TreeHouse Foods: Reports Second Quarter 2017 Results

Oak Brook / IL. (thf) TreeHouse Foods Inc. reported a second quarter GAAP loss per fully diluted share of USD 0.60 compared to GAAP earnings of USD 0.33 reported for the second quarter of 2016. The Company reported adjusted earnings per fully diluted share1 for the second quarter of USD 0.51 compared to adjusted earnings of USD 0.60 for the second quarter of 2016.

«Although we delivered adjusted earnings within the range of our second quarter guidance and we are seeing gross margin improvement, our recovery has been slower than we originally anticipated», said Sam K. Reed, Chairman and Chief Executive Officer.  «We continue to make great strides toward completing the integration of the Private Brands business and are pleased to have paid down over USD 470 million in debt since we closed the acquisition; however, adverse market conditions, pricing lag from commodity cost increases, and operating inefficiencies related to lower than anticipated volumes continued to present challenges in the second quarter».

«It is clear that we are witnessing an evolution in the retail landscape, as digital technology and bricks and mortar compete for the attention of consumers in a slow to no growth food and beverage marketplace. As our customers seek growth in this environment by reinvesting in their corporate brands, we continue to believe that we are best positioned to capitalize on the opportunity. However, it is imperative that we as an organization return to our legacy levels of profitability», said Reed. «As a result, we are launching the first phase of TreeHouse 2020, a comprehensive strategic blueprint that consists of aggressive actions to manage our category and customer portfolio and optimize our manufacturing and supply chain. By doing so, we believe we can improve our operating margin structure by approximately 300 basis points by the end of 2020», Reed continued.

The Company today announced its TreeHouse 2020 restructuring program. Based on new data analytic capabilities and key insights recently visible as a result of the Company’s systems integration of Private Brands, TreeHouse 2020 is a multi-year plan to fully integrate the business and reduce its cost structure in order to invest in market-differentiated capabilities that will serve the rapidly evolving needs of its customers that are strategically focused and highly committed to their corporate brands.

The TreeHouse 2020 restructuring plan will be executed in multiple phases over the next several years. The key elements of Phase 1 actions include the closure of two manufacturing facilities and the downsizing of another as outlined in a separate press release issued today. TreeHouse expects that the restructuring charges associated with these three facilities will total USD 44.5 million, of which USD 29.7 million will be cash and USD 14.8 million will be non-cash.

Outlook

«As we enter the back half of the year, the environment remains highly competitive, which is pressuring volumes across nearly all of our divisions. We are diligently working to improve our operational effectiveness, aggressively simplify our offerings, and reduce our cost structure», continued Reed. «However, our current forecast is below our original expectations for the year, and we are lowering our full year guidance for adjusted earnings per fully diluted share to a range of USD 3.15 to USD 3.30. We anticipate third quarter adjusted earnings will be within the range of USD 0.75 to USD 0.83».

Because the Company cannot predict some of the key items impacting reported GAAP results, such as the impact of foreign exchange, the third quarter forecast for both GAAP and adjusted earnings is the same. With regard to the full year, TreeHouse provided a GAAP earnings per fully diluted share guidance range of USD 1.92 to USD 2.07. The difference between the full year GAAP and adjusted (non-GAAP) guidance ranges is related to the impact of adjusting for the items noted in the earnings per share reconciliation table for the six months ended June 30, 2017, equating to USD 1.23 per fully diluted share.

Financial Results

Net sales for the second quarter totalled USD 1’522.2 million compared to USD 1’541.4 million for the same period last year, a decrease of 1.2 percent. The change in net sales from 2016 to 2017 was due to the following:

Three Months Six Months
(unaudited) (unaudited)
Volume/mix (0.3) % 0.1 %
Pricing (0.3) (0.5)
Product recalls 0.7 0.5
Acquisition/divestiture (1.1) 8.7
Foreign currency (0.2)
Total change in net sales (1.2) % 8.8 %

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The change in net sales was primarily due to the divestiture of the SIF business in the second quarter of 2017 which contributed 1.1 percent to the overall decline. Unfavorable volume/mix, pricing, and foreign exchange was offset partially by the favorable impact of the 2016 sunflower seed recalls.

Cost of sales as a percentage of net sales was 81.8 percent in the second quarter of 2017, compared to 82.8 percent in the second quarter of 2016. Included in cost of sales in the second quarter of 2016 was USD 5.3 million related to product recalls compared to an insignificant amount in the second quarter of 2017. In addition to the impact to net sales, product recalls contributed 1.0 percent to the reduction in cost of sales as a percentage of net sales year-over-year. The impact of acquisition, integration, divestiture, and restructuring costs for the second quarter of 2017 and 2016 was a gain of USD 0.9 million and expense of USD 0.9 million, respectively, further contributing 0.1 percent to the reduction in cost of sales as a percentage of net sales. Excluding the impact of product recalls and acquisition, integration, divestiture, and restructuring costs, cost of sales as a percentage of net sales was relatively flat to the prior year primarily due to higher operating and commodity costs, offset by a reduction in variable incentive compensation and depreciation.

