | (1.42) | (0.75) | ||||||||||||
| Dilutive impact of shares [2] | – | 0.01 | 0.01 | 0.02 | ||||||||||||
| Adjusted diluted EPS from continuing operations (Non-GAAP) | USD | 1.10 | USD | 1.00 | USD | 2.39 | USD | 1.97 | ||||||||
[2] As reported results for the twelve months ended December 31, 2019 and the three and twelve months ended December 31, 2018 reflect a loss, all equity awards were considered anti-dilutive and excluded from the EPS calculation. The corresponding adjusted amounts, however, reflect net income and equity awards are considered dilutive. Accordingly, adjustments are required to reflect total dilutive shares of 56.5 million compared to basic shares of 56.2 million for the twelve months ended December 31, 2019 and total dilutive shares of 56.5 million compared to basic shares of 56.0 million for the three and twelve months ended December 31, 2018.
Fourth Quarter 2019 Segment Results
| Three Months Ended December 31, | ||||||||||||||||||||||||
| Baked Goods | Beverages | Meal Solutions | ||||||||||||||||||||||
| (unaudited, Dollars in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
| Net sales | USD | 406.5 | USD | 425.2 | USD | 268.0 | USD | 286.6 | USD | 465.0 | USD | 481.7 | ||||||||||||
| Direct operating income | 53.9 | 53.0 | 44.2 | 51.0 | 63.9 | 67.6 | ||||||||||||||||||
| Direct operating income percent | 13.3 | % | 12.5 | % | 16.5 | % | 17.8 | % | 13.7 | % | 14.0 | % | ||||||||||||
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The change in net sales from the fourth quarter of 2018 to the fourth quarter of 2019 was due to the following:
| Three Months Ended December 31, | |||||||||||||||||||||
| Baked Goods | Beverages | Meal Solutions | |||||||||||||||||||
| (unaudited, Dollars in millions) | Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||
| 2018 Net Sales | USD | 425.2 | USD | 286.6 | USD | 481.7 | |||||||||||||||
| SKU rationalization | (7.7) | (1.8) | % | (0.1) | – | % | (0.2) | (0.1) | % | ||||||||||||
| Volume/mix excluding SKU rationalization | (12.5) | (3.0) | (7.7) | (2.7) | (27.3) | (5.6) | |||||||||||||||
| Pricing | 1.5 | 0.4 | (10.8) | (3.8) | 11.2 | 2.3 | |||||||||||||||
| Foreign currency | – | – | – | – | (0.4) | (0.1) | |||||||||||||||
| 2019 Net Sales | USD | 406.5 | (4.4) | % | USD | 268.0 | (6.5) | % | USD | 465.0 | (3.5) | % | |||||||||
.
Baked Goods
Net sales in the Baked Goods segment decreased USD 18.7 million, or 4.4 percent, in the fourth quarter of 2019 compared to the fourth quarter of 2018. The change in net sales was due to unfavorable volume/mix mostly from lost distribution related to In-Store Bakery, Bars, and Crackers, and the efforts to simplify and rationalize low margin SKUs. Partially offsetting the overall decline in net sales was a pricing increase of USD 1.5 million, or 0.4 percent, driven by pricing actions taken to recover commodity, freight, and packaging inflation, partially offset by increased trade spend.
Direct operating income as a percentage of net sales increased 0.8 percentage points in the fourth quarter of 2019 compared to the fourth quarter of 2018. This increase was primarily driven by cost savings due to TreeHouse 2020 and Structure to Win initiatives and lower freight costs due to increased market capacity and reduced spot market usage. These improvements were partially offset by lower volumes and higher period expense.
Beverages
Net sales in the Beverages segment decreased USD 18.6 million, or 6.5 percent, in the fourth quarter of 2019 compared to the fourth quarter of 2018. The change in net sales was due to unfavorable pricing and trade attributable to competitive pressure in Single Serve Beverages and unfavorable volume/mix primarily due to lost distribution mostly related to Single Serve Beverages, Broth, and Powdered Creamers.
Direct operating income as a percentage of net sales decreased 1.3 percentage points in the fourth quarter of 2019 compared to the fourth quarter of 2018. The decrease primarily resulted from unfavorable pricing and trade attributable to continued competitive pressure in Single Serve Beverages. These declines were partially offset by lower freight costs due to increased market capacity and reduced spot market usage, and lower selling, general, and administrative expenses driven by cost savings due to Structure to Win initiatives.
Meal Solutions
Net sales in the Meal Solutions segment decreased USD 16.7 million, or 3.5 percent, in the fourth quarter of 2019 compared to the fourth quarter of 2018. The change in net sales was due to unfavorable volume/mix primarily from lost distribution related to Pasta and Pickles and unfavorable foreign currency. These declines were partially offset by lower trade spend and pricing actions taken to recover commodity, freight, and packaging inflation.
Direct operating income as a percentage of net sales decreased 0.3 percentage points in the fourth quarter of 2019 compared to the fourth quarter of 2018. The decrease was primarily due to unfavorable volume/mix mostly due to lost distribution partially offset by reduced trade spend and pricing actions taken to recover commodity, freight, and packaging inflation.
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