Treehouse Foods, Inc.

Welcome to the Treehouse Foods fourth quarter 2022 conference call. All participants will be in 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, again press star one. 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 thank you for joining us today. Earlier this morning, we issued our earnings release and posted our earnings deck, both of which are available within 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. On October 3, 2022, we completed the divestiture of a significant portion of our meal preparation business. As such, we'll be discussing our results on an adjusted continuing operations basis. A reconciliation of non-GAAP measures to their most direct comparable GAAP measures can be found in the release and the appendix of today's earnings deck. With that, let me now turn the call over to our CEO and President, Mr. Steve Oakland.

Thank you, PI, and thank you all for joining us today. I'm pleased to be here to report our progress on the strategic transformation of Treehouse. Starting with our strong Ford quarter, in continuing in our outlook for 2023 and beyond. On slide three, we've shared the key messages that I'd like you to take away from today's call. First, we've accomplished a great deal in 2022, reaching a major strategic milestone in early October by divesting a significant portion of our meal prep business at a compelling valuation. We reshaped our portfolio, sharpening our focus as a higher growth, higher margin private label snacking and beverage business. This will enable us to improve the consistency of our execution and our results. Second, our fourth quarter results are evidence of this improved execution as we outperformed the broader private label market in terms of unit growth across our core retail business. Third, our guidance for 2023 reflects the compelling opportunity we expect to capture as a new treehouse, including top-line growth of 6% to 8% and significant profit improvement with adjusted EBITDA expected to be in the range of $345 to $365 million. This represents a year-over-year growth rate of approximately 24% at the midpoint. Fourth, we have a clear purpose and strategic ambition to drive long-term growth across private label stacking and beverages. We believe that beginning in 2024, we can grow revenue 3% to 5% and adjusted EBITDA 8% to 10% on an annual basis based on the portfolio as it's constructed today. and deliver free cash flow of at least $200 million for the next three plus years. We have the right team in place, and our portfolio has never been better positioned to win and drive sustainable growth and shareholder value. Let me now turn to slide four, which summarizes our fourth quarter results. Sales in the fourth quarter grew 22% to $996 million. driven by pricing to recover inflation. Adjusted EBITDA of $120 million was at the top end of our guidance range. Importantly, EBITDA margin of 12% represents a 320 basis point improvement on a sequential basis. I'm very proud of our strong finish to the year, and I want to thank the entire Treehouse organization, their hard work and dedication in making all of this happen. Before I turn it over to Pat to give you more color on the quarter, I want to spend a few minutes putting our fourth quarter performance in context with the rest of the retail landscape. As we all know, over the past two years, we've seen unprecedented input cost escalation and pricing to recover that inflation. During the fourth quarter, Pricing was up about 17% across the entire retail landscape, as everyone has had to recover higher input costs. On slide five, we've provided a look at how volumes are faring across the industry. We used measured channel data to give you an apples to apples comparison. You can see total edible consumption on a unit basis, declined over 3% as a result of high prices. When you move to the right, we've narrowed the data set to capture just those categories in which we operate. Units for national brands, shown by the wine-colored bar, declined 5%, while private label and total, indicated in gold, outperformed and was slightly positive. Treehouse specifically did better than that. In the fourth quarter, our units grew almost 3.5% within retail measured channels. I'd like to point out that our unit growth for our core retail business was more than 3% in both measured and unmeasured channels. Pat will take you through the sales walk in his comments. The pressure on today's consumer is significant. Shoppers are seeking value. and the private label value proposition continues to gain momentum, supporting unit share gains, which we've now seen for the last 54 consecutive weeks. We continue to invest in our business to support our customers in capturing that demand. With that, let me turn it over to Pat to take you through our fourth quarter and guidance. You'll find that the rest of our typical macro slides on shelf prices, price gaps, and shopper basket are in the appendix of our deck today. I'll come back at the end to share with you how we're going to build on the progress we've made and how that translates into the long-term outlook of the business. Then we'll open the call up to your questions. Pat?

