Treehouse Foods, Inc.

Welcome to the Three House Foods Third Corner 2024 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, press the pound key. Please note, this event is being recorded. At this time, I would like to turn the call over to Matt Siller of Treehouse Goods for the reading of the Safe Harbor Statement.

Good morning, and thank you for joining us today. Earlier this morning, we issued our third quarter earnings release and posted our earnings deck. These items are available within the investor relations section of our website at treehousefoods.com. Before we begin, I 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 29th, 2023, we completed the divestiture of our snack bars business. Consistent with prior quarters, we will discuss 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 tables of today's earnings deck. With that, let me now turn the call over to our Chairman, CEO, and President, Mr. Steve Oakland.

Thank you, Matt, and good morning, everyone. Today, I will discuss our third quarter financial results and provide an update on our operations and our outlook for the remainder of the year. Before we get to the results, I would like to update you on the voluntary recall of frozen griddle products, which we announced last month. As you can see on slide four, Treehouse Foods initiated the recall of products made in our Brantford, Ontario facility out of a commitment to food safety and quality. The recall was initiated as a result of routine quality assurance testing of our products made at the facility. We have temporarily closed the facility to conduct a deep cleaning, sanitation, and hygienic restoration. Our entire organization is committed to food safety, and we are extremely disappointed to have this event occur in our system. But it recommits all of us to be relentless when it comes to food safety. We expect the facility to resume manufacturing in the first quarter of 2025. Moving to our third quarter results, outlined on slide 5, our organic net sales trend improved. We delivered adjusted net sales of $854 million, which was just below our guidance range. Our performance was impacted by weakening consumer trends across our industry, and specifically our categories, as the third quarter progressed. Additionally, Hurricane Helene caused some delays in shipping volume out of our North Carolina distribution center in the final days of the quarter, which we estimate was an impact of between $5 and $10 million of our top line. Despite these sales results, we still recorded adjusted EBITDA of $103 million, which was at the midpoint of our guidance range. This was driven by our strong adjusted gross profit, a result of the savings associated with our supply chain initiatives. We executed well against the savings initiatives in our supply chain, securing anticipated procurement savings, which provided the benefits expected this quarter. Importantly, the progress we are making on these initiatives should lead to positive momentum for next year. Let's take a closer look at the consumer trends that we experienced during the third quarter. in the categories in which we operate, which are detailed on slide 6. While private brand unit sales were positive in the quarter, we did see a significant deceleration as the quarter progressed, which you can see on the right side of the page. This slowdown was a result of continued pressure on the consumer that impacted the broader market. This trend persisted through October, and we assume that it likely continues in the near term. With that said, overall, private brand industry dynamics remain favorable when compared to historic levels. As you can see on slide seven, specifically, price gaps are healthy and private brands continue to take share. But given the lower consumption environment, the share gains are coming from a smaller pie. Finally, as it relates to promotional levels, we have seen the traditional pattern of gradual increases as the calendar year has progressed. While we do expect the typical seasonal ramp in the fourth quarter, we would note that promotions are still below the historic levels seen prior to the pandemic. As you can see on slide 8, private brands have been consistently gaining share over the last two decades, which we believe will continue over the long term. Treehouse remains attractively positioned at the intersection of two incredibly powerful long-term consumer trends. the growth of private brand groceries in North America, and a consumer's shift towards snacking. Continuing with the discussion of the long-term opportunity on slide 9, it's clear that many grocery retailers also see further runway for growth in private brands and are making their own strategic investments accordingly. Walmart and Albertsons both launched new private brands recently. Costco's Kirkland brand is well established globally, and Aldi continues its store-based expansion across the U.S. with an assortment that is focused almost exclusively on private brands. This emphasis underscores the opportunity available to Treehouse to partner with our retail customers, gain share, and create value over the long term. I would like to conclude by providing some additional perspective on how we plan to manage the business in the near term, which incorporates both challenging consumer trends and slower category growth. Given these trends, we continue to focus on the things we can control as an organization, primarily in our supply chain. We have made significant progress on a number of areas, but we still have the opportunity to improve our execution and consistency. The foundation we've built with our supply chain initiatives remains strong, and we are focusing on executing what you see outlined on slide 10. We have visibility to delivering our commitment of $250 million of gross supply chain savings through 2027. The building blocks of these initiatives include driving manufacturing efficiencies through TMOS, our treehouse management operating system, procurement savings opportunities, and improving the efficiency of our network. Additionally, I believe we've positioned the company in the right categories and will capitalize on opportunities to invest in those categories to improve our competitive positioning, depth, capabilities, and execution. In this environment, we think it's prudent to focus on profitability and cash flow. We are building a strong margin management function. which should allow us to enhance our profitability by allocating our capacity to the most attractive mix of businesses that drives profitability for both Treehouse and our customers. Additionally, we have the opportunity to develop a more efficient pricing architecture. I'm confident in our ability to drive improved profitability as a result of the progress on these initiatives, despite a slower growth environment. With that, I will now turn the call over to Pat for further detail on our third quarter results and our updated outlook. Pat?

