Baked goods, beverages, condiments, meals and snacks will be TreeHouse's five front-line business units.

OAK BROOK, ILL. — After suffering from a “self-inflicted wound” during the third quarter of fiscal 2016, TreeHouse Foods is reorganizing in an effort to better serve the market for private brands. The initiative involves reorganizing TreeHouse’s operating companies into a single, customer-facing approach and realigning sales teams from their present sales channel orientation to a product category basis, according to the company.

Sam K. Reed, chairman and c.e.o. of TreeHouse

“Five divisions: baked goods, beverages, condiments, meals and snacks will be formed as front-line business units, each engaging our customers across all channels with a market-backed basket of closely-related products sold in the same aisle rather than the entire TreeHouse cornucopia,” said Sam K. Reed, chairman and chief executive officer, during a Nov. 2 conference call with financial analysts to discuss third-quarter results.

Prompting the reorganization was the company’s quarterly performance, which executives described as lower than expected. Net income for the third quarter ended Sept. 30 was $37,174,000, equal to 66c per share on the common stock, compared with net income of $28,441,000, or 66c per share, during the same quarter of the previous year. TreeHouse had forecast earnings of 75c to 80c in the third quarter.

Sales, due to the ConAgra Private Brands acquisition, were $1,586,850,000 compared with sales of $798,638,000 the year prior.

TreeHouse has seen strong performance from its coffee business.

In addition to the lower-than-expected performance, the company said its troubles would extend into the fourth quarter as well.

“Specifically, the shortfalls in Q3 earnings and Q4 outlook are principally attributable to a miscalculation on our behalf regarding the internal issues, not market conditions or organizational capability,” Mr. Reed said. “We had underestimated the heavy burden that the acquired Private Brands team would bear under the combined weight of the T.S.A., I.T. conversion, integration, operating company reorganization and ConAgra's dissolution. Simply put, we inadvertently overloaded the newly acquired team with an administrative workload that interfered with their day jobs and distanced them from the private label marketplace.”

Despite the shortfall, Dennis Riordan, chief financial officer and interim president, said the company’s fundamentals remain strong.

Dennis Riordan, c.f.o. and interim president of TreeHouse

“Our legacy businesses had a second straight quarter of North American Retail grocery volume mix of at least 4% growth,” he said. “And this growth was not the result of relying just on the strong performance of our coffee business. Nearly 70% of our legacy product category showed positive volume trends in the quarter compared to the run rate for the year.”

With regard to the Private Brands business, TreeHouse Foods showed improved volume growth in most categories compared to the previous year, but fell behind sales expectations.

“Compared to last year volumes were down about 3.1%, and the primary reason we missed our earnings target this quarter was due to the sales shortfall,” Mr. Riordan said.

He emphasized that the Private Brands business is not losing customers.

“… in fact, we continue to make inroads, albeit small right now, toward securing new business,” Mr. Riordan said. “However, we have experienced sales challenges that we believe are the result of not having enough attention on programs and merchandising that could have and should have generated incremental sales opportunities at existing accounts.

Most of TreeHouse's sales shortfall took place in its cookies and crackers and ready-to-eat cereal categories.

“Most of the sales shortfall took place in our cookies and crackers and ready-to-eat cereal categories that require a lot of attention to promotions and merchandising to be successful.”

During the fourth quarter the company expects earnings in the range of $1.07 to $1.12 per share and full-year earnings in the range of $2.80 to $2.85.

“While our expectations for 2016 will not be met, we are as confident as ever that our long-term plans for the business that we laid out earlier this year are intact, including our original expectations for accretion in 2017 and 2018 from the Private Brands acquisition.”

Nov. 2 was a busy day for the company. In addition to addressing its earnings shortfall, the company announced Chris Sliva, who took over the role of president earlier this year, was leaving to pursue another opportunity. Mr. Riordan will fill the role of president until a replacement has been found.

 Chris Sliva, who took over the role of president earlier this year, is leaving to pursue another opportunity.

Despite reassurances from management, some analysts urged caution following the conference call. In a note to investors, analyst Robert Moskow of CreditSuisse said, “While the huge pullback in what had been an overly crowded TreeHouse stock today may look like a compelling entry point at first glance, we don’t feel comfortable recommending it until we get a deeper understanding into the health problems facing the acquired Private Brands business, the path toward cost synergies and the reasons behind the abrupt departure of the company’s c.o.o. Chris Sliva.

“Management stood by its lofty e.p.s. accretion estimates for Private Brands in 2017 and 2018 despite the sales shortfalls that caused higher-than-expected dilution in 2016. However, it is hard to give management much credit for this when it no longer sounds comfortable providing an earnings base from which the earnings will grow and when it has based these estimates on its ability to stabilize volume trends by 1Q 17 — something that sounds increasingly difficult to accomplish.”