Q3 2021 TreeHouse Foods Inc Earnings Call
Yeah.
[music] welcome to the Treehouse Foods third quarter 2021 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.
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 thanks for joining us today.
Morning, We issued two press releases, which are available along with our slide deck in the Investor Relations section of our website at Treehouse to stock comp.
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.
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.
And in the company's filings with the SEC.
In addition, we will be discussing operating and financial results on an adjusted basis.
A reconciliation of these non-GAAP measures referenced during today's discussion to their most direct comparable GAAP measures can be found in today's press release on our website I'd now like to turn the call over to our CEO and President Mr. Steve Oakland.
Thanks, Pete and good morning, everyone.
Before I get into the details of the quarter I'd like to address the additional announcement that we made this morning.
After careful consideration, including engagement with many of our shareholders. The Treehouse Board has approved a plan to explore strategic alternatives.
As we undertake this exploration of alternatives, which may include the sale of the company or the transaction to allow us to focus on our higher growth snacking and beverage businesses by divesting a significant portion of the meal prep business.
We will remain focused on supporting our customers and on the actions that we're taking to gain share and optimize our portfolio and grow our topline.
Our board and management team are steadfast in our belief that the secular headwinds we are facing are episodic.
And they will pass.
The long term consumer demand trends and fundamentals of the underlying business remains strong.
We are not speculating on potential outcomes or timing of the review.
And we do not intend to comment further unless and until the board has approved a specific course of action or has determined that further disclosure is appropriate.
We have given you a lot to consider this morning, not only in terms of the strategic review, but our earnings and the outlook for the remainder of the year.
So let me put all of this into context.
At Treehouse, we are essentially the supply chain for our customers private label products.
Placing us squarely in the middle of the macro disruptions across our industry today.
As you've heard me say many times private label plays a vital role for our customers.
And given our size and scale, we have an obligation to do all we can to provide food and beverages, both for our customers and for their consumers.
We are making a conscious decision to support the customer during this difficult time.
The changes we have made to our business over the last several years have enhanced our ability to deliver on our customers' critical needs by providing better service.
As a result, we have strengthened our customer relationships, which have been a critical factor in implementing multiple price increases this year to recover inflation.
We've made important progress in fact this has been one of the most collaborative pricing environments that I have ever seen.
Our teams are rising to the challenge and a historically difficult operating environment and I'm confident that our pricing will catch up over the cycle.
Bill will talk about pricing more in a few minutes, but I'm proud of how our teams are working closely in partnership with our customers to navigate these unprecedented headwinds.
Our strong relationship and improved ability to serve the customers is reflected in our third quarter performance.
Seven of our 10 largest categories, we outperformed private label a trend that we've seen over the last year.
We're also seeing demand strengthen in the second half of the year.
As we navigate the pandemic, we have invested significantly to support our customers.
Bearing the rising costs to secure ingredients in transportation and to maintain labor in our plants.
Well that has enabled us to maintain strong customer relationships and to expand our top line as you saw on our revised outlook for the fourth quarter.
It comes with significant near term impact on our profitability.
We believe these costs are temporary and will impact our performance in the near term.
What are the right thing to do for the long term success of our customers and Treehouse.
As the board embarks on its strategic review, we as a management team are committed to maintaining our focus on the things that we can control.
Including the pricing actions, we have underway and supporting our customers.
With that as a framework, let's turn to the specifics of the quarter on slide four.
Third quarter revenue of $1 $1 billion grew five 3% versus last year.
On an organic basis revenue grew one 7%.
And was driven by pricing of 3%.
Demand for private label products has strengthened in recent months.
To the point that today, we have more demand than the supply chain challenges allow us to fulfill.
Third quarter, adjusted EBITDA was $109 million.
Adjusted EBITDA margin of nine 9% declined 320 basis points.
By inflation labor and supply chain disruption.
We delivered adjusted diluted EPS in the third quarter or 46 cents within the range of our guidance that we communicated in August.
Slide five outlines the impact of inflation labor and supply chain disruptions, we've seen across the manufacturing landscape.
I want to talk for a moment about how these factors are impacting our business.
Inflation across the entire complex continues our commercial organization is working diligently on pricing recovery efforts.
