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TreeHouse Foods (THS) Hurt by Cost Inflation, Pricing a Breather

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TreeHouse Foods, Inc. THS appears to be troubled by elevated cost concerns, mainly due to the higher cost of inputs. The company is also seeing tough volume comparisons with the year-ago period, which benefited from the initial pandemic-induced demand surge. These factors were visible in the company’s second-quarter 2021 results, wherein management also curtailed its guidance for the full year.

That being said, the company is on track with its pricing endeavors. Also, a higher away-from-home food demand has been aiding this manufacturer and distributor of private label packaged foods and beverages.

Roadblocks on TreeHouse Foods’ Path

TreeHouse Foods’ second-quarter 2021 results reflected a decline in both top and bottom lines. During the quarter, volume/mix fell 7.4% due to soft retail demand, which resulted from tough comparisons with the year-ago period’s burgeoning pandemic-induced demand. Volume/mix was also hurt by lower private label retail grocery demand in the second quarter, as the macroeconomic factors like government stimulus and elevated disposable income turned consumer purchasing behavior toward branded retail grocery. Apart from the above-mentioned factors, the volume/mix associated with the sale of two in-store bakery facilities had an adverse impact.

During the second quarter, gross margin came in at 16.6%, contracting 1.8 percentage points from the year-ago quarter’s figure. This decline was caused by lower volumes, inflated commodity costs, adverse channel mix and warehouse overflow storage expenses. Total operating expenses, as a percentage of sales, rose 0.3 percentage points to 16.2% as a result of the integration costs related to the recent pasta business buyout. The adjusted EBITDA from continuing operations slumped 23% to $96.7 million on account of soft volumes, adverse channel mix, commodity cost inflation and warehouse overflow storage costs. Management, on its second-quarter earnings call, said that it expects a further rise in commodity, freight, and packaging costs. The company predicts additional cost inflation of $40 million in 2021.

Several other food companies, such as Kellogg K, Conagra Brands CAG and The J.M. Smucker SJM, to name a few are battling input cost inflation. Coming back to TreeHouse Foods, management curtailed its 2021 sales and earnings guidance, on account of the revenue shortfall in the second quarter, constant volatility in the macroeconomic landscape, further rise in commodity, freight, and packaging costs as well as the timing lag associated with the impact of pricing to battle the elevated input costs. For the year, the net sales are now anticipated to be $4.20-$4.45 billion compared with the $4.40-$4.60 billion expected earlier. The adjusted earnings from continuing operations are expected to be $2.00-$2.50 per share now, down from the previously-guided range of $2.80-$3.20 per share.

Will Hurdles be Offset?

Management, on its second-quarter earnings call, noted that demand for private brands are likely to return to the historical growth levels once the environment normalizes and inflation converts to elevated prices. Apart from this, the company benefited from a higher demand for away-from-home food; distribution gains as well as sale of new products in the quarter. The Foodservice sales jumped 64%, thanks to the reviving away-from-home channel. With things opening up and restrictions being lifted, we believe the away-from-home food demand is likely to keep rising and serve as a tailwind.

Additionally, TreeHouse Foods’ second-quarter volumes received partial respite from favorable pricing impacts. The company’s pricing actions to battle commodity and freight cost inflation have been working well. The company, at its earnings call, stated that it intends to undertake further pricing in select categories, though the full impact of these actions is unlikely to be reflected in the company’s profits, until 2022. As for the pricing actions already implemented, those are expected to be reflected, starting the third quarter’s beginning and speed up in the year-end.


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