TreeHouse Foods under pressure

by Keith Nunes
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A soft retail environment contributed to challenges at TreeHouse Foods in the recent quarter.
 

OAK BROOK, ILL. — TreeHouse Foods, Inc. is undergoing a dramatic transformation as management has integrated Conagra’s Private Brands business and reorganized the company. At the same time the manufacturer of private label products must contend with a soft retail market. Both the reorganization and soft retail market challenged the company during the first quarter of fiscal 2017, ended March 31, and is expected to weigh heavily on second-quarter results.

Net income totaled $28.2 million, equal to 50c per share on the common stock, and compared favorably to the same period of the previous year when the company recorded a loss of $3.2 million.

Sales for the quarter were $1,536.2 million, an increase compared with fiscal 2016 when sales totaled $1,270.2 million.

Sam Reed, TreeHouse Foods
Sam K. Reed, chairman and c.e.o.

“As often has been the case following large-scale consolidation and organizational realignment, our initial top-line advances have temporarily outdistanced their bottom-line counterparts,” said Sam K. Reed, chairman and chief executive officer, during a May 4 conference call with financial analysts. “While this phenomenon has affected the quality of our first-quarter earnings, I regard it as transitory in nature.”

Initiatives under way at the company that are part of the reorganization include stock-keeping unit (s.k.u.) reduction and customer reviews with an eye toward dropping low volume customers.

“Our division teams have made great strides in identifying s.k.u.s to either eliminate entirely or to consolidate with other very similar formulations,” said Dennis Riordan, president of TreeHouse Foods, on May 4. “Our goal is to identify 25% reduction in s.k.u.s with only a minor effect on top-line sales. However, any shortfall in sales would be more than offset through higher gross margins.

“Our progress has been good, but eliminating and consolidating s.k.u.s takes time as we need to work both internally in formulation changes, work with our customers on approving the changes and then running down our existing inventories of materials, containers and labels that will be affected by the change.”

The company faced margin pressure during the quarter, because it was dropping many low volume customers faster than it was able to lower some manufacturing plant operating costs.

 

“As a result, we saw margin pressure in a variety of our product categories,” Mr. Riordan said. “This was combined with some input cost changes, particularly in our snack nuts division, that were not immediately offset with increased pricing. So even some categories like dressings and sauces, that were not affected by the big co-pack business losses, saw some margin erosion.”

Mr. Riordan added that the company is focused on realigning some operations to reduce costs throughout the rest of the year. Additionally, TreeHouse Foods is working on targeted pricing programs to recover margins lost due to increased input costs.

Dennis  Riordan, TreeHouse Foods
Dennis Riordan, president

“I expect we’ll see the same level of success in recovering input cost as we have with driving incremental volume in the first quarter. The realization of pricing, however, won’t occur until the third quarter based on the normal time lag between acceptance and invoicing.”

Management iterated its warning that the second quarter of fiscal 2017 will be its low point primarily due to uneven demand during the first quarter. Despite the challenges ahead, the company reaffirmed its full year e.p.s. guidance of $3.50 to $3.70.

A larger issue for the company may be what is occurring at retail. Mr. Reed noted that the consumer spending element of gross domestic product posted its lowest quarterly gains since 2003.

“…the entire grocery industry, retailers and suppliers alike, has struggled to sustain forward momentum, particularly in core categories and traditional channels…,” he said.

Analysts on the conference call were particularly interested in the news from TreeHouse management that some retailers are opening the bidding process for some of their business earlier than usual.

“I think the underlying factor here is that for the retail grocery business, particularly in traditional channels and particularly among those outlets who are subscribed to syndicated services, the key factor here is the substantial downturn in foot traffic …” Mr. Reed said. “…When you looked across the totality of the edibles portfolio, the business was down for the quarter and it successively got weaker as the quarter went along. And the point there is that we are seeing grocers reopen bidding earlier or midterm and often the case is and it is — it’s all about the profitability of their business.”

Mr. Reed added that 80% of TreeHouse Foods’ profits come from 36 customers and that the company is focused on better serving those customers. 
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