Treehouse Foods, Inc.

welcome to the treehouse foods first quarter 2022 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 star one again 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 our earnings release, which is available along with the 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. 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 Oakland.

Thank you, Fiay, and good morning, everyone. Before I get into the details of the quarter, let me make a couple of quick comments around some strategic and governance updates since our last call. As a reminder, we announced in mid-March that the Board unanimously decided that the focus of our ongoing strategic review will be on reshaping Treehouse by building leadership and depth around a focused group of categories in our higher growth snacking and beverage businesses. While we will not be speculating on potential outcomes or the timing, it remains ongoing and will continue to provide updates as we make progress. We also announced several changes to our board of directors. We've recently welcomed Scott Osvelt, partner with Channa Partners, and Joe Scalzo, CEO of Simply Good Foods. Both are already contributing a great deal of unique financial and industry knowledge and insight. Scott and Joe will make great additions to Treehouse. I want to thank Ashley Buchanan and John Gaynor, who stepped down this year. They have brought excellent perspective to our board and we greatly appreciate their time and contributions. As we continue our strategic journey to drive growth and create value, the work we have done over the last several years to optimize the business, focus on commercial and operational excellence, and align our structure with how our customers think has enabled us to execute throughout this dynamic environment. In the first quarter, our execution was strong. Our focus on commercial excellence enabled us to successfully implement pricing to recover inflation while furthering our customer collaboration. These efforts combined with our ongoing focus on the operations and the continued strong demand for our private label products position us well to deliver our full year guidance. But before I get further into the first quarter numbers, Let me start, as I usually do, by framing the macro environment. This continues to be an unprecedented operating environment. On slide four, you can see that inflation continues and commodity inputs are still escalating. While we see improvements in our business, labor markets remain tight across the country and are going to take some time to normalize. The supply chain continues to be disrupted. particularly across the ingredients and materials complex, often reflected in longer delivery lead times and allocated availability. Against the backdrop of these macro headwinds, private label demand has continued to strengthen with strong growth in both measured and unmeasured channels. This is very encouraging and is a sign that the private label value proposition is becoming increasingly important to consumers. This value proposition is being supported by broad consumer trends. Consumer savings rates, as you can see on the left of slide five, have now dipped below pre-pandemic levels as government stimulus has abated. On the right, you can see that inflation, as reflected in higher shelf prices, continues to rise. These higher prices are being felt in the grocery store, at the gas pump, and across the economy. further pressuring the consumer. On slide 6, on the left, you can see that the price gap between branded and private label for our treehouse categories has widened, a key data point supporting our value proposition to the consumer. Price gaps have historically ranged from 26% to 30%. Gaps widened above this range to the low 30s more recently. This will vary from month to month. But gaps at this level present the consumer with a more attractive private label value proposition. Today, given the absolute price point inflation, the dollar value savings of a basket of private label goods is simply more substantial. As a result, consumer shopping patterns are beginning to shift, and we're seeing it in the data. On the right, you can see that private label unit share posted gains on a year-over-year basis. These have shifted meaningfully in the recent months, and share in the most recent period is now trending slightly above pre-pandemic levels. This reaffirms the strong underlying fundamentals for private label. Slide 7 tracks buying patterns for households earning above and below $100,000 a year. It's clear that private label unit share is on an upward trajectory with both demographics. supporting strengthening demand for private label regardless of income level. Let's now turn to the first quarter results on slide eight. We executed well in the quarter. We again invested in service for our customers, and our teams continue to collaborate with them to successfully implement pricing to recover inflation. It's a muscle that we have now exercised for more than a year, and our commercial organization has demonstrated strong capability here. We have also slowly been able to improve service in certain categories, particularly in snacking and beverages. These efforts, coupled with improving private label demand, enabled us to deliver first quarter revenue of $1.14 billion, up 7.9% from last year. Given the supply chain constraints and the broad macro factors I highlighted earlier, this was a solid start to the year. This quarter, we again had more demand than these constraints allowed us to fulfill. We are working very hard to improve service levels, which are in the low 90s when you take into account that we have several categories on allocation. First quarter adjusted EBITDA totaled $58 million. Adjusted EBITDA margin of 5% declined 460 basis points, driven by inflation, labor, and supply chain disruption, and the timing lag as we implement our pricing. Adjusted diluted EPS for the first quarter was a loss of 15 cents compared to 36 cents last year. And as you saw in our release, we are reaffirming our annual guidance today. We have work to do to return the business to historic levels of profitability, but I'm encouraged with our progress and the start to the year. I believe that we are on track and we have the building blocks in place to continue to improve service and profitability throughout the year and to position ourselves well for our fourth quarter seasonal peak. Demand for private label is growing and even in this environment of unprecedented pricing, we have several successes with both new product wins and expanded distribution. In fact, in the first quarter, In eight of our ten largest categories, we are outperforming the broader private label market, which has returned to pre-pandemic unit market share levels. While inflation continues, our teams are on top of it, and we're working with our customers. Our March pricing is now in effect, and we have communicated additional pricing that will become effective at the beginning of the third quarter. As we look to drive savings across the network, Cost control and continuous improvement are also important areas of focus. Along these lines, on the labor front, we are making headway. We are seeing slow but steady success, implementing new labor strategies to attract and specifically to retain talent. We are also doing what we can to mitigate supply chain disruption, where challenges range from ingredient and packaging availability to driver and equipment shortages. Our solutions span securing backup ingredient suppliers to, in certain cases, collaborating with our customers to reformulate where necessary. These are capabilities that will support our customers over the long term. I'll close by stressing that through all of this, we continue to be intently focused on the customer. In the near term, that means additional investment, but we believe investing in the customer is the right long-term decision and will strengthen our relationships and our business. We will continue to work diligently to fill every order that we can and to supply our customers with food and beverages that provide a strong value proposition to their consumers. Let me now turn it over to Bill to walk you through the details of the quarter and the outlook. Bill?