Selling and distribution expenses decreased USD 9.5 million, or 9.1 percent, in the second quarter of 2017 compared to the second quarter of 2016. Selling and distribution expenses as a percentage of net sales decreased to 6.2 percent in the second quarter of 2017, compared to 6.8 percent in the second quarter of 2016.  The decrease was primarily related to a reduction in variable incentive compensation and cost savings in 2017.

General and administrative expenses increased USD 5.0 million, or 6.4 percent, in the second quarter of 2017 compared to the second quarter of 2016. General and administrative expenses as a percentage of net sales increased slightly to 5.4 percent in the second quarter of 2017, compared to 5.1 percent in the second quarter of 2016.  This increase was primarily related to increased stock compensation costs of USD 3.0 million due to the shift of the annual grant date to the first quarter in 2017, higher acquisition, integration, and divestiture costs in the second quarter of 2017 compared to the second quarter of 2016, and the build-out of the new segment structure, offset partially by a reduction in variable incentive compensation and cost savings.

Other operating expense was USD 94.0 million in the second quarter of 2017 compared to USD 3.3 million in 2016. The increase was entirely due to the loss on the divestiture of the SIF business of USD 85.2 million in the second quarter of 2017 and higher costs associated with restructurings that were announced in recent quarters with respect to the Company’s closure of the City of Industry, California; Ayer, Massachusetts; Azusa, California; Delta, British Columbia (frozen griddle); and Ripon, Wisconsin facilities as well as the downsizing of the Battle Creek, Michigan facility.

Net interest expense increased USD 0.6 million in the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher interest rates associated with Federal interest rate increases offset partially by lower net debt.

The Company’s foreign currency impact was a USD 0.4 million gain for the second quarter of 2017, compared to a gain of USD 0.8 million in 2016, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar during the respective periods.

Other expense was USD 1.2 million for the second quarter of 2017, compared to income of USD 0.7 million in 2016. The change was due to the non-cash mark-to-market adjustments on derivative instruments, primarily foreign currency contracts, commodity contracts, and interest rate swaps.

Income tax benefit of USD 21.8 million was recorded in the second quarter of 2017 compared to expense of USD 3.2 million for the same period of 2016. The effective tax rate was 38.9 percent for the second quarter of 2017 compared to 14.4 percent for second quarter of 2016. The change in the effective tax rate for the second quarter of 2017 compared to the second quarter of 2016 is primarily a result of the income tax benefit on the Company’s loss before income taxes for the second quarter of 2017, the income tax benefits related to share-based payments, and the income tax benefit from the release of reserves for unrecognized tax benefits. The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

Net loss for the second quarter of 2017 was USD 34.2 million, compared to net income of USD 19.0 million for the same period of the previous year.  The reason for this change is more than explained by the divestiture of the SIF business discussed above.

Adjusted Ebitdas was USD 148.5 million in the second quarter of 2017, a 4.1 percent decrease compared to the second quarter of 2016. The decrease in adjusted Ebitdas was primarily due to unfavorable pricing from competitive pressure, higher operating and commodity costs, and unfavorable mix, partially offset by a reduction in variable incentive compensation and cost savings. Adjusted Ebitdas is a non-GAAP financial measure. See «Comparison of Adjusted Information to GAAP Information» below for the definition of adjusted Ebitdas and a reconciliation of adjusted Ebitdas to net (loss) income, the most comparable GAAP financial measure.

Fully diluted shares outstanding for the second quarter of 2017 was approximately 57.0 million shares compared to 57.5 million shares in the second quarter of 2016. The decrease was due to reporting a GAAP net loss in the second quarter of 2017 which requires diluted shares to be computed in the same manner as basic shares.

The Company’s second quarter 2017 results included six items noted below that, in management’s judgment, affect the assessment of earnings.

