OAK BROOK, ILL. — On May 7, TreeHouse Foods, Inc. lowered its earnings and sales outlooks for the year, because single-serve coffee margins have eroded due to excess capacity and the growth expected in snacks following the company’s acquisition of Flagstone Foods in 2014 has not materialized. Management said it is working to address both issues, but added that neither challenge lends itself to a quick fix.
In single-serve coffee, the introduction of Keurig Green Mountain’s 2.0 brewer has not spurred category growth, and the picture is further muddled as independent brewer manufacturers have gained a foothold in the category by offering brewing systems priced below those offered by Keurig Green Mountain. Excess capacity in the market built up, because many branded and private label coffee manufacturers scaled up pod production in anticipation of increased demand following the 2.0 introduction.
|Sam K. Reed, chairman, president and c.e.o. of TreeHouse Foods|
“Manufacturer margins have dropped sharply as product mix shift and excess capacity have further eroded private label pricing,” said Sam K. Reed, chairman, president and chief executive officer of TreeHouse Foods. “The initial effect of these developments on TreeHouse should diminish over time as the single-serve category transitions to a new equilibrium.”
Following the announcement of the 2.0 brewer launch, many coffee manufacturers shifted their pod production to Keurig Green Mountain out of fear that if they didn’t they would be excluded, according to TreeHouse Foods.
“Last year’s tumult over the specter of technological lockout and the promise of enhanced consumer benefit has faded into background static,” Mr. Reed said. “In consequence, less than a year following the introduction of the 2.0 technology, retail grocers have signaled their intentions to return to TreeHouse.”
The performance of TreeHouse’s Flagstone snacks business was affected by weak sales during the holidays, timing delays in new product placement and in produce merchandising programs, according to the company.
“In the interim at Flagstone we have installed a new president, developed new products, secured holiday bookings, invested in automation and ‘diligenced’ acquisition candidates,” Mr. Reed said. “While much has changed since its acquisition Flagstone Foods remains the cornerstone of a multibillion-dollar better-for-you snacks platform in the making. To sum things up we are tackling two immediate tactical issues but we are by no means disheartened by our future strategic prospects.”
Net income for the quarter ended March 31 was $17,852,000, equal to 42c per share on the common stock, and a slight improvement compared with net income of $14,322,000, or 39c per share, during the first quarter of fiscal 2014.
Sales for the period rose sharply due to acquisitions and totaled $783,145,000 compared with $618,903,000 during the previous year.
Due to the challenges in single-serve coffee, Mr. Reed said the company was lowering its full year adjusted earnings per share guidance to a range of $3.40 to $3.55 and that the company expected fiscal 2015 sales to be in a range of $3.4 billion to $3.5 billion.
“We believe that our coffee setback will be short term in nature, as we have secured new business that will begin shipping in the fourth quarter, some of which will be returning to TreeHouse Foods,” Mr. Reed said. “More importantly, over the long term, we firmly regard ourselves as the best positioned to execute a robust private label program with our customers’ best interests in mind.“While we face some immediate challenges in 2015, we expect to build momentum as the year progresses and establish a foundation for a very solid organic growth year in 2016. As always, we remain steadfast in our commitment to the growth of private label and corporate brands. The acquisition environment remains robust, and we are in a great position to participate in a meaningful way, with nearly $400 million available under our current revolving credit facility.”