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spk02: Welcome to the Treehouse Foods third 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 star 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 Treehouse Foods for the reading of the Safe Harbor Statement.
spk01: Good morning, and thanks for joining us today. This morning we issued two press releases, which are available along with our slide deck 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 gap 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 Oakland.
spk10: Thanks, PI, and good morning everyone. Before I get into the details of the quarter, I'd like to address the additional announcement that we made this morning. After careful consideration, including engagement with many of our shareholders, the Treehouse Board has approved a plan to explore strategic alternatives. As we undertake this exploration of alternatives, which may include the sale of the company or a transaction to allow us to focus on our higher growth snacking and beverage businesses by divesting a significant portion of the meal prep business, we will remain focused on supporting our customers and on the actions that we are taking to gain share optimize our portfolio, and grow our top line. Our board and management team are steadfast in our belief that the secular headwinds we are facing are episodic, and they will pass. The long-term consumer demand trends and fundamentals of the underlying business remain strong. We are not speculating on potential outcomes or timing of the review, and we do not intend to comment further unless and until the Board has approved a specific course of action or has determined that further disclosure is appropriate. We have given you a lot to consider this morning, not only in terms of the strategic review, but our earnings and the outlook for the remainder of the year. So let me put all of this into context. At Treehouse, we are essentially the supply chain for our customers' private label products. placing us squarely in the middle of the macro disruptions across our industry today. As you have heard me say many times, private label plays a vital role for our customers. And given our size and scale, we have an obligation to do all we can to provide food and beverages both for our customers and for their consumers. We are making a conscious decision to support the customer during this difficult time. The changes we have made to our business over the last several years have enhanced our ability to deliver on our customers' critical needs by providing better service. As a result, we have strengthened our customer relationships, which have been a critical factor in implementing multiple price increases this year to recover inflation. We've made important progress. In fact, this has been one of the most collaborative pricing environments that I have ever seen. Our teams are rising to the challenge in a historically difficult operating environment, and I'm confident that our pricing will catch up over the cycle. Bill will talk about pricing more in a few minutes, but I'm proud of how our teams are working closely in partnership with our customers to navigate these unprecedented headwinds. Our strong relationship and improved ability to serve the customers is reflected in our third quarter performance. In seven of our 10 largest categories, we outperformed private label, a trend that we've seen over the last year. We're also seeing demand strengthened in the second half of the year. As we navigate the pandemic, we have invested significantly to support our customers, bearing the rising costs to secure ingredients and transportation and to maintain labor in our plants. While that has enabled us to maintain strong customer relationships and to expand our top line, as you saw in the revised outlook for the fourth quarter, it comes a significant near-term impact on our profitability. We believe these costs are temporary and will impact our performance in the near term, but are the right thing to do for the long-term success of our customers and Treehouse. As the Board embarks on its strategic review, We, as a management team, are committed to maintaining our focus on the things that we can control, including the pricing actions we have underway and supporting our customers. With that as our framework, let's turn to the specifics of the quarter on slide four. Third quarter revenue of $1.1 billion grew 5.3% versus last year. On an organic basis, revenue grew 1.7%. and was driven by pricing of 3%. Demand for private label products has strengthened in recent months to the point that today we have more demand than the supply chain challenges allow us to fulfill. Third quarter adjusted EBITDA was $109 million. Adjusted EBITDA margin of 9.9% declined 320 basis points. driven by inflation, labor, and supply chain disruption. We delivered adjusted diluted EPS in the third quarter of 46 cents within the range of our guidance that we communicated in August. Slide five outlines the impact of inflation, labor, and supply chain disruptions we've seen across the manufacturing landscape. I want to talk for a moment about how these factors are impacting our business. Inflation across the entire complex continues. Our commercial organization is working diligently on pricing recovery efforts. While the escalation and duration continue to be unprecedented, I'll say it again, I'm very encouraged by the level of collaboration that we are experiencing with our customers. Labor across all manufacturing has not only become more costly, but today's shrinking labor participation and the numerous opportunities for all types of manufacturing labor, require a more progressive strategy to staff our plants effectively. To address this, our HR organization is working with our teams to pivot our labor strategy, being creative and looking holistically at the issues. Although very early in, we are deploying new strategies and are just beginning to see some of the positive effect as a result. This is compounded by the supply chain disruption, materials