TreeHouse: Reports Q4/2015 Results and Provides Outlook

Oak Brook / IL. (thf) TreeHouse Foods reported fourth quarter earnings of 0.85 USD per fully diluted share compared to 0.78 USD per fully diluted share reported for the fourth quarter of last year. The Company reported adjusted earnings per share in the fourth quarter of 1.08 USD compared to 0.99 USD in the fourth quarter of the prior year, excluding the items described below.

The Company’s 2015 fourth quarter results included three items noted below that, in management’s judgment, affect the assessment of earnings. The first item was a 0.11 USD per share expense for acquisition, integration and related costs. The second item was a 0.06 USD per share loss on the foreign currency re-measurement of intercompany notes. The final item was a 0.06 USD per share loss on restructurings and facility consolidation costs.

Items Affecting Diluted EPS Comparability (unaudited):

	Q4/2015		Q4/2014		FY-2015		FY-2014
Diluted EPS as reported	USD 0.85		USD 0.78		USD 2.63		USD 2.23
Acquisition, integration and related costs	0.11		0.06		0.20		0.65
Foreign currency loss on re-measurement of intercompany notes	0.06		0.08		0.31		0.17
Restructuring/facility consolidation costs	0.06		0.02		0.07		0.04
Mark-to-market adjustments	–		0.05		(0.01)		0.05
Debt refinancing costs	–		–		–		0.39
Adjusted EPS	USD 1.08		USD 0.99		USD 3.20		USD 3.53

 
«We finished the year strong, and our employees deserve a great deal of credit for continuing to focus on improving our operations and driving excellent margin progress», said Sam K. Reed, Chairman, President and Chief Executive Officer. «While overall market conditions remained soft and weakness in the Canadian dollar persisted, both of which weighed on our top line, we are very proud to have delivered margin expansion of 150 basis points in the fourth quarter».

Adjusted earnings before interest, taxes, depreciation, amortization, and non-cash stock based compensation, or Adjusted EBITDA (a reconciliation to net income, the most directly comparable GAAP (generally accepted accounting principles in the United States) measure, appears on the attached schedule), was 120.2 million USD in the fourth quarter of 2015, a 2.3 percent increase compared to the same period in the prior year. Adjusted EBITDA was higher this quarter due to improved margins across our business from strong operating performance and favorable commodity costs, more than offsetting the impact of lower sales and unfavorable Canadian foreign exchange.

Net sales for the fourth quarter totalled 865.4 million USD compared to 903.5 million USD last year, a decrease of 4.2 percent, due to unfavorable Canadian foreign exchange, reduced volume/mix across most categories, and pricing concessions. Compared to the fourth quarter of last year, sales in the fourth quarter of 2015 for the North American Retail Grocery segment decreased 2.3 percent; sales for the Food Away From Home segment decreased 6.1 percent; and sales for the Industrial and Export segment decreased 13.5 percent.

Reported gross margins were 21.0 percent in the fourth quarter of 2015 compared to 19.9 percent in the fourth quarter of the prior year. The increase in gross margin was due to improved operating performance and favorable input costs, partially offset by the unfavorable impact of Canadian foreign exchange. In the fourth quarter of 2014, cost of sales included 0.8 million USD of acquisition, integration and related costs. In the fourth quarter of 2015, cost of sales included 3.0 million USD of restructuring and facility consolidation costs.

Selling, distribution, general and administrative expenses increased 3.5 million USD in the fourth quarter of 2015, or 4.0 percent, to 89.4 million USD. As a percentage of net sales, these costs increased from 9.5 percent in the fourth quarter of 2014, to 10.3 percent in the fourth quarter of 2015. Included in selling, distribution, general and administrative expenses are approximately 6.3 million USD and 1.1 million USD of acquisition and integration costs for the fourth quarter of 2015 and 2014, respectively. After considering the impact of acquisition and integration costs in each year, selling, distribution, general and administrative expenses as a percent of net sales increased marginally to 9.6 percent of net sales, compared to 9.4 percent in the fourth quarter of 2014.

Amortization expense decreased to 14.8 million USD in the fourth quarter of 2015, compared to 17.1 million USD in 2014, as a number of intangible assets were fully amortized during 2015.

Other expense was 18.9 million USD for the fourth quarter of 2015, a decrease of 4.4 million USD from 23.3 million USD in the same period last year. Net interest expense decreased in the fourth quarter of 2015 versus the prior year, as the Company paid down debt. Loss on foreign currency exchange increased due to changes in U.S. and Canadian exchange rates. Additionally, other expense (income), net decreased due to non-cash mark-to-market gains on derivative contracts in the fourth quarter of 2015 compared to losses in the fourth quarter of 2014, and lower acquisition costs in the fourth quarter of 2015 versus 2014.

Income tax expense increased in the fourth quarter to 20.1 million USD. The Company’s fourth quarter effective income tax rate increased to 35.1 percent from the 2014 fourth quarter rate of 34.8 percent due to a state tax ruling late in the fourth quarter of 2015.

Net income for the fourth quarter of 2015 totalled 37.3 million USD compared to 33.9 million USD in the previous year.

Fully diluted shares outstanding for the fourth quarter of 2015 increased to approximately 43.8 million shares compared to 43.4 million shares in the fourth quarter of 2014.

Segment Results

North American Retail Grocery: This segment sells branded and private label products to customers within the United States and Canada. These products include non-dairy powdered creamers; sweeteners; condensed, ready to serve and powdered soups, broths and gravies; refrigerated and shelf stable salad dressings and sauces; pickles and related products; Mexican and other sauces; jams and pie fillings; aseptic products; liquid non-dairy creamer; powdered drinks; single serve hot beverages; specialty teas; hot and cold cereals; baking and mix powders; macaroni and cheese; skillet dinners; and snack nuts, trail mixes, dried fruit and other wholesome snacks.