Thanks, Steve, and good morning, everyone. I'd like to start by thanking the entire Treehouse team for their hard work this quarter. You can see a summary of our third quarter results on slide 11. Our adjusted net sales were down just over 1% year over year. Importantly, we delivered solid adjusted EBITDA of approximately 103 million, which was up 14% year-over-year. Our adjusted EBITDA margin was 12%, which was up 160 basis points compared to last year. On slide 12, we have provided further detail on our year-over-year net sales drivers. Our third quarter adjusted net sales were down just over 1%, which reflects a sequential improvement in our trend compared to the past couple of quarters. Some of our recent business wins were offset by headwinds from slowing consumption in our categories and the impact of Hurricane Helene, which disrupted distribution in the final days of the quarter. Pricing was a headwind of about 50 basis points due to targeted commodity-driven pricing adjustments, as we expected. Additionally, net sales was negatively impacted by the voluntary recall of griddle products, which provided a drag of over 1%. Moving on to slide 13, I'll take you through our adjusted EBITDA drivers. Volume and mix, including absorption, was down $1 million, driven by lower volume in the quarter. PNOC, pricing net of commodities, was down $3 million year-over-year and was driven by higher commodity costs and targeted pricing investments. Operations and supply chain were a net $20 million benefit versus the prior year, driven by supply chain cost savings, primarily related to our procurement initiatives. Lastly, SG&A and other was a $3 million drag versus last year, primarily due to less TSA income as we expected. Moving on to our capital allocation strategy, which is outlined on slide 14, the board and management continue to be focused on deploying capital in a manner that enhances returns for shareholders. Our first priority remains investing in our business, which we do organically through CapEx and inorganically by strategically adding depth and capabilities. We will also continue to maintain our balance sheet strength and execute on our share repurchase program when we feel our stock price is dislocated. We will continue to be disciplined and look at all capital deployment decisions by evaluating risk-adjusted returns. Moving to our outlook on slide 15, we are updating our full-year adjusted net sales to negative 2 to negative 1% year-over-year, or $3.37 billion to $3.4 billion. which reflects our expectations that consumer trends will remain below recent quarters, as well as the impact of our recent griddle recall. Additionally, we have updated our adjusted EBITDA guidance range to $335 to $345 million. This update reflects our expectations that slowing consumption and consumer-driven mixed trends we've experienced throughout the year continue in the fourth quarter, creating further deleveraging of our supply base during peak season. It also reflects the impact related to our griddle recall. Additionally, we are revising our free cash flow expectations to at least $120 million. Our guidance for net interest expense of $56 to $62 million and capital expenditures of approximately $145 million remain unchanged. As it relates to the fourth quarter, we expect adjusted net sales to be in the range of $900 to $930 million representing approximately negative one to two percent year-over-year growth. Importantly, we expect volume to drive our fourth quarter net sales with a very modest track from pricing. Our fourth quarter adjusted EBITDA is expected to be in the range of 116 to 126 million. Finally, given the recall in our griddle business and our revised expectations for 2024, I thought it would be helpful to provide some initial perspectives on how we are planning fiscal 2025, which are outlined on slide 16. As Steve noted in his remarks, we see a current macro environment exhibiting challenging consumer trends and slowing category growth. As it relates to our top line, our current expectation is that the growth from new business wins and strengthen our broth business. will likely be offset by the impact of our griddle recall and softness in recent consumption trends that are likely to persist. As a result, we will focus on our supply chain and margin management initiatives to improve efficiency and optimize costs to drive year-over-year EBITDA growth that is not dependent on top-line performance, some of which Steve discussed earlier. I look forward to providing further context once we report Q4 2024 in February of next year. With that, I'll turn it back over to Steve for closing remarks. Steve.