either not showing up on time or not enough of the necessary inputs arriving at our facilities. Our service levels overall are still in the 90s, but certain categories have been under more pressure, and the inherent complexity of private label will continue to pressure our service levels. Nearly all of our meal prep categories are currently on allocation. a clear sign that orders are outpacing our disrupted capacity. Demand has strengthened since we last spoke, and that's very encouraging. As certain federal stimulus programs expire, we are seeing signs of private label recovery, while at the same time, we are winning new business with existing customers. Turning to slide six, you may have seen similar data from us before. The top green line represents the change in private label dollar sales as compared to two years ago among those states that opted out of enhanced unemployment benefits early in June and July. The orange line represents the same data, but among those states where these benefits expired in the fall. As you can see, dollar sales increased meaningfully among those states where the benefits recently expired. approaching the growth rate levels of the states that expired in the summer. This aligns with our expectations that as things normalize, consumers will return to purchasing private label and share will continue to recover. Bill will get into this more, but we estimate that in the third quarter we had roughly $40 million in unmet demand due to constraints across the network, either not being able to run lines due to lack of labor or because we didn't have the appropriate supplies. Looking forward, our near-term priorities are very clear. First, labor. We're addressing how to best improve staffing and attendance across our plans. More broadly, we are creating an environment that not only empowers our employees to be efficient and productive, but also is fulfilling for them individually and professionally. Second, We must continue pricing to offset inflation. Our pricing is in the market, and while there is a lag, we will need to continue pricing to cover higher commodity costs. We'll also focus on cost control and lean across the organization, and we'll work with our customers to identify inefficiencies and opportunities for value engineering across the product mix. And third, we will continue to focus on the customer. Our teams will continue to work diligently to mitigate disruptions and manage through this uncertainty to fill every order that we can, supplying our customers with food and beverage for their consumers. As we continue to take actions to support our customers in the current environment, our results will be affected in the near term. Slide 7 shows our guidance revisions and updates for our outlook for the balance of the year, including the impact of the investments we are making to support our customers. While we expect demand for our products to continue to strengthen, there will certainly be some limits on how much of that demand we will be able to service. Given that, we now expect our top line to finish the year in the lower half of our current guidance range. We are looking across the supply chain to address today's disruptions. It will be costly in the near term as we invest to serve the customer. However, as I noted earlier, we will continue to price proactively to offset inflation. We are a complex supply chain business with 29 categories and 40 plants as we are organized today. We've done a lot over the last several years to focus on continuous improvement and lean to make ourselves more efficient. In this environment of supply chain disruption, however, we are making a conscious decision to invest in the customers. bearing significant cost to ensure that our products reach our retailer shelves for their consumers. It is our belief that investing to serve the customer is the right decision and will serve to strengthen our relationship and the business for the long term. This also provides the best backdrop for the strategic alternatives that we will consider. Let me now turn it over to Bill to take you through the details of the quarter and the outlook. Bill?
spk03: Thank you, Steve, and good morning, everyone. On slide eight, you see that third quarter revenue was $1.1 billion of 5.3% versus last year, of which three points was pricing related. Had we been able to service the $40 million of revenue that Steve mentioned earlier, we would have delivered the top end of our revenue guidance in the quarter. We are taking creative and dramatic steps to address our service challenges in these very difficult times. On slides 9 and 10, we have provided revenue by division and by channel. Middle prep net sales grew 7.4%, elevated by 5.2 points from the pasta acquisition. Organic sales grew nearly 2%, of which 4.6 points was pricing. As noted on our prior calls, the rapid escalation in soybean oil, a meaningful input for our dressings business, was one of the first commodities for which we priced earlier this year. Volume and mix declined 2.8 points, driven by supply chain constraints and partially offset by the continued improvement in the food away from home channel. Food away from home is expected to return to 2019 levels in early 22. Snack and beverage revenue grew 2%, of which 1.1% was driven by volume and mix, and in particular, new product introductions. The balance of the growth was split between pricing and effects. Slide 10 details our top line by channel. The unmeasured retail channel, which includes key retailers in the value club and online space, continued to drive growth of 6% this quarter. This compares to a decline of 2% in the measured channels, a sequential improvement over the second quarter. Looking forward, we expect unmeasured channel growth to continue to outpace measured channels. Slide 11 provides our earnings drivers. Volume and mix, including absorption, were a negative 26 cents of impact. Moving to the right, I want to spend some time on PNOC, pricing out of commodities, and give you a sense for both our pricing progress