Shares of TreeHouse Foods Inc. plunged Thursday, as the company struggles to digest its acquisition of ConAgra Foods Inc.’s private-label business, a decision that has led to plant shutdowns, a lowered annual profit outlook and a reshuffling of TreeHouse’s executive ranks.
TreeHouse completed the $2.7 billion deal earlier this year, making a bold move to become the biggest U.S. maker of store-branded groceries. TreeHouse, spun off from Dean Foods Co. a decade ago, has seen revenue double along with expenses, as the Oak Brook, Ill., food company has gotten a taste of the struggles ConAgra endured with the foundering private-label business.
“The third quarter was a tale of two cities,” said Sam K. Reed, chief executive officer of TreeHouse, in a prepared statement. “Our legacy business continued to perform well…On the other hand, while the private brands business showed sequential improvement, its results fell short of our expectations for the quarter.”
Shares closed down 19% to $69.72 on Thursday.
ConAgra, the maker of Chef Boyardee and Slim Jim snacks, jettisoned the business less than three years after spending $5 billion to buy it. ConAgra said it discovered after closing the deal with Ralcorp Holdings Inc. that problems were worse than anticipated, including poor customer satisfaction and manufacturing issues.
The growth of private labels has drawn intense competition, pressuring margins. The private-label division that was sold to TreeHouse at a steep discount made cereal, pasta, condiments and snacks for supermarkets to use as their house brands.
On Thursday Chief Financial Officer Dennis Riordan, who was slated to retire, will instead take the post of interim president, replacing Christopher Sliva, who resigned to pursue another career opportunity.
Matthew Foulston, chief financial officer of minerals producer Compass Minerals International Inc., will take over as CFO of TreeHouse. He is slated to make the transition no later than Dec. 2.
The exit of Mr. Sliva and the pending retirement of Mr. Riordan are troubling signs, said William Chappell Jr., an analyst for SunTrust Robinson Humphrey.
“In our opinion, two of the people most responsible for making the private brands deal are no longer in their operational roles, and cracks in the deal are already starting to appear,” Mr. Chappell said in a note to clients. “We still believe in the long term potential for the deal but now believe the stock is dead money, at best, until mid-2017.”
A call seeking comment from TreeHouse officials wasn’t immediately returned.
Besides the shuffle of executives, the company also announced that it was shuttering a plant in Canada and trimming back its manufacturing capacity in Michigan.
TreeHouse said the closure of its Delta, British Columbia, plant, which produces frozen griddle products, will impact about 90 employees. The partial closure of a plant in Battle Creek, Mich., will affect about 100 out of 160 employees.
“We are lowering our full year 2016 earnings expectations due to the combination of lower than expected third quarter sales from the private brands business, along with our belief that fourth quarter private brands sales will fall short of our goal to stem its year-over-year sales declines,” Mr. Reed said.
For the full year, the company now expects adjusted earnings on a per-share basis between $2.80 and $2.85, down from a previous projection of $3.00 and $3.10. Analysts surveyed by Thomson Reuters expect $3.07.
For the current quarter the company expects adjusted earnings between $1.07 a share and $1.12 a share, much lower than the analyst estimate of $1.25.
In its latest quarter, TreeHouse reported a third-quarter profit of $37.2 million, or 65 cents a share, up from $28.4 million, or 65 cents, a year earlier. Excluding certain items, the company posted adjusted earnings of 70 cents a share, compared with 86 cents a share a year ago.
Revenue nearly doubled to $1.59 billion, but the cost of sales also jumped, more than doubling to $1.3 billion. Analysts polled by Thomson Reuters projected earnings of 78 cents a share on $1.64 billion in sales.
By Ezequiel Minaya
Source: Wall Street Journal
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