TreeHouse Foods has recorded first quarter earnings of $0.41 per fully diluted share when compared to $0.38 per fully diluted share reported for the first quarter of 2014.
The Company reported adjusted earnings per share in the first quarter of $0.59 compared to $0.80 in the prior year, excluding the items described below.
The Company's 2015 first quarter results included two items noted below that affected the year-over-year quarterly comparison. The first item is a $0.16 per share loss on the foreign currency translation of intercompany notes. The second item is a $0.02 per share expense for acquisition, integration and related costs.
"We delivered first quarter earnings in line with expectations, with 8 of our 14 legacy grocery categories posting solid margin growth. We continue to be highly focused on simplifying our business and growing profitability, and in most of our legacy categories, we are gaining momentum and generating higher net profits. However, this progress is only partially offsetting the profitability decline in single serve hot beverages, as the level of competition has intensified," said Sam K. Reed, Chairman, President and Chief Executive Officer.
"We continue to be pleased with the integration progress of our recent acquisitions. Protenergy Natural Foods continues to deliver results above our initial expectations, and we expect Flagstone Foods' growth to ramp up meaningfully in the back half of 2015," Mr. Reed concluded.
Adjusted earnings before interest, taxes, depreciation, amortization, and non-cash stock based compensation, or Adjusted EBITDA (a reconciliation to net income, the most directly comparable GAAP (generally accepted accounting principles in the United States) measure, appears on the attached schedule), was $84.5 million in the first quarter of 2015, a 4.8% increase compared to the prior year. Adjusted EBITDA was higher due to acquisitions.
Net sales for the first quarter totaled $783.1 million compared to $618.9 million last year, an increase of 26.5%, due to sales from acquisitions. Partially offsetting the increase in net sales was unfavorable foreign exchange and pricing. Volume/mix was flat in the first quarter of 2015 compared to the first quarter of 2014. Compared to the first quarter of last year, sales in the first quarter of 2015 for the North American Retail Grocery segment increased 30.9%, sales for the Food Away From Home segment decreased 0.4% and sales for the Industrial and Export segment increased 31.6%.
Reported gross margins decreased to 19.5% in the first quarter this year from 21.5% in the first quarter of last year resulting from the impact of lower margin sales from recent acquisitions (accounting for 100 basis points of the reduction), a shift in legacy sales mix, reduced pricing, and unfavorable exchange rates on raw material purchases by the Company's Canadian operations.
Selling, distribution, general and administrative expenses increased $18.4 million in the first quarter of 2015, or 25.7%, to $90.2 million. As a percentage of net sales, these costs decreased from 11.6% in the first quarter of 2014, to 11.5% in 2015. The decrease in costs as a percentage of net sales was primarily related to continued cost rationalization as the Company leverages its resources, partially offset by increased costs in areas such as employee compensation, benefit costs, and information technology due to the continued growth of the Company.
Amortization expense increased $5.3 million in the first quarter this year compared to the first quarter of 2014, or 52.8%, to $15.3 million, due to additional costs from acquisitions, which was partially offset by lower legacy amortization.
Other expense was $20.9 million for the first quarter of 2015, a decrease of $9.4 million from $30.3 million in the same period last year, as last year's expense included $16.7 million for refinancing activities that did not recur this year. Offsetting reduced spending for financing activities was $8.4 million of higher foreign currency exchange expense due to changes in U.S. and Canadian exchange rates, and higher interest expense resulting from higher debt levels associated with the 2014 acquisitions. Interest income and other income increased compared to the first quarter of 2014, due primarily to $1.4 million in annual patronage refunds pertaining to a term loan and higher non-cash mark-to-market gains on derivative contracts.
Income tax expense increased in the first quarter to $7.9 million. The Company's first quarter effective income tax rate increased to 30.8% from the 2014 first quarter rate of 28.5% due to the settlement of unrecognized tax benefits in the first quarter of 2014 associated with the Company's 2011 examination by the U.S. Internal Revenue Service and the impact of a shift of income from Canada to the U.S., where it was subjected to a higher tax rate.
Net income for the first quarter of 2015 totaled $17.9 million compared to $14.3 million in the previous year.
