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David Rolfe Comments on Treehouse Foods

- By Holly LaFon

Treehouse Foods (THS) was one of our better performers in the first quarter. Remember that we added to our position on weakness in Q4, after what we viewed as a confluence of unfortunate, shorter-term events, plus we saw a lot of reassurance in the Company's Q4 report that our long-term thesis remains intact. In the fourth quarter, revenues rebounded in the acquired Private Brands business; the Company continued to deliver on Private Brands synergies and cost savings; and the legacy Treehouse business continued to report healthy volume growth, which was well ahead of the broad industry, along with improving margins. Furthermore, there were several signs within the quarter that large retailers were aggressively culling their business with major brands and shifting more shelf space to private label programs, as traditional branded food players continue to struggle with declining volumes, and as established retailers face competition from alternative retailers such as Aldi and Trader Joe's, both of which depend heavily on private label. This industry-wide shift to private label share has been trending for many years and remains a primary tenet of our long-term thesis for Treehouse, and this shorter -term plateau shift in share gains validates our longer-term thinking. Finally, we see it as likely that the Company should be able to deliver results ahead of market expectations as we move through 2017, given that the Company has factored roughly flat earnings growth in its legacy business into its full-year guidance, yet the strong results of this business in recent quarters, as well as the signs we are seeing of an acceleration in near-term private label share gains across the industry, lead us to believe that this guidance will prove conservative. Over the longer term, we remain believers in the Company's ability to deliver healthy growth in earnings and cash flows as it wrings value from the Private Brands acquisition, consolidates the growing private label industry, and diverts its internal resources to higher-growth/higher-margin categories while continually removing operating costs.

From David Rolfe (Trades, Portfolio)'s Wedgewood Partners first-quarter 2017 shareholder letter.
This article first appeared on GuruFocus.