TreeHouse Foods: Not Out Of The Woods (NYSE:THS)

In the final days of 2020, I wondered what the plan was for TreeHouse Foods, Inc. (NYSE:THS). The company has been struggling ever since it acquired ConAgra’s private brands in 2015, long having cast a shadow on the business amidst a poor growth profile, elevated leverage, and related concerns.

With the company announcing a bolt-on deal at the time, the timing of such a transaction left me wondering a bit, as there was no need to be brave.

Some Background

TreeHouse was actually long regarded as a good serial acquirer, one with a decent track record as it tripled sales to $3 billion between 2007 and 2015, with shares trading at $90 at the time.

That all changed as the company pursued a $2.7 billion deal for ConAgra’s private brands in 2015 in order to double the business to $6 billion in sales. Ironically, TreeHouse appeared to have timed the deal rather well, as ConAgra paid roughly double the price for the activities a few years before.

Despite the promise of higher earnings, these earnings were only revised lower to the low $2s as a net debt load of $2.5 billion was high, at more than 4 times EBITDA. With shares trading in the $40s at the time, there were few reasons to become too upbeat, albeit that great execution allows for significant earnings growth, but this was never really delivered upon as earnings came in at just $2.39 per share in 2019.

As the company struggled until the pandemic, the company actually announced a fire sale that summer, selling its snack business for a mere $90 million while some $670 million in sales would leave the door. Some retained earnings and some other divestments made that the company reported a net debt load of $1.85 billion by the end of 2020, as the company guided for sales at around $4.3 billion that year with adjusted earnings seen around $2.70 per share following strong demand that year.

With leverage being addressed that looked a bit better, although the upside was capped as well following these divestments. Trading at $40, equity of the company was valued at $2.2 billion, as a $1.85 billion net debt load translated into a $4.1 billion valuation, equivalent to the sales and resulting in a high-single-digit EBITDA multiple, which looked about fair as margins were always the trouble of TreeHouse.

With the company so long being plagued by high leverage, I was surprised to see the company spending $242 million to acquire Ebro’s Riviana Foods U.S.-branded business late in 2020, even if it is just a bolt-on deal. The transaction was set to add $200 million in sales and boost earnings by about a quarter per share. With relative leverage ratios still sizable, shares trading at 15 times adjusted earnings after a solid year, and long-term execution being very mixed at best, there were no reasons for me to be involved.

Struggles – Some Momentum

Since voicing a cautious tone at $40 late in 2020 we have seen shares trade in a $40-$50 range in 2021, as shares actually hit a low at $30 in recent months after which they have recovered in a spectacular fashion to $47 at the moment of writing.

In June 2021, TreeHouse reached a deal to sell its cereal business for merely $85 million to Post Holdings (POST), and in November of that year, the company officially indicated that it was exploring strategic alternatives to maximize value. By February of this year, TreeHouse announced its 2021 results with full year sales coming in pretty much flat at $4.3 billion, as the impact of net divestments has been offset by pricing. That was about the good news as adjusted earnings fell from $2.73 per share to just $1.19 per share.

EBITDA shrank to just below the $400 million mark and while net debt was down to $1.6 billion, leverage ratios were stuck at 4 times. Based on this understanding, it was really hard to see value. The company is now categorized its sales in two segments: a $2.7 billion meal preparation segment with near 10% direct margins, and a $1.6 billion snacking & beverage segment with equal margins. The only good news was that sales were seen up 11% in 2022 with EBITDA seen flattish around $400 million. Alongside the first quarter results, it appeared that net debt only inched up to $1.7 billion amidst working capital requirements, yet the company reconfirmed the outlook and its intention to create value.

Second quarter results, as released in August, triggered the company into hiking the full year sales guidance to mid-teens growth, yet this was driven by pricing and inflation as the full year EBITDA guidance was left unchanged, as net debt came in at $1.69 billion. Shares were rallying, however, as the company announced on the 11th of August that it has sold a major part of its meal preparation business to Investindustrial in a $950 million deal, while some $70 million in EBITDA will leave the door.

The deal involves the sale of $1.6 billion worth of sales, indicating that the company is receiving a modest sales multiple. With the deal involving a $530 million cash component, pro forma net debt will fall to $1.16 billion, as EBITDA should fall to $330 million. This makes that a >4 times leverage ratio will fall to 3.5 times, as TreeHouse will obtain $420 million in high-yielding bonds from the acquirer as well. If these are monetized at face value, leverage will fall to 2.2 times EBITDA.

With 56 million shares of TreeHouse now valued at $47, equity is valued at $2.6 billion, and the enterprise is valued at $3.8 billion. This is now applied to a business which will post sales of around $2.5 billion and report EBITDA at $330 million, indicating that valuations still look largely fair.

After all, while lower interest costs should more than offset a lower earnings contribution from the divested activities, a just-above $1 earnings number in 2021 does not look compelling with shares trading at $47. Hence, I still see absolutely no reasons to get involved here, as while leverage will be addressed, the situation remains quite complicated and earnings power is simply not here to reveal any potential appeal.