While the escalation and duration continue to be unprecedented I'll say it again I'm very encouraged by the level of collaboration that we are experiencing with our customers.
Labor across all manufacturing has not only become more costly, but today shrinking labor participation and the numerous opportunities for all types of manufacturing labor.
Require a more progressive strategy to staff our plants effectively.
To address this our HR organization is working with our teams to pivot our labor strategy be.
Being created and looking holistically at the issues.
Although very early and we are deploying new strategies and are just beginning to see some of the positive effect as a result.
This was compounded by the supply chain disruption.
Materials, either not showing up on time or not enough of the necessary inputs, arriving at our facilities.
Our service levels overall are still in the nineties, but certain categories have been under more pressure.
And the inherent complexity of private label will continue to pressure our service levels.
Nearly all of our meal prep categories are currently on allocation.
Sign that orders are outpacing our disrupted capacity.
Demand has strengthened since we last spoke.
And that's very encouraging.
As certain federal stimulus programs expire we are seeing signs of private label recovery.
At the same time, we are winning new business with existing customers.
Turning to slide six you may have seen similar data from us before.
The top Green line represents the change in private label dollar sales as compared to two years ago. Among those states that opted out of enhanced unemployment benefits early in June and July.
The Orange line represents the same data, but among those states where these benefits expired in the fall.
As you can see dollar sales increased meaningfully among those states, where the benefits recently expired.
Approaching the growth rate levels of the states that expired in the summer.
This aligns with our expectations that as things normalize consumers will return to purchasing private label and share will continue to recover.
Bill will get into this more but we estimate that in the third quarter, we had roughly $40 million and unmet demand due to constraints across the network.
Either not being able to run lines due to lack of labor or because we didn't have the appropriate supplies.
Looking forward, our near term priorities are very clear.
First labor.
We're addressing how to best improve staffing and attendants across our plants more broadly we are creating an environment that not only empowers our employees to be efficient and productive, but also was fulfilling for them individually and professionally.
Second we must continue pricing to offset inflation.
Our pricing is in the market and while there is a lag we will need to continue pricing to cover higher commodity costs.
We will also focus on cost control and lean across the organization.
And we'll work with our customers to identify inefficiencies and opportunities for value engineering across the product mix.
And third we will continue to focus on the customer our teams will continue to work diligently to mitigate disruptions and manage through this uncertainty to fill every order that we can supplying our customers with food and beverage for their consumers.
As we continue to take actions to support our customers in the current environment. Our results will be affected in the near term.
Slide seven shows our guidance revisions and updates for our outlook for the balance of the year, including the impact of the investments we are making to support our customers.
While we expect demand for our products to continue to strengthen there will certainly be some limits on how much of that demand, we will be able to service.
Given that we now expect our topline to finish the year in the lower half of our current guidance range.
We are looking across the supply chain to address today's disruptions it will be costly in the near term as we invest to serve the customer.
However, as I noted earlier, we will continue to price proactively to offset inflation.
We are a complex supply chain business with 29 categories and 40 plants as we are organized today.
We've done a lot over the last several years to focus on continuous improvement and lean to make ourselves more efficient.
In this environment of supply chain disruption. However, we are making a conscious decision to invest in the customer bearing significant cost to ensure that our products reach our retailer shelves for their consumers.
It is our belief that investing to serve the customer is the right decision and will serve to strengthen our relationship and the business for the long term. This also provides the best backdrop for the strategic alternatives that we will consider.
Let me now turn it over to Bill to take you through the details of the quarter and the outlook Bill.
Thank you, Steve and good morning, everyone.
On slide eight you see that third quarter revenue was $1 1 billion up by.
<unk>, 3% versus last year of which three points was pricing related.
And we've been able to service a $40 million of revenue as Steve mentioned earlier, we would have delivered the top end of our revenue guidance in the quarter.
We are taking creative and dramatic steps to address our service challenges in these very difficult times on.
On slides nine and 10, we have provided a revenue by division and by channel.
<unk> net sales grew seven 4% elevated by five two points from the past the acquisition.
Organic sales grew nearly 2% of which four six points was pricing.
As noted on our prior calls the rapid escalation in soybean oil.