Thank you, Steve, and good morning, everyone. Starting with slide nine, first quarter revenue grew 7.9% versus last year. Pricing contributed 11.7%, very much aligned with the expectations we communicated back in February for low double-digit pricing as we entered the year. I want to make sure I recognize our amazing general managers and commercial teams. They continue to do an excellent job communicating with our customers and implementing the appropriate pricing to recover these inflationary costs. It's a testament to both the team and the capabilities that we're building here at Treehouse. Netting against the pricing, volume and mix declined 3.7%. We continue to address supply chain constraints and availability of materials and ingredients across the network so that we can improve production and in turn, service. Turning to the segments, our meal prep division net sales grew 7.3%. Driven by 13.3 points of pricing, which is largely reflective of the escalation in oils, durum, and oats. Pricing was offset in part by a 5.9% volume and mix decline. While Mill Prep continues to face production constraints, we are making solid progress. The team is on the right track to improve service and doing a good job around expense control. In PASTA, our primary challenges are in labor and material availability, namely carton and film packaging. Within refrigerated dough, we are taking steps to improve production by addressing sapping issues. Our snacking and beverages division delivered first quarter revenue of 9%, of which 8.8% was pricing and 0.2% was volume and mix. Our service has been strong in categories like pretzels and broth. And in a number of categories, we've been able to capture incremental private label demand coming our way. While snacking and beverages does have several categories that are still constrained, such as cookies and crackers, we are working diligently to improve production and restore service to target levels. Turning to our performance by channel on slide 10, you can see that in retail measured channels, sales grew 5%. Similar to prior quarters, revenue in unmeasured channels was better, posting growth of 6%. As a reminder, The unmeasured channels include key retailers of the value, club, and online space. Slide 11 walks you through our earnings drivers. Volume and mix, including absorption, contributed negative one cent in the quarter. As private label demand has strengthened, we are doing all that we can to capture that volume. To date, we have not seen an elasticity impact. Immediately, it's difficult to track because we have production constraints, and this is uncharted waters in light of this unprecedented inflation. We will, of course, continue to monitor that closely. Moving to the right, total PNOC, pricing net of commodities, contributed negative 55 cents versus last year, which in large part reflects the higher cost inventory produced in the fourth quarter that was sold in Q1, partially offset by pricing. In the quarter, operations contributed negative 13 cents versus last year as we continue to address supply chain challenges. SG&A contributed 9 cents in the quarter. We benefited from expense timing and continued spend control. We do not anticipate the G&A contribution to be as significant going forward. Finally, interest expense favorability contributed 9 cents in the quarter versus last year due to our successful refinancing early in 2021. On the balance sheet, our revolver is largely undrawn. So between cash on hand and the revolver, we have strong liquidity of more than $900 million. As I noted last quarter, we successfully amended our credit facility in February to increase our debt covenant leverage ratio and provide additional flexibility in 2022. Our debt covenant leverage in the first quarter was 4.4 times, well below our higher amended covenant ratio of 5.5 times. I'd like to point out that we've added our cash flow statement to the press release today, which I think many of you will appreciate. Turning to guidance, today we are reaffirming our full-year 2022 guidance as seen on slide 12. We expect revenue in 2022 to grow at least 11%, driven primarily by pricing, which came in this quarter at almost 12%. and will build throughout the year as we take additional pricing actions to recover the further escalation in commodities. Pricing in the first half of the year is being offset in part by lower volumes, driven by constraints and service challenges due to labor and supply chain disruption. But as you saw in our first quarter results, increased private label demand coupled with our work to restore service levels are positively impacting our performance. We expect this to continue strengthening both the top line and profitability as the year goes on. Adjusted EBITDA in 2022 is expected to be between $385 million to $415 million, weighted primarily toward the back half of the year. Specific to the second quarter, we are anticipating flattish to slight sequential improvement in adjusted EBITDA margin from the 5% level we reported in the first quarter. We continue to believe adjusting without margins will improve as the year continues and approach pre-pandemic levels in the second half, which on average were in the 11% to 12% range. As Steve noted earlier, this continues to be a dynamic environment, and macro factors will continue to play a role in how the year unfolds, as seen on slide 13. Our teams are doing a great job navigating through, and we believe we have the billing box in place to capture demand. recover inflation, and mitigate disruption. Importantly, private label demand is robust and strengthening. The macro environment has become more supportive of private label. Unit share is growing and is slightly above pre-pandemic levels. We will continue to collaborate with our customers to improve service and capture the growth in private label consumption. Over the full cycle, we expect to be able to recover the entirety of the inflationary headwind. Our pricing actions last year and earlier this year are now being reflected in our results. Our teams have also communicated substantially all of the incremental pricing that will be effective in early Q3. I'm confident that we are mobilized to take further pricing should it be warranted. We also have important tools that we are leveraging to recover inflation, such as lean and continuous improvement, as well as hedging and buying forward commodities where possible. On the labor and supply chain front, it is critical that we position ourselves for our seasonal peak in the back half of the year and that we mitigate disruption and improve production. Our teams are focused and working diligently to restore service levels to meet the growing demand. We expect to continue to make progress, and by doing so, we believe that we can restore the business to historic levels of profitability. With that, I'll pass it back over to Steve to wrap things up.

