Treehouse Foods, Inc.

Welcome to the Treehouse Foods second quarter 2025 conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Please note this event is being recorded. At this time, I would like to turn the call over to Treehouse Foods for the reading of the Safe Harbor Statement.

Good morning, and thank you for joining us today. Earlier this morning, we issued our second quarter earnings release and posted our earnings deck. These items are available within the investment 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 these risks is contained in the company's filings with the SEC. 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, Pat and I will discuss our second quarter financial results and provide an update on our operations and our outlook for the remainder of the year. Our results are outlined on slide four. I'm pleased to report we achieved adjusted net sales and adjusted EBITDA results that exceeded the upper end of our guidance ranges. This performance further demonstrates the execution of our margin improvement plan we discussed with you earlier this year. We are confident the plan will meaningfully benefit results for the remainder of this year and beyond. The operating environment remains dynamic, but we are focused on controlling what we can control and executing against our plans to drive profits and cash flow, regardless of the macro headwinds. Our comments today will reflect efforts to reduce structural costs and to better align our business with what we're experiencing in the near term, while we position the business to create value over the longer term. Additionally, we are focused on execution, maintaining our improved service levels, and our griddle business is now in a place to positively impact our results in the second half of the year. Shifting gears, let's take a look at the consumer trends we experienced during the second quarter in the categories in which we operate, which are detailed on slide five. The progression on volume this quarter unfolded largely as we expected. We began our margin management activities as early as the fourth quarter of last year, leading to some deliberate pricing and distribution choices to make our manufacturing network more efficient. In some cases, we now serve a narrow set of customer needs, but do that more efficiently. This, combined with softer ongoing consumer trends, which were felt across the broader market, put pressure on units during the quarter, pricing more than offset the unit volumes, driving growth for the quarter. We expect these volumes and pricing dynamics to continue in the third quarter, with unit volumes improving in the fourth quarter. At a macro level, the private brand industry dynamics remain favorable relative to national brands, as you can see on slide six. Specifically, price gaps are healthy and private brands continue to either take or maintain share despite the lower consumption environment. As it relates to promotion levels, what we have experienced thus far in 2025 is similar to what we experienced a year ago. With that said, you have probably heard plenty of commentary about promotions from others in our industry. So we thought it would be helpful to spend some time on historical levels of national brand promotion within our categories. On slide seven, you can see a 10-year view of national brand promotion levels as a percent of total sales within our categories. The current level of promotion remains well below to levels seen prior to the pandemic. Now, looking ahead, we do anticipate some increase in promotional intensity in some of our categories, which is reflected in our guidance today. As you move to slide eight, you'll notice that private brands have consistently gained share over the last two decades, which we believe will continue over the longer term. This gradual share growth occurred despite higher levels of promotion and a variety of promotional strategies over this period of time. Continuing with the discussion of the long-term private brand opportunity on slide nine, it's clear that many grocery retailers also see further runway for growth in private brands and are making their own strategic investments accordingly. Private brands provide an opportunity to deliver higher margins at a time when retailers across the industry are dealing with cost pressures, whether it be labor, input cost inflation, or tariffs. Some examples of these retailers include Aldi, which continues its store-based expansion across the U.S. with an assortment that is focused almost exclusively on private brands. Walmart is focused on growing better goods, a private brand which makes quality, trend-forward, and chef-inspired food approachable, and affordable. These are two of many examples that underscore the opportunity available to Treehouse to partner with our retail customers, gain share, and create value over the long term. I'd like to conclude by providing some perspective on how we continue to manage the business to align with the near-term realities of slower category growth. The foundation we've built with our supply chain initiatives remains strong, and we're focused on executing what you see outlined on slide 10. We're taking action to deliver our commitment of $250 million of gross supply chain savings through 2027. In the current environment, we think it's prudent to focus on profitability and cash flow. We have strengthened our margin management function allowing us to enhance our profitability by allocating our capacity to the most attractive mix of businesses that best drives benefits for both our customers and Treehouse. This quarter's results are another example of our disciplined approach. While this is impacting our volumes, it aligns with our strategic focus on margin and cash flow. Ultimately, the impact will be seen in our adjusted EBITDA. Finally, we are also focused on our cost structure. We are empowering our organization to make faster decisions to better serve the complex needs of our customers. We are focused on running a lean organization and driving synergies through a broader utilization of shared services. We also have an opportunity to optimize our plants and their capacity. In most of our categories, we have multiple production locations. This allows us to move production to gain efficiency, depending on the needs of the business, as we discussed last quarter within our non-dairy creamer business. Furthering this effort, we recently made the decision to close two plants to right-size our network within our pickles and cookies businesses. We believe these strategic decisions improve our competitive positioning and also allow us to be more flexible with capital, focusing our investments in areas that will provide better margin profiles and growth potential, all in an effort to drive improved profit and cash flow. I'll now turn the call over to Pat for further detail on our second quarter results and our outlook. Pat?