April input for our dressings business was one of the first commodities for which we price earlier this year.
Volume and mix declined two eight points driven by supply chain constraints and partially offset by the continued improvement in the food away from home channel.
Food away from home is expected to return to 2019 levels in early 'twenty two.
That Ian beverage revenue grew 2% of which one 1% was driven by volume and mix and in particular new product introductions.
The balance of the growth was split between pricing and FX.
Slide 10 details our topline by channel the.
The unmeasured retail channel, which includes key retailers in the value club online space continue to drive growth of 6% this quarter.
This compares to a decline of 2% in the measured channels, a sequential improvement over the second quarter.
Looking forward, we expect unmeasured channel growth continue to outpace measured channels.
Slide 11 provides our earnings drivers.
Volume and mix, including absorption were a negative <unk> 26 cents of impact.
Moving to the right I want to spend some time on peanuts pricing net of commodities and gives you a sense of both our pricing progress as well as the cost impact of rising inputs.
I want to be sure to recognize our commercial teams in a very fine job, they've done coordinating and communicating with our customers and implementing multiple price increases this year.
As Steve noted and I'll reiterate we will describe the pricing environment is very constructive.
Our intense focus on service and strong communication with the customer is enabling us to have a very good dialogue around pricing.
This gives me confidence that we will be able to continue to price and recover the continued input cost escalation over the cycle.
The pricing actions, we took early in the year are now being reflected in our P&L as expected.
In the third quarter pricing contributed 43, partially offsetting inflation, we incurred in the first half of the year.
The continued escalation of commodities packaging freight and labor is outpacing our pricing recovery.
In the third quarter, the higher input costs was a negative 88.
Total peanut or the net of these two is negative <unk> 45.
Also in the third quarter operations contributed <unk> 22 in total versus last year.
While the comparison to the prior year as positive the COVID-19 related disruption impacting labor and supply chain cost the company by about <unk> <unk> in the quarter.
Across our 29 categories and 40 plants, we have been working hard to mitigate the impact.
The balance of the operations of our larger represents the higher cost inventory produced in the third quarter that will impact us negatively in the fourth quarter as we sell that product.
SG&A was a benefit of <unk> 16.
This was due to the reversal of variable compensation plan accruals and continued cost management of discretionary spending.
Finally interest expense favorability contributed <unk> <unk> in the quarter versus last year.
Turning to slide 12, I'd like to make a few points on our balance sheet.
In the last 12 months, we paid down more than $300 million in debt, reducing total debt from $2 2 billion to $1 $9 billion.
This is our lowest debt level since 2015, we.
We've also reduced our weighted average cost of debt by 100 basis points due to the refinancing completed earlier this year.
This action lowered our annual interest cost by approximately $20 million.
Our revolver is largely undrawn so between cash on hand, and the revolver, we have strong liquidity of nearly $800 million.
As anticipated we generated cash in the third quarter I will do so again in the fourth quarter.
Financial leverage in the third quarter was three nine times as we build inventory to prepare and anticipate continued supply chain interruption.
Turning now to slide 13, our revised guidance for the remainder of the year takes into account the following.
Similar to Q3, we anticipate we'll have some limitations on our ability to meet all demand indicated by our customer orders and we think revenue in 2021 will be between $4 two to $4 $3 billion to $5 billion.
We do not see signs of inflation society.
Although we are on track to affect our next on our pricing actions, we will not fully recover all of this year as inflation and the calendar year due to the timing lag.
While we are exploring many avenues to mitigate the lack of labor availability and supply chain dynamics in the near term our cost to service the customer will be significantly higher.
As a result of these factors, we are reducing our EBIT guidance to 155 million to $175 million, which compares to $230 million to $260 million previously.
We anticipate that most of our investments to serve the customer will impact us on the Cogs line.
Resulting in a sequential and year over year erosion in gross margin in the fourth quarter.
This translates to full year adjusted EPS of $8 eight to $1 28.
Down from a revised August guidance of $2 and $2 50 per share.
We are disappointed to be sharing a second guidance revision.
I'll Echo Steves earlier comment we believe these near term investments to support our customers will serve to strengthen our relationships in the business for the long term.
