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TreeHouse (THS) Q1 Earnings Beat Estimates, Sales Decline

Zacks Equity Research

TreeHouse Foods, Inc. THS released first-quarter 2019 results, with the bottom line beating the Zacks Consensus Estimate. However, earnings and sales declined year on year. Headwinds like SKU rationalization and the McCann's divestiture as well as the adverse impacts from volume/mix and currency fluctuation impacted the quarter’s outcome. However, pricing actions and savings initiatives such as TreeHouse 2020 and Structure to Win, provided some respite.

Quarter in Detail

Adjusted earnings of 13 cents per share beat the Zacks Consensus Estimate of 11 cents, and fell within management’s earlier guided range of 5-15 cents. However, the bottom line reflects a 5-cent decline from the year-ago quarter.

Net sales of $1,301.1 million missed the consensus mark of $1,307 million and tumbled almost 12.2% year over year. The downside was caused by SKU rationalization of low-margin businesses and the divestiture of McCann's business. Excluding SKU rationalization and divestiture impacts, sales fell 10.2%, 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 came in at 15%, down 70 basis points (bps) from the year-ago quarter’s figure. This was triggered by lower volumes as well as unfavorable mix in the snacks and meal solutions units.

Operating expenses declined 18.7% year on year. As a percentage of sales, the same declined 1.2 percentage points to 15.1%. This upside was due to lower freight as well as cost savings from the TreeHouse 2020 and Structure to Winprograms.

Further, adjusted EBITDAS declined 7.4% to $98.9 million, owing to low volumes and fixed cost impacts, partially offset by cost savings.

Segment Details

The company made certain changes to its reportable segments on Jan 1, 2019. Accordingly, the condiments and meals units have been consolidated into a single unit and rechristened as Meal Solution. Further, bars and ready-to-eat cereal categories have been shifted to the baked goods segment.

Baked Goods: Sales in the segment fell 7.2% year on year to reach $422.7 million. The downside was caused by SKU rationalization, adverse volume/mix and currency, partially mitigated by favorable impacts from pricing. Direct operating income (DOI) margin in the segment advanced 440 bps to 10.6%, gaining from favorable pricing, lower product costs, reduced freight, favorable mix and gains from savings efforts. These were partially negated by higher commodity expenses.

Beverages: Sales fell 4.8% to $237.2 million due to efforts to rationalize SKUs, adverse volume and unfavorable pricing. DOI margin increased 270 bps to 18.5%, owing to reduced costs related to commodities, production and freight as well as favorable mix. These were partially countered by unfavorable pricing.  

Meals Solutions: Net sales declined almost 11.2% to $464.9 million, owing to SKU rationalization efforts, impacts from the divestiture of McCann’s business, adverse volume/mix and currency rates. However, the decline was partly compensated by improved pricing. DOI margin declined 60 bps to 10.1%, owing to lower volumes, higher commodity costs and unfavorable mix. These were countered by gains from pricing and savings efforts.

Snacks: Net sales in the segment plunged 30.4% to $176.3 million due to soft volume/mix and unfavorable pricing.

Other Financial Updates

The company concluded the reported quarter with cash and cash equivalents of $79 million, long-term debt of $2,285.2 million and total shareholders’ equity of $2,123.2 million.

TreeHouse utilized cash for operating activities amounting to $37.9 million during the first quarter.

Other Developments

In a separate release, management announced the divestiture of the ready-to-eat cereal business to Post Holdings. The ready-to-eat cereal unit is part of the company’s baked goods segment. Terms of the divestiture were not disclosed. However, the sale is likely to be completed by the end of the third quarter of 2019.

Additionally, management announced the closing of the Snack nuts and Trail mix plant located at Minnesota. The company’s snacks division has been sluggish for a while, which in turn is prompting management to undertake such plant closures. Moreover, the company expects the snacking business to adversely impact bottom line by nearly 15-25 cents in 2019. Management is continuing to review strategic opportunities for its snacks business and expects to complete the same by August.

Q2 View

Management expects second-quarter 2019 adjusted earnings in the range of 25-35 cents and net sales in the band of $1.27-$1.31 billion. Decline in snacks and meals solutions divisions is likely to drag down quarterly performance.

Price Performance

This Zacks Rank #3 (Hold) stock gained 29.1% in the past six months compared with the industry’s decline of close to 1.6%.

Looking For Consumer Staples Stocks? Check These

McCormick & Company MKC, with long-term earnings growth rate of 9%, carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

General Mills GIS, with a Zacks Rank #2, has long-term earnings per share (EPS) growth rate of 7.5%.

Inter Parfums IPAR, with long-term EPS growth rate of 12.3%, carries a Zacks Rank #2.

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