Thanks, Steve, and good morning, everyone. I'd like to start by thanking the team for their commitment to execution again this quarter. You can see a summary of our second quarter results on slide 11. Our adjusted net sales were up 1.4% year over year. We delivered strong adjusted EBITDA of 73.3 million, which was up about 4% year over year. Our adjusted EBITDA margin rose 20 basis points to 9.1%. On slide 12, we have provided further detail on the drivers of our year-over-year adjusted net sales. The decline in volume and mix reflects planned margin management actions, some slower takeaway in the quarter, and service impacts due to the restoration of our griddle facility, all of which were in line with our expectations. Our acquisition of Harris Tea was a benefit of almost 5% as expected. Pricing was a benefit of approximately 4% due to commodity-related pricing adjustments, primarily within our coffee business. Additionally, net sales were negatively impacted by griddle recall-related returns, our ready-to-drink business exit last year, and a modest foreign exchange drag, which in total resulted in a decline of just over 1%. Moving on to slide 13, I'll take you through our adjusted EBITDA drivers Volume and mix provided a drag of $1.1 million, driven by lower volumes, including the impact of our margin management actions, which were largely offset by Harris T volume. PNOC, pricing net of commodities, was a drag of $9.7 million year over year and was driven by higher costs due to commodity inflation. Operations and supply chains delivered a $10.6 million benefit versus the prior year, driven by supply chain cost savings and improved operational execution. Lastly, SG&A and other delivered a 2.9 million benefit versus the prior year, driven primarily by cost reduction efforts. 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, as we did with our acquisition of Harris T earlier this year. We will maintain our balance sheet, which currently involves building cash throughout the year to drive our net debt to adjusted EBITDA ratio to our desired range by year end. We will continue to be disciplined and look at all capital deployment decisions by evaluating risk-adjusted returns. Moving on to our outlook on slide 15, we are anticipating our full-year adjusted net sales will grow between negative 0.5 and 1% year-over-year or in a range of $3.36 billion to $3.415 billion Company volume and mix are still expected to decline approximately 1% year over year, driven by an expected 1% decline in base volume and mix. The Harris T volume benefit is still expected to be offset by our previously announced decision to exit the ready to drink business and other margin management actions, along with the impact of the griddle recovery. We now expect that commodity related pricing will be a low single digit benefit in 2025. driven by pricing to offset commodity inflation. We are reiterating our adjusted EBITDA guidance range of $345 to $375 million. We are also reiterating our free cash flow expectations of at least $130 million. Our guidance for net interest expense and capital expenditures remain unchanged. Additionally, our current guidance contemplates what is in place as it relates to tariff policies as of today. With that said, we will continue to monitor and evaluate any potential additional impacts as new information becomes known. As it relates to the third quarter, we expect adjusted net sales to be in the range of $840 to $870 million, representing approximately flat growth at the midpoint. Organic volume and mix are expected to decline high single digits as a result of margin management actions. Pricing is expected to provide an approximate 4% benefit. Our third quarter adjusted EBITDA is expected to be in the range of $90 to $110 million. With that, I'll turn it back over to Steve for closing remarks. Steve.