as well as the cost impact of rising inputs. I want to be sure to recognize our commercial teams and the very fine job they've done coordinating and communicating with our customers and implementing multiple price increases this year. As Steve noted, and I'll reiterate, we would describe the pricing environment as very constructive. Our intense focus on service and strong communication with the customer is enabling us to have a very good dialogue around pricing. This gives me confidence that we will be able to continue to price and recover the continued input cost escalation over the cycle. The pricing actions we took early in the year are now being reflected in our P&L as expected. In the third quarter, pricing contributed 43 cents partially offsetting inflation we incurred in the first half of the year. The continued cost escalation of commodities, packaging, freight, and labor is outpacing our pricing recovery. In the third quarter, the higher input cost was a negative 88 cents. Total PNOT, or the net of these two, is negative 45 cents. Also in the third quarter, operations contributed 22 cents in total versus last year. While the comparison to the prior year is positive, The COVID-related disruption impacting labor and the supply chain cost the company by about $0.07 in the quarter. Across our 29 categories and 40 plants, we have been working hard to mitigate the impact. The balance of the operations bar largely represents the higher cost inventory produced in the third quarter that will impact us negatively in the fourth quarter as we sell that product. SG&A was a benefit of $0.16. This was due to the reversal of variable compensation plan accruals and continued cost management of discretionary spending. Finally, interest expense favorability contributed $0.08 in the quarter versus last year. Turning to slide 12, I'd like to make a few points on our balance sheet. In the last 12 months, we've paid down more than $300 million in debt, reducing total debt from $2.2 billion to $1.9 billion. This is our lowest debt level since 2015. We've also reduced our weighted average cost of debt by 100 basis points through the refinancing completed earlier this year. This action lowered our annual interest costs by approximately $20 million. Our revolver is largely undrawn. So between cash on hand and the revolver, we have strong liquidity of nearly $800 million. As anticipated, we generated cash in the third quarter and will do so again in the fourth quarter. Financial leverage in the third quarter was 3.9 times as we build inventory to prepare and anticipate continued supply chain interruption. Turning now to slide 13, our revised guidance for the remainder of the year takes into account the following. Similar to Q3, we anticipate we will have some limitations on our ability to meet all of the demand indicated by our customer orders. And we think revenue in 2021 will be between $4.2 to $4.325 billion. We do not see signs of inflation subsiding. Although we are on track to affect our next round of pricing actions, we will not fully recover all of this year's inflation in the calendar year due to the timing lag. While we are exploring many avenues to mitigate the lack of labor availability and supply chain dynamics, in the near term, our cost of service to customer will be significantly higher. As a result of these factors, we are reducing our EBIT guidance to $155 million to $175 million, which compares to $230 million to $260 million previously. We anticipate that most of our investments to serve the customer will impact us on the COGS line, resulting in a sequential and year-over-year erosion in gross margin in the fourth quarter. This translates to a four-year adjusted EPS of $1.08 to $1.28, down from our revised August guidance of $2.00 and $2.50 per share. We are disappointed to be sharing a second guidance revision, but I'll echo Steve's earlier comment. We believe these near-term investments to support our customers will serve to strengthen our relationships and the business for the long term. We are reducing our 2021 free cash flow guidance to at least $100 million. I'll point out here that as we manage our working capital and focus on serving our customers, we're making conscious decisions to build inventory, which due to inflation is more costly. As a result, the working capital contribution from inventory this year will be lower. Our debt repayment and liquidity is largely unaffected. Slide 14 covers our fourth quarter guidance and our expectation for adjusted EPS between zero and 20 cents. Before turning it back over, I think it's important to give you a way to think about normalized profitability and the large moving parts of disruption this year, specifically in three areas. First, private label demand and changing consumption patterns. Second, inflation and pricing. And third, labor and supply chain disruption. We do not believe these factors represent structural changes to the business, so I want to try and quantify their impact on 21 and our underlying profitability in broad strokes. On slide 15, we started with our February eBay guidance of approximately $300 million because we believe that this is a much closer normalized annual level of profitability for the company. As you move from left to right, we have layered on our estimates for the full year impact of the macro disruptions. First, on demand and private label consumption. Recall that in the first half of the year, we cited softer private label consumption trends due to the macro environment. such as brand and promotional activity in certain categories, and government stimulus supporting consumers trading up to brands. We talked in August about this impacting revenue in both the quarter and the year, and we estimated this to be a $40 million impact to EBIT this year. Turning to inflation, our original guidance contemplated input cost headwinds of approximately $100 to $110 million. The additional inflationary headwind is another $125 million, more than double our original estimate. Our pricing actions to