Treehouse Foods, Inc.

Hello, welcome to the Treehouse Foods third quarter 2023 conference call. All lines 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, simply press 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. Our press release and earnings deck, both issued this morning, are available in the investor relations section of our website at treehousefoods.com. Before we begin, we would 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 September 29, 2023, we completed the divestiture of our snack bars business. For purposes of our discussion today, we will briefly cover our third quarter results on a whole company basis as the third quarter guidance that we previously issued incorporated the snack bars business. Results for the quarter are also provided on a continuing and discontinued operations basis in the press release with the snack bars business reported in discontinued operations. The majority of our discussion today around our operating and financial results will center around performance on an adjusted continuing operations basis. We have provided recast historical financials for treehouse continuing operations for 2019, 2020, 2021, and 2022 on an annual basis, and 2022 and 2023 on a quarterly basis so that you can best compare operating performance. A reconciliation of non-GAAP measures to their most direct, comparable GAAP measures can be found in today's press release and the appendix tables of today's earnings deck. With that, let me turn the call over to our Chairman, CEO, and President, Mr. Steve Oakland, for his opening remarks.

Thank you, Colleen, and good morning, everyone. I'm pleased to be here today to discuss our third quarter financial results and provide an update on our outlook for the remainder of the year. Treehouse has made important progress executing our strategy to date, positioning the company to capitalize on industry and consumer trends and create long-term value for our shareholders. On slide three, we've noted the key takeaways for the quarter, and we'll discuss each of them in detail on the call. Turning to our results, For the third quarter, we delivered year-over-year net sales and volume growth and outperformed the broader private brand market in the retail channel. We were particularly pleased to see our core retail volume increase 1% despite a voluntary product recall and a discrete supply chain disruption late in the quarter. These factors, combined with weaker co-manufacturing and food away from home sales, and lower than anticipated consumption in select retail categories, resulted in sales below our original expectations. Importantly, as a result of our team's strong execution, we grew adjusted EBITDA from continuing operations by nearly 13% year-over-year. in line with the high end of our guidance range. Turning to our outlook briefly, reflected in our full year sales guidance are significant changes from when we originally issued guidance. First, the voluntary recall and discrete supply chain disruption that I mentioned earlier, although behind us now, impacted the end of the third and the beginning of our fourth quarters. Next, The snack bar divestiture was an impact of approximately $160 million on a full year. And finally, the current consumer trends have shifted, which I'll speak to in more detail. Taking this into account, we've revised or adjusted net sales expectations for the full year and now anticipate achieving approximately 4% to 5% year-over-year growth. Against these lower sales, we are reaffirming our adjusted EBITDA guidance range of $360 to $370 million, which represents approximately 25% year-over-year growth at the midpoint. Given the number of moving parts, Pat will provide more detail in his presentation on our results, outlook, and our capital allocation strategy. I do want to highlight that we have deployed nearly $200 million of capital to support the execution of our strategy and create value for our shareholders. This includes our recent acquisitions to increase our depth and capabilities and the repurchase of approximately $50 million of company stock. We also expect to deploy capex of approximately $140 million directly into our manufacturing facilities in our supply chain this year. One additional item I'd like to highlight is the receipt of approximately $427 million in proceeds from the repayment of our seller note in October. As you'll remember, this seller note relates to our meal preparation divestiture, and the repayment marks a final step in this transformative transaction. Our balance sheet strength is an asset and we are focused on deploying capital where we can maximize returns. We are continuing to strengthen and build on Treehouse's position as a private brand powerhouse in higher growth, higher margin snacking and beverage categories. Year to date, our team has remained focused on sustaining and growing our leadership and depth across our categories, enhancing our supply chain and delivering superior service and quality to our customers. Noted on slide four are two recent portfolio shaping actions. We closed the sale of our Lakeville, Minnesota facility and snack bar business for approximately $61 million. The snack bar business was not expected to contribute positive adjusted EBITDA this year. And although bars can be a good consumer category, Private brands penetration in this category is very low. With this divestiture, our portfolio is now more focused on categories where we see the greatest opportunity for the company moving forward. Separately, last month we announced an agreement to purchase the Bix Pickle business in Canada for a base purchase price of approximately $20 million, relating primarily to acquired inventory. We expect to close in the fourth quarter. This transaction will enhance our capabilities in our pickle category and expands our presence and scale in Canada. Treehouse has had a co-packing arrangement with VIX for many years, and we are pleased to bring this additional margin accretive volume into our manufacturing network. Turning to our internal supply chain initiatives, we have continued to invest directly into our supply chain, as you can see on slides