Thanks, Pat. Before we open the call up to your questions, I'd like to reiterate that we are focused on closing out the year as we are on track to deliver organic volume growth in the fourth quarter. And while we are disappointed with the recall event, we are committed to improving our execution and consistency. Looking ahead, believe we have positioned the company well to capitalize on the opportunities in front of us we are focused on the things that we control including new business opportunities strengthening the foundation of our supply chain and margin management initiatives and restoring production after the recalls this should drive improved profitability and cash flow despite the macro headwinds with that I I'll turn the call over to the operator to open the line for 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, press the pound key. And the first question comes from Andrew Laser of Barclays. Your line is open.

Great. Thanks so much. Good morning, Steve and Pat. Good morning, Andrew. Good morning. I guess, Steve, even excluding the recall, you still paint a somewhat bleaker outlook, right, for 25, despite private label outperforming brands and Treehouse having the benefit of the new distribution wins and a recovering broth business. And you went through some of the things that are expected to be offsets to that on the top line. I guess my question is, like, what do you think changed so dramatically just from last quarter? And maybe this is a little bit of also a broader industry question. Obviously, you've been in the industry a long time. I'm still, I think a lot of people are a little puzzled, right, on, like, where some of this volume is going. You know, if private label isn't outperforming more than it is relative to brands in sort of this kind of environment, it just begs the question, where is it going? I don't know if you have any better perspective than what we see out there, but I'd love your thoughts on that, because clearly something changed pretty dramatically, even just than what you guys were thinking about from an industry standpoint last quarter.

You know, Andrew, thank you. And yes, it did. I mean, if you look at just unit volume, right, if I look at where was that coming from for the first half of 24, for example, the mass channel, right, mass channel was leading that charge. In the third quarter, we saw the mass channel get negative. And as we look at October, the mass channel is even more dramatically negative. The largest grocers in the country have been having a tough time, the traditional grocers. I'm looking at their data, and I see a steep downward trend in private label when you look at August, September, and October. So we're now looking at a private label, in our categories anyways, that's maybe just 200 basis points above flat for the year. So a big change from what we saw at the beginning of the first six months of the year when we were at the top end of our guidance range on a sales standpoint. I would love to say that it's the election uncertainty. I'd love to say that it's the timing of Thanksgiving, all of those things. But I think we just have to plan for something different. And we can't continue to disappoint you on the top line. So we're going to plan for that number to be flat. The fact that we have wins in the fourth quarter allows us to give a guidance range with a positive number, at least in the bottom or the top end of it anyways, right? So we think we can scratch out a little bit of positive because we get some new business wins in the fourth quarter. So we're going to plan on that. If the consumer is better, we'll be better. But we think that takes pressure off our growth capital. It takes pressure off our organization, lets us focus. on getting these recalls behind us, on driving our TMOS savings, driving our procurement savings. So we just think it's one of those moments when we should look inward. We should drive savings, drive cash flow, and then as the consumer comes back, we'll be prepared to do it. But your guess is as good as mine because I saw spending data that suggests some of the other categories were okay. But I don't think this is inconsistent from what you saw from a lot of the other large-cap food companies. They've seen the total categories volumes down. That's for sure. Yeah, I don't know where it's gone, Andrew.

