TreeHouse Foods, Inc.THS reported better-than-expected first quarter 2016 results. However, it has tightened its earnings view for 2016 due to the lower margin structure of the acquired business of Private Brands.
This Illinois-based food company posted earnings per share of 48 cents per share in the first quarter of 2016. Earnings beat the Zacks Consensus Estimate of 40 cents by 20% and were way ahead of the company's guided range of 38 - 43 cents. However, earnings declined 18.6% from the year-ago level due to lower gross margin and currency headwinds.
The company's earnings will continue to be dampened by the acquisition of the Private Brands Business (closed in Feb 2016), which has a margin structure that is lower than the legacy TreeHouse business, thus resulting in the earnings decline.
Net sales of $1.270 billion beat the Zacks Consensus Estimate of $1.248 billion by 1.8%. Sales also grew significantly by 62.2% year over year due to the inclusion of business from the Private Brands acquisition, partially offset by lower volume/mix, primarily in the Industrial and Export segment, and currency headwinds.
All the segments posted strong growth on a year-over-year basis. North American Retail Grocery segment sales increased 72.1%. Sales from the Food Away From Home segment grew 27.5%; and sales from the Industrial and Export segment increased 35%.
Gross margin was 17.7% in the first quarter, down 180 basis points from 19.5% last year. The decline was due to lower margin business from the Private Brands acquisition and currency headwinds, which were partially offset by operational efficiencies and favorable input costs.
Adjusted EBITDA increased 48.2% to $125.2 million driven by the inclusion of operating income from the acquisition of the private brands operations of ConAgra Foods, Inc. CAG , operating efficiencies, and favorable commodity costs, partially offset by currency headwinds and lower legacy volumes.
In 2016, the company anticipates the overall food industry to face weakness and expects revenues for the industry to remain flat. TreeHouse plans to focus on integrating its recently closed acquisition of the Private Brands Business.
TreeHouse net sales are expected to double in 2016 to approximately $6.3-$6.5 billion, driven by the addition of the Private Brands Business. Gross margin is expected to be roughly flat year over year, as the profit contribution from the newly acquired Private Brands Business is below legacy margin levels. Foreign exchange headwinds will continue to challenge margins.
However, TreeHouse has tightened its full year earnings guidance to a range of $3.00 to $3.10, compared with $2.95 to $3.10 expected earlier.
Second Quarter Fiscal 2016
The company expects second quarter earnings to be weak due to the duplicative costs resulting from the Private Brands acquisition and its lower margin structure.
The company expects the trend of lower sales to continue in 2016. However, it expects better margins to continue into the second quarter as revenues from most of the Private Brands categories will begin to stabilize in the second half of the year.
As a result, second quarter adjusted earnings per share are expected to be in a range of 50 cents to 55 cents per share.
TreeHouse has a Zacks Rank #3 (Hold).
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