TreeHouse Foods, Inc. THS released third-quarter 2019 results, with the top and the bottom line missing the Zacks Consensus Estimate. Also, earnings and sales declined year on year. Headwinds like SKU rationalization, adverse impacts from volume/mix and currency fluctuations affected the quarter’s outcome.
Dismal quarterly performance along with trimmed earnings expectations for 2019 dampened investors’ sentiments. Shares of the company fell 11.3% in yesterday’s trading session. We note that this Zacks Rank #4 (Sell) stock has lost 7% in the past three months against the industry’s rise of 3.1%.
Per management, performance in the reported quarter was affected by unexpected reductions in September orders and certain temporary operational disruptions. However, the quarter gained from prudent savings plans and pricing actions in some of the segments.
Quarter in Detail
Adjusted earnings from continuing operations amounted to 55 cents per share that missed the Zacks Consensus Estimate of 59 cents. The bottom line declined 3.5% from the year-ago quarter’s level of 57 cents.
Net sales of $1,057.3 million missed the consensus mark of $1,086 million and fell 5.4% year over year. The downside was caused by adverse impacts from SKU rationalization and currency fluctuations of 0.9% and 0.1%, respectively. Excluding these factors, organic sales fell 4.4% primarily due to adverse volume/mix of almost 4.7%. Pricing favorably impacted organic sales by almost 0.3%.
Gross margin came in at 17.6%, down 150 basis points (bps) from the year-ago quarter’s figure. The downside was caused by lower volumes and increased expenses related to change in regulatory requirements.
Total operating expenses increased 38.2% year on year. As a percentage of sales, the same increased 7.2 percentage points to 22.9%.
Further, adjusted EBITDA from continuing operations declined 2.6% to $118 million due to fixed cost impacts stemming from low volumes and related adverse impacts from fixed cost elements. These were partially offset by lower freight costs, savings from the Structure to Win and TreeHouse 2020 initiatives as well as efficient pricing actions.
TreeHouse Foods, Inc. Price, Consensus and EPS Surprise
TreeHouse Foods, Inc. price-consensus-eps-surprise-chart | TreeHouse Foods, Inc. Quote
The Snacks and the Ready-to-eat business segments have been categorized as discontinued operations from third-quarter 2019 onwards. On Aug 1, 2019, the company completed the divestiture of the Snack business to Atlas Holdings. Further, the sale of the ready-to-eat cereal business to Post Holdings, Inc. POST is on track, which is likely to be completed by the end of this year. The ready-to-eat cereal business is a component of the Baked Goods unit.
Baked Goods: During the third quarter sales in the segment fell 6.7% year on year to $351.8 million. The downside was caused by SKU rationalization, adverse volume/mix and currency. This was partially mitigated by favorable impacts from pricing. Direct operating income (DOI) margin in the segment advanced 20 bps to 8.7%, driven by favorable pricing and mix. These were partially negated by lower volumes.
Beverages: Sales fell 0.8% to $234.4 million due to efforts to rationalize SKUs and unfavorable pricing. These were partly mitigated by improved volume/mix. DOI margin declined 240 bps to 16.3% thanks to unfavorable pricing, partially countered by lower commodity costs.
Meals Solutions: Net sales declined almost 6.6% to $471.1 million thanks to SKU rationalization efforts, adverse volume/mix and currency rates. However, the decline was partly compensated by improved pricing. DOI margin declined 110 bps to 12.8% due to higher operating costs and fixed cost impacts stemming from lower volumes. These were partially mitigated by lower freight costs, savings from the TreeHouse 2020 and Structure to Win initiatives as well as lower SG&A expenses.
Other Financial Updates
The company concluded the reported quarter with cash and cash equivalents of $45.1 million, long-term debt of $2,158 million and total shareholders’ equity of $1,806 million.
For the first nine months of 2019, cash provided by operating activities amounted to $5.8 million.
Sales for 2019 are expected in the range of $4.26-$4.36 billion. Management now expects adjusted earnings from continuing operations for 2019 in the band of $2.30-$2.50 compared with the prior view of $2.33-$2.63. The Zacks Consensus Estimate for earnings for 2019 is currently pegged at $2.50.
Net sales for the fourth quarter of 2019 are expected in the band of $1.11-$1.21 billion, reflecting a decline of 3% at mid-point. Decline in volumes in the Baked Goods and Meals Solutions units is likely to dent quarterly performance and will be partially offset by growth in Beverages division.
Further, management expects fourth-quarter adjusted earnings from continuing operations in the range of $1.03-$1.23, suggesting a rise of 13% year on year at midpoint. The Zacks Consensus Estimate for earnings in the fourth quarter is pegged at $1.22.
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