Thanks, Bill. In my opening remarks, I spoke at length about the macroeconomic environment and the evolving consumer purchasing behavior in recent months, which is translating into unit share gains for private label. For those of you who've covered treehouse and private label for some time, you'll recall that historically there have been three main factors that support private label growth. The economy, demographics, and retailer support. I'd like to close my remarks today and say a few words about retailer support as seen on slide 14. Private label is a key part of our retail customer strategies. Our customers all have unique strategies for how they position private label for their consumers, but regardless of whether they are value retailers, traditional grocers, club stores, experiential retailers, or pure play e-commerce businesses, the bottom line is that Treehouse is a key partner for retailers as they look to drive loyalty, traffic, consumer experience, and ultimately higher profit margin. As you can also see, some of the latest retailer quotes here is evident that our customers are focused on private label growth as a key part of their strategies. When combined with the economic environment, the underlying fundamentals for private label growth are healthy and very much intact. I have no doubt that our customer relationships are stronger today as a result of our investments to drive commercial excellence, as we have transformed our business over the last several years. Along our journey, I'm also confident that we have made great operational strides. We believe that our work around lean and continuous improvement coupled with our actions to mitigate the ongoing disruption, will enable us to improve service and produce more of what our customers need as we head into our seasonal peak later this year. And our people, our talent, and our values are critical to what we do and how we do it. I'm encouraged that we are focusing our capabilities on restoring service and fulfilling the demand being created by the tailwinds we're seeing in private label. With our building blocks in place, I'm confident that our first quarter results position us well to be on track to achieve our full year guidance. With that, let's open the call up to your questions.

