Treehouse Foods, Inc.

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.

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.

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?