recover this inflation are in the market and confirmed by customers. I showed you earlier how pricing is starting to be reflected in our third quarter results. Our realized Q3 price increase of 3% is expected to accelerate to 4% to 5% in Q4, building to low double digits in 2022. We estimate that the timing lag in calendar 21 is approximately $75 million. It is important to understand that over the course of the cycle, we are confident we have the initiatives in place to recover the entirety of the inflation headwinds. Finally, the constraints related to labor and supply chain disruption is affecting our ability to meet strengthening demand. For us, these challenges are especially acute across our 40-plant network. Despite the near-term costs, we believe the right thing to do for our business over the long term is to continue to serve the customer to the best of our ability. We estimate that the incremental cost this year is approximately $60 million. We've also captured the benefit of the reversal of the variable compensation accrual of $35 million. The net of these factors represent the near-term impact that has driven our 2021 eBay guidance to $165 million at the midpoint. While the magnitude and the velocity of change across the landscape continues to be unprecedented, we strongly believe that these disruptions will, at some point, normalize. It will take some time. It could be a few quarters or more. What I do know and where I do have confidence is around our teams and the initiatives we have put in place to mitigate the disruption. Private label demand is strengthening. Our pricing is confirmed, and we are mobilized to effectively address further inflation with additional pricing. We're getting creative around how we staff and schedule our plans, thinking holistically about how we assent our people so that we can improve attendance. We're getting after opportunities across the entire supply chain spectrum. On the production side, this includes ensuring we have backup suppliers to prioritizing our customers' most important SKUs. On the transportation side, we've completed additional freight RFPs, and in some cases, we'll utilize the spot markets to ensure that we can get inputs and finished product to the right place at the right time. And we will further leverage lean and continuous improvement learnings throughout the network. When we come back to you in February on our year-end earnings call, we will give you more specific direction on 2022. With that, let me now turn it back over to Steve to wrap things up so that we can get to your questions.
spk10: Thanks, Bill. I'll keep my closing remarks short today and leave you with three thoughts. First, we're encouraged by the strengthening demand. Today, we have more orders than we can fill. As our customers focus on surety of supply, we are winning business and outperforming an environment where we've been taking a great deal of pricing. We have pricing that's in effect in the month of December, which is unprecedented for as long as I've been in the food business. This is a difficult environment for everyone, but customers have been appreciative. of the level of detail, transparency, and communication we are providing. This cements my belief that we're making the right decision to invest in the customer. We are making a clear choice to bear the near-term cost of servicing our customers to help keep their shelves stocked. As a result, we are outperforming in our largest categories. When things normalize, and they will, we will be a stronger business and benefit from having served the customer during this time of unprecedented disruption. The alternative would have been to spend less and choose not to service as much demand. While that might have been a near-term solution for our earnings, I don't believe it's the right long-term decision for the business. And finally, we'll stay focused on running the business as the Board conducts its review. As I mentioned earlier, We won't be speculating on potential outcomes or timing of the review. When we have something definitive to report, we will do so in a timely manner. With that, let's open the call up to your questions.
spk02: We will now begin the question and answer session. I would like to remind everyone in order to ask a question, press star followed by the number one on your telephone keypad. To withdraw your question, press the pound key.
spk06: the first question comes from john anderson of william blair your line is open thank you good morning everybody morning john hi john hi um a couple of questions um one steve you you mentioned that um a couple of times that the demand is is strengthening for private label um understand that you're having some supply chain disruption issues now so the demand is exceeding your ability to supply, but can you talk a little bit more about, you know, when you say about stronger demand, talk about stronger demand for private label, you know, are you seeing private label share gains begin again? Are you seeing private label have more success now vis-a-vis branded offerings? Or are you talking more specifically about your business, um,
spk10: you know within the private label segment just trying to kind of parse that out a little bit more sure well I would say good morning John I would say it's a couple of things yes the macro data and I and we shared a slide that suggests the impact of government stimulus and and where that's happened earlier where it's come off later and the share gains there so the macro share data is improving and But we also talked about how we continue to perform well in our top categories. So our strategy is working, right, to serve the customer through this. And, you know, we talk about this, but it's unprecedented, right? The work that we're doing together with the customer and the fact that we're being awarded new business through this disruption would suggest that we are performing really well share-wise. And that's at the same time when we see the overall macro private label starting to recover. So I think it's both.
