New TreeHouse Foods chief Steven Oakland has only been in the hot seat at the US own-label supplier for a matter of weeks but, despite better-than-expected underlying earnings per share, the company’s results for the first quarter of 2018 gave an indication of the challenge ahead. Simon Harvey reports.

TreeHouse Foods’ rationalisation programme and the disposal of its soups and infant products business continued to weigh on its financial results in the first quarter, published yesterday (3 May), with the largest private-label supplier in the US signalling more pain to come.

With only six weeks under his belt as chief executive, Steven Oakland spoke with an air of optimism on a conference call with investors this week on his ability to turnaround the company’s top line and profits, but acknowledged that there is much work to be done.

Oakland is tasked with seeing through the TreeHouse 2020 strategy launched last August under his predecessor Sam Reed with the objective of improving operating margins by three percentage points and putting the company back on a path to growth following net losses of more than US$200m in the past two years. 

As part of the strategy, TreeHouse is committed to reduce its SKU count – bloated by the acquisition of the then ConAgra Foods’ own-label assets in 2016 – by 25% by the end of the decade. And to that end, the firm offloaded its soups and infant foods business known as SIF in May last year.

But it has not been a good start to 2018 as profit margins withered in the first quarter on the back of a further decline in sales, while TreeHouse turned in a loss compared to a profit in the same period a year earlier.

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To be fair, after only six weeks on board, Oakland will need more time to impose his stamp on the business but is perhaps well placed to turnaround TreeHouse’s results after 35 years at J.M. Smucker, a predominately branded food manufacturer.

”I have been impressed and encouraged by what I have seen at TreeHouse so far and with what the team has accomplished to date,” Oakland said on the earnings call. ”But it’s clear to me that there are some things we do well, and there are some things that we do not. 

”I understand that our investors have high expectations, just as I do. I also recognise the sense of urgency to turn this business around.”

Still, the pass-through effects from the rationalisation push and the disposal of SIF look set to linger for the time being, at least into the second quarter and perhaps beyond, given the outlook painted by TreeHouse.

This week, the company reported a 3.6% drop in first-quarter sales to $1.48bn, although that figure came in at the top-end of its guidance of $1.4bn to $1.5bn. Excluding items, TreeHouse’s earnings per share were $0.18, down from $0.61 a year earlier but better than the $0.13 forecast by analysts, which was likely a key reason for the company’s stock price rising yesterday.

However, in a blow to the 2020 target, margins deteriorated by 2.2 percentage points to 2.8%, based on adjusted EBIT.

In dissecting the numbers by stripping out the impact from the SKU rationalisation and the divestiture of the SIF business – the removal of which contributed 2.8% to the overall decline in first-quarter sales –TreeHouse’s top-line rose 1.9%.

However, the 1.9% growth represents a slowdown from the underlying 2.4% increase recorded in the fourth quarter. 

And a further easing in the top line seems to be on the cards after TreeHouse this week forecast second-quarter sales of $1.3-1.4bn. 

That would mean the company is expecting to lose around $80m in sales based on the most optimistic scenario from the first quarter, suggesting more pain to endure from the SIF disposal and the SKU rationalisation programme.

Moreover, TreeHouse explained the first-quarter sales numbers were depleted compared to the same period of 2017, when the SIF business contributed $43m and the company garnered an additional $40m from associated SKUs before it started to reduce the count.

Also, the programme to cut the amount of low-margin products resulted in a 2.7% decline in the volume and product mix last quarter.

Chief financial officer Matthew Foulston said on this week’s conference call: ”As we compare our Q2 outlook to the prior year, volume and mix will be down due to the continued impact of SKU rationalisation.”

Despite the negatives though, Foulston sees some relief emerging by the time we get into the third quarter.  

”We will also, you know, flush out finally, the back-end of the SKU rationalisation because of the nature of a lot of these SKUs – they are slow runners, they are clogging up the warehouses,” he explained. 

”They are taking up a lot of square footage. So, as we finally work that out of the tail of the system, we are going to be running less SKUs, higher runners, less changeovers, and we’ll be in a much better position as we get into Q3.”

Those comments might be welcomed by investors after net income fell to a loss of $34m last quarter, from a profit of more than $28m a year earlier. On the operations front, the company also booked a loss of $8.7m, compared to an operating profit of $67m in the same period of 2017.

But on a brighter note, TreeHouse reaffirmed its earnings outlook for 2018 at $2 to $2.4 per adjusted diluted share. That metric came in at $0.18 for the first quarter, near the upper threshold of the company’s $0.10-$0.20 guidance. 

Better still, it is looking for a $0.20-$0.30 print in the current quarter, while there appeared to be no change to the 2018 sales outlook of $5.9bn to $6.1bn, although that would represent a slowdown from previous years if proven correct.

Meanwhile, Oakland said he had spent the first six weeks of his tenure “getting up to speed on our businesses”, with his appointment received with some recognition by his predecessor Reed.

“Steve’s arrival has brought a new sense of urgency and strategic focus to our transformative agenda,” Reed noted, adding the company has also embarked on a major SG&A initiative called Structure To Win, which aims to deliver some $55m in annual savings. 

Oakland concluded: “I can assure you that we are taking a look at all elements of the portfolio and shining a bright light on everything we do. We will take the necessary steps to turn TreeHouse around, not only from a process, cost structure, and organisational standpoint, but also in terms of restoring top-line growth.”