Thanks, Steve, and good morning, everyone. I want to first echo my appreciation to the Treehouse team this past year. We went through a great deal of change, and I'm proud of the company we are today. I'll start on slide six, and as Steve noted earlier, fourth quarter revenue grew 22%. Pricing to recover inflation accelerated further in Q4 and was up 24.6%, reflecting our cumulative efforts to recover inflation. Volume and mix declined 2.2% in the quarter. On slide seven, we provided a look at our case volume by channel. As Steve noted earlier, Across our core retail grocery business, in both measured and unmeasured channels, we delivered 3% volume growth. As a reminder, the retail grocery business represents approximately 80% of our annual revenue. It's also worth noting our volume growth would have been higher had we not faced lingering supply chain and service constraints in about half of our categories. Additionally, Our retail growth was offset primarily by the exit of certain co-packed and food-away-from-home volumes, including the pickle business that we discussed last quarter. Turning to slide eight and our profit drivers, fourth quarter adjusted EBITDA totaled $120 million, which was at the top of our guidance range. Adjusted EBITDA margin was 12%, representing a sequential improvement of 320 basis points. Volume and mix, including absorption, declined $5 million in the quarter. Pricing net of commodities was positive once again, contributing $90 million versus last year, which demonstrates that our efforts to recover inflation continue to be realized. We have seen a number of the traded commodities begin to come down, but I want to highlight two things. First, most commodities remain at historically elevated levels, and second, only about half of our basket of inputs are considered tradable. Our non-tradable cost basket is comprised of hundreds of inputs, everything from labels and specialty packaging to food chemicals and foil lids. We continue to see meaningful inflation in this area. Some of the inflation we are seeing in our non-traded inputs is offsetting deflation and the traded commodities. As a result, we are still taking some pricing currently but it's much more surgical in nature. The last bar represents operations, which declined $35 million in the fourth quarter as we continue to mitigate supply chain disruption and invest in employee retention. Our focus on TMOS, our treehouse management operating system, is ongoing, as well as our efforts around labor stability and line reliability. In the fourth quarter, we continue to make progress on our service levels across the network and delivered more than 100 basis points improvement sequentially with about half of our categories near target service levels. Slide 9 demonstrates both the progress we've made in paying down debt over the last three years, including a significant reduction to Q4 when we used the divestiture proceeds to pay down $500 million in October. We ended the year with covenant leverage of 3.2 times in line with our range of three to three and a half times, and liquidity of more than 500 million. Turning now to our 2023 guidance on slide 10. We expect to grow sales by six to 8% in 2023, driven by pricing, as we lap the actions we took to recover inflation last year. The impact of the pricing graph will be most prominent in the first half of the year. You'll recall that pricing to recover inflation was affected in late March, July, and late September of 2022. Our guidance assumes that volumes will be flat this year. As I mentioned, about half of our categories are back to target levels of service. We continue to face constraints in certain categories, like cookies, creamer, and single-serve beverages. We're working diligently to resolve our supply chain challenges, and by the end of this year, we expect most of our categories to be very close to our target service level of 98%. Adjusted EBITDA is projected to be between 345 to 365 million, which, at the midpoint, represents a year-over-year increase of 24%. The key drivers are pricing and supply chain initiatives as we continue to drive team-offs and continuous improvement. We expect net interest to be between 20% and 25 million in 2023, reflecting the benefit of approximately 45 million in income, primarily related to interest on the note receivable. Interest expense will be very similar to 2022, between 65 and 70 million. Recall that the financial statements we provided back in November were recast to remove the impact of the divested business and factor in the use of cash proceeds to reduce debt. CapEx is estimated to be about $130 million in 2023. This year, approximately half of our spending will be focused on growth and supply chain initiatives in areas such as capacity expansion and innovation capabilities. The other half will be focused on infrastructure and maintenance. In total, our 2023 spending is anticipated to be at the high end of our long-term range of 3% to 3.5% of sales. as we have a number of locations that require upgrades and investments in equipment that will ultimately improve line reliability and efficiency. Specific to the first quarter, we are guiding to growth of 9% to 12% on the top line and adjusted EBITDA margin improvement of 300 to 450 basis points on a year-over-year basis.

With that, I'll turn it back to Steve for closing comments. Steve?