We are reducing our 2021 of free cash flow guidance to at least $100 million.
I'll point out here that as we manage our working capital and focus on serving our customers, we're making conscious decisions to build inventory, which due to inflation is more costly.
As a result of the working capital contribution from inventory this year will be lower.
Our debt repayment and liquidity is largely unaffected.
Slide 14 covers our fourth quarter guidance and our expectation for adjusted EPS between zero and 20.
Before turning it back over I think it's important to give you a way to think about normalized profitability and a large moving parts of this swaption this year specifically in three areas.
Private label demand and changing consumption patterns.
Inflation in pricing and third labor and supply chain disruption.
We do not believe these factors represent structural changes to the business. So I want to try and quantify their impact on 'twenty, one and our underlying profitability in broad strokes.
On Slide 15, we started with our February EBIT guidance of approximately $300 million because we believe that this is a much closer normalized annual level of profitability for the company.
As you move from left to right, we have layered on our estimates for the full year impact of the macro disruptions.
First on demand in private label consumption.
We call that in the first half of the year, we sighted softer private label consumption trends due to the macro environment, such as branded promotional activity in certain categories and government stimulus supporting consumers trading up to brands.
We've talked in August about this impacting revenue in both the quarter and the year and we estimate this to be a $40 million impact to EBIT. This year.
Turning to inflation.
Our original guidance contemplated input cost headwinds of approximately $100 million to $110 million.
The additional inflationary headwind is another $125 million more than double our original estimate.
Our pricing actions to recover this inflation or in the market and confirmed by customers I.
I showed you earlier, how pricing is starting to be reflected in our third quarter results.
Our realized skewed the price increase of 3% is expected to accelerate to 4% to 5% in Q4 building to low double digits in 2022.
We estimate that the timing lag in calendar 'twenty, one is approximately $75 million.
It is important to understand that over the course of the cycle. We are confident we have the initiatives in place we cover the entirety of the inflation headwinds.
Finally, the constraints related to labor and supply chain disruption is affecting our ability to meet strengthening demand.
For us these challenges are especially acute across our 40 plant network.
Despite the near term costs, we believe the right thing to do for our business over the long term is to continue to serve the customer to the best of our ability.
We estimate that the incremental cost this year is approximately $60 million.
We've also captured the benefit of the reversal of the variable compensation accrual of $35 million.
The net of these factors represent a near term impact that has driven our 2021 EBIT guidance to $165 million at the midpoint.
While the magnitude and the velocity of change across the landscape continues to be a precedented. We strongly believe that these assumptions will at some point normalize it will take some time it could be a few quarters or more.
What I do know why I do have confidence is around our teams and the initiatives we have put in place to mitigate the disruption.
Private label demand is strengthening.
Our pricing is confirmed and we are mobilized to effectively address further inflation with additional pricing.
We're getting creative around how we staff and schedule our plans thinking holistically about how we assess our people so that we can improve attendance.
We're getting after opportunities across the entire supply chain spectrum on.
On the production side. This includes ensuring we have backup suppliers to prioritizing our customers' most important skus.
On the transportation side, we've completed additional freight rfps and in some cases, we'll utilize the spot market to ensure that we can get inputs and finished product to the right place at the right time.
And we will further leverage lean and continuous improvement learnings throughout the network.
When we come back to you in February on our year end earnings call. We will give you more specific direction on 2022.
With that let me now turn it back over to Steve to wrap things up so that we can get to your questions.
Thanks, Bill I'll keep my closing remarks short today and leave you with three thoughts.
First we're encouraged by the strengthening demand.
Today, we have more orders than we can fill.
As our customers focus on surety of supply, we are winning business and outperforming in environment, where we've been taking a great deal of pricing.
We have pricing that's in effect in the month of December which is unprecedented for as long as I've been in the food business.
This is a difficult environment for everyone, but customers have been appreciative of the level of detail transparency and communication we are providing.
This cements my belief that we're making the right decision to invest in the customer.
We are making a clear choice to bear the near term cost of servicing our customers to help keep their shelf stock.
As a result, we are outperforming in our largest categories when things normalize and they will we will be a stronger business and benefit from having served the customer during this time of unprecedented disruption.