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. Again, press the star 1. The first question comes from Chris Grohe of Stiefel. Your line is now open.

Hi. Good morning. Good morning, Chris. Good morning, Chris. Hi. Hi. I had just two questions for you. The first one would just be in terms of incremental pricing coming through now in the third quarter. Is it a meaningful step up in pricing that you're expecting? And I guess the degree to which you're seeing any elasticity. It seems like a lot of your volume at this point has been constrained by supply constraints more than elasticity necessarily. But I just want to get a sense of what you're seeing there, that level of pricing in Q3, like how much incremental is coming through, and then what that could do to volume.

Hi, Chris. This is Bill. Thanks for your question. The pricing that we've communicated in the market is essentially all communicated. It'll hit in Q3. It's hard to say what's meaningful these days, but it covers our commodity inflation that we've seen thus far. And to your point, it'll float through the P&L in Q3, and we'll think we'll be set unless there's additional inflation coming through. I'll let Steve handle the one on elasticity.

Yeah, sure. You know, I think, Chris, first of all, you're right. Our supply chain limits have really been the inhibitor for us, not the demand piece. And so as that slowly improves, we think, you know, the absolute volume and units are going to improve. You know, I think, you know, as the consumer having elasticity, we're starting to see private label share from a unit standpoint pick up. I think the consumers we talked about in the prepared remarks is under a lot of pressure. And, um, you know, the conversations we're having with the customer suggests they're trying to, to be sure they have a value offering. I mean, that's not for every consumer. We know that. Uh, but, but the customer is really focused on having value offerings in the store. And we think that bodes well for the back half.

Okay. And just a bit of a follow on, but if you just look at the PNOC that you put on that, on your EPS bridge, um, just look at that over four quarters, you're talking almost $2 per share. So I just want to get a sense of the recovery piece of that, meaning that by the third quarter, you'll have pricing in place that offsets the inflation you know, and I guess it's on the backside of that, that you can start to earn back some of that lost PNOC. Is that the way to think about it?

Yeah, that's right, Chris. The Q1 result is obviously burdened by a bit of a lag and the inventory capitalization variances that came in through the quarter if you think about how that looks in q2 it gets it improves and in the back half it improves dramatically and so we think we'll recover those dollars in the back half and for the full year we should be okay there okay thanks so much for your time today the next question comes from the line of John Anderson with William Blair your line is now open

Good morning, everybody. Thanks for the question.

Yeah, morning, John. Hi, John.

Hi. I have kind of a follow-on to the earlier question around supply constraints. So service levels are not where you want them, but it sounds like they're improving and you expect them to improve further. Could you help us understand maybe how much you think the labor and supply chain constraints impacted volume in the first quarter, and how you're kind of thinking about the improvement or what kind of improvement you expect as you move through the year, that would be helpful. Thank you.

Sure. Hi, John. This is Bill again. You know, the service rates – that we have are not close to our goal, but they are improving. We've seen labor coming back into our plans and our teams continue to execute. You know, in terms of the impact on volume, you know, for the quarter, you know, for the full year, we thought we'd be in a flattish position on price and volume with a more significant decline in the first quarter. So we've seen that improve a bit. And so our efforts are working. So we continue to execute. We think service will return to normalized levels, you know, building in the back half. And as we execute forward, we back to our normal rates. And we continue to focus on that significant area.

Right. Thanks for that. And I guess, you know, I'm wondering with private label unit share improving and now above pre-pandemic levels, have you, are you seeing any kind of changes in maybe marketplace dynamics, national brands, maybe promoting with more frequency or depth, or is it? kind of fairly steady as she goes, given that we're in this high inflation environment and everybody's looking to take price to kind of recover those costs?

You know, John, I think it is still really disrupted. So, and I think service levels, I think we said in the prepared comments that they're in the low 90s, right? I think we as an industry have a long way to go to get the customer back to where we need to get the customer. At the same time, we're trying to recover this inflation. So, I don't think we've seen that dynamic. The biggest dynamic we've seen, and it was in the back end of the quarter, was the consumer dynamic, and that's their shift of value, right? So I wouldn't say the competitive dynamic is different. I would say the consumer dynamic is different.

