TreeHouse Foods, Inc. Reports First Quarter 2017 Results

FINANCIAL RESULTS

Net sales for the first quarter totaled $1.5 billion compared to $1.3 billion for the same period last year, an increase of 20.9%, due to an additional month of sales from the acquisition of the private brands operations of ConAgra Foods, Inc. ("Private Brands" or "the acquisition") and favorable volume/mix, primarily in the Beverages segment, which was partially offset by lower pricing. Compared to the first quarter of last year, sales for the Baked Goods segment increased 55.4%; sales for the Beverages segment increased 19.2%; sales for Condiments segment increased 4.9%; sales for the Meals segment increased 18.9%; and sales for the Snacks segment increased 12.7%. Sales growth from the prior year was variable by segment, primarily related to the additional month of Private Brands business and the relative weighting of this business within the respective segments.

Reported gross margins were 18.6% in the first quarter of 2017 compared to 17.7% in the first quarter of the prior year, an increase of 90 basis points.  Included in gross margin for the first quarter of 2017 was the impact of $2.4 million and $1.4 million related to product recall reimbursement recorded in Net sales and Cost of sales, respectively, and $4.2 million of restructuring and facility consolidation costs recorded in Cost of sales. Included in the first quarter of 2016 was $10.5 million of costs related to acquisition and integration activities and restructuring and facility consolidation costs. These items contributed 70 basis points to the overall 90 basis points increase in gross margin. The remaining increase in gross margin was primarily related to lower commodity costs and an additional month of relatively higher margin seasonal Private Brands products.

Selling and distribution expenses increased $19.1 million, or 22.3%, in the first quarter of 2017 compared to the same period in 2016.  This increase was primarily due to an additional month of Private Band business in 2017. Selling and distribution costs as a percentage of net sales remained relatively flat year-over-year with a slight increase due to temporarily higher freight associated with one customer.

General and administrative expenses decreased by $15.5 million, or 16.4%, in the first quarter of 2017 compared to the same period in 2016. This decrease was due to higher acquisition and integration cost in the first quarter of 2016 compared to 2017, partially offset by an additional month of the Private Brands business in 2017. General and administrative expenses as a percentage of net sales decreased from 7.5% in the first quarter of 2016 to 5.2% in 2017 due to the change in acquisition and integration cost year-over-year. In the first quarter of 2016, the Company incurred approximately $33.0 million (2.6% of net sales) of acquisition and integration cost related to the Private Brands acquisition, compared to $3.6 million (0.2% of net sales) in the first quarter of 2017. Excluding the impact of acquisition and integration cost, general and administrative expense as a percentage of net sales was relatively flat year-over-year as increases related to the build-out of the new segment structure were largely offset by cost saving initiatives.

Amortization expense increased $4.8 million in the first quarter of 2017 compared to 2016, primarily due to the amortization of intangible assets from the Private Brands acquisition.

Other operating expense in the first quarter of 2017 was $6.8 million compared to $1.7 million in 2016. The increase was due to higher costs associated with restructurings that were announced in recent quarters with respect to the Company's closure of the City of Industry, California; Ayer, Massachusetts; Azusa, California; Ripon, Wisconsin; Delta, British Columbia, Canada facilities, as well as the partial closure of the Battle Creek, Michigan facility.

Net interest expense increased $4.0 million in the first quarter of 2017 compared to the first quarter of 2016, due to higher debt and interest rates from financing the acquisition.

The Company's foreign currency impact was a $0.1 million loss for the first quarter of 2017, compared to a gain of $4.1 million for the same period in 2016, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar during the respective quarters.

Other expense, net was $0.6 million for the first quarter of 2017, compared to $5.0 million in the first quarter of 2016. The change was due to non-cash mark-to-market adjustments on derivative contracts, primarily foreign currency contacts and interest rate swap agreements.

Income tax expense of $11.5 million was recorded in the first quarter of 2017 compared to a gain from taxes of $1.6 million for the same period of 2016.  The effective rate was 29.0% in the first quarter of 2017 compared to 33.3% in the prior year's first quarter. The Company's effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

Net income for the first quarter of 2017 was $28.2 million, compared to a net loss of $3.2 million for the same period of the previous year.  The reasons for this change are outlined in the individual line item discussion and analysis provided in the preceding paragraphs.

