Treehouse Foods, Inc.

Welcome to the Three House Foods second quarter 2021 conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, simply press par, followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Please note this event is being recorded. At this time, I would like to turn the call over to Three House Foods for the reading of the Safe Harbor Statement.

Good morning, and thanks for joining us today. This morning we issued a press release, which is available, along with a slide presentation, in the Investor Relations section of our website at treehousefoods.com. Before we begin, we'd like to advise you that all forward-looking statements made on today's call are intended to fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and projections and involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. Information concerning those risks is contained in the company's filings with the SEC. In addition, we will be discussing operating and financial results on an adjusted basis. A reconciliation of these non-GAAP measures, referenced during today's discussion to their most direct comparable GAAP measures, can be found in today's press release on our website. I'd now like to turn the call over to our CEO and President, Mr. Steve Oakwood.

Thanks, PI, and good morning, everyone. Thank you for joining us. Before I get into the details of the quarter, I'd like to start by framing the environment in which we're operating today. In the first half of this year, we've been lapping last year's record shipments from the COVID-related pantry stock. And I'll discuss the environmental challenges impacting the industry. But through all of this, we've been operating well. And while we've faced individual disruptions, the changes we've made across the organization over the last several years have enabled us to operate successfully. We're responding to customer needs quickly and effectively, and we have maintained service levels at 98%. Looking deeper at our performance in seven of our ten largest categories, like crackers, pretzels, and portable dressings, we've gained share within private label in the quarter. However, total consumer demand for private label has been lower than expected. We believe this is temporary, and I'll discuss this more in a minute. As the economy reopens, we are navigating supply chain disruptions and changes in retailer inventory as they address the evolving demand landscape. At the same time, commodity, freight, and packaging inflation has continued to escalate. Although challenging in the near term, the good news is that this will not impede our ability to execute on our strategy to drive long-term sustainable growth. we have been very successful in several areas. Recall that we talked to you on our last two earnings calls about higher commodity packaging and freight costs of roughly $160 to $170 million this year. Our execution around pricing to recover the higher input costs has been successful. The focus on our customers and delivering high service levels coupled with with a well-organized, data-driven process have enabled our pricing execution. Retail customer acceptance around pricing has been strong, and I'm pleased with our success today. I want to thank our general managers and our commercial organization for what continues to be a disciplined, well-coordinated effort. We will see these pricing initiatives reflected beginning in the third quarter and ramping into the end of the year. Bill will bring more detail to this in his comments. We continue to believe that the investments we're making today in our business, both organic and inorganic, will position us for success as the environment normalizes. And our Riviana integration is on track to deliver synergies ahead of target this year. We are evaluating a short list of acquisition opportunities that would provide an incremental growth catalyst. Of course, we will remain disciplined in seeking the right fit and valuation, and I'll share more thinking around M&A in my closing remarks. We remain committed to optimizing our portfolio. We took another important step in that effort in the second quarter as we completed the sale of the ready-to-eat cereal business for $85 million in early June. Looking at the balance of 2021, as you saw in our release, we are revising our guidance due to our ongoing expectations for the challenging environment that I mentioned earlier. Bill will take you through the details, but our outlook takes into account the following. Our second quarter results, a view that the macro trends continue to pressure private label, and we anticipate some additional inflation for the balance of the year. We expect to take further pricing actions in certain categories. However, the full impact of those actions is not expected to flow through our P&L until 2022. Now turning to slide five and our second quarter results. Second quarter revenue of $1 billion was down from $1.04 billion last year, which included about $83 million of COVID-related pantry stocking. Adjusted EBITDA of $97 million in the second quarter and adjusted EBITDA margin of 9.6% declined to 250 basis points versus last year, driven primarily by lower volume and inflation. We expect pricing will be reflected in our P&L beginning next quarter. We delivered adjusted EPS of 26 cents in line with our guidance framework. I'll walk quickly through the next few slides on the macro environment, which are important for understanding how the broader environment is impacting private label. On slide six, recovery of the away-from-home sector continues and appears to be stabilized, with growth versus 2019 in the 5% to 7% range for the last few months. At the same time, at-home food consumption remains strong versus 2019, a more normalized year. However, private label in measured channels is lagging the overall market. On slide 7, on the left, we show what has happened over the last 18 months as a combination of government stimulus and fewer outlets for spending has bolstered disposable income. We believe that this dynamic has artificially supported a shift in traditional value shoppers' buying patterns as stimulus dollars have periodically boosted income. We have seen a greater propensity for that shopper to trade up to brands. On the right side, we've taken it a step further to look at income levels and purchasing behavior. As you'd expect, edible dollar spend has moved higher regardless of income level. What's interesting is the purchasing behavior for brands versus private label at different income levels. The top two bars represent households with income greater than $100,000 a year and shows edible purchases for the second quarter of 2021 versus 2019. For these households, 17% of their food and beverage purchases were private label. This has been consistent from before the pandemic to today. The bottom two bars represent how habits of the typical value shopper, or those households making less than $100,000 a year, have changed. The chart suggests that these shoppers have shifted more of their dollars away from private label to brands as a result of the additional income. Although three rounds of government stimulus checks created an unexpected shift in consumer purchasing behavior, our view is that that shift is not sustainable long-term, particularly given the inflationary environment. We do expect that stimulus will continue to support the value shopper through the balance of 2021, before beginning to normalize as these programs recede. In addition, we are also seeing promotional activity in certain categories impacting private label consumption as brands invest to retain consumers. Although promotions in total are still below pre-pandemic levels, in the second quarter, we saw aggressive competitive merchandising in a few of our meal prep categories, like pasta and dry dinners. Turning to slide A, today's inflationary environment is presenting headwinds across the entire food industry. Brands do have more short-term levers, such as trade promotion, marketing, and price pack architecture. However, as they too raise prices to address the near-term escalation in input costs and the longer-term labor cost headwind, we believe that the traditional private label value proposition will return. As I noted earlier, The combination of our fact-based approach, trusted retailer relationships, and strong customer service levels have been key factors in our ability to successfully implement pricing this year. Given those same factors, we are confident in our ability to implement a third round of pricing in certain categories later this year, the impact of which will be reflected in 2022. Slide 9 is our revised guidance for the full year. While I'm disappointed to take our estimate down, the combination of lingering COVID-related impact as well as a steady inflationary pressure will make for a challenging operating environment for the remainder of the year. At Treehouse, we've been incredibly focused on thoughtfully navigating the continued uncertainty, and I'm confident that we've built an organization that can mitigate these issues long-term. I'm proud of how our organization continues to deliver for our customers, and I want to thank our employees for their hard work and commitment to high customer service levels. Finally, it's important to recognize that despite the near-term pressures, underlying retail support for private label remains strong, and I'll come back to this in my closing remarks. As the macro environment normalizes and government stimulus ends, we believe consumption and behavior patterns will revert to pre-pandemic trends, and there's still a lot of runway for private brands. Let me now turn it over to Bill to take you through the details of our quarter and the outlook. Bill?