spk06: Okay. And then I know you're not prepared to talk about 2022 at this point, but when I think about your business in 2020, your EBIT was around $300 million. That was the original plan this year, a little more than $300 million. We're now looking at a little more than half that, $165 million. As we think broadly about 2022, you know, the waterfall you put together on slide 15, I believe, you know, would suggest that much of this is transitory or, you know, temporary in nature. You know, how should we think about 2022? Is it getting back to a run rate of $300 million in EBIT? Or are there, you know, investments, as you put it, in the customer base? relationships and service levels that are going to prohibit you from getting back to that kind of level for some longer period of time. Thank you.
spk10: Yeah, thanks, John. I'll start and I'll let Bill help me here. But, you know, obviously we're not prepared to guide next year. We'll do that at our fourth quarter call. But we did really want to leave you, and slide 15 was designed to leave you with some thoughts on the earnings power of the company, which we think are actually better than they've been in the past. So if you think about what we talked about today, the work we've done on commercial excellence and the work we're doing to invest in the customer today is resulting in very strong top line growth and new business, right? It's also allowing us to recover unprecedented inflation, right? And we are convinced that across this cycle, our costs and our pricing, those lines will cross, right? So we feel good about those things. The question is, when will the supply chain normalize? we're convinced that will happen. And when it does, given the fact that private label is also improving, we think we're going to be in a position to take an outside share of that, right, an outside share of that. So we'll try to give more information as we go forward. We'll do it on our next call, on our thoughts on next year. But I think the model that you have to build and why we thought this was so important is when that recovers, we should be in a better position than we've ever been to take advantage of it.
spk06: So maybe the quick follow-up is on slide 15, the $60 million that you've identified as supply chain disruption impact on EBIT this year, is that, what's the run rate view of that on an annualized basis? Does that reflect, because I don't know when that started, what you're expecting, the cadence of that. Do you know what I mean? Is there a way to think about If supply chain issues persist, what could that mean on a full year basis in 2022? Thanks. Hi, John.
spk03: Let me see if I can add a few pieces of color here for you. First and foremost, As Steve mentioned, as you acknowledged, we won't have much detail on 2022. But let me give you a couple of things to think about. First is pricing. So in Q3, our pricing was up 3%. It was probably closer to 3.5% as we lapped a one-time trade true up a year ago. We expect that to be about 4.5% in Q4. And then as we get into 2022, we think we'll get into the low double digits as far as pricing. And so when you look at the slide 15 that we gave you and you think about kind of the pricing lag and then the supply chain disruption, those are the two pieces that we have to focus on. At a point in time, to Steve's point, somewhere in the cycle, the pricing will recover the inflation. The lag will be handled by us getting back to normal operations in terms of having enough labor to service the demand, as well as having enough labor to do our typical cost programs that we allow to take costs out in the manufacturing facilities. And then as the inflation declines, we'll moderate how that comes down with pricing. So we have an ability, we think, over the cycle to recover it. The point around next year, I think it's just too early to tell. The margins that we exit Q3 with, we are in our midpoint of our guidance, we're predicting That could be very similar to Q4, which is extraordinarily low compared to our normal run rates, and it's really driven by those labor challenges. We're making a lot of headway there. We have a unique labor strategy that we're applying to help solve that in the plants, but we're just not in a position to call the timing. But over the cycle, we think we'll fully get back to our normalized $300 million EBIT, which is what we showed on that slide.
spk06: Okay. Thanks so much. I'll pass it on.
spk03: Thanks, Bill.
spk02: The next question comes from Andrew Lazar of Barclays. Your line is open.
spk07: Hey, everybody.
spk03: Morning, Andrew. Morning, Andrew.
spk07: Steve, I wanted to start off first with the comments around the clear and conscious decision to invest in the customer. And I think, as you mentioned, the alternative, I think most would agree, it didn't make a lot of sense. And so you take sort of some of the near-term pain um to invest in the customer and you as you said you're winning some some new business um perhaps as a result of that choice as well so i guess my first question is how do you ensure that relationship that in theory is getting strengthened here sort of matters when things normalize and i ask that because you know as we all know you know private label is inherently a pretty competitive uh world and i don't know just historically it just seems like a lot of the investments let's say a tree house or others have made in, you know, scale and being a sort of a better supplier and being a more efficient supplier for retailers across, you know, a whole bunch of private label categories. It just seems to me it's sort of never played out in a way where key retail customers have said, Hey, that's something we value and we'll truly, you know, be less willing to maybe go to some small regional player just because they can give you a penny less per pound of a deal. You know what I mean? Like it just never seemed like it's completely come full circle to really benefit tree house longer term. And I'm wondering if you think this time is different again, when things normalize and why that would be.
