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TreeHouse Foods reports Q4 2016 results

Published 09 February 2017

TreeHouse Foods reported fourth quarter GAAP loss per fully diluted share of $4.96 compared to earnings of $0.85 reported for the fourth quarter of last year.

The Company reported adjusted earnings per fully diluted sharein the fourth quarter of $1.14compared to earnings of $1.08 for the fourth quarter of last year.

"Following a third quarter where we fell short on both internal and external expectations, we accomplished a great deal in the fourth quarter and are pleased with where we finished the year," said Sam K. Reed, Chairman and Chief Executive Officer. "We delivered volume growth in the base business, with North American Retail Grocery volume/mix up 2.9% in the fourth quarter. Our integration of Private Brands is progressing well and according to our plan. In fact, Private Brands gross margin improved to its highest level since we closed the transaction last February."

"In early 2017, the Company reorganized to a five division structure – Baked Goods, Beverages, Condiments, Meals and Snacks," he continued. "We believe we will have established a solid foundation for future growth and stability and we remain committed to carrying out on our promise of transformation and delivering shareholder value. As we enter 2017, year two of this transformative journey, our long-term strategy, business plans, functional initiatives, and financial targets have been formulated to make good on these commitments."

"The breadth and depth of our product offering in private label food and beverage is unparalleled in the industry, and that puts us in a unique position to serve our customers in ways that cannot be easily replicated by the competition," Mr. Reed continued. "We remain dedicated to our private label enterprise as we support our customers' corporate brand initiatives, while offering consumers the best balance of both quality and cost."

The Company's 2016 fourth quarter results included six items noted below that, in management's judgment, affect the assessment of earnings. The first item was a$6.19 per share expense for impairment of goodwill and other intangible assets. The second item was a $0.17 per share expense for acquisition, integration, and related costs. The third item was a $0.14 per share expense for restructuring and facility consolidation costs. The fourth item was a $0.04 per share expense for foreign currency losses on the re-measurement of intercompany notes. The fifth item was a $0.18 per share gain for mark-to-market adjustments. The final item was a $0.26 per share gain reflecting the tax impact of the aforementioned adjusting items.

Net sales for the fourth quarter totaled $1,776.7 million compared to $865.4 millionlast year, an increase of 105.3%, due to the inclusion of business from the acquisition of the private brands operations of ConAgra Foods, Inc. ("Private Brands") and favorable volume/mix, primarily in the North American Retail Grocery segment, partially offset by lower pricing. Compared to the fourth quarter of last year, sales for the North American Retail Grocery segment increased 123.3%; sales for the Food Away From Home segment increased 69.5%; and sales for the Industrial and Export segment increased 22.8%.

Reported gross margins were 19.7% in the fourth quarter of 2016 compared to 21.0% in the fourth quarter of the prior year. The decrease in gross profit as a percent of net sales was due to unfavorable pricing primarily from competitive pressure, lower margin products from the Private Brands acquisition, which contributed 30 bps toward the decline, and an increase in variable incentive compensation, partially offset by generally lower input costs and operating efficiencies. Included in gross margins for the fourth quarter was the impact of $4.2 million of costs primarily related to restructuring activities compared to costs of$3.0 million for restructuring activities in the fourth quarter of 2015.

Selling and distribution expenses increased $65.8 million, or 139.8% in the fourth quarter of 2016 compared to 2015. This increase is primarily due to $69.2 millionof incremental costs from the Private Brands business, higher variable incentive compensation, and additional investments in the sales force that were partially offset by favorable freight rates.

General and administrative expenses increased by $53.7 million, or 126.7%, in the fourth quarter of 2016 compared to 2015, of which $35.8 million pertains to incremental costs of the Private Brands business. Also contributing to the increase was approximately $3.1 million in higher variable incentive compensation accruals compared to the prior year period and an incremental increase of $3.2 million of acquisition and integration costs in the fourth quarter of 2016 compared to the prior year period. In 2015, the Company reduced variable incentive compensation accruals due to weaker than planned operating results. The remaining increase of$11.6 million was primarily due to infrastructure investments and additional costs due to the growth of the Company.

Amortization expense increased $14.1 million in the fourth quarter of 2016 compared to 2015, primarily due to the amortization of intangible assets from the Private Brands acquisition.

The Company recorded a non-cash charge of $352.2 million related to impairment of goodwill and other intangible assets primarily associated with the North American Retail Grocery – Flagstone ("Retail Flagstone") reporting unit. In theCritical Accounting Policies section of our third quarter Form 10-Q filing, the Company provided an early warning disclosure stating that the Retail Flagstone reporting unit may not pass the first step of the goodwill impairment test. In two full years since acquisition, this business has experienced unforeseen challenges including, but not limited to, pricing declines from competitive pressure, unfavorable almond commodity costs, cashew supplier issues, and costs associated with the sunflower seed recall.