Thanks, Pat. As we begin 2023, we continue to see a macro environment that supports private label growth. That, coupled with our improving service levels and our investments in capacity, support our guidance for growth, both short term and long term. I'm excited about the direction we're heading and our journey as a more focused private label snacking and beverage company. Last fall, we shared with you our new purpose statement shown on slide 11, to engage and delight one customer at a time. Our strategic ambition is profitable growth driven by leadership in consumer trending categories. Beyond the 2023 guidance Pat discussed earlier, we believe that over the next three years plus, we can deliver annual growth of 3% to 5% in revenue, 8% to 10% in adjusted EBITDA, and free cash flow of at least $200 million. We're confident we can deliver that level of growth because we have a clear purpose, ambition, and strategy attached to a solid portfolio of categories. Those of you who have followed the company for some time know that for the last several years, we've rallied around operational and commercial excellence, portfolio optimization, and people and talent. These tenets continue to ring true to our priorities, and as a new treehouse, we've sharpened and refined our strategic growth pillars to better reflect how we will engage and delight our stakeholders. As a supply chain for our retail partners, our resources support the nation's biggest and best retailer brands. Leveraging our work and operational excellence, we are now building a world-class supply chain. This requires investments in talent and technology. It includes an ongoing commitment to team loss and continuous improvement applied to both manufacturing and to our distribution network with a greater customer centricity in mind. The sale of a significant portion of meal prep enabled us to better optimize our portfolio and strengthen our balance sheet. Today, we are a higher growth, higher margin business focused on private label snacking and beverages. We will drive profitable growth through category leadership and investment in capabilities. We've talked in the past about how we outperform in categories where we have competitive advantage, defined by a leadership position and having depth. Depth can mean different things in different categories, but it's essentially having the right capabilities, capacity, and geographical reach to drive mutually profitable growth for our customers and for Treehouse. We're at a pivot point in our strategic journey. Rather than prioritize free cash flow to pay down debt, as we have for the last several years, today our balance sheet is strong. we will generate healthy pre-cash flow to invest in our business and build our capabilities, which will be key to our success, which leads me to strategic customer partnerships. We've come a long way toward driving commercial excellence since I first arrived. Today, we are building on our collaborative efforts and taking it to the next level for key customers with whom we have strong alignment and growth prospects. We're going beyond simply the fundamentals, to create a more true partnership. Joint business planning, innovation solutions, leadership engagement, and long-term agreements are all part of this journey. Finally, people and talent continue to be the heart of our organization. We strive to be a talent leader and to be seen as the employer of choice in the markets in which we operate. We're doing that by better defining career paths, harmonizing and modernizing targets and rewards, and through employee engagement. I'm confident that we have the right team, priorities, and investments in place, and we're in the right categories to drive sustainable revenue and profitability growth and long-term value creation for our stakeholders. With that, let's open the call up to your questions. Operator?

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. Your first question comes from the line of Andrew Lazar from Barclays. Your line is open. Great.

Morning, everybody.

Morning, Andrew.

To start off, I think on the third quarter call, Steve, you identified two sort of large buckets of impacts, right, between where you would end up this year or where you would end up 22 EBITDA and what you see as sort of your normalized EBITDA range going forward. One was PNOC and then one was some of the supply chain disruption. So PNOC's now been positive for two quarters in a row as pricing is catching up, obviously making really good progress there. So I guess my question is, how much of the, I think it was 40 million in supply chain impacts, do you think you can recover from? in 23 specifically? That kind of underpins your sort of guidance range. And then I've just got to follow up.

Sure, sure. Well, I think you've seen PNOC be positive the last, like I say, two quarters. And I would expect that the first half of this year, right? I mean, most of the pricing, we will start to lap it as we get into the back half of the year. With regard to exactly how much of the supply chain recovery, I don't think we've given that exact number, Pat. We've

No, we've not. I think what we're trying to suggest is, you know, we've got about half of our plants that are operating at a normalized level of service, and we expect that that remaining half, you know, will improve over the course of the year. You know, we exited 2022 with, you know, about 93, 94 percent service in the fourth quarter. You know, we expect that to continue to move up, you know, as we start to do that. We're still seeing some pockets of you know, labor challenges, a little bit of material availability, and some line things, which is why you're seeing us invest in CapEx. But we're pleased with the progress in service, and we're pleased with the progress and margin that we saw.

Yeah, I guess we just haven't given an exact number. But, Andrew, we do expect to make progress. And I think if you work through our guidance, you'll see that we have to make progress on that line in order to make the numbers we've given you. So we feel good about it.