That's helpful. Last quick one. On the strategic review, I just want to understand the comments you made at the top. Should we think of the strategic review as kind of ongoing as opposed to kind of uh wound down um based on what you've kind of said previously uh if you could characterize that for us a little bit um particularly in the context of of some of the um you know some of the early objectives around um you know or or sale considerations thank you yeah i i think so i think we've talked strategically right about um getting our portfolio right we we know that our snacking and beverage categories

are growing much faster in some cases. They're more attractive from a margin standpoint. So we will continue to invest in those. The question is, do we, you know, if we chose to simplify our business a bit, would you do that in one large transaction or would you do it in several smaller ones? And I think that's really where the board is focused right now is understanding those dynamics. And so we'll have more information on that hopefully as we go forward and But I think we want to make it very clear today that we do see the opportunity to invest in our higher growth snacking and beverage business. And we'll do that regardless of whether it's through one large transaction or several small ones.

Thanks so much.

Your next question comes from the line of Robert Moscow with Credit Suisse. Your line is now open. Hi.

My name is Robert Moscow. Good morning. I have a couple of questions. You know, in the past, when you've had unexpected cost inflation, you know, in first quarter, you've had to guide to a pricing lag in the year that would hurt your EBITDA. But this time you're saying, hey, we've already announced the pricing and we're going to keep our guidance unchanged. So is it possible that your pricing is going through a little faster than normal?

and and maybe retailers are getting used to it and then i have a follow-up hey robert still you know the um our guide at the midpoint accounted for the lag in pricing you know q1 was burdened uh by the inventory in december and january that came through the omicron uh virus impact so we had those negative variances there we accounted for that in the guidance. As we've gone through the year, inflation is a bit more than we thought and we priced a bit more. I think the environment is very constructive for pricing. Our teams have done a great job with their commercial partners and our customers are still very much focused on supply and getting private label on the shelf. So we think it's going the way we thought it may unfold and we're on track.

You know, and Rob, the only other thing I would say is we do have some visibility to our costs in the near term. And so as long as we have the right things that are hedgeable hedged and the right things that aren't, we have visibility to those. I think we've been more diligent this year in guiding to that and pricing. Our timing of our pricing lives within that three dimensions, right? How far out do we see our cost structure and then how do we react and make sure that we We cover what we can cover before we lose visibility.

Well, just so that we can kind of keep track of it a bit, like Ukraine war, that's the new news. Like how much more inflation do you have this year versus what you expected? Is it 200, 300 basis points?

You know, when we head into the year, Rob, we saw inflation, you know, being double digit. I think I said on the last call, it was in the mid-teens. You know, it's definitely going to be a couple points higher than that, but still within the high teens. And so that's all accounted for in our guidance.

Okay. So here's the follow-up. I think other people have tried to ask this. I'm going to try to get some numbers from you. And if you can't, I totally understand. But... You've had some sales that you've probably lost due to supply chain constraints, and I suspect that that's volume that you committed to with customers and that you just weren't able to satisfy. So that's one number. Can you give us any sense as to what that number is, like on an annualized basis, so that we could consider adding it back, say, in 2023 when everything – comes back, if that's possible. And then there might be another number out there where like, if you could commit to all the volume that the customers wanted, that might be another number that's even bigger. And can you frame it to me in that way?

Rob, let me start with the first part of the question, and I can't really quantify it. You know, here's what we know. We know that our service levels at around, you know, in the 90% that we talked about, you know, our target is higher than that, right, 98.5. So we think we could have, you know, again, serviced with much more demand had we hit our levels from that perspective. We do know that orders and volume cases are coming in much higher, but you have to sort through what could be double ordering and all those pieces. I can't really give a number in that context. But your intuition is right in that we do have much more demand. The private label tailwinds are strong. As we go throughout the year and in the next year, we'll give you more visibility. You don't have to expect about that. And then, obviously, you've got to account for all that pricing that's coming through. You know, we have not seen elasticity at this point. We are in uncharted waters given the magnitude of the pricing, and we don't anticipate elasticity, but we'll have to account for that as well as we go through the year. Okay.

Understood. Thanks.

The next question comes from Bill Chappell with Truist Securities. Your line is now open.

Thanks. Good morning.

Morning, Bill. Good morning, Bill.

