TreeHouse Foods - A Continuing Saga

I enjoy listening in on the THS earnings calls because I always seem to learn something new. Some things I learned today.

Their stock was down less than 3.5% for the day, after being down over 8% late morning, as the market possibly fully absorbed the numbers and management's commentary. Even after this drop it looks like THS stock has matched the market's movement over the last six months, which is a dramatic improvement in their stock price performance over the 18 months prior.

Food Drive published a fairly extensive post soon after the end of the call with a pretty stark headline TreeHouse Foods' net sales plummet 10% in Q3. This was slightly different than the headline on THS' own press release "TreeHouse Foods, Inc. Delivers Third Quarter 2018 Results Above Guidance ...". 

• Although THS management attributed some of their third quarter sales miss to hurricanes, and dodged a question as to whether the sales would spring back once facilities were reopened, I thought the overall tone if not content was fairly positive.
• As the article indicated "... one thing (CEO Steve) Oakland is definitely channeling is optimism."!

The calls are always accompanied by some interesting PowerPoint slides.

• The 10% sales decline included 2.3% points from sku rationalization, but that is still a 7.5% decline on a adjusted basis, with Snacks down 22.6%, (in part as a result of the hurricanes) - ouch.

• This one highlights the direct margin improvement by division. Condiments is described as the poster child for implementation of some of their improvement initiatives, and this chart clearly bears that out. It also highlights how much higher the percentage margins are for beverages, versus the other divisions, as well as highlighting the issues with Snacks - Ouch.

Another interesting chart is this one dealing with anticipated cost level changes for cost components. Although I'm sure it is a conscious effort to demonstrate their grasp of the markets for their major inputs, it does kind of signal the direction and magnitude of price changes to the industry, to both buyers and other manufacturers. I'm curious how other manufacturers will use this information in their approach to buyers and visa versa.

Management also pointed out that the sales declines reflected accounts which were lost a year or more ago when they were faced with defending commodity based price increases and THS' service levels in the low 90%'s.

• The analyst's were quite interested in knowing where service levels were now, and Oakland answered as best he could, generally intimating that there were currently meeting customer expectations around the 98% level.
• I was struck more by the length of time it takes for new suppliers to take over business THS has lost, Oakland indicated 9-12 months. This struck me as quite long, but he spoke about formulation and formula approvals, plant inspections and test runs. Regardless, these steps imply sophisticated Private Label buyers, who are switching suppliers for core proprietary products, a step which was not taken lightly on their part and more importantly are not likely to change again unless the new supplier has a problem!

Near the end of the call management pointed out that they were planning an Investor Day presentation in early December in New York. For the last three years, they have held a fall presentation in Chicago in conjunction with PLMA.

• On a hunch, I checked, and I don't see that TreeHouse is registered for next weeks PLMA show.
• That should open up some space at the front of the Sky Hall - it looks like Post's Golden Boy Foods is there. This is ironic, as the old Ralcorp split into Post and Ralcorp Private Brands, which was sold to ConAgra, which was then sold to TreeHouse . . .

One thing that the Analysts seemed very interested in, and which Oakland promised to speak about in more detail in New York, was the prospect of a broader strategic restructuring. The elephant in the room was what THS was going to do about the Snacks division, which includes Flagstone Foods.

• A quick review of the financials indicates that through the end of 2017, the company has written down all goodwill and customers lists associated with the Snacks division. This amount totaling over $800 million seems to represent almost 100% of the original purchase price paid for Flagstone in 2014.

The prospect of a sale brings the mind the recent announcement from Campbell's that they may sell their Fresh Division, primarily Bolthouse Farms, which they originally purchased for $1.55 billion, but may now fetch between $500 million and $700 million in a sale. A quote which I paid particular attention to in the Food Drive article was

• "It just kind of became one problem after another,” Brittany Weissman, an analyst at Edward Jones, told Food Dive. "They just didn’t have the knowledge base and the team in place to really understand" the refrigerated distribution system and volatility in the commodity market.
• I believe THS has made similar observations regarding their running of Flagstone.

I have always believed that THS is doing all the right things, and are in the right market.

• It is just a question as to whether they can get their act together before better operators create franchises in their individual categories/divisions, which get the job done for their customers, and don't give buyers a reason to switch away from them.

When put it in those terms, THS may be . . .