TreeHouse Foods, Inc. THS reported first-quarter 2018 results, wherein both top and bottom lines came ahead of estimates for the second time in a row. Though results were hurt by increased freight and commodity costs and divestiture of SIF (Canned Soup and Infant Feeding) business, the better-than-expected performance was a treat for investors. Also, management's retained view for 2018 even amid these challenges reflect its confidence in strategic growth initiatives. Markedly, shares of TreeHouse Foods gained 8.8% yesterday.
Let's see if the positive sentiment can sustain and help revive this Zacks Rank #4 (Sell) stock that has lost almost 48% in a year, compared with the industry
's decline of 17.3%.
Quarter in Detail
Adjusted earnings of 18 cents per share plunged considerably by 70.5% year over year. However, earnings surpassed the Zacks Consensus Estimate of 13 cents.
TreeHouse Foods, Inc. Price, Consensus and EPS Surprise
TreeHouse Foods, Inc. Price, Consensus and EPS Surprise | TreeHouse Foods, Inc. Quote
Net sales of $1,481.2 million came ahead of the Zacks Consensus Estimate of $1,428 million. Though sales dropped 3.6% year over year, it was mainly owing to the divestiture of the SIF business. Excluding the impact of divestiture and SKU rationalization efforts, sales climbed 1.9%, courtesy of favorable pricing and currency translations, partly offset by adverse volume/mix. Management blamed the year-over-year fall on soft volume/mix on Beverages, Meals, and Snacks units, along with SKU rationalization endeavors.
Gross margin was 15.7% in the quarter, down 290 basis points (bps) from the year-ago figure, due to higher cost of sales stemming from margin improvement initiatives and restructuring activities. Gross margin comparison was also impacted by the reimbursement received in the first quarter of 2017 from product recalls, which was absent this time. Further, gross margin was hurt by increased operating expenses, unfavorable mix and escalated commodity costs (particularly cashews, durum, almonds, packaging, eggs, and oils). These were partially offset by improved pricing.
Adjusted operating expenses, as a percentage of sales dipped 0.2 percentage points, thanks to savings from Structure to Win initiative, additional cost-saving efforts and lower amortization costs. This was somewhat negated by escalated freight costs. Adjusted EBITDA fell 30.6% to $106.8 million, while the adjusted EBITDA margin contracted 280 bps to 7.2%.
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 rose 1.4% to $346 million. This resulted from improved pricing, positive currency impact and better volume/mix - courtesy of greater distribution mainly in the cracker and cookies category. Direct operating income margin for the segment contracted 420 bps to 8.1% owing to escalated commodity, freight and warehouse expenses, somewhat cushioned by reduced operating costs.
Beverages: Sales tumbled 7% to $249.1 million, thanks to unfavorable volume/mix and pricing both largely owing to greater competition. During the quarter, direct operating income margin declined 610 bps to 15.8% owing to lower pricing, higher commodity expenses (mainly oil), adverse volume/mix and escalated freight costs. These were partially compensated by lower SG&A expenses.
Condiments: Sales for the segment rose 1.6% to $315.2 million as a result of positive pricing and foreign exchange rates, negated by unfavorable volume/mix. The latter was a result of SKU rationalization efforts and intense competition in the pickles, sauces and jams categories. Direct operating income margin declined 160 bps to 8.6%, primarily due to higher commodity costs (primarily eggs and packaging), increased operating costs and increased freight expenses. This was somewhat compensated by positive currency and reduced SG&A costs.
Meals: Net sales tanked 14.5% to $277 million primarily owing to the divestiture of the SIF business, along with adverse volume/mix stemming from competition. Sales were somewhat cushioned by improved pricing. Direct operating income margin increased 30 bps to 10.8%. The upside was mainly due to reduced operating expenses and a fall in SG&A, partly negated by increased commodity costs (mainly durum) and high freight costs.
Snacks: Net sales from the segment inched higher by 1.1% to $293.9 million, owing to improved pricing (related to commodity-based price increases), partially countered by unfavorable volume/mix due to competition. Direct operating income margin crashed 200 bps to 2.3% due to increased commodity costs (particularly of cashews), and greater freight and operating costs. These were partially compensated through lower SG&A expenses.
Other Financial Updates
The company concluded the quarter with cash and cash equivalents of $128.5 million, long-term debt of $2,533.2 million and shareholders' equity of $2,219.8 million.
Net cash from operating activities in the quarter was $57.8 million, while free cash flow was $16.4 million.
During the quarter, TreeHouse Foods bought back 0.4 million shares for $17.1 million and plans to make buybacks of $50 million under the plan. Apart from this, management speculates repurchasing additional shares up to $100 million in 2018.
2018 & Q2 Outlook
Management remains encouraged about exploiting the opportunities in the significant private label space. The company remains focused on curtailing costs and aligning capacities with consumer needs efficiently.
Further, management is on track with its TreeHouse 2020 initiative, which is expected to contribute operating margin growth of nearly 300 bps over the next three years, while it also expects annual savings of about $55 million from its Structure to Win plan.
However, increased freight and commodity costs are likely to remain headwinds for some time now. Management also expects volume/mix to remain unfavorable in the second quarter, due to SKU rationalization efforts. These factors, along with an expected operational drag raise concerns for the second quarter. Nevertheless, SG&A savings and amortization and tax gains should provide some respite.
That said, TreeHouse Foods reiterated its earnings guidance for 2018, alongside issuing a fresh view for the second quarter.
For 2018, the company continues to envision earnings in the band of $2.00 to $2.40 per share. The Zacks Consensus Estimate for 2018 currently stands at $2.07.
Management anticipates second quarter sales in a range of $1.3-$1.4 billion. Earnings for the second quarter are expected in the range of 20-30 cents per share, reflecting sequential improvement courtesy of favorable pricing, SG&A control and operational gains. The Zacks Consensus Estimate for the second quarter stands at 33 cents.
Unsure About TreeHouse Foods? Check These Food Stocks
Conagra Brands CAG with a long-term earnings per share growth rate of 8%, sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
United Natural Foods UNFI with a long-term earnings per share growth rate of 8.2%, flaunts a Zacks Rank #1.
MEDIFAST INC MED , with the same Zacks Rank as Conagra Brands, has delivered back-to-back positive earnings surprises in the past two quarters.
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