Thanks, Pat. As we continue to navigate the consumer backdrop in 2025, we are keenly focused on further strengthening the foundation of our supply chain and margin management initiatives, leveraging our improved service levels in key categories ahead of our peak seasonal period, and pursuing profitable new business opportunities. With that, I'll now 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 with number one on your telephone keypad. To withdraw your question, press the pound key. We remind everyone to limit yourselves to one question and one follow-up. The first question comes from Andrew Lazor of Barclays. Your line is open.

Great. Thanks. Good morning, Steve, Pat, and Matt. Morning, Andrew. Morning. Steve, I guess first off, based on some of the charts in your slides, The percent price gaps, right, between branded and private label, while still above historical levels, have looked like they've been narrowing a bit relative to last year. As you know, private label has taken some more pricing in the second quarter maybe than did some of the branded players. As a result, looks like in the second quarter, brands actually saw better volume performance in your categories relative to private label. Just hoping you can provide maybe a bit more color on how the competitive environment played out in the quarter I guess, relative to your expectations and how you see that dynamic playing out through the balance of the year.

Sure. Sure. First of all, let me touch on the pricing piece. As you know, most of the pricing that went through was commodity, a little bit of tariff pricing. And usually those are the same on a unit basis, right? So if a private label unit has 20 cents of commodity increase, a branded unit will have 20 cents. So when you look at a chart that's within a couple of tenths of a percent, right? I apologize for the scale. 4.1 to 3.9 looks pretty dramatic. But it's really the same thing. And when you think that brands are 25% more expensive because they have trade and marketing in their price list, right? So... you know, we've actually moved our prices the same or maybe even a penny or two less when it comes to shelf price. So that commodity increase is pretty much the same. And I think that's why you've seen the gaps hold up so well, right? So I think we've taken a higher percentage price increase, but we've taken basically the same penny per unit. And so that's why the shelf prices, you know, have changed about the same. You know, So that's one thing. I would also say that, you know, the second quarter for us is a quarter where is our smallest sequential quarter typically. We look at our top five categories. And in four of our top five categories, we've performed at or above the private label share, right? So we've held our gain share. And in the one that we didn't, quite frankly, it's a customer mix. And maybe, Pat, you can speak to the customer issue here.

Yeah, I think looking at the IRI data is helpful. It's probably directional from a private label because we don't have all the distribution that shows up on the IRI by customer. And so depending on what distribution we have by customer in each category, that will vary a little bit. So I don't think we see that as too disconnected.

Yeah, we don't align exactly with the total universe of private label. So I guess we look at the second quarter as our biggest businesses did pretty well. There's some margin management involved here, which we expected and we guided to. And the forecasts from the customers for the third and fourth quarters, our two biggest quarters, are pretty solid. So we think the year is going to unfold pretty much how we thought. There is some promotional noise, we know, in the back half, and we've accounted for that, we think. So we think the year will fold out just about as we expected.

Got it. Got it. Thank you. And then just a quick follow up. I know you guys are pretty disciplined about the types of assets that you've been willing to sort of pick up, you know, ones that give you more depth, maybe capabilities in certain categories where you want to go deeper or vertically integrate more like what you've done in coffee or tea, what have you. Has the environment along those lines in terms of maybe availability of interesting assets that might fit in terms of improving your depth or capabilities in certain categories, increased at all just given how difficult growth has been to come by in the industry? And I'm curious if there's a change in that perspective.

Well, you know, Andrew, that's a great catch. You know, this year, 25, we looked at it as a year to reset our cost structure, right? And we talked about margin management. We've talked about some plant consolidations now that are public. We've done some organizational streamlining, those kinds of things. But investing in our hot beverage business, coffee and tea, if you look at within private label, coffee and tea over the last few years have done really well. We think that's a place to position ourselves. The same thing we've done, we've done it more organically in our cookies and crackers business. That's been investments in our plants. We're trying to be really disciplined on our capital allocation and You know, the opportunities when we get them to do it inorganically just make it faster, quite frankly. Things like the Harris Tee got us to a place we wanted to be much quicker. But that investment will be in those categories that we think are performing the best. We like all of our categories, but several of them we think have a little more momentum in them for the near term and the long term, and that's where the capital allocation is going if we can.

