TreeHouse’s Playbook for All to See.

This last week TreeHouse Foods (THS) released their first quarter results and had their call with their stock analysts. Although always entertaining and informative. This session was a little more informative than most.

• TreeHouse released their financial results for the past two years, restated for their newly defined five operating segments:  Baked Goods, Beverages, Condiments, Meals and Snacks. Two things I found particularly interesting. First how significant their introduction of K-cups evidently has been to their results. Margins on Beverages are the highest in the group, close to double the second highest category. So despite not being the segment with the greatest sales it does generate the most margin. Second, how low margins are in the Snack segment. At about 4% the margins are almost six points lower than the next lowest category, and eighteen points below Beverage. No wonder they always talk about the impact of mix, with heterogeneous margins like this.
• Management also outlined their plans for future growth, where they will focus on a limited number of accounts. This is driven by the fact that thirty-six customers account for about 80% of their profits, and possibly sales. These accounts are also the ones who value THS’s investment in value adds such as promoting consumer focused innovation, and will be their focus going forward. So while they will keep their volume with these customers at all costs, this means that for the other 260 some customers and some 3,100 customer SKUs , THS is likely to do less to compete for that business. Thus there are excellent sales and margin opportunities associated with this $1.2 billion of business for manufacturers who can economically meet these customers needs with their own operations.
• THS management also laid out one more play in their playbook, moving most of their major customers to open-book/formula/market based pricing and stating that nineteen of their twenty-five largest component or ingredient categories can be tracked and effectively communicated to customers to support this model.

Most companies avoid providing this much detail on their business operations, as they don’t want to provide their competition with too much intelligence on what they are doing. In THS’s case, since they are a public company they have to disclose certain information to the investing public, they go one step further and let their analyst community in on their overall strategy in all it’s interesting detail. They obviously feel that the lower cost of capital, gained by increasing their credibility with investors, far exceeds any higher costs arising from competitive responses to their disclosures. Besides I believe it was the Green Bay Packers who were not afraid to let their opponents know what their plays were, as they still had to stop them.

This being said, THS’s stock fell 12% after their results were released, so I may be all wrong, But THS has grown from sales of zero in 2005, to over $6 billion this last fiscal year, and are in the throes of absorbing the Conagra/RalCorp acquisition. THS management also believes they are well positioned to take advantage of the anticipated expansion of store brands focused retailers such Aldi and Lidl and the prospect of more online purchase of groceries. As a result, I suggest the jury is still out on their long-term prospects.