OAK BROOK, ILL. – The embracing of big data can be a good news, bad news situation. At TreeHouse Foods, Inc., new I.T. initiatives gave management the ability to better track margin structure, production, logistics and procurement for each of its stock-keeping units (s.k.u.s).
That’s the good news.
The bad news is the results showed a supply chain and fixed assets operating at utilization levels management deemed too low. As a result, the company has initiated TreeHouse 2020, a program that will feature plant closures, line retirements, network optimization and productivity investments to eliminate redundancy and lead to the rationalization of corresponding unprofitable s.k.u.s and nonstrategic customers.
A number of startling learnings from its new business and data assessments prompted the company to act decisively. For example, while management thought the company served 1,700 unique customers, it turns out there are 1,400. As part of the 2020 initiative that number is being reduced to 1,100 unique customers. Management has also set a goal of rationalizing 25% of its estimated 23,000 s.k.u.s.
|Matthew Foulston, c.f.o. of TreeHouse Foods|
“We went from 20-plus plants to more than 50, when we closed the Private Brands transaction,” said Matthew J. Foulston, chief financial officer, during an Aug. 3 conference call with analysts to discuss the company’s second-quarter results. “Our operational misses have been magnified by this environment. Simply put, we have excess capacity, we have too many non-strategic customers, and we make too many marginal s.k.u.s.”
Once the TreeHouse 2020 program is completed, the company expects to generate 300 basis points of annual operating margin improvement by the end of the year 2020.
During the second quarter, ended June 30, the company incurred a loss of $34.2 million. During the same period of fiscal 2016, net income totaled $19 million, equal to 34c per share on the common stock.
Sales for the quarter dipped slightly to $1,522.2 million from $1,541.4 million the previous year.
Second-quarter results were adversely affected by the divestiture of the canned soup and infant feeding businesses.
“On a pretax basis, we recorded an $85 million loss on the sale. And … the impact on our ongoing operating profit is negligible," Mr. Foulston said. “We have struggled with the category dynamics and profitability of this business for a number of years and believe it’s in our best interest to focus our resources, both capital and management time, in areas where both the value and the likelihood of winning are greater.”
Looking toward the rest of the fiscal year, management sees continuing headwinds.
|Sam Reed, chairman and c.e.o. of TreeHouse Foods|
“As we enter the back half of the year, the environment remains highly competitive, which is pressuring volumes across nearly all of our divisions,” said Sam K. Reed, chairman and chief executive officer. “We are diligently working to improve our operational effectiveness, aggressively simplify our offerings and reduce our cost structure.
“However, our current forecast is below our original expectations for the year, and we are lowering our full-year guidance for adjusted earnings per fully diluted share to a range of $3.15 to $3.30. We anticipate third-quarter adjusted earnings will be within the range of 75c to 83c."
|||READ MORE: Renovation plan highlights|||
Renovation plan highlights
The executive charged with executing TreeHouse 2020 is Robert B. Aiken Jr., the company’s new president and chief operating officer. During the earnings conference call he delved into some of the specifics of how he sees the program unfolding during the next few years.
|Robert Aiken, president and c.o.o. of TreeHouse Foods|
“First, we will maintain our steadfast focus on simplification, both from a product and category perspective, but also from a customer perspective,” he said. “We are deep into segmenting our customer base and shifting focus to the large and growing customers strategically committed to private label, as well as standardizing commercial terms and eliminating exceptions across our customer base.”
Mr. Aiken added that s.k.u. reductions will allow the TreeHouse executives to make targeted decisions regarding plant and production line optimization. On Aug. 3, the company announced it would close two manufacturing plants in Brooklyn Park, Minn., and Plymouth, Ind., by the end of the year, and the shifting of some production away from its plant in Dothan, Ala.
“We'll also be permanently shutting down numerous lines that are projected to operate at low utilization levels,” Mr. Aiken said. “Phase 1 includes approximately 20 such lines that we plan to decommission. Over the course of TreeHouse 2020, we plan to increase our capacity utilization by up to 20% from existing levels, but still maintain flexibility to grow.”
The company also will be focused on making its mixing centers more agile, with the ability to become more integrated with customer supply chains.
“We'll build capabilities across the spectrum of full customer requirements from full truckloads to mix pallets of the entire range of TreeHouse products,” Mr. Aiken said. “This agile distribution capability will be particularly meaningful as e-commerce customers become a greater force going forward, because that is how they typically order from suppliers.”
Finally, Mr. Aiken said there will be a greater emphasis on continuous improvement and standardizing processes throughout the company. A part of that effort will include completing the installation of a manufacturing component of the SAP enterprise resource management software.
“With the powerful new business and analytical tools we've built, we also have the opportunity to optimize pricing and margin based upon a clearer understanding at the s.k.u. level of our margin, input costs and cost to serve,” he said. “As our organizational structure continues to mature, these analytical tools also provide the platform for improved forecasting and planning across our divisions.”
For the first six months of fiscal 2017, TreeHouse Foods recorded a loss of $6 million. The same period the year prior the company earned $15.8 million, equal to 29c per share.Sales for the first six months rose to $3,085.4 million from $2,811.6 million the previous year.