The alternative would have been to spend less and choose not to services much demand.
While that might've been a near term solution for our earnings.
Don't believe it's the right long term decision for the business.
And finally, we will stay focused on running the business as the board conducts its review.
As I mentioned earlier, we won't be speculating on potential outcomes or timing of the review.
When we have something definitive to report we will do so in a timely manner.
With that let's open the call up to your questions.
We will now begin the question and answer session I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad to withdraw your question press the pound key.
The first question comes from Jon Andersen of William Blair.
Your line is open.
Thank you good morning, everybody good morning, John Hi, John.
A couple of questions one.
Steve you mentioned that.
Couple of times that the demand is strengthening for private label.
Understand that you are having some supply chain disruption issues now so the demand is exceeding your ability to supply but.
Can you talk a little bit more about.
When you say about stronger demand talk about stronger demand for private label.
Are you seen private label share.
Their games.
Begin again are you seen private label have more success now.
These are the branded offerings.
Are you talking more specifically about your business.
Within the private label segment.
Trying to kind of parse that out a little bit more.
Sure.
I would say good morning, John I would say, it's a couple of things.
Yes, the macro data and we shared a slide that suggests the impact of government stimulus.
And where that's happened earlier, where it's come off later in the share gains there. So the macro share data is improving.
But we also talked about how we continue to perform well and our top categories. So our strategy is working right to serve the customer through this and you know.
We talk about this but it's unprecedented rate the work that we're doing together with the customer and the fact that we're being awarded new business through this disruption would suggest that we are performing really well share wise.
And Thats at the same time, when we see the overall macro private label starting to recover so I think I think it's both.
Okay and then on.
I know you're not prepared to talk about 2022 at this point, but.
So when I think about your business in 2020.
EBIT was around 300 million.
That was the original plan this year, a little more than $300 million.
You know we're now looking at.
A little more than half that $1 65.
As we think broadly about 2022.
You know the waterfall you put together on slide 15 I believe.
Would suggest that much of this is transitory or temporary in nature.
<unk>.
How should we think about 42 is it is it getting back to us.
Our run rate of $300 million in EBIT or are there.
Investments as you put it in the customer relationships and service levels that are going to prohibit you from doing getting back to that kind of level for for some longer period of time. Thank you.
Yes, Thanks, John I'll start and I'll, let Bill Bill help me here, but.
Obviously, we're not prepared to guide next year, we will do that at our fourth quarter call.
But we didn't really want to leave you in slide 15 was designed to leave you with some thoughts on the earnings power of the company, which we think are actually better than they've been in the past. So if you think about what we talked about today.
The work we've done on commercial excellence and the work we're doing to invest in the customer today is resulting in very strong topline growth and new business right.
It is also allowing us to recover unprecedented inflation right and we're convinced that across the cycle our costs and R. R.
Our pricing those lines will cross right. So we feel good about those things. So the question is when will the supply chain normalizes.
We're convinced that will happen.
And when it does given the fact that private label is also improving we think we're going to be in a position to take an outside share of that write an outsized share of that so.
We will try to give more information as we go forward, we'll do it on our next call on our thoughts on next year.
But I think the model that you have to build and why we thought this was so important.
Is one that recovers we should be in a better position than we've ever been to take advantage of it so.
So maybe the quick follow up is on slide 15, the $60 million that you've identified as supply chain disruption.
Impact on EBIT this year is that.
What's the run rate view of that on an annualized basis does that reflect.
Cause that.
No when that started.
What you are expecting the cadence of that.
Do you know what I mean is there a way to think about.
Supply chain issues persists, what could that mean on a full year basis in 2022, Thanks, Hi, John Let me see if I can add a few pieces of a color here for you first and foremost.
As Steve mentioned as you acknowledged we won't have much detail on 2022, but let me give you a couple of things to think about first is pricing. So in Q3, our pricing was up 3% it was probably closer to three and a half.
We lapped a onetime trade 12, a year ago, and we expect that to be about four and a half in Q4, and then again to 2022, we think we'll get into the low double digits as far as pricing and so when you look at the fit test slide 15 that we gave you and you think about kind of the pricing lag and then the supply chain.
And those are the two pieces that we have to focus on it.