I wish I had a better reflection on it. And then a follow-up would be in the vein of sort of controlling what you can control, I think last quarter you talked about expecting to, at least within your own categories, starting to gain share. within private label in your categories as you went through the third quarter. Even if we exclude sort of the griddle recall, do you think that started to happen more broadly in some of your categories? Or are there still share losses even within private label?

You know, no, I think we saw some real glimmers of hope there, right? We lapped the losses that came out of all the COVID, you know, bidding and everything we went through post-COVID. You know, four of our top five categories, right? Cookies, dough, pretzels, and coffee really performed well in the quarter. The fifth of that is broth, right? And it's on its way back. It's right on where we thought it would be. But, you know, we guided it won't be 100% back until the first quarter of 25. So, yes, I see us growing in a number of those places. I think our in-store baked cookie business did a really nice job. It's going to drive some fourth quarter growth. Our dough business is driving some of that. But, you know, and then, of course, the return of broth is going to drive some of that. But we have to do all of those things to scratch out 1% or 2%, right? And so I just think that's unusual. You know, private label's grown share for, what, the last couple of decades. We're just growing share of a negative pie right now.

Okay, thanks. I'll leave it there. Appreciate it.

Your next question comes from Jim Solero with Stephens, Inc. Your line is open.

Hey, guys. Good morning. Thanks for taking our questions. Maybe as a follow-up there to some of the commentary on the category, we still see promotional activity is below historical levels. And if I think about the incentive for some of the branded players to try to drive volume back to their respective categories, if they increase that promotional activity kind of back to historical levels, should we think about that as having an overall positive or negative impact for you guys? Because on one hand, I could see a scenario where You know, it brings volume back overall. And so, you know, you're competing for a share of a bigger pie. But on the other hand, I could see that it compresses the value gap and maybe it makes private label less attractive. So just any thoughts on kind of where you would land on that dynamic?

Sure. You know, historically, gaps have been smaller than they are today. So we have historically seen brands promote really aggressively in the fourth quarter. And we've done okay even with smaller price gaps. So in today's environment, we have a larger price gap. And by the way, those price gaps are percentages. They're percentages of larger numbers. So the penny gap is pretty large right now, largest it's ever been. So you've got large penny gaps. So I think, to your point, drive traffic to the shelf overall will be good for the categories, and private labels should hold share, right? So we'd love to see more traffic at the shelf. I think that's the challenge. Traffic numbers are down. We've seen that from some of the largest retailers. Now there's some exceptions, you know, Club and there's a couple places. Unfortunately, those places where traffic is up don't have enough assortment and don't have enough, you know, volume in core food to drive the industry. So I think a little bit of promotion, I'd love advertising because we've got to get the consumer engaged in the categories again and back in the grocery store.

Okay. And then... You know, we've seen a lot of large retailers either adding new private label brands or kind of expanding the offering with existing ones. How do you think about the composition of the shelf moving forward? Just as, you know, particularly if consumers are more value seeking, is there an opportunity for you to just gain outside share as private label just expands, you know, kind of the percentage of the overall shelf facings?

You know, I think our retail partners know their consumers really well. And I think you saw Albertsons launch a new private label brand in this last, you know, what, six months? And then we obviously saw Better Goods at Walmart. So I think they understand exactly that target, and they're doing it for exactly the reasons you said, right? They recognize the new consumer today is looking for both value and has a lot of loyalty to the store. So we think there's going to be new avenues for us to grow. We participate, by the way, in both of those new brands. So we'll be supporting those retailers. So yes, I do think so. And I think they recognize private label is gaining share regardless of where the pie's going. So they're trying to skate where the puck is going, right? They're going to private label. So we see opportunities going forward. It's just really frustrating that we can't deliver a more consistent set of top-line results in this environment, right? But we need the consumer to come to us.