spk10: Well, well, Andrew, I think this time is about as different as it, as it can get right. And a surety of supply is, has become such a key metric. We're seeing longer-term agreements. We're seeing price transparency in agreements. We are seeing a different customer environment. There's no question. But we're also focused strategically on core retailers and core segments. We're running our two segments fundamentally differently. We're running our growth business differently than we're running our cash business. And so I think we better are aligning our business units with how the customer thinks. So Unfortunately, all of this disruption the last year or so, you haven't seen the progress we're making strategically. We think it's all of those things. But what gives me comfort is the customer agreements, the more long-term agreements, the more commodity escalator-type clauses that are in agreements today. That's starting to build momentum, and that tells me that there's a longer-term connection here.
spk07: That's helpful. That's helpful. Thank you. And then When we think about, and thank you for breaking out some of the pieces on slide 15, that's helpful. And I would agree that the vast majority of that, you know, over the course of a cycle, right, will be transitory. The one piece that I guess could potentially be more structural, and this wouldn't just be for Treehouse, of course, but for everybody, would be just sort of what it's going to take to keep, you know, to keep a labor force, you know, at, you know, sort of at the plant and engaged, and I don't know whether that's just longer-term wages for the industry as a whole go higher, but I guess do you think there's an element of that that could end up being somewhat structural and maybe impair to some extent that sort of $300 million sort of EBIT mark that you highlighted?
spk10: You know, I don't think it will impair our EBIT, but I do think it is structural. And we typically don't price for labor. We typically price for commodities and for freight. And what we've done in this case is we've priced for the structural change, what we view as the structural change in labor, right? And so we assume that we should, through efficiency, be able to take a couple points out of our cost structure every year. Tough to do in a COVID environment, but a very reasonable expectation. I think most CPG has that expectation. But this time is different. I do think that labor is a structural change, and we have a point of view on that for this year and next year that is built into our pricing. and that's a communication that we're having with a customer, and I think the customer sees it and they agree with it. So I do think there will be a structural change, but I think hopefully that's going to be almost behind us, right? So I don't think it's going to hurt our long-term earnings power.
spk07: Right. Thank you so much. Then very quickly, the last one would be, depending on what you ultimately do or don't do with the portfolio going forward, I guess how much scale do you think is important? for a broad-based private-level supplier like Treehouse to have with the customer, right? Because you mentioned that a possibility is potentially divesting a very large portion of your sales base. And so I'm just trying to get a sense of how that would impact, if it does, your relationship with customers to whom you now supply over 30 different categories of private-level product, even though I know not all of these categories are created equal in terms of margin structure to you and competitiveness within the category and things of that nature. I'm trying to get a sense of like how much scale is needed or how little is too little based on what you want to try and accomplish going forward. Thanks so much.
spk10: Sure, Andrew. Well, I would just leave you on, we've talked a lot about our strategy of depth versus breadth. And, you know, one of the options we said was divesting the piece of the meal prep business simply allows us to pull our strategy forward. We have talked about those businesses as growth engines and cash engines. And we use the cash engine businesses to generate funds to invest in the growth business. And so if we decided to pull that forward, we would simply have that cash available sooner and be able to execute that strategy a little faster. I think both of those businesses are plenty of scale in our industry. The important thing is that you serve the customer well in the particular category. So I think we would never put something out there that wouldn't allow that to happen, but we think there are plenty of alternatives, and I don't want to prejudge what'll happen here. The board's going to do a full review of all alternatives, but there are plenty of alternatives that will bring a number of options that scale will not be a barrier to. Great.
spk07: Thank you so much.
spk10: Okay. I'll take care.
spk02: The next question comes from Chris Grohe of Stiefel. Your line is open.
spk08: Thank you. Good morning.
spk03: Good morning, Chris. Good morning, Chris.
spk08: Hi. I had a question, and I know it's a bit of a follow-on to earlier questions, but I guess from the standpoint where you do view and many view these costs as transitory and this is a cycle and your pricing is catching up, I understand the near-term disruption, but I want to understand if you believe you can capture these costs over the course of the cycle, in particular with that strong pricing coming through next year, What ultimately led to or what's the outcome of the strategic alternative review? Meaning, if you think you can get this back, is there something else going on, like within meal prep in particular, that's challenging the business that you want to try to solve for now?
