TreeHouse remains on the M&A trail

TreeHouse remains on the M&A trail

TreeHouse Foods tightened its full-year outlook today (6 November) but booked a drop in third-quarter earnings, as one-time charges dented the bottom line.

Reported net earnings fell to US$19.88m in the third quarter to 30 September, down from $22.65m in the prior year period. The US private-label company registered charges related to acquisition and integration expenses, as well as a foreign currency loss on the translation of inter-company notes.

Shares in the group were down 1.59% to $83.78 at 12:41 ET.

However, on an adjusted basis, TreeHouse earnings were up 8.5%. Adjusted EBITDA was $103.5m, a 32.7% increase compared to the prior year.

Net sales also rose, reaching $795.7m, compared to $567.2m last year, an increase of 40.3%. TreeHouse attributed the gains to "sales from acquisitions and favourable volume/mix".

The company tightened its full-year EPS range to $3.60-$3.70 from $3.60-$3.75.

TreeHouse CEO Sam Reed said he was "extremely impressed" with the quality of recent acquisitions, which have included Protenergy Natural Foods and Flagstone Foods. The company remains on the lookout for further M&A to drive growth, he added.

"The acquisition environment remains robust, and we continue to evaluate potential strategic prospects. The opportunity to consolidate the private-label landscape remains attractive, and we expect to finish the year with substantial availability under our credit facility," Reed said.

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TreeHouse Foods, Inc. Reports Third Quarter 2014 Results
- Third quarter adjusted EPS increased 8.5% from prior year to $0.89 in 2014
- Total net sales increased 40.3%, driven by acquisitions and volume/mix
- North American Retail Grocery volume/mix grew 4.7% in the third quarter
- Full production of 2.0 compatible single serve hot beverages began at the end of October
- Company tightens full year adjusted EPS guidance to $3.60-$3.70, reflecting higher share count

OAK BROOK, Ill., Nov. 6, 2014 /PRNewswire/ -- TreeHouse Foods, Inc. (NYSE: THS) today reported third quarter earnings of $0.47 per fully diluted share compared to $0.61 per fully diluted share reported for the third quarter of last year.  The Company reported that adjusted earnings per share increased 8.5% in the third quarter to $0.89 compared to $0.82 in the prior year, excluding the items described below.

The Company's 2014 third quarter results included two items noted below that affected the year-over-year quarterly comparison.  The first item is a $0.31 per share expense for acquisition, integration and related costs.  The second item is a $0.11 per share loss on the foreign currency translation of intercompany notes. 


Three Months Ended

Nine Months Ended

September 30

September 30







Diluted EPS as reported

$      0.47

$ 0.61

$   1.43

$  1.72

Acquisition, integration and related costs





Foreign currency loss on translation of intercompany notes





Debt refinancing costs





Restructuring/facility consolidation costs





Mark-to-market adjustments





Adjusted EPS

$      0.89

$ 0.82

$   2.52

$  2.21

"We are pleased to report volume/mix growth in our North American Retail Grocery segment of 4.7% in the third quarter, which represents our sixth straight quarter of year-over-year volume/mix improvements in this segment.  Most of our core categories reported gains in the quarter, led by single serve hot beverages, which grew more than 40% in the third quarter and nearly doubled in the month of October compared to last year," said Sam K. Reed, Chairman, President and Chief Executive Officer. 

"We are confident that private label continues to be the right strategic course for TreeHouse," continued Mr. Reed.  "We are more and more becoming the supplier of choice throughout our customers' stores – in snacking, where our prospects are bright given the recently completed addition of Flagstone Foods; within center of the store shelf stable products, where we are contemporizing packaging with the acquisition ofProtenergy Natural Foods; and in single serve hot beverages, where we are now in full production mode for 2.0 compatible cups, as we began shipping to our customers at the end of October and anticipate continued double digit growth in 2015.  We see significant ongoing opportunity in all of these areas, as we remain committed to partnering with our grocery customers to offer the best combination of choice and value for consumers." 

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 $103.5 million in the third quarter, a 32.7% increase compared to the prior year.  Adjusted EBITDA was higher due to acquisitions and improved volume/mix.

Net sales for the third quarter totaled $795.7 million compared to $567.2 million last year, an increase of 40.3%, largely due to sales from acquisitions and favorable volume/mix in each of our segments, partially offset by unfavorable foreign exchange.  Compared to last year, sales in the third quarter for the North American Retail Grocery segment increased 47.4%, sales for the Food Away From Home segment increased 1.9% and sales for the Industrial and Export segment increased 53.1%.

Reported gross margins decreased to 19.9% in the third quarter this year from 20.3% last year, as lower margin business from acquisitions and the related acquisition and integration costs offset an improved sales mix and operational efficiencies.  Also contributing to the decrease is the impact of unfavorable foreign exchange.  Legacy gross margins (before considering the impact of acquisitions and facility consolidation costs) increased 180 basis points to 23.1%, well above the Company's goal of 100 basis points.  Included in 2014 cost of sales were acquisition and integration costs of $9.6 million, compared to $1.0 million in 2013.  Also included in 2013 cost of sales were $4.7 million of restructuring and facility consolidation costs. 

