OAK BROOK, ILL. – The fourth quarter of fiscal 2014 was not kind to TreeHouse Foods. Several issues, most notably a dramatic rise in tree nut prices and an equally dramatic devaluation of the Canadian dollar, combined with a key customer’s decision to destock its inventory during the quarter placed unexpected pressure on the company’s results. While maintaining a positive outlook, company executives warned some of the issues may have lingering effects as fiscal 2015 progresses.

“A frigid arctic front descended on the food and beverage industry late this winter,” said Sam K. Reed, president, chairman and chief executive officer, in a conference call with securities analysts on Feb. 12. “Our TreeHouse was not spared and, like many others, suffered storm damage. Our hopes for a strong fourth-quarter finish were dashed in December as holiday season revenues fell substantially short of our plans.”

For the quarter, the company earned $33,917,000, equal to 80c per share on the common stock, compared with earnings of $22,784,000, equal to 62c per share, during the fourth quarter of fiscal 2013.

Sales for the quarter rose to $903,513,000 compared to $660,321,000 the previous year.

With regard to tree nuts, Mr. Reed said both national and private label segments struggled as two of every three grocery chains reported lower volumes than the previous year. Almonds and walnuts particularly were affected as drought in California triggered low yields, a supply shortage and sharply higher costs.

“Flagstone, like others, was caught in this industry-wide squeeze as price increases of 9% to 13% on tree nuts curtailed the usual seasonal promotions and merchandising,” he said.

Dennis Riordan, chief financial officer, said at the beginning of the fourth quarter the Canadian dollar was trading at C0.90c for every $1, but declined in December to C0.86c per $1.

“As many of you know, the Canadian dollar is now trading at about C0.79c compared to $1,” Mr. Riordan said. “That represents a deflation rate of just over 13% when compared to the average Canadian dollar exchange rate in 2014. The devaluation will have a significant effect on our earnings in 2015 because we have a large presence in Canada due to our E.D. Smith, Associated Brands and Protenergy Natural Foods businesses. A little over 11% of our sales were in Canada in 2014.

“In the case of E.D. Smith in particular, we have a very high percentage of their input cost purchased in the U.S.A. but sold into Canada. This magnifies the effect of the Canadian dollar because many of their input costs are effectively rising by over 13%, but their sales will not cover the higher costs.”

For fiscal 2014, ended Dec. 31, TreeHouse Foods earned $89,880,000, equal to $2.28 per share on the common stock. In fiscal 2013, the company recorded net income of $86,988,000, equal to $2.39 per share.

Sales for the year were $2,946,102,000, an increase compared to the year prior when sales were $2,293,927,000.

Looking ahead to 2015, Mr. Riordan said sales are expected to increase by approximately 24% due to full-year revenues from the Flagstone Foods and Protoenergy businesses, which were acquired in 2014.

“On a legacy basis, we believe organic sales growth in our Retail segment will be in the range of 2% to 3%,” he said. “Our gross margins will be relatively flat in total for 2015 as the margin headwinds from the FX challenges and negative sales mix from the acquisitions of Protenergy and Flagstone will be offset by internal improvements and other savings initiatives.

“So all things considered, we believe our full-year adjusted earnings per share will increase between 8% and 12% in 2015 to a range of $3.80 to $3.95. This is a wider range than we normally give, but with the big swing in Canadian exchange rates we believe it's prudent to widen the guidance for 2015.”

Expressing cautious optimism

Mr. Reed called TreeHouse’s single-serve beverage business the primary engine propelling the company’s organic growth during the past three years. Today, the business generates half a billion dollars in sales, but it is facing new competition.

“Our growth engine, initially geared for pedal to the metal acceleration, must now shift into overdrive for sustained momentum over the long haul,” he said. “As we venture forth into 2015, our growth plans are predicated upon private label expansion, customer brand innovation and consumer stratification. Taken as a whole, these factors spell opportunity for TreeHouse albeit at lower margins as private label growth in retail channels exceeds that of brands and household penetration expands to middle-class families seeking greater value in single-serve beverages.”

Mr. Reed also pulled back on the company’s expectations for its Flagstone Foods snacks business.

“Our outlook for healthy snacks is now more guarded than before the holidays,” he said. “As a consequence, our expansion will proceed at a slower pace than originally foreseen. We now must, as we have in virtually all of our dozen acquisitions, revise our initial business plans in pursuit of growth, profits and category leadership.”

To address the price increases in tree nuts, the company plans to vary nut combinations in specific products and refine packaging and merchandising around the perimeter of retail formats to drive impulse buys.

“The one factor here that was extraordinary was the effect of the drought on the almond crop in California. (It) was far beyond the expectations of anyone in the marketplace,” Mr. Reed said. “But now that we know what to expect we will adjust to that. I think you'll see us move quite quickly here.”

In his prepared remarks, Mr. Reed called 2014 an extraordinary year of strategic progress and operational advance marred by unforeseen events at the year’s end.