And then I guess how much – I guess what's the magnitude – even directionally, of sort of net inflation that you're expecting in 23? And how much of the pricing that you need to sort of offset that is sort of incremental from here versus the benefit from carryover actions already taken?

Yeah, we're sort of expecting mid single digit inflation as we think about what we'll experience in 2023. So nothing like what we saw over the last cycle. You know, we have some pricing in place, and I think as we've described it, you know, there are pockets of some deflation and then some pockets of inflation. And so, you know, we'll continue to have those kind of very fact-based conversations with the customers to bring to them the total basket of goods so that they can understand what that looks like and then take pricing accordingly as necessary.

Yeah, and I think your question is how much more do we have to take. A good piece of that was taken already in the month of January, and so much of that is already in.

Thanks so much.

Your next question comes from a line of Rob Moscow from Credit Suisse. Your line is open.

Hi. Thanks. I was wondering, you know, you're going through capacity constraints at a time when, you know, the private label industry probably has a golden opportunity to grow volumes. I'm sure a lot of retailers want to give it more shelf space and consumers want to trade down to it. Do you have a sense at retail what your volume growth could have been or could be this year if you were fully up to speed? And is there a risk of losing shelf space to your competitors who might be a little farther along?

You know, Rob, I think if, you know, Pat said a minute ago about half of our categories are operating at the right service levels. So if you thought a point or two on half our business is probably out there to get, right, would be my guess. And my understanding, and look, I have the benefit of top to tops with virtually all of our customers, our largest customers today. And I think we're performing as well or better. And I think that, uh, you know, if you take you back to slide five in our deck, when you look at where private label is in macro and how we're doing, right. So I don't think we're at risk of losing business for that reason. Right. So I think we're performing and we're leveraging our scale pretty well right now. So if anything, I think we're grabbing maybe a little bit of that in some of the dual supply customers, they're offering us an extra division or two, that kind of thing, because I think we are actually recovering faster. than some of our peer set. I can tell you we have a full court press on. I can tell you that we're doing everything we can to get ourselves in a position to take advantage of this opportunity. And I think you're absolutely right. It's a great time for private label. And we're prioritizing everything. The little bit of business we lost, Pat touched on it in his comments, the little bit of business that, you know, our national branded Copac business that's down, we're trying to repurpose that capacity as fast as we can to private label.

Okay. And a follow-up would be, when you developed your long-term plan, 3% to 5% top line, and then the 8% to 10% EBITDA margin, your capital investments, how much capacity are you going to add to your existing footprint to deliver that 3% to 5%? And also, are there productivity targets on a percent of COGS basis that are that are helping you get all that margin expansion? It's a lot of margin expansion in that guide.

Yeah, I would say there's both of those, Rob. The capital that we've guided to will facilitate the capacity to meet that number. We have balanced those two numbers. So we will have plenty of capacity to meet that growth rate. And then the capital and the TMOS work You know, we haven't talked a lot about team loss, but team loss is in its early stages, but we've got a lot of success so far. So we're very confident in the margin expansion. We can get that without taking price to the customer, I guess, is the real answer there.

Okay. The three to five, is it mostly volume embedded in that assumption, or do you also include like a 2% kind of run rate for inflation?

Yeah, we'll have cost savings initiatives in there to help offset inflation, and that's, I think, how we've operated sort of pre the current environment. You know, that's how we tend to work with our customers to help offset some of that.

But historically, Rob, I think what your question is, historically those categories have grown at 3% to 5%, and it's mostly volume-driven, a little bit of inflation.

Mostly volume. Thank you.

Mostly volume.

All right, thanks.

Your next question comes from a line of Bill Chappelle from Truist Securities. Your line is open.

Thanks. Good morning.

Morning, Bill.

First one, kind of a follow-up on pricing. What we've heard, and I think everyone's heard over the past few months, is I guess one retailer or a couple retailers took pricing from the manufacturers but didn't raise it at the store level just to kind of accelerate or boost

some uh customer traffic accelerate some private label share did you see that in any of your categories and it's bugged has that now uh reversed as we've moved into 2023 you know i would say in in a macro bill it's hard to say each individual item in each individual retailer there's a couple of especially the hard discounters um and some of the large mass customers have been really aggressive on private label there's no question but I think most of our pricing has been passed through. You know, the gaps remain healthy, but most of our pricing has been passed through. I mean, there's an occasional market on an occasional item that someone gets hot, but I wouldn't say that's the norm. I think it's the exception.