Hey, just... Speaking on service levels, I'm just trying to understand, you know, this has been an issue, especially going back to two years ago, the start of the pandemic. And, you know, I guess part of the problem was private label in general wasn't getting, and you in particular, wasn't getting product to the store, so brand took share. So is there something new that's really continuing to keep those service levels low over the past year, or does it just take a long time to really work through these things?

You know, Bill, I think you've probably heard a number of our branded or other peers talk about the supply chain challenges. They're predominantly on do we have the right number of people in our plants to produce the total demand. That is improving, right? And our strategies there, we focused on hiring, training, and now on retention. I would say we've made great progress on the people front of this, but there still is – supply chain in the materials and ingredients complex, packaging, those kinds of things. And so we're working with our vendors, we're working with our customers to give them much more visibility to exactly what we need so we can get it there on time. But I think the last piece of this that needs to be solved is really the inbound materials and inbound packaging. And we are more complex, right? So we do ask for more variants of the same thing from our vendors than our peers. And so, you know, we are making great progress there, but we have a ways to go. And I think that's our biggest thing.

That helps. And then on the pricing front, just trying to understand, because a lot of, I guess, the brand appears, it seems like they've already done pricing. And I think I'm right in saying that we won't, as a consumer, see a whole lot of change in your pricing on a shelf in third quarter. The retailers go ahead and take that pricing. So I just try to understand if price gaps will shrink, And that will have any impact on your volume or the price gaps are already where they will be three months from now?

You know, I think we're encouraged by the price gaps because it tells us that with the pricing we have in the market, we're providing value to that retailer. And the key to private label and the retailer's focus right now is having that value offering in each one of the categories. And so we don't see that as an inhibitor at all. I would tell you a private label naturally will take probably more frequent lower price increases because our margins are lower. We price on actual experience and not on forward curves. We don't have the umbrella that brands have to set category pricing. I think it's natural for us to take pricing more often, probably slightly less from a percentage standpoint. But the encouraging thing for us is we don't see a problem with the price gap and the umbrella that we're operating under is providing. And I mentioned this in the prepared remarks. You know, a lot of pricing in some of these categories is up substantially. So a 30% price gap today is a lot more pennies per unit. So it's a little bit more of an absolute penny savings than it's been historically. And so when you add those things together, we think the umbrella is going to be fine.

Great. Thanks so much.

The last question today comes from Carla Casella with JP Morgan. Your line is now open.

Hi, thanks for the question. This is Oliver Brotman on for Carla. If you could just provide some more color on the gross margin outlook and which commodities are the most inflationary and your ability to hedge those commodities.

Hi, Oliver. It's Bill. Thank you for your question. If you think about just kind of how we manage the margin piece and the commodities going forward, you know, obviously, inflation's up, as I said, mid-teens to high-teens. We do look to coverage crops that half of our basket, about 50% or so, is what we can cover either in commodities or forward contracts. And so we take that coverage out about six months. Obviously, at the peak here, we don't want to get, you know, too over our skis in coverage, but we keep managing through that. As far as some of the commodities, obviously edible oils is up. Plastics driven by crude oil is up. Wheat, which impacts our crackers and cookies and dough business, and obviously durum wheat impacting pasta. You know, we have pricing out there to cover our inflation. We'll keep managing through that as we have all year. We also have continuous improvement programs where we've actually, you know, gotten back to our lean efforts and really have some good traction in our plans in terms of taking out waste and lowering those pieces. So with all that coming together, we think we'll be very close to the midpoint of our guidance given the inflation that we're seeing.

Awesome. Thanks for that. And just a second question. In the prepared remarks, you commented on where leverage is. Is there a stated target? And would you contemplate any debt pay down with a potential asset sale? Thanks.

Yeah, I won't comment on any transaction. But from a leverage perspective, we like to keep the leverage between three and three and a half times. Q1 is the quarter where we burn cash as we build the inventory and work through this disruption. As we get to the second half of the year in Q4, we build cash nicely and we'll look to continue to deliver from that perspective as things normalize.

Awesome. Thank you so much.

This concludes our question and answer session. I would like to turn the conference back over to Steve Oakland for closing remarks.

Yes, I'd just like to thank everyone for being with us today and wish you a great day. Look forward to talking to you soon. Thank you.

This concludes today's conference call. You may now disconnect.