These challenges led to lower than originally planned results in this unit in the past. Despite the impairment, the Company maintains its optimism about snacks as an attractive category for customers and consumers, given the healthy, on-the-go nature of snacks and the ability to have facings in both the perimeter and center of the grocery store. The snacks category remains an important part of TreeHouse's strategy going forward, and the Company is confident that its new division structure, with its dedicated go-to-market teams, will restore this business to growth.

Other operating expense in the fourth quarter of 2016 was $4.4 million, compared to $1.3 million in 2015. The increase was due to higher costs associated with restructurings that were previously announced with respect to the Company's closure of the City of Industry, California; Ayer, Massachusetts; Azusa, California;Ripon, Wisconsin; Delta, British Columbia, Canada facilities and the partial closure of the Battle Creek, Michigan facility.

Net interest expense increased $19.8 million in the fourth quarter of 2016 compared to 2015, due to higher debt levels from financing the Private Brands acquisition and higher interest rates.

The Company's foreign currency impact was a $0.3 million loss for the fourth quarter of 2016, compared to a loss of $7.8 million in 2015, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar during the respective quarters.

Other income was $10.4 million for the fourth quarter of 2016, compared to expense of $0.3 million in 2015. The change was due to non-cash mark-to-market adjustments on derivative contracts, primarily interest rate swap agreements and foreign currency contracts.

Income tax expense of $16.5 million was recorded in the fourth quarter of 2016. The effective rate was (6.2%) compared to 35.1% in the prior year's fourth quarter. The change in the rate year-over-year is primarily related to the impairment loss on goodwill and other intangible assets that are not deductible for tax purposes. Excluding the impact of the impairment, the fourth quarter tax rate would have been 32.4%. Our effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

Net loss for the fourth quarter of 2016 was $281.8 million, compared to net income of $37.3 million in the previous year. The reasons for this change are outlined in the individual line item discussion and analysis provided in the preceding paragraphs.

Adjusted EBITDAS was $210.3 million in the fourth quarter of 2016, a 74.9% increase compared to the same period in the prior year. The increase in adjusted EBITDAS this quarter was driven by the inclusion of operating income from the Private Brands acquisition and generally favorable commodity costs, partially offset by higher costs due to the growth of the Company, unfavorable pricing primarily from competitive pressure, and higher variable incentive compensation. Adjusted EBITDAS is a non-GAAP financial measure. See "Comparison of Adjusted Information to GAAP Information" below for the definition of adjusted EBITDAS and a reconciliation of adjusted EBITDAS to net income, the most comparable GAAP financial measure.

Fully diluted shares outstanding for the fourth quarter of 2016 increased to approximately 56.8 million shares compared to 43.8 million shares in the fourth quarter of 2015. The increase is primarily due to the impact of 13.3 million shares issued on January 26, 2016 in a public offering of the Company's common stock, with the net proceeds of such offering used to partially fund the Private Brands acquisition.

Segment results

North American Retail Grocery net sales for the fourth quarter of 2016 increased 123.3% to $1,493.4 million from $668.8 million during the same quarter of the previous year, driven by a 122.2% increase due to the Private Brands acquisition and favorable volume/mix, partially offset by lower pricing. Volume/mix increased 2.9% in the fourth quarter, as higher volume/mix in single serve beverages, carton soup, and dressings were partially offset by lower volume/mix in snacks, non-dairy creamer, pickles, canned soup, and hot cereals.

Direct operating income margin in the fourth quarter decreased 160 basis points to 14.3% in 2016. This decrease is due to unfavorable pricing primarily from competitive pressures, higher variable incentive compensation, and lower margin Private Brands business (a 20 bps impact), partially offset by generally lower commodity costs and lower freight rates.

Food Away From Home net sales for the fourth quarter of 2016 increased 69.5% to$152.0 million from $89.6 million during the same quarter of the previous year, driven by a 74.5% increase due to the Private Brands acquisition, which was partially offset by declines in both volume/mix and pricing.

Volume/mix had a 3.5% unfavorable impact, as increases in pickles and Mexican sauces were more than offset by declines in dressings and aseptic products. Direct operating income margin in the fourth quarter decreased 180 basis points to 12.3% in 2016, primarily due to the impact of lower margin products from the Private Brands acquisition (impact of 100 bps), select unfavorable input costs, and higher variable incentive compensation, which were partially offset by favorable freight rates.

Industrial and Export net sales for the fourth quarter of 2016 increased 22.8% to$131.4 million from $107.0 million during the same quarter of the prior year, primarily driven by a 31.8% increase from the Private Brands acquisition, partially offset by unfavorable volume/mix. Volume/mix declined 9.7% from prior year as most product categories showed a year-over-year decline, led by soup, non-dairy creamer, and pickles, primarily due to competitive pressure. Direct operating income margin in the fourth quarter decreased 670 basis points to 12.3% in 2016, primarily due to the impact of lower margin business from the Private Brands acquisition (impact of 530 basis points) and higher variable incentive compensation partially offset by favorable freight rates.



Source: Company Press Release