spk10: You know, Chris, I would just say that our board and our management team are about shareholder value. And there's been a disconnect, we think, for some time in Treehouse's cash generation, in Treehouse's growth opportunities. And quite frankly, our share price. And so if we have a chance to do better for our investors, we're going to do that, regardless of that, the timing. We think the backdrop, as you just said, and the backdrop, as I explained in an earlier question, whether you buy 100 shares of our stock today or you're looking to buy all of them, you're buying it based on your conviction on the future. And we're convinced that the conviction on the future is really bright. And so if there's a disconnect between the marketplace and, you know, the public marketplace and another marketplace, our board feels an obligation to review that and to give our shareholders the best possible options.
spk08: Okay. Thank you. In an environment where you were obviously considering all alternatives, but in particular focused on the meal prep business, you know, historically you talked about that PC or segment of your business you called kind of reviewer revitalized. You also had your cash engines. If I think about the businesses from that breakdown you had historically, is it the review and revitalize and the cash engine that would be most likely for you to consider selling if you were to sell just pieces of the business? I don't know if that's a fair question or not, but I'm trying to understand how to think of it in those previous buckets you had.
spk10: You know, I would just say that I wouldn't be surprised with a transaction that would approach $2 billion. There's probably... $2 billion of businesses that would provide a great scale platform in the private label industry and would allow us to do what I said earlier, simply pull a strategy forward, right? Those are our cash generators. If we can monetize those and invest heavily in that snacking and beverage, that high growth platform, that makes sense. But you know what? I hate to get too involved in this because I think the board is going to... We talked very openly about the sale of the company as an option and about all options. And so... I just want to make sure that we don't gun jump the board here. Let's let us run a process and we'll be back to you when it's appropriate.
spk08: Okay. I appreciate that call. It was a good perspective, Steve. Thank you.
spk10: Thanks, Chris.
spk08: Thanks.
spk02: The next question comes from Robert Moscow of Credit Suisse. Your line is open.
spk04: Hi. I think most of these Questions have been asked. But I guess I would like to know, you know, a lot of your food peers have run into supply chain problems. All of them have. But it just seems like treehouses, the impact on treehouse has been bigger than the rest, both in the magnitude of your guidance cut and also just now you're talking about a strategic review of the whole business. So... Maybe in the context of the $60 million you need to spend, why is it that your supply chain seems to be feeling more pain than the rest?
spk10: You know, Rob, I would say there's a couple things. You know, you've seen the peer set have gross margin down anywhere from 250 basis points to 500 basis points. So we probably fall right in the middle. But one thing I think to remember about us, is we are only a supply chain business, right? We don't have marketing levers. We don't have many of the other levers that you have in your branded lives, right, that I had in my prior life. But also just the nature of our complexity, okay? We make a multiple of everything we make, right? We do it over a multiple of plants for a company our size. That really works well in a normalized environment. But when your vendors labor... gets short, and I ask for 15 varieties of the same item, we're probably the more difficult, the more complex customer to serve for our vendor. We ship an awful lot of freight for our size, but we ship it out of 100 ship points versus a dozen ship points that a similar size CPG company would do. So I think the complexity of private label is inherent, and it's reflected in Treehouse, and it's probably reflected in the impact.
spk04: Okay, and a follow-up. Slide 17 says you outperformed in seven of your largest categories, but I noticed that you didn't include pasta or beverages, and these are categories where you have been investing. So can you tell me what's happening specifically there? Are you losing share, and can you be more specific?
spk10: You know, no. You know, I think with all the noise in our pasta acquisition, I mean, our pasta business in total is up a lot. It's up in branded. It's up in different regions. So I think we just chose not to – we'll speak to that maybe in a future call. So we didn't miss that in any reason in particular other than the fact that there's noise in it from what's in last year and not in this year. So, no, we just look at the largest categories where we're focused, and those are working. So – We didn't pull any out or exclude any because we're losing share.
spk04: Can you tell me a little bit about how they're performing, though? Like, is pasta meeting your expectations? Is beverage? Yeah, sure. Okay.
spk10: Yeah, sure. The pasta business is incredibly strong. It's impacted by the labor issues that we have today. And so I think our pasta business is incredibly strong. It was reflected in our I don't know, Bill, if you have the exact data in front of you. I'm sorry. I'm trying to dig as we speak for the exact data. But our pasta business is good. And the only thing going on in single-serve – and I'm assuming when you say beverages, you mean single-serve beverage, not ready-to-drink.
spk04: Correct.