five and six. Over the next three years, we continue to expect to achieve gross supply chain savings of approximately $250 million, which will support our long-term adjusted EBITDA targeted growth. Let me give you an update on our progress on this front. We remain focused on implementing TMOS and other supply chain initiatives that contribute to improving execution and margin performance. On TMOS, we are continuing the rollout of the system across our manufacturing network. We expect this work to enable us to start 2024 with substantial cost-saving processes in place. In 2023 to date, we've seen a significant improvement of four percentage points in our overall equipment effectiveness, or OEE, as a result of our TMOS initiatives. As an example, we started our TMOS journey at our refrigerated dough manufacturing facility in Texas at the end of 2022. You may recall that we took time during the second quarter, our seasonally lowest from a volume perspective, to pull forward some repairs and maintenance activities at this facility. I'm pleased that we are seeing significant results. Through the end of the third quarter, that facility increased production by over 14 million pounds and improved service by over 19 points versus the prior year. This is particularly important for our retail grocery customers who will want to have refrigerated dough back on their shelves heading into the peak season. In the third quarter, we also kicked off our procurement exercise. We've completed our initial procedures around scoping and identifying opportunities, and our work here remains on track. And finally, we are progressing on our efforts to make our logistics and distribution network more customer-centric. We've completed the first stages of our warehouse consolidation plans and are seeing positive results from the initiatives to improve utilization and logistics efficiency. Next, an update on treehouse results relative to trends we've seen across the broader industry, which you can see on slide seven. In the third quarter, we saw continued strength in private brand volume compared to national brands. For the quarter, private brand unit sales in the measured retail channel were flat compared to national brands, which continued to decline. Importantly, Treehouse outperformed, delivering organic volume growth in the retail channel of approximately 1%. If you include the volume from our recent acquisitions, our retail cases were up 2%. Now turning to food consumption trends, which have been in particular focus in recent months, as retailers have seen changes in basket size and mix. At Treehouse, we've seen retailers more closely align orders to current consumer demand trends, as we've moved further past the supply chain disruptions the industry experienced in recent years. In September, we fielded a survey on consumer food consumption trends, which are on slide 8, and now show that among consumers who changed at-home eating habits Their focuses have been on reducing waste and switching to less expensive options. Notably, 65% of respondents say they have switched to store brands and more affordable options. This not only underscores that consumers continue to prioritize value in their grocery purchases, but it also shows the strength of private brands. It is clear to us that consumers are continuing to adjust their shopping patterns in response to the macroeconomic environment and pressure on their wallets. We anticipate this continuing near-term supporting private brand strength and growth opportunities. As we've discussed over the past few quarters, grocery retailers have continued to increase shelf prices, including in treehouse categories. to offset the impact of inflation. The fact is that a basket of private brand goods in our categories today generates approximately $18 of absolute savings for the consumer versus the same products offered by national brands. With pressures on the consumer, this value is significant. Given this price gap, private brands now have gained unit share for 92 consecutive weeks, reaching an all-time high for the third quarter. The value proposition in private brands is undeniable. Looking at the chart on slide 10, you can see private brand share gains in 2023 year-to-date compared to 2019's pre-pandemic levels. These gains continue to support the importance of private brands for retailers and consumers. Additionally, we continue to see private brands gain share with Gen Z and millennials, showing how we are winning with the next generation of consumers and supporting long-term private brands' consumption trends. We believe the long-term outlook is quite healthy. Before I turn the call over to Pat, I'd like to reinforce what we see as the key takeaways for the quarter. First, We delivered volume growth in our retail business and outperformed the broader private brands market in the retail channel, even in the face of disruptions that impacted the quarter. Second, we are driving margin improvement through TMOS and our supply chain initiatives and are committed to our $250 million savings goal over the next three years. Third, While we have updated our adjusted net sales guidance range for the items that I spoke to earlier, we have reaffirmed our adjusted EBITDA guidance, which puts us on track to exit the year at our targeted $400 million annual run rate. And finally, we are continuing to strategically deploy capital to drive long-term value creation. We are at a positive inflection point for Treehouse. as we look to year-end and into 2024. As a result of our portfolio reshaping, we are focused on the key categories where we have confidence we can win. Our supply chain enhancements are beginning to show in our financial results, and with our full seller note repayment, our balance sheet strength is an asset. We are attractively positioned at the intersection of two incredibly powerful long-term consumer trends, the growth of private brand groceries in North America and the consumer shift towards snacking. And we continue to benefit from current macroeconomic tailwinds. As we sit here today, we are well on track against our long-term targets. With that, I'll turn the call over to Pat.