Reconciliation of diluted (loss) earnings per share to adjusted diluted earnings per share
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
(unaudited) (unaudited)
Diluted EPS per GAAP USD (0.60) USD 0.33 USD (0.11) USD 0.28
Acquisition, integration, divestiture, and related costs 1.58 0.08 1.64 0.83
Restructuring/facility consolidation costs 0.14 0.05 0.33 0.13
Mark-to-market adjustments 0.04 (0.03) 0.05 0.06
Foreign currency gain on re-measurement of intercompany notes (0.05) (0.06) (0.12)
Product recall (reimbursement) costs (0.02) 0.27 (0.09) 0.27
Tax impact on adjusting items (0.58) (0.10) (0.64) (0.36)
Adjusted Diluted EPS USD 0.51 USD 0.60 USD 1.12 USD 1.09

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Segment Results

Baked Goods
Segment Metrics
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
(unaudited) (unaudited)
Net sales USD 324.3 USD 322.9 USD 665.4 USD 542.4
Direct operating income 32.5 34.8 74.4 63.6
Direct operating income% 10.0 % 10.8 % 11.2 % 11.7 %
Change in Net Sales from Prior Year
Volume/mix 1.3 % (2.1) %
Pricing (0.7) (0.9)
Acquisition/divestiture 25.8
Foreign currency (0.2) (0.1)
Total change in net sales 0.4 % 22.7 %

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Net sales in the Baked Goods segment increased USD 1.4 million, or 0.4 percent, in the second quarter of 2017 compared to the second quarter of 2016. The change in net sales was primarily due to favorable volume/mix from increased distribution, offset partially by unfavorable pricing from competitive pressure. Direct operating income margin in the second quarter of 2017 decreased by 80 basis points to 10.0 percent, compared to 10.8 percent in the second quarter of 2016. This decrease was primarily due to higher operating costs and the non-repeat of a rebate received in the second quarter of 2016, offset partially by lower commodity costs, freight and commission rates, and cost savings.

Beverages
Segment Metrics
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
(unaudited) (unaudited)
Net sales USD 246.2 USD 212.9 USD 514.2 USD 437.8
Direct operating income 60.3 54.1 119.0 111.8
Direct operating income% 24.5 % 25.4 % 23.1 % 25.5 %
Change in Net Sales from Prior Year
Volume/mix 18.3 % 19.7 %
Pricing (1.5) (1.7)
Acquisition/divestiture (1.2) (0.5)
Total change in net sales 15.6 % 17.5 %

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Net sales in the Beverages segment increased USD 33.3 million, or 15.6 percent, in the second quarter of 2017 compared to the second quarter of 2016. The change in net sales was primarily due to favorable volume/mix associated with additional distribution, primarily in the single serve beverage, broth, non-dairy creamer, and tea categories, offset partially by unfavorable pricing due to competitive pressure and lower sales due to the sale of a part of the Tetra re-cart broth business associated with the divestiture of the SIF business. Direct operating income margin in the second quarter decreased by 90 basis points to 24.5 percent, compared to 25.4 percent in the second quarter of 2016. The decrease in direct operating income margin is primarily due to unfavorable pricing and commodities (primarily oils and green coffee), offset partially by favorable volume/mix and cost savings.

Condiments
Segment Metrics
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
(unaudited) (unaudited)
Net sales USD 344.9 USD 340.5 USD 655.0 USD 636.1
Direct operating income 36.0 41.9 67.7 77.0
Direct operating income% 10.4 % 12.3 % 10.3 % 12.1 %
Change in Net Sales from Prior Year
Volume/mix 1.7 % 0.3 %
Pricing 0.3 (0.3)
Acquisition/divestiture 3.1
Foreign currency (0.7) (0.1)
Total change in net sales 1.3 % 3.0 %

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Net sales in the Condiments segment increased USD 4.4 million, or 1.3 percent, in the second quarter of 2017 compared to the second quarter of 2016. The change in net sales was primarily due to favorable volume/mix from additional distribution, favorable pricing from commodity based price increases and lower trade spend, offset partially by unfavorable foreign exchange. Direct operating income margin in the second quarter of 2017 decreased by 190 basis points to 10.4 percent, from 12.3 percent in the second quarter of 2016. This decrease is primarily due to higher commodity costs for soybean oil, cucumbers, peppers, and packaging, as well as higher operating costs, offset partially by selling, general, and administrative cost savings.

Meals
Segment Metrics
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
(unaudited) (unaudited)
Net sales USD 288.4 USD 317.0 USD 612.4 USD 589.4
Direct operating income 33.8 29.4 67.8 55.8
Direct operating income% 11.7 % 9.3 % 11.1 % 9.5 %
Change in Net Sales from Prior Year
Volume/mix (2.9) % (1.7) %
Pricing (1.4) (1.5)
Acquisition/divestiture (4.7) 7.1
Total change in net sales (9.0) % 3.9 %

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Net sales in the Meals segment decreased USD 28.6 million, or 9.0 percent, compared to the second quarter of 2016. The change in net sales was primarily due to the divestiture of the SIF business, unfavorable volume/mix primarily in the ready-to-eat cereal category, and unfavorable pricing from commodity based price reductions and competitive pressure. Direct operating income margin in the second quarter of 2017 increased by 240 basis points to 11.7 percent, from 9.3 percent in the second quarter in 2016. This increase was primarily due to favorable commodity costs, lower depreciation, and selling, general, and administrative cost savings.