Okay, great. I appreciate all the thoughts back in the queue. Thank you.

Your next question comes from John Anderson with William Lear. Your line is open.

Good morning. Thanks for the questions, everybody. Good morning. The first question I had is I'm still – kind of trying to square the commentary on, you know, the kind of consistent private label unit share gains and your kind of advantaged position in snacking with the ongoing kind of volume mix declines. And I'm wondering, Steve, are you seeing a tougher sliding in your particular private label categories right now? In other words, is the unit performance um in in the categories that you're levered to um softer than uh private label more broadly across the store and kind of if so why or are you just kind of seeing the overall um performance of private label across the store um kind of soft at present thanks

Yeah, John, you know, I do think there is some variability by category, right? We have a couple categories that are having a really tough time. Hot cereal, for example, is having a tough time. But in general, I would say it's an overall comment, right? I think we've seen, and I think we've seen it, traditional grocery, the largest traditional grocery retailers that have had those strong, big, deep assortment on private label, they maybe are having some of the toughest times. We've got some, you know, we've got some data that would suggest in October, they're down nearly double digits, right? And so that's a tough environment for our categories, but for all the Center Store private label categories. I'm sure there are outliers, right, in dairy and those kinds of things. We don't watch those categories very closely, so I apologize for that. You know, I stay much closer to what's going on in Center Store.

Okay. You know, just pivoting to the focus, around supply chain initiatives, cost savings, margin improvement, cash flow. Could you provide us with an update on the progress overall against your gross cost out target of $250 million, where you sit, say, exiting 2024 on that objective, and how to think about the incremental savings in 2025 surrounding that program? And also, are you kind of, are any of the savings associated with that initiative, you know, volume dependent or are these things that, you know, you've kind of got top line outlook out there and however that kind of comes in, you're going to be able to kind of deliver on the savings. So kind of the cadence where you are at the end of this year, incremental savings in 25, and if there's any volume dependence on that. Thank you.

Sure. Yeah. Hey, John, this is Pat. I can start. I think we're pleased. If you saw our chart in this quarter's materials, we did see $20 million positive of supply chain, which I don't think we've seen over the last several quarters. And that is the flow through of some of the initiatives that we've started. So we're pleased to see that. I'd say, you know, one of the ones we're able to start quickly was the procurement cost savings initiative. And so I think you're seeing the benefit of Treehouse scale in that of having the conversations with our vendors and ingredients and packaging and places like that and We've done the first few projects and we got that partway through the year, so we'll lapse some savings into next year. We've got other projects we'll start. So we feel good about procurement cost savings as being one of the main levers. We think about team officer as one of the ways that we can just drive service and efficiency in our plants and drive out waste. And so I think that's one that over that timeframe will be relatively consistent annually. And you'll see procurement kind of deliver back out this year. into next year and then start to trail off, you know, the following year. And then the last part that we focus on would be our distribution network. And so we have the chance to do some work around driving out how many miles we travel, putting inventory closer to customers, and being able to deliver service and take some cost off that way. You know, that's work that is ongoing right now. And so we, you know, we've not yet realized those. So I think those will start to come. I think we've done a really good job of being efficient in the current freight environment. So we've had favorable sort of annual RFP results in that space that have helped us. And we've been doing really good work to drive full truckloads and those types of things to be efficient within what we do. And I think we'll continue to do those things, and then we'll look at our distribution network over time. So I feel like we're making the progress on those gross savings that we had hoped to make, and we continue to drive those forward.

Thank you.

Your next question comes from Rob Dickinson with Jefferies. Your line is open.