Selling, distribution, general and administrative expenses increased $30.8 million in the third quarter this year, or 47.7%, to $95.5 million from $64.7 million in the same period last year.  Included in the increase was an additional net $4.7 million of acquisition and integration costs in the third quarter of 2014 compared to 2013.  Also contributing to the increase was $2.8 million in additional stock based compensation expense, resulting from additional employees from acquisitions and the strong performance of the Company.  The remaining increase was primarily due to increased distribution and delivery costs and general and administrative expenses resulting from acquisitions, higher volume, rising freight rates and general business growth.  After considering the impact of acquisition and integration costs in each year, selling, distribution, general and administrative expenses as a percentage of net sales was 10.9% for the third quarter of 2014 compared to 10.7% in 2013.  

Other expense was $17.2 million for the third quarter, an increase of $5.4 million from $11.8 million in the same period last year.  This increase was due to higher foreign currency exchange losses due to the weakening of the Canadian dollar relative to the U.S. dollar.  Partially offsetting this increase was a decrease in interest expense of $2.5 million, driven by lower average interest rates resulting from the Company's debt refinancing activities earlier this year.

Income tax expense increased in the third quarter to $10.9 million.  The Company's third quarter effective income tax rate increased to 35.4% from the 2013 third quarter rate of 22.8% due to an increase in state tax expense, acquisition related expenses that are not deductible for tax purposes and the tax impact of a shift in revenue between jurisdictions.

Net income for the third quarter totaled $19.9 million compared to $22.7 million last year. 

Fully diluted shares outstanding for the third quarter increased to approximately 42.0 million shares as a result of the equity offering completed on July 22, 2014, which financed, in part, the Flagstone Foodsacquisition.


The Company has three reportable segments:

  1. 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; salsa and Mexican 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; snack nuts; trail mixes; dried fruit; and other wholesome snacks.
  2. Food Away From Home – This segment sells non-dairy powdered creamers; sweeteners; pickles and related products; Mexican 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.
  3. Industrial and Export – This segment includes the Company's co-pack business and non-dairy powdered creamer 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. The most common products sold in this segment include non-dairy powdered creamer; baking and mix powders; pickles and related products; Mexican sauces; 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 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 third quarter increased 47.4% to $592.4 million from $401.9 million during the same quarter last year, driven by a 44.3% increase from acquisitions and a 4.7% increase in volume/mix, partially offset by the unfavorable impact from pricing and foreign exchange.  The Company posted volume/mix gains in the beverages, pickles and soup and gravy categories that were partially offset by volume/mix decreases in the jams category.  The volume/mix increase was driven in large part by the continued success of the single serve hot beverages program.  Direct operating income margin in the third quarter decreased to 13.9% in 2014, from 15.5% in 2013.  Contributing to this decrease were higher acquisition and integration costs compared to the prior year, the impact of unfavorable foreign exchange, increased freight costs and the net impact of lower margin sales from acquisitions, partially offset by improved sales mix and operational efficiencies.  Acquisition and integration costs reduced direct operating income by $8.8 million in the third quarter of 2014, compared to costs of $0.7 million in 2013.   

Food Away From Home segment net sales for the third quarter increased 1.9% to $98.7 million from $96.9 million during the same quarter last year, due to acquisitions.  Slight increases in volume/mix and pricing were offset by foreign currency.   Volume/mix improvements in the aseptic and beverages categories were partially offset by reductions in the pickles and dressings categories.  Direct operating income margin in the third quarter decreased to 12.5% in 2014, from 13.4% in 2013 due to the impact of unfavorable foreign exchange and higher input costs.

Industrial and Export segment net sales for the third quarter increased 53.1% to $104.7 million from $68.4 million during the same quarter last year, largely driven by a 47.6% increase from acquisitions and a 5.0% increase in volume/mix.  The volume/mix increase was primarily driven by growth in the beverages (predominantly single serve hot beverages), beverage enhancers and infant feeding categories, partially offset by volume/mix reductions in the dressings category.  Direct operating income margin in the third quarter decreased to 16.0% in 2014, from 17.7% in 2013, primarily due to higher freight costs. 


The Company tightened its full year 2014 adjusted earnings per share guidance to a range of $3.60-$3.70, which reflects a higher number of fully diluted shares outstanding from the equity offering completed inJuly 2014 and the accretion from the Flagstone Foods and Protenergy Natural Foods acquisitions, and incorporates the most recent estimate of asset valuation work on goodwill and amortization of intangibles.  The Company expects the average shares outstanding in the fourth quarter to be approximately 43.4 million, while the full year average shares outstanding should be approximately 40.6 million.  The Company does not expect the adjusted earnings to be materially different from prior expectations.

Regarding the balance of the year, Mr. Reed said, "Our legacy businesses are performing exactly in line with our original estimates for the year, and we have made great strides bringing Protenergy Natural Foodsand Flagstone Foods into the TreeHouse family.  We have been extremely impressed with the quality and dedication of the management teams and their associates at these fine companies.  Our full year 2014 sales will be approximately $3 billion, as the operations of both Protenergy and Flagstone will be fully reflected in our fourth quarter results.  Not only are we dedicated to growing our revenue base, but more importantly, we continue to make improvements for the long-term health of the business."

"The acquisition environment remains robust, and we continue to evaluate potential strategic prospects.  The opportunity to consolidate the private label landscape remains attractive, and we expect to finish the year with substantial availability under our credit facility," concluded Mr. Reed.

Original source: TreeHouse Foods