TreeHouse Foods (NYSE:THS) was a relative detractor from performance during the quarter after a confluence of a few unfortunate, though we think transient, events. The Company unexpectedly missed its quarterly earnings estimates and reduced 2016 guidance, despite having had a few wins earlier in the year not long after closing the Private Brands acquisition in January. The Company reiterated, however, its long-term accretion guidance for Private Brands. From the time the merger was announced (late 2015), we had seen multiple areas where we think this longer-term guidance is still understated. Because of our belief in this cushion management built into their original guidance, we remain comfortable that they will be able to hit their long-term growth expectations, despite these shorter-term issues.
On the same day the Company announced its disappointing Q3, the company also announced that their COO, Chris Sliva, was leaving the company. He turned up as the new CEO of a small food company a few days later. Fortunately - the only bit of good news on the day - Dennis Riordan, the retiring CFO, reversed his retirement on this news, announcing that he would stay on as President/COO for as long as he was needed.
The market took all of this news badly, combining the poorly timed management changes with what we view as unrelated short-term issues in Private Brands, and concluded that there were serious institutional issues with the company. We think we just had a confluence of unfortunate events. After speaking with management, we remain comfortable with the depth and breadth of the Company’s executive leadership, which is heavily supplemented by the engagement of their board of directors. We also continue to be quite optimistic about the long-term potential of the combined Private Brands and legacy TreeHouse businesses. As the largest manufacturer and distributor of private label grocery products in the U.S., we believe TreeHouse should benefit from the secular shift toward private label, particularly in higher margin natural and organic segments, while driving out costs in lower growth segments, through unmatched scale in both manufacturing and distribution. We remain optimistic about the significant upside reward at TreeHouse, relative to diminished downside risks, and added to our positions on weakness during the quarter.
From David Rolfe (Trades, Portfolio)'s fourth quarter 2016 Wedgewood Partners investor letter.