spk10: Yeah, because the ready-to-drink business, quite frankly, is on fire. Single-serve beverage at existing customers is performing extremely strong. We did have one customer change during the quarter. that probably has a sequential negative lag on that quarter, but the absolute business is strong and the year-to-date business is strong. Bill, I don't know, do you have the data in front of you?
spk03: Yeah, let me just add, Rob, I have a little context just on Riviana in particular and that acquisition we made a year ago. You know, overall, it's going very well and we're pleased. The Q3 revenue for Riviana was $33 million. which was a bit hampered by the supply chain disruption and their allocation and dorm is spiking. But we expected EPS for the year of 20 or 30 cents, and Viviana is already there. On the revenue side, in a normalized environment, we think it'll be fine. Service has been challenged a bit just through the overall supply disruption. But as you may have seen, Ebro did close their California facility, and we're moving that volume into our plants. And so we're on track for the most part. Synergies are good. So our pasta business is strong.
spk04: Okay. Thank you.
spk03: Yep.
spk02: The next question comes from Bill Chaffell of Truist Securities. Your line is open.
spk09: Thanks. Good morning. Hi, Bill. Hi, Bill. Just trying to understand kind of price gaps and how they are today and how they are moving forward. I mean, it seems like, and I think part of the model is it's a little bit, takes a little bit longer for you to pass off pricing with every retailer versus like a national branded competitor. And I don't think that's changed. So just trying to wonder as have the price gaps gotten wider where private label is picking up because of that. And then as, As your pricing fully goes through in the next few months, maybe that changes and the price gaps tighten and private label kind of loses or loses some of its momentum. Or have the retailers gone ahead and taken the pricing and you're just not going to benefit from it until the price goes through?
spk03: Hi, Bill. It's Bill Kelly. You know, the price gaps that we see today are just, they're close to a normalized rate, you know, slightly higher, but not anywhere any significant. As you can imagine, lots of noise with the promotional pieces and some of the trade and the leverage that CPG pulls to manage their margin profile. But we think the pricing is coming through. You've heard from the CPG peers, pricing is coming through as well. So we think those gaps will be near historical rate and it'll be positive for us as we move forward.
spk09: But as of today, you don't think price gaps are a reason why private labels starting to bounce back. It's just a, it's more stimulus checks and other things.
spk10: Yeah. I think it's more consumer behavior than, than price gap. Yeah. We think the price gaps are normalized and across our system. I mean, there, there's a few categories where the price gaps are high. There's a few where they're tight, but we would say they're, they're near normal levels, maybe a little bit higher than normal levels, but not, not dramatically.
spk09: Got it. And then just one other on the, on the supply chain, you know, going back, you and most of your peers had a kind of a remarkable, um, job during the first lockdowns, pandemics, supply chain pressures, stuff like that. How is that, you know, that much different? Is it just, it didn't happen as fast and you didn't have to do kind of emergency operations or, and, and crept up on so many people or, or is there something I'm missing?
spk10: No. I mean, if you think about when we were essential workers, right, the initial, the initial lockdown, um, Our vendors were lined up to support us, right? Our trucking companies were lined up to support us because other industries were closed, right? And the demand for labor wasn't as high. The demand for labor as the economy reopens is enormous, right? I mean, you can't open a newspaper or a Wall Street Journal without an announcement from either a large retailer or a large e-com retailer or someone, you know, that's going to hire tens of thousands of workers, right? So I think the – and then at the beginning, the stimulus hadn't built up in that consumer's or in that individual's pocketbook. So I think it was a very different sense. At the beginning, it was about keeping our people safe, right, distancing folks, doing all those things. Now it's about availability. And there's so much competing for the resources, right, the competition for trucks, the competition for ingredients and packaging, all of those things is – It's fundamentally different than what happened at the beginning.
spk09: Got it. Thanks for the color.
spk10: Thank you.
spk02: The last question today comes from Carla Casella of J.P. Morgan. Your line is open. Hi. I'm wondering if the asset sales, is your thought they're potentially selling assets to pay down debt or would proceeds be have to or be considered for a debt pay down?
spk03: Hi, Carla. Good morning. I think, you know, per our agreements, we will be required to invest in our business as appropriate. We're pretty comfortable with our debt structure as we have in place. And depending on the outcome of the strategic reviews, then we will update the capital strategy accordingly.
spk02: Okay, great. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Steve Oakland for closing remarks.
spk10: Well, I'd like to thank you all, and I'm sure we'll be together soon. So have a great day and appreciate all of your thoughts and your questions. And we'll talk to you soon. Take care.
spk02: This concludes today's conference call. You may now disconnect.
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