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Will Soft Volumes Hurt TreeHouse Foods' (THS) Q3 Earnings?


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TreeHouse Foods, Inc. THS is scheduled to report third-quarter 2018 numbers on Nov 1, before the opening bell. This manufacturer of packaged foods and beverages has been battling cost pressures stemming from higher commodity and freight. Also, unfavorable volume/mix across most segments acts as a headwind to the company. Nevertheless, the company is on track with its TreeHouse 2020 initiative, which is expected to drive margins. Also, it is progressing well with its Structure to Win plan.

Notably, earnings of this manufacturer of packaged foods and beverages surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 21.1%. That said, let's see what's in store for TreeHouse Foods this time around.

How are Estimates Faring?

The Zacks Consensus Estimate for third-quarter earnings is pegged at 55 cents, reflecting a decline of 17.9% from the year-ago reported figure. We note that the consensus mark has been stable over the past 30 days. The Zacks Consensus Estimate for revenues stands at $1,442 million, down approximately 7% from $1,549 million registered in the year-ago period.

TreeHouse Foods, Inc. Price, Consensus and EPS Surprise

TreeHouse Foods, Inc. Price, Consensus and EPS Surprise | TreeHouse Foods, Inc. Quote

Let's delve deeper and find out the factors impacting the results.

Factors Distressing TreeHouse Foods' Performance

TreeHouse Foods' earnings surprise history has been favorable. However, it has been witnessing a year-over-year decline in top and bottom lines for five straight quarters now. Revenues in the second quarter of 2018 were mainly marred by the divestiture of SIF (Canned Soup and Infant Feeding) business and SKU rationalization. Also, sales were impacted by adverse volume/mix, which was a hurdle in the Baked Goods, Condiments and Meals segments.

Additionally, the company anticipates the SKU rationalization efforts and soft volumes across most of its divisions to hurt top-line growth in the third quarter as well as 2018. The Zacks Consensus Estimate for third-quarter revenues of Baked Goods, Beverages, Condiments, Meals and Snacks units is pegged at $330 million, $229 million, $319 million, $256 million and $309 million, respectively. This shows a decline of 6%, 6.5%, 4.5%, 10.2% and 7.2%, respectively, from sales recorded in the prior-year quarter. Moreover, management lowered its 2018 sales view and now expects the same to be lower by about $100 million, coming in at $5.8-$6 billion. This also makes us somewhat cautious about the company's upcoming performance.

Additionally, higher freight and commodity costs negatively impacted the company's direct operating income (DOI) margin that declined across most segments in the last reported quarter. Notably, DOI margins contracted in all segments except Condiments. Freight and commodity costs have hurt TreeHouse Foods' gross and EBITDA margins as well. Unfortunately, freight and commodity cost headwinds are expected to linger in 2018, which remains a threat for the impending quarter as well.

Will Growth Strategies Offset Hurdles?

TreeHouse Foods remains on track with its TreeHouse 2020 strategic plan that was announced in second-quarter 2017. The plan has been designed to restructure and realign the business as a whole. Apart from cost savings, the initiative is expected to manage the company's portfolio and optimize production and supply chain. We expect this strategy along with the company's Structure to Win program to help it battle cost-related worries.

Notably, the Structure to Win program is focused on aligning the company's SG&A expenses with its division structures. Management remains encouraged about prospects from this program, and expects savings from this program to be ahead of the original schedule of nearly $30 million in 2018.

Moreover, TreeHouse Foods has always been focused on expanding its product offerings through acquisitions. In this regard, the addition of Private Brands (in February 2016) aided revenues and helped the company lower debt. The company's other acquisitions include Flagstone Foods, PFF Capital Group, Inc. ("Protenergy"), Cains Foods, L.P., Associated Brands, and Naturally Fresh, Inc. The company expects to utilize its scale, management depth, integration expertise and access to capital to pursue both small and large acquisitions in future.

While these tailwinds as well as focus on healthy and organic products should provide some cushion to TreeHouse Foods, the aforementioned headwinds cannot be ignored.

What the Zacks Model Unveils

Our proven model does not conclusively show that TreeHouse Foods is likely to beat earnings estimates this quarter. This is because a stock needs to have both - a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) - for this to happen. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Although TreeHouse Foods has a Zacks Rank #3, its Earnings ESP of 0.00% makes surprise prediction difficult.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

The Hain Celestial Group, Inc. HAIN has an Earnings ESP of +5.66% and a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here .

The Kraft Heinz Company KHC has an Earnings ESP of +1.86% and a Zacks Rank #3.

Lamb Weston Holdings, Inc. LW has an Earnings ESP of +0.48% and a Zacks Rank #2.

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TreeHouse Foods, Inc. (THS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: THS , KHC , HAIN , LW



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