Shares of TreeHouse Foods, Inc. THS tumbled 12.9% yesterday, following the company's fourth-quarter 2017 results, wherein both top and bottom lines declined year over year. While earnings bore the brunt of soft sales and margins, revenues were mainly marred by divestiture of SIF business. Although earnings and sales topped estimates, management's bleak outlook for the first quarter and 2018 seems to have been a let-down for investors.
In fact, TreeHouse Foods has been off investors' good books for quite some time now, as the company's shares have lost 55% in a year, compared with the industry
's decline of 6.6%. Nevertheless, we believe that the company's TreeHouse 2020 initiative should improve this Zacks Rank #3 (Hold) company's performance over time.
Quarter in Detail
Adjusted earnings of $1.02 per share tumbled 10.5% year over year. However, earnings surpassed the Zacks Consensus Estimate of 93 cents and also came ahead of management's guidance range of 91 cents to $1.01.
Treehouse Foods, Inc. Price, Consensus and EPS Surprise
Treehouse Foods, Inc. Price, Consensus and EPS Surprise | Treehouse Foods, Inc. Quote
Net sales of $1,699.9 million came ahead of the Zacks Consensus Estimate of $1,686 million. However, sales declined 4.3% year over year mainly owing to the divestiture of the SIF (Canned Soup and Infant Feeding) business. The divestiture lowered revenues by approximately 6.7%. Excluding the impact of divestitures and an additional week of Private Brands, sales grew 2.4%, courtesy of favorable pricing, currency translations and volume/mix.
Gross margin was 15.3% in the third quarter, down 440 basis points (bps) from the year-ago figure, due to higher cost of sales stemming from margin improvement initiatives and restructuring activities. Further, gross margin was hurt by increased operating expenses, unfavorable mix and escalated commodity costs. These were partially offset by lower incentive compensation and depreciation.
Further, Adjusted EBITDA tumbled 22.6% to $162.7 million, due to higher operating costs. Adjusted EBITDA margin also contracted 230 bps to 9.6%.
The company's reportable segments are organized by products and are classified into Baked Goods, Beverages, Condiments, Meals, and Snacks.
Baked Goods: Sales from the segment decreased about 7% to $387.3 million. This resulted from divestiture impact and unfavorable pricing. Volume/mix remained flat in the quarter. Direct operating income margin for the segment contracted 160 bps to 14% owing to escalated operating expenses and an additional week of Private brands, somewhat compensated by reduced SG&A costs.
Beverages: Sales increased 4.3% to $314.3 million, thanks to favorable volume/mix owing to greater distribution. This was partially offset by unfavorable pricing, resulting from intense competition. During the quarter, direct operating income margin declined 510 bps to 17.9% owing to lower pricing, higher commodity expenses (mainly oil) and escalated operating costs (mainly freight). These were partially compensated by lower SG&A expenses.
Condiments: Sales for the segment rose 4.2% to $311.8 million as a result of favorable volume/mix, pricing and foreign exchange rates. Volume/mix gained from higher distribution of pickles, cheese and dressing categories. Direct operating income margin declined 210 bps to 11%, primarily due to higher commodity costs (primarily soybean oil), increased operating costs and absence of a one-time rebate recorded last year.
Meals: Net sales plunged 26.6% to $292.2 million owing to the divestiture of the SIF business, an additional week of Private Brands, adverse volume/mix in the ready-to-eat cereal category and unfavorable pricing. Both pricing and volume/mix bore the brunt of stiff competition. Nonetheless, direct operating income margin increased 70 bps to 12.8%. The upside was mainly due to sale of low-margin SIF business and lower depreciation, partly negated by increased commodity costs (mainly oats and durum).
Snacks: Net sales from the segment jumped 8.6% to $394.3 million, owing to better volume/mix (from higher distributions) and improved pricing (related to commodity-based price increases). Direct operating income margin crashed 490 bps to 0.3% due to unfavorable mix and increased commodity costs (particularly of cashews). These were partially compensated through lower SG&A expenses and better pricing.
Other Financial Updates
The company concluded the quarter with cash and cash equivalents of $132.8 million, long-term debt of $2,535.7 million and shareholders' equity of $2,263.3 million.
Net cash from operating activities in 2017 was $506 million, while free cash flow was $320.2 million.
During the fourth quarter, TreeHouse Foods launched its previously announced share repurchase plan and made buybacks of 0.6 million shares for $28.7 million. Management may continue with its repurchase program in 2018.
TreeHouse 2020 & More
The company remains on track with its TreeHouse 2020 Initiative, which is a strategic plan including various aggressive steps to manage the company's portfolio and optimize production and supply chain. The plan aims to improve the company's operating margin by 300 bps by the end of 2020, by undertaking complete business integration and expense reduction. The company expects to invest these savings in market-differentiated capacities to cater to consumers' ever-changing demands.
In this regard, the company made certain achievements in the first phase of the program. Incidentally, it closed plants in Plymouth, Indiana and Brooklyn Park, Minnesota. It also shut down 19 production lines permanently and removed 27% of its SKUs. This exceeded the company's target of removing 25%. Further, management chalked out various steps for 2018. In 2018, the company plans to close down certain facilities, shut down at least 15 production lines and roll out the TreeHouse Management Operating System to 12 plants.
Apart from this, TreeHouse completed a review of its SG&A and associated costs, along with a major global consulting firm. As a result, the company intends to curtail the company's salaried headcount by mid-2018. Well, the company anticipates savings of roughly $30 million in 2018.
While the company is on track with TreeHouse 2020 plan, the initiative is likely to take time to reflect in the company's overall results. The company expects the food and beverage space to evolve further in 2018, with transformation across stores and growth of e-commerce. Amid an evolving retail grocery scenario, management remains focused on simplifying, modifying and optimizing its production and distribution footprint. Management stated that it remains concentrated on augmenting top line, enhancing operating margins and generating robust free cash flow over time.
However, for 2018, the company anticipates net sales to dip by nearly $5.9-$6.1 billion owing to SKU reduction plans and sale of SIF business. EBIT is expected to come in a range of $265-$305 million, while the EBIT margin is likely to range from 4.5% to 5%. This reflects a decline from last year.
Effective tax rate is projected to decline, to 25-26% - thanks to the tax reforms. Consequently, earnings for the year are envisioned in the band of $2.00 to $2.40 per share. The Zacks Consensus Estimate for 2018 currently stands at $2.72.
Earnings for the first quarter are expected in the range of 10-20 cents per share, which also reflects a year-over-year decline due to soft volumes, operational inefficiencies, and the unfavorable timing of elevated commodity and freight costs with respect to pricing. The Zacks Consensus Estimate for the first quarter is projected way higher at 49 cents.
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