Got it. And then the second one, on Pat's commentary on the supply levels, I mean, service levels, I was a little surprised you said supply. they wouldn't expect them to be back to normal by the end of the year. I think that's still 10 months away. So, I mean, is there any major obstacle roadblocks from that happening sooner? Or maybe give a little more color of why it would take that long for everything to be back to normal?

Yeah, and maybe the context for that was we wouldn't expect every single plant. I don't think that that means when you think about the fact we've got half of our plants today, you know, we've got sort of glide paths in place across all those plants. And there's a handful that are challenged where we're putting in a little bit more capital or a little bit more repairs and maintenance over the course of the year to help get us to those glide paths and stabilizing some of the markets. So I, you know, from a labor perspective. So I don't think that means, you know, as a totality, you wouldn't sort of wait out to an improved, much improved service level, but it will take us probably the better part of the year to get everything fully up.

Yeah, and we hold ourselves to 98.1, which is a pretty aggressive target and private label. So I think there's a couple places. One place we do want to touch on, you know, I know our top line number wasn't quite what we had hoped it was going to be. I think it was solid at 22%, but not what we'd hoped. We had a couple weather events in the fourth quarter. You know, obviously we had a hurricane, which affects our pickle business and some of our other things. But we also, we have a, a cookie facility in a Buffalo suburb of Tonawanda, New York. And that community got hit with, what, five and six feet of snow. We had damage in that facility that we couldn't get fixed, and that would linger into the month of January for us. And so, you know, we've had a few things that we've got to get to, and we are in the midst of that. But there were a couple things outside our control that hit us that maybe softened our sales number. It was not demand-driven. There was plenty of demand in the quarter. We just had a couple categories that Mother Nature got in the way of.

Got it. You think you could be in the 70s, 80s percent of your businesses at the service levels you want maybe by mid-year?

Is that realistic? I think that's very comfortable. Yeah, we will just have one or two we think that will linger into the back half because we've got to do some physical investment in the structures.

Got it. Thanks so much.

Your next question comes from a line of Chris Grove from Stiefel. Your line is open.

Hi, good morning.

Hi, Chris.

Hi. Just a quick question for you on the volume. I guess just to understand as we look ahead, should private label retail volumes be growing? Would you expect in 2023 away from home and command to still be down for the year? You've got some lapping issues and I just want to get a sense of how that composition might break out.

Yeah, Chris, I think we've talked a little bit about the pickle business in particular. We will lap that for a couple more quarters, so I do think you'll see that at least through the first half. And then I do think we saw just some general food-away-from-home softness in a few categories as folks have changed some of their consumption from that perspective. So that was maybe less significant than the business that we exited, but we did see a little bit of that, so we are anticipating that to continue for a little bit.

Yeah, and Chris, our command volume, like most, is branded, in some cases, super premium brands, right, which are getting hit pretty hard. I would say, though, if we guided our units to flat, if you go back to slide, well, I think it's what's slide five in our deck, it suggests that our core retail business has to grow nicely, right, low single digits in order for that to happen. So we expect our core retail business to grow this year nicely in units and And that'll be leverageable. That's why we can guide the kind of margin performance that we're guiding.

Okay. And then just a follow-up question, if I could. And with the balance sheet now in a much better place, you're holding that note that could make the balance sheet look even better. You're quickly in a better position. So when you talk about investing in the business, Steve, or improving capabilities, how much of that is an internal comment? How much of that is an ability to acquire now, if that's an opportunity, to help kind of fast-forward some of that action?

You know, Chris, thank you. Yeah, we feel really good about the opportunities in our business, right? And so I think, first of all, we've looked internally and we think there's an opportunity to invest in capability internally. And I think Rob asked the question on capacity for the future to fund all this growth, to fund the growth we're missing right now. So I think it'll focus internally. If we have the chance to buy that capacity, and I would say assets, capabilities, we would do that if that can accelerate the path, right? I think acquisition for us would be capability-driven, not necessarily new businesses, not adjacencies, those things that we've done in the past. It would all be about we think we're in a great group of categories. We just need to be able to sell more. The demand is there. So if the assets are there, we'll use M&A to do it. And there's a couple places I think you may see us do that.

Okay. Thank you for that color then.