Food Away From Home: This segment sells non-dairy powdered creamers; sweeteners; pickles and related products; Mexican and other sauces; refrigerated and shelf stable dressings; aseptic products; hot cereals; powdered drinks; and single serve hot beverages to foodservice customers, including restaurant chains and food distribution companies, within the United States and Canada.

Industrial and Export: This segment includes the Company’s co-pack business and sales to industrial customers for use in industrial applications, including products for repackaging in portion control packages and for use as ingredients by other food manufacturers. This segment sells non-dairy powdered creamer; baking and mix powders; pickles and related products; refrigerated and shelf stable salad dressings; Mexican sauces; aseptic products; soup and infant feeding products; hot cereals; powdered drinks; single serve hot beverages; specialty teas; and nuts. Export sales are primarily to industrial customers outside of North America.

The direct operating income for the Company’s segments is determined by deducting manufacturing costs from net sales and also deducting direct operating costs, such as freight to customers, commissions, and direct selling and marketing expenses. Indirect sales and administrative expenses, including restructuring charges and other corporate costs, are not allocated to the business segments as these costs are managed at the corporate level.

North American Retail Grocery net sales for the fourth quarter of 2015 decreased 2.3 percent to 668.8 million USD from 684.4 million USD during the same quarter of the previous year, driven by a 1.0 percent decrease in volume/mix, a 0.9 percent unfavorable impact from foreign exchange, and reduced pricing. During the fourth quarter, the Company experienced lower volumes from competitive pressures in a majority of its categories, with the exception of single serve hot beverages and snacks, which posted positive volume growth versus the fourth quarter of 2014. Direct operating income margin in the fourth quarter increased to 15.9 percent in 2015 from 14.0 percent in 2014. This 190 basis point increase in margins was due to operational efficiencies and commodity price favorability, partially offset by continued competitive pressures, primarily on single serve hot beverage margins, and the impact of unfavorable foreign exchange.

Food Away From Home net sales for the fourth quarter of 2015 decreased 6.1 percent to 89.6 million USD from 95.4 million USD during the same quarter of the previous year, primarily due to volume/mix decreases of 3.6 percent, a 1.8 percent unfavorable impact from foreign exchange, and reduced pricing. The Company posted a volume increase in the quarter in the cereals category that was more than offset by reduced volumes in the pickles and other sauces categories. Direct operating income margin in the fourth quarter increased to 14.1 percent in 2015 from 13.9 percent in 2014, primarily due to favorable input costs.

Industrial and Export net sales for the fourth quarter of 2015 decreased 13.5 percent to 107.0 million USD from 123.7 million USD during the same quarter of the prior year, largely driven by an 8.1 percent decrease in volume/mix, a 2.7 percent unfavorable impact from foreign exchange, and reduced pricing. The volume/mix decrease was primarily driven by the soup, single serve hot beverages, dressings, and beverage enhancers categories, partially offset by increases in the pickles category. Direct operating income margin in the fourth quarter increased to 19.0 percent in 2015, from 18.2 percent in 2014. This 80 basis points improvement in direct operating income margin was primarily due to commodity price favorability and a favorable shift in sales mix.

Outlook

«This year marks the beginning of an important journey for us, as we press forward with our strategic vision and relentlessly focus on tactical execution», said Reed. «We remain fully committed to growth and simplification, and believe that our greatest opportunities continue to lie ahead. We remain dedicated to building a private label platform that offers a broad portfolio of products that are important to our customers and supports their efforts to build their corporate brands, while offering consumers the best combination of choice and value».

In 2016, the Company believes the overall food industry will continue to face weakness and overall top line growth for the industry will be relatively flat. This year, TreeHouse will intensely focus on integrating its recently closed acquisition of the Private Brands Business.

TreeHouse net sales are expected to double in 2016 to approximately 6.3 to 6.5 billion USD, driven by the addition of the Private Brands Business. The Company expects the Canadian exchange rate in 2016 to be approximately 0.72 USD for the year. This represents an approximate 0.09 USD headwind to full year earnings per share.

Gross margin is expected to be roughly flat year-over-year, as the profit contribution from the newly acquired Private Brands Business is below legacy margin levels and foreign exchange headwinds will continue to challenge margins. Partially offsetting these challenges will be a continued focus on internal improvements and other savings initiatives.

Selling, distribution, general and administrative, and amortization expenses, excluding stock compensation, are expected to rise as a percent of net sales to 13.5 percent-13.7 percent. The Company will also incur higher stock compensation expense of 13 to 14 million USD this year primarily due to greater employee participation following the Private Brands Business acquisition. Also, the Company plans to make additional investments in systems implementations to more quickly bring its newest acquisitions onto the SAP platform.

Net interest expense is expected to increase to 108 to 112 million USD as a result of the higher debt levels and interest rates from the acquisition of the Private Brands Business.

The effective tax rate is expected to rise to a range of 35 percent-36 percent due to higher income from the Private Brands Business acquisition, as well as a shift to more U.S. versus Canadian income, which is subject to a higher tax rate.

TreeHouse reiterated its guidance of 2.95 USD to 3.10 USD in adjusted earnings per share in 2016. The Company also anticipates weighted average shares outstanding will average approximately 56.7 million shares for the year.

In regard to the first quarter of 2016, the Company expects earnings will be challenged due to the acquisition of the Private Brands Business, which has a margin structure that is lower than the legacy TreeHouse business, integration expenses, and ongoing weakness in foreign exchange. As a result, first quarter adjusted earnings per share are expected to be in the range of 0.38 USD to 0.43 USD per share. The first quarter estimates are already considered in the 2016 guidance.