At a point in time to Steves point somewhere in the cycle the pricing will recover the inflation.
<unk> will be handled by us getting back to normal operations in terms of.
Having enough labor to service the demand as well as having enough labor to do our typical cost programs that we allow to take costs out in the manufacturing facilities and then as the inflation declines will.
A moderate how that comes out with pricing. So we have an ability we think over the cycle to recover at the point around next year I think it's just too early to tell.
The margins that we execute the with we are in our midpoint of our guidance, we're predicting that to be very similar to Q4, which is extraordinarily low compared to our normal.
Run rates and it's really driven by those labor challenges, we're making a lot of headway. There we have a unique labor strategy that we're applying to to help solve that in the plants, but we're just not in a position to call the timing, but over the cycle. We think we will fully get back to a normalized $200 million EBIT, which is what we showed on that slide.
Okay. Thanks, so much I'll pass that.
Thanks Bill.
Your next question. The next question comes from Andrew Lim Saar.
Barclays. Your line is open.
Hey, everybody.
Andrew Good morning, Andrew.
Steve I wanted to start off first with the comments around the clear and conscious decision to invest in the customer and I think as you mentioned the alternative I think most would agree that didn't make a lot of sense.
So you take sort of some of the near term pain.
To invest in the customer and you as you said youre, winning some some new business, perhaps as a result of that choice as well. So I guess my first question is how do you ensure that relationship that in theory is getting strengthened here sort of matters when things normalize and I ask that because.
As we all know private labels inherently are pretty competitive.
World and I don't know just historically it just seems like a lot of the investments, let's say, a treehouse or there isn't made in <unk>.
Scale, and being sort of a better supplier and being a more efficient supplier for retailers across a whole bunch of private label categories. It just seems to me it's sort.
Never.
Played out in a way where key retail customers have said, hey, that's something we value.
And we will truly.
It'd be less willing to maybe go to some small regional player just because they can give you a penny less per pound of a deal.
It just never seemed like it's completely come full circle to really benefit treehouse longer term and I'm wondering if you think this time is different again, when things normalize and why that would be.
Well, Andrew I think this time it was about as different as it can get right and a surety of supply has become such a key metric.
And longer term agreements we're seeing.
Price transparency and agreements we are seeing we are seeing a different.
Customer environment Theres No question, but were also focused strategically on on core retailers and core segments right. We were running our two segments fundamentally differently right, we're running our growth business differently than we're running our cash business and so I think we better are aligning our business units with how the customer thinks so.
Unfortunately, all of this disruption in the last year or so you haven't seen the progress we're making strategically.
We think we think it's all of those things so but what gives me comfort is the relation is the customer agreements.
More long term agreements the more <unk>.
Modesty escalator type clauses that are in agreements today.
That's starting to build momentum and that tells me that there's.
There is a longer term connection here. That's helpful. That's helpful. Thank you and then when we think about and thank you for breaking out some of the pieces on slide 15 that that's helpful.
And I would agree that the vast majority of that over the course of a cycle right it will be.
We will be transitory.
The one piece that I guess could potentially be more structural in this wouldn't just be for treehouse of course, but for everybody would be just sort of what it's going to take.
To keep you know to keep the labor force.
At.
Sort of at the plant and engaged and I don't know whether thats just longer term wages for the industry as a whole go higher but I guess do you think there is an element of that that could end up being somewhat structural and maybe impair to some extent that sort of $300 million sort of EBIT EBIT Mark that you highlighted.
I don't think it will I don't think it will it.
It will impair our EBIT, but I do think it is structural and we typically don't price for labor, we typically price for commodities and for freight and what we've done in this cases, we've priced for the structural change what we view as a structural change in labor right and so we assume that we should through efficiency be able to take a couple of points out of our cost structure every year tough.
To do in a COVID-19 environment, but a very reasonable expectation I think most CPG has that expectation.
But at this time is different I do think that labor is a structural change.
And we have a point of view on that for this year next year that is built into our pricing.
And Thats, a communication that we're having with the customer and I think the customer sees it and they agree with it.
So I do think there'll be a structural change, but I think I think hopefully that's going to be almost behind US right. So I don't think it's going to hurt our long term earnings power right. Thank you. So much and then very quickly last one would be.