Great. Thanks so much. I kind of wanted to touch on some of the drivers, revenue growth kind of near term and maybe as we kind of get into early part of next year. You know, I kind of, let's just say, I guess for argument's sake, like Q4 sales are at the midpoint, at least, or, you know, around slattish net. So, but volume's still growing in the fourth quarter. You know, we haven't dimensionalized the actual dollar impact necessarily exactly for what, you know, frozen could be in Q4, nor do I know exactly what, you know, the kind of that dollar recovery piece could be on the broth side. So maybe I just kind of ask it that, like, you know, we have the frozen waffle head when in Q4. Does that fully offset the broth recovery kind of year over year, given, you know, last year's Q4? Or could that, you know, could none of the two be positive? That's the first question.

Yeah, Rob, this is Pat. I think those are largely offsetting. I think, you know, we're making the progress we'd hoped to make on broth. And then you've got some new business wins. I'd say, you know, the other headwind we sort of described was, you know, some of the consumption softness as well is probably a headwind relative to, you know, maybe some of the distribution we won. It's just that lower volume than we had hoped given the softer consumption.

Okay. Okay. Cool. That makes sense. And then I guess just, you know, kind of a broad question, you know, kind of focused on your categories relative to the store category. You know, over the past few months at least, you know, we have seen shoppers maybe buying a little bit more kind of meal-related items, right, like pasta, chicken, what have you, and kind of snacks more broadly. I mean, not every, you know, specific area of snacks has, you know, been a little pressured or, you know, underperforming a bit. But kind of broadly, you know, snacks, there's been a lot of news on snacks. You can't kind of miss it. So, you know, I, I'm, I'm curious, like, you know, when you think about your portfolio, you know, within snacks, like, are there, are there specific areas where, you know, you are trying to maybe push a little bit harder because it's working. I go back to the investor day when you, you had the pretzel twist that, you know, on a branded side of growing really well, um, just trying to kind of gauge kind of, you know, how you're viewing kind of, you know, broader snacks relative to the store and then, You know, are there areas where you say, hey, this is working? Yes, we're totally leaning into that area right now, maybe relative to other parts of the portfolio. That's all. Thank you so much.

Sure, Rob. You know, I think you touched on one of them, which is pretzels. And that salty snack business for us is doing really well. And our pretzels business was a highlight for the third quarter. And that momentum will continue both in the fourth and in the first quarter with new business wins in pretzels. The other place that's strong for us is cookies. We're not a big manufacturer in there, so it's a large growth rate on a small number. But our in-store baked cookie business is really good as well, the things that are sold in the in-store bakery section. So we see cookies as strong. We see pretzels as strong. We think there's some other opportunities in our hot beverage business, et cetera, that we think will give us some growth. But we're going to lean into those two in particular. So that's probably consistent with what you've seen in other segments of the store. But we do think the consumer is buying different. They're buying a different assortment in the grocery store to deal with the pressure on their wallet.

Okay, great. Thanks so much, Steve.

Your next question comes from Matt Smith with Stifo. Your line is open.

Hi, good morning, Steve. Thanks for taking my question. I wanted to come back to the frozen griddle recall and just get a sense from you that the confidence and visibility you have into the restart of that facility you mentioned, you expected to kind of come back online for production in the first quarter. Just your level of conviction behind that based on how you've seen the issue unfold so far.

Sure. Sure. You know, I think these are obviously very disappointing. I'd go back to the fact that we ask our supply chain to do three things. We ask it to provide quality first, which was where we put food safety, to do cost and then do service. And you've seen us talk a lot externally about the work that TMOS has driven on cost and service. This recall is a result of our own diligence inside our own facilities. And so we've made equal investments this year, incremental investments in our food safety teams. to drive food safety through our organization, and we identified gaps in that facility, right? And the fact that I think we've identified those gaps, we have the resources behind it to make it right, I think we'll be in good shape to get it started in the first quarter. So I don't think there's, I mean, there's obviously always risk, but I feel really good about that, given the fact that we have the resources on it and that we drove this decision. And I think it's also given us learnings across our system, right? The technology today is so much greater when it comes to how you test and the resources available to all of us as food companies. I think the increase in recalls that you've seen is a result of that commitment. I mean, I think we're learning a lot. We're fortifying our system, and I think this will make us stronger as a business long term. I feel like we have our arms around it, and we're doing the right things. So I feel good about the first quarter.