Fully diluted shares outstanding for the first quarter of 2015 increased to approximately 43.6 million shares compared to 37.7 million shares in the first quarter of 2014, primarily as a result of the equity offering completed on July 22, 2014, which financed, in part, the Flagstone Foods acquisition.
SEGMENT RESULTS
The Company has three reportable segments:
North American Retail Grocery - This segment sells branded and private label products to customers within the United States and Canada. These products include non-dairy powdered creamers; sweeteners; condensed, ready to serve and powdered soups, broths and gravies; refrigerated and shelf stable salad dressings and sauces; pickles and related products; Mexican and other sauces; jams and pie fillings; aseptic products; liquid non-dairy creamer; powdered drinks; single serve hot beverages; specialty teas; hot and cold cereals; baking and mix powders; macaroni and cheese; skillet dinners; and snack nuts, trail mixes, dried fruit, and other wholesome snacks.Food Away From Home - This segment sells non-dairy powdered creamers; sweeteners; pickles and related products; Mexican and other sauces; refrigerated and shelf stable dressings; aseptic products; hot cereals; powdered drinks; and single serve hot beverages to foodservice customers, including restaurant chains and food distribution companies, within the United States and Canada.Industrial and Export - This segment includes the Company's co-pack business and non-dairy powdered creamer sales to industrial customers for use in industrial applications, including products for repackaging in portion control packages and for use as ingredients by other food manufacturers. This segment sells non-dairy powdered creamer; baking and mix powders; pickles and related products; refrigerated and shelf stable salad dressings; Mexican sauces; aseptic products; soup and infant feeding products; hot cereals; powdered drinks; single serve hot beverages; specialty teas; and nuts. Export sales are primarily to industrial customers outside of North America.
The direct operating income for the Company's segments is determined by deducting manufacturing costs from net sales and deducting direct operating costs, such as freight to customers, commissions, and direct selling and marketing expenses. Indirect sales and administrative expenses, including restructuring charges and other corporate costs, are not allocated to the business segments as these costs are managed at the corporate level.
North American Retail Grocery net sales for the first quarter of 2015 increased 30.9% to $592.4 million from $452.4 million during the same quarter of the previous year, driven by a 36.6% increase from acquisitions, partially offset by a 2.6% decrease in volume/mix, a 2.0% unfavorable impact from foreign exchange and reduced pricing. The Company posted higher first quarter sales in the pickles and Mexican sauces categories that were offset by decreases in most other categories. A large portion of reduced sales was in the beverages (primarily single serve hot beverages) category, where competitive pressure resulted in reduced volume and pricing. Direct operating income margin in the first quarter decreased to 13.1% in 2015 from 16.6% in 2014. The unfavorable impact of legacy sales mix, reduced pricing, and the impact of unfavorable foreign exchange were the primary reasons for the reduction in direct operating income as a percentage of net sales. Additionally, lower margin business from the Protenergy and Flagstone acquisitions contributed approximately 50 basis points to the decline in direct operating income margin compared to the first quarter of 2014.
Food Away From Home net sales for the first quarter of 2015 decreased 0.4% to $88.3 million from $88.7 million during the same quarter of the previous year primarily due to pricing, as volume/mix increases were offset by the unfavorable impact of foreign exchange. The Company posted a volume/mix increase in the quarter as higher volume/mix associated with the aseptic category was partially offset by a reduction in the other sauces and beverages categories (primarily single serve hot beverages). Direct operating income margin in the first quarter increased to 13.6% in 2015 from 10.7% in 2014. Last year we had operational issues at one of our plants, while this year we are performing much better at that location. Partially offsetting the increase in margins was higher cost of sales of U.S. sourced raw materials for the Canadian operations and reduced year-over-year pricing.
Industrial and Export net sales for the first quarter increased 31.6% to $102.5 million from $77.8 million during the same quarter last year, largely driven by an 18.9% increase from acquisitions and a 13.3% increase in volume/mix. The volume/mix increase was primarily driven by growth in the soup and infant feeding, beverages (predominantly single serve hot beverages), and Mexican sauces categories. Direct operating income margin in the first quarter increased to 21.0% in 2015, from 19.3% in 2014, primarily due to operational efficiencies at the plants and favorable input costs, partially offset by lower margin business from acquisitions.