Snacks
Segment Metrics
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
(unaudited) (unaudited)
Net sales USD 317.0 USD 358.0 USD 607.6 USD 615.8
Direct operating income 10.1 19.0 22.6 28.8
Direct operating income% 3.2 % 5.3 % 3.7 % 4.7 %
Change in Net Sales from Prior Year
Volume/mix (12.7) % (10.4) %
Pricing 1.2 1.4
Acquisition/divestiture 7.7
Total change in net sales (11.5) % (1.3) %

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Net sales in the Snacks segment decreased USD 41.0 million, or 11.5 percent, in the second quarter of 2017 compared to the second quarter of 2016. The change in net sales was primarily due to unfavorable volume/mix from soft consumer trends, the exit of low margin co-pack business, and reduced merchandising support from customers, offset partially by favorable pricing from commodity based price increases. Direct operating income margin in the second quarter of 2017 decreased 210 basis points to 3.2 percent, from 5.3 percent in the second quarter of 2016. This decrease was primarily due to unfavorable mix, higher commodity costs predominantly related to cashews, and slightly unfavorable freight and commission rates.

Comparison of adjusted information to GAAP information

We have included in this release measures of financial performance that are not defined by GAAP («non-GAAP»). A non-GAAP financial measure is a numerical measure of financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Cash Flows. We believe these measures provide useful information to the users of the financial statements as we also have included these measures in other communications and publications.

For each of these non-GAAP financial measures, we provide a reconciliation between the non-GAAP measure and the most directly comparable GAAP measure, an explanation of why management believes the non-GAAP measure provides useful information to financial statement users, and any additional purposes for which management uses the non-GAAP measure. This non-GAAP financial information is provided as additional information for the financial statement users and is not in accordance with, or an alternative to, GAAP. These non-GAAP measures may be different from similar measures used by other companies.

Adjusted Earnings Per Fully Diluted Share, Adjusting for Certain Items Affecting Comparability

Adjusted earnings per fully diluted share («Adjusted Diluted EPS») reflects adjustments to GAAP earnings per fully diluted share to identify items that, in management’s judgment, significantly affect the assessment of earnings results between periods. This information is provided in order to allow investors to make meaningful comparisons of the Company’s earnings performance between periods and to view the Company’s business from the same perspective as Company management. This measure is also used as a component of the Board of Director’s measurement of the Company’s performance for incentive compensation purposes. As the Company cannot predict the timing and amount of charges that include, but are not limited to, items such as acquisition, integration, divestiture, and related costs, mark-to-market adjustments on derivative contracts, and foreign currency exchange impact on the re-measurement of intercompany notes, management does not consider these costs when evaluating the Company’s performance, when making decisions regarding the allocation of resources, in determining incentive compensation for management, or in determining earnings estimates. The reconciliation of Adjusted Diluted EPS, excluding certain items affecting comparability, to the relevant GAAP measure of diluted EPS as presented in the Consolidated Statements of Operations, is presented above.

Adjusted Net Income and Adjusted Ebitdas, Adjusting for Certain Items Affecting Comparability

Adjusted net income represents GAAP net (loss) income as reported in the Condensed Consolidated Statements of Operations adjusted for items that, in management’s judgment, significantly affect the assessment of earnings results between periods as outlined in the Adjusted Diluted EPS section above. This information is provided in order to allow investors to make meaningful comparisons of the Company’s earnings performance between periods and to view the Company’s business from the same perspective as Company management. This measure is also used as a component of the Board of Director’s measurement of the Company’s performance for incentive compensation purposes and is the basis of calculating the Adjusted Diluted EPS metric outlined above.

Adjusted Ebitdas represents adjusted net income before interest expense, interest income, income tax expense, depreciation and amortization expense, and non-cash stock-based compensation expense. Adjusted Ebitdas is a performance measure commonly used by management to assess operating performance, and the Company believes it is commonly reported and widely used by investors and other interested parties, as a measure of a company’s operating performance between periods.

A full reconciliation between the relevant GAAP measure of reported net (loss) income for the three and six month periods ended June 30, 2017 and 2016 calculated according to GAAP, adjusted net income, and adjusted Ebitdas is presented in the attached tables. Given the inherent uncertainty regarding adjusted items in any future period, a reconciliation of forward-looking financial measures to the most directly comparable GAAP measure is not feasible.

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