Thank you.

Thanks, Andrew.

The next question comes from Jim Solera of Stevens, Inc. Your line is open.

Good morning, guys. Thanks for taking our question. Steve, I wanted to ask a question regarding innovation. You know, we've heard a lot of companies that have reported talk about innovation as a way to kind of stand out and, you know, engage with the consumer, particularly in kind of a softer macro backdrop. How does that flow through in your position? And do we see private label kind of riding on the coattails of some of that innovation and trying to have innovation alongside branded? Or do we find that if branded innovation picks up, that can maybe pull some attention away from private label?

Just any thoughts on kind of the push-pull there?

Sure. You know, the nice thing about private label from an innovation standpoint is we are fast followers, right? If you look at our investments in things like pretzels, we have a seasoned pretzel business that is really a result of the innovation in the industry and the dots phenomena, all of those things. We see branded innovation in categories as really important. The key for us is trying to determine when it really becomes a trend. We've got to make sure it's not a fad, it's a trend. We have tried to get in too early in the past and that's not been successful. We have to You remember private labels may be 20% of a great category, less than that of a lot of categories. So we need that innovation to get moving so that 20% of that is meaningful for us. So there's a lag between branded innovation and private label follow, but we're excited about it. We have it in coffee with cold brew. We have it, you know, brew over ice, all of those things. We have it in pretzels with seasoned and filled. And we have it in other categories. We have it in broth with bone. So we see innovation as positive for the whole industry in the categories, and the key for private label is picking those places to invest so that we can follow quickly.

Great. And maybe thinking about optimizing your supply chain relative to other suppliers that are some of the private label partners could go to. Do you feel that your capabilities on innovation are much more, are you at a structural advantage relative to peers such that, you know, you can be much quicker to kind of catch on to if you see something established as, you know, a trend and not a fad?

Sure, sure. I think our balance sheet helps us a lot there, right? Our size and scale give us some opportunity there. I think we've been able to move faster on things like pretzels. We've actually made acquisitions in those spaces when we see the opportunity, right, to get us there faster. I think the work we've done in the coffee business, you'll start to see that over the next couple of years. I think we've put not just great assets in place, but great people and great capabilities. So I think... I think that's where our balance sheet helps us, right, especially in a higher-cost capital environment. You might have had a time a couple years ago when capital was much cheaper that it was a little easier for some of the smaller guys to do it, but I think our size and our balance sheet give us some advantage today.

Great. I appreciate the thoughts. I'll hop back into the queue. Yep. Thank you.

The next question comes from Robert Mosco of TD Common. Your line is open.

Hi, Steve. Good to talk to you. Hey, Rob. Yeah, good. You too. I wanted to see if you could drill down a little bit into a couple of categories. You know, you bought the North Lake facility, expanded your coffee capabilities significantly, and you can see in the tracking data some pretty extraordinarily good demand for ground coffee, even with prices being higher. You know, the category volume is still really high. And I want to know if you're seeing that in your results also. Is that segment of your business performing well? And what do you think is going to happen in August when all these brands start raising price?

You know, that's a great question. Yes, we see demand for – and we see opportunity in ground coffee right now. And we pack ground coffee for both retailers and some large food service institutions. And so – That's a great new business for us. I talked about investment we made. You know, Farmer Brothers built a wonderful asset there, but we felt it needed to be fully built out. That work is just finishing as we speak right now. So it's giving us capability. We're literally bidding on projects that we could have never bid on before, right, for next year. So we're encouraged by that. You know, we have the Brazilian... tariffs coming in place, you know, that's 40-some percent or the largest coffee growing country in the world. You know, hopefully most of us have a little bit of that hedged and are in a good place for that. I think we'll see what happens over the next, you know, few months. There are formulation alternatives. Our team has worked on all of those, but we will probably see, assuming those tariffs stay in place, Big assumption, right, as you know, what the volatility of tariffs have been. But I think, you know, ground coffee on a per serving basis is still really reasonable compared to every other way to consume coffee. So I think the consumer will be frugal. I think private label will have a nice opportunity because of our price gaps. But I think the category will hold up. I don't think we'll change, you know, if you think about foreign, a 50% price tariff on 40% of the input cost, I don't think that'll change the per serving price enough to change the consumer dynamics. But I do think it's an opportunity for private label because we'll have lower price points on the shelf.