Thanks, Steve. Thank you.

Your next question comes from Bill Reuter with Bank of America. Your line is open.

Hi. I just have two. The first, you know, clearly you've been doing this a long time, and your partners are, you know, partnerships are strong, you're important to all of them. I was just wondering if you've gotten any sense that given there have been a couple challenging issues with regard to the broth and the waffles, if there have been any sort of changes to the relationships that could impact the business longer term.

You know, I would say, and I think you've heard us talk about this, I think we've taken the customer on this journey with us, right? And The facility that makes frozen griddle had half a dozen audits by our customers and outside facilities in the last 12 months, right? And those audits came back positive. So I think our customer realizes that we've gone that step farther to guarantee food safety and our commitment to it. And so I think those journeys have actually strengthened our relationships. Everybody's frustrated when these things happen, but our broth business as we recover will be bigger than our broth business was before. And I think our waffle business will recover similarly. So it's a little early to give that exact number, but I think our waffle business looks like it's going to be in really good shape.

Good, good, good. All good to hear. And then secondarily, when you were discussing capital allocation, you did reference that you're going to look opportunistically at share repurchases. You're still pretty much near your leverage target. I guess I'm wondering if M&A is something which you're currently evaluating. I have heard that there are increasing numbers of targets that might be more willing to move a little bit on price. So just what the outlook is there.

Sure. Sure. I think the first thing is our capital allocation strategy, you know, and priorities remain unchanged, right? It's going to be to invest in our business, number one, and And when it comes to M&A in our business, we look at build versus buy, right? We think we have a couple of categories that have great opportunity in them, and we would like to increase our capabilities. If we can buy those capabilities cheaper than we can build them, then we'll buy them. We did that in coffee, for example. Other places we've invested, like crackers, to build the capability. So I think in the near term, you'll see M&A simply be that build versus buy decision. We'll maintain that balance strength that you talked about. We love our leverage ratio in the zone that it's in today. And then our stock price, as you know, over this year has been somewhat dislocated, and we've announced those things. We'll continue to announce those things as appropriate. But when our stock price is dislocated, we'll look to buy shares.

Great. That's all from me. Thank you. Thank you.

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

Hi, thank you. I'm just curious, if we look at your sales by channel, grocery versus command versus away from home, it looks like, you know, as away from home has grown, is that any of the driver of your margin improvement? Your margins have been coming in better than we've expected, but even on software sales, I'm just curious if any of that is just the channel mix.

Hey, Carla, this is Pat. No, I would say the margin improvement really comes from our supply chain productivity initiatives. And so, you know, in this quarter in particular, we think that we're starting to see the benefits of the procurement. So I don't think that the channel mix is necessarily driving any change in margin there.

Yeah, and food service is relatively small. We have a couple categories, pickles, et cetera, where, you know, food service is really a relevant segment. But, you know, we're mostly a retail grocery business. And I think we expect that to continue.

Okay. And I'm sorry, did you give the dollar impact of the supply chain savings expected for fourth quarter?

No, I don't think we specifically quantified that. But I think as we looked out, you know, we felt like there was a gross of $50 million. And, you know, we got net of $20 this quarter when you look at our bridge. So I think we feel like we're on track to do what we needed to do on that gross basis.

Okay, great. Thanks. The rest of my questions have been answered.

Great.

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

Well, I'd like to thank you all for being with us today. I'd like to thank you for your questions, and hopefully we'll be back together in person soon. Have a great day.

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