TreeHouse Foods (THS) Beats Q4 Earnings, Lags Sales Estimates

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TreeHouse Foods, Inc.THS released fourth-quarter 2018 results, with the bottom line beating the Zacks Consensus Estimate and improving year on year. The quarterly results gained from favorable pricing actions and savings initiatives such as TreeHouse 2020 and Structure to Win.

However, top-line performance in the reported period was dismal, thanks to SKU rationalization, McCann's divestiture as well as adverse impacts from volume/mix and currency fluctuation. Further, management anticipates volume losses in 2019, which are likely to impair sales.

Quarter in Detail

Adjusted earnings of $1.03 per share improved by a penny from the year-ago quarter's tally and beat the Zacks Consensus Estimate of 96 cents. In fact, the bottom line improved almost 5% from the mid-point of the previous guidance of 88 cents and $1.08. Savings from the Structure to Win initiative contributed significantly to the bottom line.

Net sales of $ 1,481.1 million missed the consensus mark of $1,493 million and tumbled almost 12.9% year over year. The downside was caused by rationalization of low margin SKUs and the divestiture of McCann's business. Excluding these impacts, sales fell 10.5%, primarily due to adverse volume/mix and foreign currency headwinds. These were somewhat compensated by favorable pricing.

TreeHouse Foods, Inc. Price, Consensus and EPS Surprise

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

Gross margin was 17.6%, up 240 basis points (bps) from the year-ago quarter's figure. The upside was propelled by reduced restructuring expenses as well as favorable pricing that was undertaken to counter higher commodity costs and tariffs.

Operating expenses declined 71.8% year on year. As a percentage of sales, the same declined 30.7 percentage points to 14.7%.

Further, adjusted EBITDAS inched up 0.1% to $162.8 million, driven by improved pricing, lower costs stemming from LIFO liquidation as well as gains from savings efforts. These were partially countered by increased production costs, unfavorable volume/mix, higher commodity costs and variable incentive compensation.

Segment Details

The company's reportable segments are organized by products and classified into Baked Goods, Beverages, Condiments, Meals and Snacks.

Baked Goods: Sales in the segment were almost flat year on year, owing to favorable impacts from pricing. These were partially offset by SKU rationalization, adverse volume/mix and currency. Direct operating income (DOI) margin in the segment advanced 40 bps to 14.4%, gaining from favorable pricing, lower product costs and lower SG&A expenses stemming from savings efforts. These were partially negated by higher commodity expenses, higher freight and adverse volume/mix.

Beverages: Sales fell 8.8% to $286.6 million due to efforts to rationalize SKUs, adverse volume and unfavorable pricing, stemming from stiff competition. During the reported quarter, DOI margin declined 10 bps to 17.8%, owing to higher production costs. These were partly compensated by better commodity costs and lower SG&A expenses.

Condiments: Sales in the segment fell 8.8% to $284.1 million as a result of SKU rationalization efforts, adverse volume/mix stemming from competition and currency headwinds. This was partially offset by improved pricing. DOI margin expanded 160 bps to 12.6%, primarily due to lower SG&A expenses (backed by cost-saving efforts), better pricing and lower LIFO liquidation related costs.

Meals: Net sales declined almost 10% to $262.8 million, owing to SKU rationalization efforts, impacts from the divestiture of McCann's business, adverse volume/mix stemming from competition and softness across various categories. However, the decline was partly compensated by improved pricing. DOI margin rose 160 bps to 14.4%. Growth was mainly driven by better pricing, lower operating costs and reduced SG&A expenses.

Snacks: Net sales in the segment plunged 34% to $260.2 million due to soft volumes and impacts from SKU rationalization actions, partly offset by better pricing.

Other Financial Updates

This Zacks Rank #3 (Hold) company concluded the reported quarter with cash and cash equivalents of $164.3 million, long-term debt of $2,297.4 million and total shareholders' equity of $2,141.9 million.

TreeHouse generated cash flow from operating activities of $505.8 million during 2018, while free cash flow amounted to $309.6 million.

The company bought back about 0.3 million shares for $54.6 million in the quarter. For 2018, the company repurchased 1.2 million shares.

2019 Outlook

Management plans to continue focusing on the TreeHouse 2020 initiative and consistent improvement in operations as well as information technology. Further, management expects revenue decline in the first half of 2019, due to volume loss. Nevertheless, the company is expected to attain revenue growth in the second half, on the back of private label growth.

That said, TreeHouse Foods anticipates adjusted earnings in 2019 in the range of $2.35-$2.75, up from $2.20 delivered in 2018. However, sales are projected in the range of $5.35-$5.75 billion, down from $5.81 billion in 2018. Further, adjusted EBIT is expected in the range of $290-$325 million.

Q1 View

Management expects first-quarter 2019 adjusted earnings in the range of 5-15 cents and net sales in the band of $1.27-$1.33 billion. Decline in the Snacks division is likely to drag quarterly performance.

Price Performance

The stock has gained 13.8% in the past three months, against the industry 's decline of 4.1%.

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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.

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

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