Okay. And a follow-up is on broth. I didn't hear much mention of it. Where are you at in terms of regaining market share in broth after the plant issues that you had Do you expect to be more competitive in this coming soup season?

Yeah, I think – thank you. It's kind of nice not to talk about it for a quarter, frankly. We've had fantastic service, like virtually weeks of 100% service in broth over the last month or two. And so it's really nice to see that team delivering. Literally there were conversations as recently as yesterday with some of our largest partners on the broth forecast team and getting it exactly right for, you know, November, December, October, November, December, let's call it. And so we feel that business was one of our fastest growing pre-pandemic, and we feel like it's on the verge of coming back to that.

Okay. Thank you.

Your next question comes from Matt Smith of Stiefel. Your line is open.

Hi, good morning, Steve. Just the first question would be regarding the private, the underlying volume decline you called out for the year around 1%. Can you talk about the expectations in the second half? I think volumes on an underlying basis are down a little over two and a half percent year to date. You have some tailwinds like griddle and broth, but what are you embedding for the underlying category performance for private label in the outlook?

Sure. Yeah, Matt, I'll take that one. I think we're embedding, I would say, more of the same. I do think you've got some tailwinds that you highlighted in terms of getting all the broth production online and griddle production online that'll be tailwinds for us from that perspective. But if you're asking about underlying consumer trend, we're not expecting anything significantly different from what we saw in the first couple quarters this year.

Yeah, really, it's us lapping those supply chain issues and holding steady with where we are today from a consumer standpoint. If a consumer comes back to us a bit, that would all be on top of what we've guided. But if not, we feel really good about what we've guided.

Thanks. And as a follow-up, you mentioned beginning to lapse some of the margin management activity that you pursued in the fourth quarter. Now that you have a couple of quarters of experience and the benefit that's flowing through the P&L, are you looking at a broader... range across the business for opportunities for more margin management activity? And how would you scale that opportunity relative to the actions that you've taken over the last couple of quarters?

You know, hopefully in the prepared remarks, we got started early. We got started in the fourth quarter of last year. I think we'll see most of that behind us. And we look at 25 as that, you know, reset the cost structure, get those things behind us, and then, you know, that cost structure we think is going to make us much more competitive in a couple targeted categories. So we see 26 as the start of a growth year, not another margin management year. So we think we've targeted the vast majority of the opportunity there, and it's gone really well. I think you can see in our dollar sales numbers, You know, there are places where we priced for some complexity and came to a nice agreement with a customer and other places where we worked with a customer to get that product out of our system. So we had both things happen there, which we hoped would happen, and it did. But we hoped to get it behind us. So I think we'll be on a normal growth trajectory coming at 26.

That's very helpful, Steve. Thank you. I'll pass it on.

Thanks. The next question comes from Scott Marks with Jefferies. Your line is open.

Hey, good morning guys. Thanks so much for taking the questions. First one I wanted to ask about was just the Q3 guide. There were some comments in the release about expectations for organic vol mix to be down high single digit percentages, which I think was a little bit less than what Maybe some folks were expecting. So wondering if you can just kind of break that down for us a bit in terms of how you see the different components impacting that.

Yeah, from a Q3 standpoint, you know, we will have a couple of things coming towards us, I think. we're expecting consumer trend to be more or less the same. You are starting to see the griddle recovery from a ValMix standpoint start to play through. And then you've got the margin management activities that are starting to, you know, that we've taken that will impact that number as well. So hopefully that helps.

