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TreeHouse Foods (THS) Crashes on Dismal Q3 Earnings & View

TreeHouse Foods, Inc. THS posted third-quarter 2017 results, wherein the top and the bottom line declined year over year. Also, earnings missed the Zacks Consensus Estimate. Results were affected by volume pressure as well as challenges related to retail bid pricing and manufacturing. The divestiture of soup business marred the quarter’s performance.

Following the results, the company lowered its 2017 earnings guidance, which weighed upon investors’ sentiment. Evidently, shares of TreeHouse Foods tumbled more than 35% on Nov 2. In the last six months, the company’s shares have lost 50.6% compared with the industry’s decline of 6.6%.

Quarter in Detail

Adjusted earnings of 67 cents per share fell 4.2% year over year and lagged the Zacks Consensus Estimate of 76 cents. Earnings were also below management’s guidance of 75-83 cents.

Net sales of $1,548.8 million came ahead of the Zacks Consensus Estimate of $1,527 million. However, sales declined 2.4% from last year owing to the divestiture of the SIF (Canned Soup and Infant Feeding) business. The divestiture lowered revenues by approximately 2.9%. This was slightly offset by gains from favorable pricing, currency translations and volume/mix. The top line also gained from product recall re-imbursements worth $1.7 million.

Gross margin was 16.8% in the third quarter, down 120 basis points (bps) from the year-ago figure primarily due to lower sales. Product recalls, margin improvement initiatives and restructuring activities lowered gross margin by 0.5%. Further, gross margin was impacted by unfavorable volume mix as well as increased operating and commodity costs. These were partially offset by gains from reduced incentive compensation and depreciation.

Adjusted EBITDA tumbled 12.7% to $148 million, due to higher commodity and operating costs, and adverse volume/mix. These were partially offset by a reduction in variable incentive compensation.

Segment Details

The company’s reportable segments are organized by products and are classified into Baked Goods, Beverages, Condiments, Meals, and Snacks.

Baked Goods: Sales from the segment increased 6.6% to $351.2 million. The segment gained from favorable volume/mix and foreign currency rates, partially offset by lower pricing. Direct operating income margin for the segment increased 310 bps to 13.4% owing to higher volume, lower selling, general, and administrative expenses (SG&A) as well as lower operations and commodity costs.

Beverages: Sales increased 4.3% to $244.9 million as a result of favorable volume/mix. This was partially offset by unfavorable pricing, resulting from enhanced competition. During the quarter, direct operating income margin declined 610 bps to 21.1% owing to lower pricing, higher commodity, freight and operating costs. These were partially compensated by lower SG&A expenses.

Condiments: Sales for the segment increased 3.4% to $333.8 million as a result of favorable volume/mix, pricing and foreign exchange rates. In the third quarter, direct operating income margin declined 150 bps to 10.3%, primarily due to higher commodity and operating costs. These were partially offset by increase in volume and price and lower SG&A expenses.

Meals: Net sales declined 18.2% to $284.6 million owing to the divestiture of the SIF business, adverse volume/mix in the ready-to-eat cereal category and unfavorable pricing. Direct operating income margin increased 180 bps to 11.3%. The upside was mainly due to favorable commodity costs and lower depreciation, which were partially offset by increased operating costs. .

Snacks: Net sales from the segment declined 5.4% to $332.6 million, owing to adverse volume/mix arising out of weak consumer trends and exit of low margin co-pack business. These were partially offset by favorable pricing. Direct operating income margin fell 480 bps to 0.5% due to unfavorable volume/mix, increased commodity and operating costs. These were partially compensated through lower SG&A expenses.

Treehouse Foods, Inc. Price, Consensus and EPS Surprise

Other Financial Updates

The company concluded the quarter with cash and cash equivalents of $131.9 million, long-term debt of $2,620.4 million and shareholders’ equity of $2,597.3 million.

Net cash from operating activities in the first three quarters of 2017 was $263.4 million, while underlying free cash flow was $142.3 million.

TreeHouse Foods also announced a share repurchase program worth $400 million, alongside of its third-quarter earnings release. This new program represents 10% of the company’s outstanding shares.

TreeHouse 2020 Initiative

The company remains on track with the initial phase of TreeHouse 2020 initiative, which includes the downsizing of a manufacturing facility and closing of another two. As part of the initiative, TreeHouse Foods remains focused on enhancing revenues and margins through strategic customer relationships. Further, in order to enhance cost savings, the company has been assessing SG&A expenses across its units and locations. The initiative is believed to improve the company’s operating margin by 300 bps by the end of 2020.

2017 Outlook

While this Zacks Rank #3 (Hold) company proceeds with its TreeHouse 2020 plan, management believes that it needs to take additional steps to enhance its position. Following a drab quarter, the company lowered its 2017 guidance. Adjusted earnings for the year are expected in the band of $2.70-$2.80 per share, compared with the previously anticipated range of $3.15-$3.30. Further, GAAP earnings for the full year are predicted in the range of $1.31-$1.41 compared with the prior view of $1.92-$2.07.

Adjusted earnings for the fourth quarter are expected in the range of 91 cents to $1.01 per share. The Zacks Consensus Estimate for the fourth quarter is projected higher at $1.29.

Looking For Consumer Staple Stocks? Check These

Investors interested in the same sector may consider stocks such as McCormick & Company, Inc MKC, Constellation Brands, Inc STZ and Inter Parfums Inc IPAR. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

McCormick delivered an average positive earnings surprise of 4.1% in the trailing four quarters. It has a long-term earnings growth rate of 9.4%.

Constellation Brands pulled off an average positive earnings surprise of 13.6% in the trailing four quarters. It has a long-term earnings growth rate of 14.8%.

Inter Parfums delivered an average positive earnings surprise of 18.1% in the trailing four quarters. It has a long-term earnings growth rate of 12.3%.

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