TreeHouse Foods’ Second-Quarter Results Reflect Healthy Base Business

Second-quarter results were above on the top and bottom lines, aided by core private-label sales growth, continued operating efficiency improvements, and lowerthan- expected interest expense. Core private-label sales grew by 6%, driven by gains for single-serve hot beverages and recovery in the conventional grocery channel. In other words, the base business performed well. And quite notably, TreeHouse announced it will begin shipping (in the fourth quarter) new single-serve coffee products that will work in both existing and next-generation (Keurig 2.0) coffeemakers, suggesting that this business has additional room for growth.

Separately, the recent acquisitions of Protenergy and Flagstone Foods are attractive on a number of dimensions. The two businesses add nearly $1 billion in sales and approximate 30% of TreeHouse’s consolidated revenue. Since both acquired businesses have grown—and are expected to grow—at double-digit rates, these transactions should accelerate TreeHouse’s underlying organic growth rate over the next few years. In addition, both businesses help establish new platforms for growth and, in turn, provide new opportunities for growth via internal and external means.

Management raised its full-year earnings guidance by $0.10 to $0.15 to reflect accretion from Flagstone Foods and Protenergy. Accordingly, we increased our 2014 EPS estimate by $0.10, to $3.70 (up 16% year-over-year), and our 2015 estimate by $0.30, to $4.30 (up 16%). We maintain our Outperform rating. TreeHouse reported second-quarter EPS of $0.84, compared with our estimate of $0.80, consensus of $0.83, and $0.65 a year ago. Organic sales increased by 5%, with volume/mix up 5% and price essentially flat. Gross margin was 22.3%, unchanged yearover- year and 30 basis points below our forecast; selling-and-distribution expense (as a percentage of sales) was 6.3%, up 30 basis points year-over-year and 10 basis points below our estimate; the general-and-administrative expense ratio was 5.3%, down 10 basis points year-over-year and in line with our estimate.

Management raised its full-year earnings guidance by $0.10 to $0.15 to reflect accretion from the Flagstone Foods and Protenergy Natural Foods acquisitions. The company now expects EPS in a range of $3.60 to $3.75, up 15% at the midpoint, and forecasts its legacy business to perform in line with prior expectations. We raised our 2014 EPS estimate by $0.10, to $3.70 (up 16% year-over-year), and our 2015 estimate by $0.30, to $4.30 (up 16%).

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