Yeah, understood. I mean, is there maybe a step up in the margin management activities just just trying to understand kind of why down the high single digit as opposed to, let's say, mid-single digit if some of the griddle recovery is starting to play out especially.

Yeah, and you've got pricing up, and then that's impacting the volume as well. So I think you – I'm not sure we're implying anything significantly different from a third quarter standpoint.

What I tried to say in the prepared remarks, there's a sales cycle here. When we go to a customer and we decide to exit something together, there's usually 90 days of packaging, that kind of stuff. That's why that really hit in the second quarter. That'll be in the third quarter, but the griddle primarily hits in the fourth quarter. right and and you know we actually had returns in the fourth quarter right product we took back so there's a significant bump up from griddle in the in the fourth quarter so that's why we say third will be similar and fourth will be uh significantly different okay got it thanks for that and just a quick follow-up um in terms of some of the pricing actions that are being taken uh

assume it's related to coffee and cocoa needs mostly, but wondering if you can just provide a little commentary on where some of those pricing actions are being taken. Thanks.

Yeah, coffee is the largest part. There was probably a tiny bit of cocoa. That's not our biggest commodity. I think we've seen a few of the oil complex also move a little bit, but those would be the biggest areas. And then we've had a very small amount of tariff pricing that we've had to push through as well.

Understood. Thanks so much for passing on.

Once again, if you have a question, it is star one on your telephone keypad. Our last question today comes from the line of John Baumgardner with Mizuho. Your line is open.

Good morning, thanks for the question.

Hi John.

Maybe first off Steve, In terms of the expectations for increased promotion in H2 that you mentioned, how do you see that playing out? Are you anticipating the balance of that promo between price versus non-price? I mean, do you think brands increase resources allocated to feature and display? How do you see that impacting visibility for store brands? And how do you think about the potential that retailers maybe de-emphasize some store brand programs in H2 in light of the branded activity?

You know, I think the retailers enjoy the margins from branded promotion and the cost that they charge for branded promotion. But I think the message we're getting from the retailer and the forecasts we have from the retailer suggests that they're going to support private label as well. So we don't see a big difference in that this year. In fact, like I say, the conversations right now are really confirming supply availability or confirming quantities or confirming all of those things. which would suggest that the, uh, the merchandising, the support for private label is solid. So, uh, I, you know, I, I do think there'll be branded spend. I mean, they, you know, we all hear about it. We, we've listened to the other calls and understand what's going on. Um, you know, you can read that chart one, you know, a couple of ways with price gaps, if that spending is going on and the percentage of volume on promotion isn't going up, um, you know, it's about, you know, efficiency of that promotional spend, right? It's not driving the kind of units that I think we all thought or all feared would happen. So I think the retailer is committed to both is a long way of saying that.

Okay. Thanks for that. And then, Pat, looking at gross margin, a bit of pressure here in Q2, presumably that ties back to the PNOC drag. How are you thinking about gross margin evolution from here on a year-on-year basis, given all the moving parts between efficiency, the griddle recovery, the margin management versus deleverage? I mean, assuming PNOC feels that positive, is it too ambitious to believe that gross margin grows for H2 at this point?

I think you'd see it sort of flattish through the third quarter, and then you'll start to see it improve over the fourth quarter. I think there's probably a little bit of peanut drag into Q3, and you are getting some of those efficiencies and supply chain cost savings that are coming through the latter part of the year.

The peanut drag, it looks like it turned the corner last quarter in Q1, and you saw pricing accelerate here in Q2. Has anything changed the margin? Are there other inputs as opposed to coffee at this point that are incrementally trending worse for you?

No, I don't think so. Again, we take, you know, three to, you know, 60 to 90 days generally to pass through as commodities go up. And, you know, I think what we're seeing is maybe just slightly elevated compared to what we estimated. So I think we're getting it all in the year. I just think you're seeing a little bit of the timing shift in terms of it was a little bit more, so we had to get the pricing through.

Okay. Thanks, Pat. Thank you. Thank you.

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

Yeah, I'd like to thank you all for being with us today, and we look forward to the opportunity to talk to you individually and in person soon. Have a great day.

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