Adjusted EBITDAS was $154.1 million in the first quarter of 2017, a 23.0% increase compared to the first quarter of 2016. The increase in adjusted EBITDAS was driven by an additional month of Private Brands business, generally favorable commodity cost, and favorable trade spend (the Company lapped a first quarter 2016 suppler quality issue), partially offset by unfavorable pricing primarily from competitive pressure. Adjusted EBITDAS is a non-GAAP financial measure.  See "Comparison of Adjusted Information to GAAP Information" below for the definition of adjusted EBITDAS and a reconciliation of adjusted EBITDAS to net income, the most comparable GAAP financial measure.

Fully diluted shares outstanding for the first quarter of 2017 increased to approximately 57.6 million shares compared to 52.7 million shares in the first quarter of 2016.  The increase was primarily due to the weighted average impact of 13.3 million shares issued on January 26, 2016 in a public offering of the Company's common stock, with the net proceeds of such offering used to partially fund the Private Brands acquisition. In the first quarter of 2016, the additional shares were outstanding for only a portion of the quarter.

The Company's first quarter 2017 results included five items noted below that, in management's judgment, affect the assessment of earnings.  The first item was a $0.19 per share expense for restructuring and facility consolidation cost.  The second item was a $0.06 per share expense for acquisition, integration, and related costs.  The third item was a $0.01 per share gain for the foreign currency impact on the re-measurement of intercompany notes.  The fourth item was a $0.06 per share gain for product recall reimbursement. The final item was a $0.06 per share gain reflecting the tax impact of the aforementioned adjusting items.

CHANGE IN SEGMENT REPORTING

In the first quarter of 2017, the Company completed changes in its organizational structure that resulted in a change in how the Company manages its business and allocates resources. The Company's reportable segments are now organized and managed by products: Baked Goods, Beverages, Condiments, Meals, and Snacks. Previously, TreeHouse's reportable segments were organized and managed by customer channels: North American Retail Grocery, Food Away From Home, and Industrial and Export. All prior period information has been recast to reflect this change.

The Company manages operations on a company-wide basis, thereby making determinations as to the allocation of resources in total rather than on a segment-level basis. The Company has designated reportable segments based on how management views its business. The reportable segments, as presented below, are consistent with the manner in which the Company reports its results to the Chief Operating Decision Maker. TreeHouse Foods' segments are as follows:

Baked Goods – The Baked Goods segment sells candy; cookies; crackers; in-store bakery products; pita chips; pretzels; refrigerated dough; and retail griddle waffles and pancakes.

Beverages – The Beverages segment sells broths; liquid non-dairy creamer; non-dairy powdered creamers; powdered drinks; single serve hot beverages; specialty teas; and sweeteners.

Condiments – The Condiments segment sells aseptic cheese and pudding products; jams, preserves, and jellies; mayonnaise; Mexican, barbeque, and other sauces; pickles and related products; refrigerated and shelf stable dressings and sauces; and table and flavored syrups.

Meals – The Meals segment sells baking and mix powders; condensed, ready to serve, and powdered soups and gravies; infant feeding products; macaroni and cheese; pasta; ready-to-eat and hot cereals; and skillet dinners.

Snacks – The Snacks segment sells bars; dried fruit; snack nuts; trail mixes; and other wholesome snacks.

The Company evaluates the performance of its segments based on net sales dollars and direct operating income. In conjunction with the change in segments, the Company revised its calculation of direct operating income to include direct general and administrative expenses. Direct operating income is now defined as gross profit less freight out, sales commissions, and direct selling, general, and administrative expenses. All prior period information has been recast to reflect this change in Exhibit 99.2.

SEGMENT RESULTS

Net sales in the Baked Goods segment increased $121.6 million, or 55.4%, in the first quarter of 2017 compared to the first quarter of 2016. The change in net sales was primarily due to an additional month of Private Brands business in 2017. Direct operating income margin in the first quarter of 2017 decreased by 80 basis points to 12.3%, compared to 13.1% in the first quarter of 2016. This decrease was primarily due to unfavorable pricing, higher supply chain and operating costs, slightly higher freight rates, and the build-out of the segment structure, partially offset by lower commodity costs.

Net sales in the Beverages segment increased $43.1 million, or 19.2%, in the first quarter of 2017 compared to the first quarter of 2016. The change in net sales was primarily due to favorable volume/mix associated with additional distribution in the current quarter in the single serve beverage, broth, and non-dairy creamer categories, partially offset by unfavorable pricing due to competitive pressure. Direct operating income margin in the first quarter decreased by 380 basis points to 21.9%, compared to 25.7% in the first quarter of 2016. The decrease in direct operating income margin is primarily due to the impact of unfavorable pricing, higher commodity costs for oils and green coffee, unfavorable sales mix, and temporary freight cost increases, partially offset by favorable operating costs through cost savings initiatives.

Condiments
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