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TreeHouse Foods (THS) Q3 Earnings Beat Estimates, Sales Lag

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Zacks Equity Research
·6 min read
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Shares of TreeHouse Foods, Inc. THS grew more than 3% in the premarket trading session on Nov 5, following third-quarter 2020 results, wherein the bottom line beat the Zacks Consensus Estimate while sales lagged the same. Results gained from an unexpected rise in demand amid the coronavirus pandemic, which compensated for softness in the food-away-from-home business. Further, the Zacks Rank #3 (Hold) company revised its financial guidance for 2020 and issued fourth-quarter view.

Quarter in Detail

Adjusted earnings from continuing operations amounted to 71 cents per share that surpassed the Zacks Consensus Estimate of 61 cents. Further, the bottom line advanced 29% year over year.

Net sales of $1,045.7 million came below the consensus mark of $1,066 million and declined 1.1% year over year. Organic sales grew 0.7% owing to higher volume/mix, backed by elevated retail demand due to the pandemic, which countered distribution loss impacts and weak demand in the food-away-from-home channel. Also, better pricing efforts, particularly in the Snacking & Beverages segment, contributed to quarterly growth.

Gross margin came in at 18%, expanding 40 basis points (bps) from the year-ago quarter’s figure. This was mainly driven by improved channel mix of greater retail business and reduced operational expenses, which more than offset higher costs incurred in connection with the pandemic, like higher production shifts, increased sanitization measures, supplemental payments and protective equipment. In fact, adjusted gross margin expanded 160 bps to 19.7%, thanks to higher volumes and lower fixed costs.

Total operating expenses, as a percentage of sales, dropped 8.7 percentage points to 14.2%, on the back of gains from hedging activities and favorable currency movements. However, adjusted EBITDA from continuing operations rose 16.3% to $131 million on reduced operational expenses and improved channel mix, partially countered by higher employee costs and other COVID-19-related costs.

TreeHouse Foods, Inc. Price, Consensus and EPS Surprise

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

TreeHouse Foods, Inc. price-consensus-eps-surprise-chart | TreeHouse Foods, Inc. Quote

Segment Details

As notified earlier, the company has reorganized itself from three segments (on the basis of product categories) to two segments (on the basis of market dynamics).

Meal Preparation: During the quarter, sales in the segment fell 2.1% year over year to $642.7 million. This can be attributable to adverse volume/mix, primarily stemming from distribution losses and lower food-away-from-home demand. Also, negative pricing actions marred the Single Serve Beverages unit. Direct operating income (DOI) margin in the segment declined 1.6 percentage points as labor shortages and warehouse expansion costs in a bid to fulfill COVID-19-induced demand acted as deterrents.

Snacking & Beverages: Net sales rose 0.5% to $403 million on improved volume/mix, increased pricing efforts and innovation, which compensated for distribution losses and adverse mix associated with divestitures. DOI margin rose 6 percentage points owing to productivity gains led by pandemic-induced demand along with better pricing and reduced operation costs.

Other Financial Updates & Guidance

The company concluded the quarter with cash and cash equivalents of $365.1 million, long-term debt (excluding operating lease liabilities) of $2,201.5 million and total shareholders’ equity of $1,827.3 million. In the first nine months of 2020, cash provided by operating activities of continuing operations amounted to $124.5 million.

Management remains encouraged with its operations amid the pandemic-led burgeoning demand. The company remains optimistic about its prospects for the private-label space and sustained momentum for at-home food consumption. Encouragingly, it updated its 2020 sales view and issued a fourth-quarter guidance.

For 2020, net sales are now anticipated to be $4.2-$4.4 billion compared with its previously guided range of $4.10-$4.40 billion. Adjusted earnings from continuing operations are expected to be $2.65-$2.75 per share compared with $2.55-$2.75 forecasted earlier. The Zacks Consensus Estimate for sales and earnings in 2020 is currently pegged at $4.34 billion and $2.67 per share, respectively. Also, it foresees adjusted EBITDA in the range of $490-$510 million.

Net sales for the fourth quarter of 2020 are expected in a band of $1.11-$1.17 billion. Adjusted EBITDA from continuing operations is anticipated in a band of $140-$160 million. Further, management expects adjusted earnings from continuing operations of $1-$1.1 per share. The Zacks Consensus Estimate for fourth-quarter sales and earnings is pegged at $1.15 billion and $1.1 per share, respectively.

Apart from these, free cash flow is envisioned to be toward the upper end of the $250-$300 million guidance range.

Business Developments

TreeHouse has inked a definitive deal to acquire most of Ebro-owned Riviana Foods’ portfolio for $242.5 million in cash. This move is likely to contribute 20-30 cents in the first year post the completion of the deal. Further, regional brands, including Skinner, No Yolks, American Beauty, Creamette, San Giorgio, Prince and Light 'n Fluffy, Mrs. Weiss, Wacky Mac, P&R Procino-Rossi and New Mill, will be added to the company’s existing portfolio. That said, the deal is subjected to customary closing conditions and estimated to be concluded by the fourth quarter of 2020.

Price Performance

Shares of the company have lost 12.5% in the past three months compared with the industry’s decline of 1.4%.

Looking for More Solid Food Stocks? Check These

Lamb Weston Holdings LW has a long-term earnings growth rate of 7% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Campbell Soup CPB, with a Zacks Rank #2, has a long-term earnings growth rate of 1.4%.

Grocery Outlet Holdings GO, with a Zacks Rank #2, has a long-term earnings growth rate of 14.3%.

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