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TreeHouse Foods stock soars after strong sales, earnings report

by Benjamin Miraski
May 08, 2008

TreeHouse Foods Inc. posted sharply lower earnings than the year-prior quarter because of a major one-time charge taken for the closing of a pickle plant. However, adjusted earnings per share far exceeded analysts’ expectations, sending the stock up more than 9 percent.

For the quarter ended March 31, the Westchester,Ill.-based producer of pickles and non-dairy creamer reported net income of $2.1 million, or 7 cents per diluted share.  Earnings were 72 percent lower than earnings of $7.4 million, or 24 cents per diluted share, in the year-prior quarter.

The company took a charge in the first quarter related to the closing of its Portland, Ore., pickle processing plant that equated to a reduction in TreeHouse’s earnings of 24 cents per diluted share.  The company also realized a charge on foreign currency translation of 3 cents per diluted share. Excluding these charges, the company earned 34 cents per diluted share.

Wall Street estimated diluted per share earnings excluding items of 25 cents, as compiled by Zacks Investment Research Inc.

Net sales grew 39 percent to $360.6 million from $259.0 million in the year prior period. Sales in the quarter were boosted by the recent acquisitions of E.D. Smith and San Antonio Farms. Excluding acquisitions, sales grew 4.7 percent.

Chairman and CEO Sam Reed said he was pleased with the company’s results in the face of a difficult economy on the conference call with analysts and investors.

“While 2008 will be a challenging year for the packaged foods industry in general, I am confident that it will also be one of great opportunity for TreeHouse,” Reed said.

The company estimates industrywide cost inflation of about 15 percent, and according to Reed, the impact to TreeHouse will be an increase in costs of $100 million this year, $20 million more than the company’s original estimates.

To combat the rising costs, TreeHouse launched a pre-emptive price increase at the end of 2007.

“We now find that another round is required to counter further cost run-ups,” Reed said.  The next price increase will be put into place before the beginning of the company’s third quarter this summer.

“I thought last year was the most challenging I have ever faced from a cost perspective in my 34 years in the food industry, but this year, the environment is even more challenging,” echoed David Vermylen, president and chief operating officer of TreeHouse.

“We are dealing with it and we are very optimistic that we will weather the storm just as we did in 2007.”

To do this, TreeHouse is aggressively hedging. Chief Financial Officer Dennis Riordan said the company is hedged on most of its input costs through the end of the year.  The one wildcard in the mix is energy costs, which are third-party expenses the company cannot hedge against.

Analyst Andrew Lazar of Lehman Brothers Holdings Inc. asked the company’s executives if they felt that the new environment, with pricing as part of the equation for food companies, was a positive down the line, despite the increased volatility in costs. Vermylen answered with optimistic humor.

“I think if you saw how much more gray hair I have since the last time we met, obviously the volatility is not the best thing for my health,” he said. “I am confident that whether we are faced with volatility or stability, we will find a way to find our way through it, as good as, if not better than others.”

In a note, analyst Jonathan Feeney from Wachovia Capital Markets LLC cited strong adjusted operating income and sales ahead of expectations as good signs for TreeHouse.  He also expects strong seasonal cash flow generation to be reflected in the quarterly report.

The company reiterated guidance for full-year adjusted earnings in the range of $1.50 to $1.55, with a bias toward the high side because of a beneficial tax environment.  TreeHouse earned $1.32 per diluted share in 2007. For the second quarter, the company expects earnings in the range of 29 cents to 32 cents per diluted share, similar to the Wall Street consensus of 31 cents compiled by Zacks.

TreeHouse Foods stock closed Thursday at $24, up $2 from the previous day’s close of $22.