Thanks.

Your next question comes from a line of Connor Radigan from Consumer Edge Research. Your line is open.

Hey, guys. Good morning. Thanks for the question. Morning, Connor. So in this slide, I think it was slide 15, where you show the price gaps versus national brands. It looks as if the price gap expanded somewhat in November, but then contracted again in December and sits roughly where it was at last year. Just kind of curious how that looks in January. So in the IRA data that we see, it seems that this private label pricing is running somewhat ahead of branded on the year-over-year basis and look to your categories. And so that would somewhat seem to imply a narrowing price gap. And I guess just is there any concern that a narrowing price gap may lead to moderating private label share gains?

You know, I'd say a couple things. Let me step back and talk about December. You know, for us to have the kind of fourth quarter we had in a good, solid December, December is very much a national brand month. And like you say, it fell back to where it normally is. You know, when people entertain for the holidays, people lean in, right? So it's not uncommon for the month of December specifically and November for Thanksgiving to have stronger branded shares, right? So if you go back and look at our business over time, you see that, right? So we performed as we expected we'd perform over the holidays and had a good, solid fourth quarter. No, I would suggest that our volume trends, and we obviously have access to many of our retailers' daily scanner data, right, and weekly scanner data. Our volumes are not slowing down based on price cap. So that has not impacted our demand signal yet.

Okay, that's great. And then just one quick follow-up on service levels also. So if I recall, service levels last quarter were around 93%, and I think you guys quantified about 96% in October. And so with the 100 basis point sequential increase, so is that number sequentially increasing to 94%? And so if so, it sounds like service levels worsened somewhat in November and December. Is that right?

Yeah, I think we had a solid month in October, and we did sort of land at about 94%. I think some of the things that Steve described earlier in terms of some of the weather events and the like are probably what dampened that a bit as we sort of exited the year.

Okay, perfect. Thanks for the call, guys.

Appreciate it.

Thank you.

Your next question comes from a line of Rob Dickerson from Jefferies. Your line is open.

Great. Thanks so much. Just a couple questions. I guess first question, kind of more broadly speaking, just given kind of the macro backdrop where the consumer is and all the pricing taken, especially on the branded side, is a sense here, right? I mean, the operating environment is obviously in a great spot for you on the private label side, but let's just say we don't really see a lot of branded deflation. Would you say that you know, over the next three years, just given your guiding at this point, that you believe that maybe we're entering some sort of, you know, beneficial cycle that could be a little longer term, just given kind of where the price deltas are and given elevated absolute prices on the branded side. That's the first question.

You know, Rob, I would say we guided based on a much more historic level. I think you're right. These are different times, right? The absolute price gap You know, we're looking at percentage price gaps, but that absolute penny gap is high. So, you know, if that, when things normalize, you know, could that drive more private label adoption? We'll see. I think, and I've said this a number of times, I think private labels position, and I had a conversation on Friday, frankly, with one of our largest customers, and they're convinced that their private label assortment, quality, and presentation's the best it's ever been. So, I You know, I think time will tell, right? I think, though, that if we can get back to historic growth rates, we build a hell of a treehouse, right? If it gets better than that, that'd be great. But I don't think we need that to happen for us to execute the way we've got it.

Okay, fair enough. And then just on the longer-term plan, you know, obviously, ongoing implied margin expansion year over year. You know, I think I heard you say earlier, you know, kind of ongoing productivity measures. Obviously, you know, pricing catches up this year and then supply chain improvements. At the same time, you know, if you're looking forward, I guess this is implied through at least 2026. So you definitely have some sense of conviction, right, on your ability to continue to increase those margins. Is there anything else in there? Is this, you know, is there a mixed impact? Do you kind of have visibility on maybe some of the forthcoming innovation, because if we assume it is mostly volume-driven, you know, kind of in the out year, then it would seem like there's got to be some mixed component and maybe some volume leverage as well. And then a quick follow-up.

Yeah, Rob, this is Pat. I think there's, you know, as we think about Steve laid out the elements of our strategy and strategic customer partnerships and And trying to grow with those customers that are growing private label, I mean, that is the crux of the strategy. And so I think as you grow with those who are growing faster on private label, I think that probably naturally improves your mix a little bit. But I do think a lot of that has to do with the volume growth and trying to grow, you know, overall with the historical rates of the categories and then trying to improve our supply chain with the investments that we've put into place and the range of CapEx that we think is necessary to do that.

Okay, cool. And then just quickly, DNA, I know you guide Tibidab, but at the same time you are investing a little bit on the capital side. Do you have a forecast for 2023 for DNA?

We do. I don't think we put that out. We'll have to probably follow up if you want the exact number. Okay. I don't have it right.

Cool. Great. Thanks, Rob. Yeah, no problem.

And your next question comes from a line of Carla Casella from JP Morgan. Your line is open.

My biggest question is on the EBITDA add-backs that you have for the covenant adjusted. Can you give us the basis for that, the $65 million one?

So you're talking about in the appendix?

Exactly. Covenant just seems like it's over $400 million, whereas we calculate $300 million, as you show in your other. I'm just wondering what the difference is. Is it go-forward cost savings or something like that?

Yeah, I think the footnote down there has, you know, it's a lot of the meal prep transaction-related costs that are being added back are within that category. You know, they're allowable under the credit agreement.

Okay, so your $300 million EBITDA has some other non-cash charges that you haven't added back as well. It looks like there's another $44 million. Are those charges that just won't recur or they're not allowed? I don't understand why you don't add them back in your EBITDA adjustments.

No, those are other sort of non-cash write-offs as defined in the credit agreement. There's things like inventory write-offs and other elements that as defined, you know, are part of the covenant calculation.

Okay. And then you've got a $427 million note receivable on the balance sheet. When do you expect to monetize that? And have you thought about how you would allocate the proceeds?

Yeah. You know, we don't have an expectation of when to monetize that. I think given the dislocation in the credit markets and you know, having to probably speculate a bit about, you know, Winland's intent in terms of when they may choose to refinance. I don't think we're in a position to sort of guesstimate when that might be. But, you know, we're really happy with the return that that note provides and to be able to go reinvest some of that interest back into the business. And so, you know, we'll continue to carry that right now. We feel good about the direction of the business on the Winland side as well.

You know, though, I do think capital allocation is a great question, right? And You know, when I arrived, you know, we had to prioritize paying down debt, right? We now have our balance sheet in a really good place where we can have a much more balanced capital allocation strategy. We will maintain a very strong balance sheet. We're there now. We'll continue that, but we can also now invest in our business. That'll be our primary look is how can we get, because we think the returns in our business are so strong. And then, you know, what are the other opportunities? Can we return some capital to shareholders? What else can we do with it? Thank you. We now have a much more balanced opportunity than we've had in the past where we really wanted to get our debt structure right and our balance sheet right. And having the transaction allowed us to make a big step change there. So that's why we feel better about the growth numbers that we're able to talk about today. Because we can invest to drive them.

That's great. Super helpful. Thank you.

Circling back to the DNA question from earlier, we think that'll be about 145 to 150.

And your next question comes from the line of William Broder from Bank of America. Your line is open.

Good morning. Earlier when you were talking about how half of your CapEx is going to be for driving capacity expansion and better innovation for your customers, I think you made some reference to potentially purchasing capacity. I guess, is that on the radar in terms of other facilities for sale that may allow you to, I guess, more aggressively grow that would speed up your ability to grow the top line?

You know, I think there will be some stuff available, yes. But, you know, it has to be right, and we're incredibly careful there, and it has to meet the right category, the right location, and the right capability. So, There may be some opportunities for some very small purchases, and there may be some, you know, I don't think anything would be huge, but there may be some other opportunities out there. So, well, you know, but those things happen when they happen. We can't speculate on the exact timing of that.

Got it. And then in terms of the TSA agreement, I guess is the expectation that this is still going to wind down over a year? And clearly you're going to have, you know, some excess costs for your operations when you're not receiving some of those revenues. Are you pretty comfortable that you'll be able to decrease those costs in line with the reductions and funds that are going to be provided to you from Invest Industrial?

Yeah, I think that's right. So there's, you know, those services are some of the back office services you would expect under a TSA and And we expect to be able to wind those down. And we know the Windland business is going to need some folks where we're providing TSA services as well so that there's probably a mutual beneficial solution there.

That makes sense. All right, great. That's all from me. Thank you.

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

I just want to say thank you for everyone for joining us today, and we look forward to seeing you in person soon. Thank you so much. Have a great day.

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