Depending on what you ultimately do or don't do with the portfolio going forward.
I guess, how much how much scale do you think is important for a broad based private label supplier like Treehouse.
<unk> with the customer right because you mentioned that a possibility is potentially divesting a very large portion of your sales base and so I'm just trying to get a sense of how that how that would impact if it does your relationship with customers to whom you are now.
Supply over 30 different categories of private label product, even though I know not all of these categories are created equal in terms of margin structure to you and competitiveness within the category and things of that nature I'm trying to get a sense of like how much scale as needed or how little is too little based on what you want to try and accomplish going forward. Thanks, So much sure.
Andrew well I would just leave you on we've talked a lot about our strategy of depth versus breadth.
And one of the options. We said was divesting that piece of the meal prep business simply allows us to pull our strategy forward right. We.
We have talked about those businesses as growth engines and cash engines and should we use the cash engine.
Businesses to generate funds to invest in the growth business and so if we decided to pull that forward. We would simply have that cash available sooner and be able to execute that strategy a little faster I think both of those businesses are plenty of scale in our industry.
The important thing is that you're that you serve the customer well in the particular category.
So I think we would never put something out there that would not allow that to happen, but we think there are plenty of alternatives and I don't want to prejudge what will happen here. The board is going to do a full review of all alternatives, but there are plenty of alternatives that will bring a number of options that would that scale will not be or will.
It will not be a barrier to great. Thank you so much.
Care.
The next question comes from Chris Growe of Stifel. Your.
Your line is open.
Thank you good morning, Good morning, Chris I wondering Chris Hi, I had a question I know, it's a bit of a follow on to earlier questions, but I guess from a from the standpoint, where we do you do view in many view these costs as transitory in this cycle and your pricing is catching up I understand the near term disruption, but I want I want to understand.
If you believe you can capture these costs over the course of the cycle in particular with that strong pricing coming through next year.
What ultimately led to or what's the outcome of the strategic alternative review, meaning if you think you can get this back is there something else going on like within meal prep in particular, that's challenging the business that you want to try to solve for now.
Chris I would just say that our board and our management team are about shareholder value and there's been a disconnect. We think for some time and treehouses cash generation in treehouses growth opportunities and quite frankly, our share price.
So if we have a chance to to do better for our investors, we're going to do that regardless of that the timing. We think the backdrop as you just said in the backdrop as I explained in an earlier question.
Whether you buy 100 shares of our stock today or Youre looking to buy all of them.
You are buying it based on your your conviction on the future.
And we're convinced that the conviction on the future is really bright and so if there's a disconnect between the marketplace and.
The public marketplaces on another marketplace.
Our board feels an obligation too.
To review that and to give our shareholders the best possible options.
Okay. Thank you.
The environment, where you were obviously considering alternatives, but in particular focus on the meal prep business historically, you've talked about that PC segment of your business you called kind of reviewer of revitalize.
You also had your cash engines, if I think about the businesses from that breakdown you had historically is it the review and revitalized and the cash interest that would be most likely for you to consider selling if you were to sell just pieces of the business I don't know its a fair question or not but I can understand how to think of it in those previous buckets you Ed.
I would just say that.
I wouldn't be surprised with a transaction that would approach $2 billion, there's probably.
$2 billion of businesses that would provide a great scale platform and the private label industry and would allow us to do what I said earlier simply pull a strategy forward right. Those are our cash generators. If we can if we can monetize those and invest heavily in that snacking and beverage that high growth platform that makes sense, but you know what.
I hate to to get too involved in this because I think the board is going to we talked very openly about the sale of the company as an option and about all options and so I just wanted to make sure that we don't we don't gun jump the board of your let's let us run a process and we will we'll be back to you when it's appropriate.
Okay I appreciate the colors good perspective, thank you.
Thanks, Chris.
The next question comes from.
Robert Moskow of Credit Suisse. Your line is open.
Hi.
Most of these questions have been asked.
But I guess I would like to know.
A lot of your food peers have run into supply chain problems all of them have.
But it just seems like Treehouse as the impact on Treehouse has been bigger than the rest are both in the magnitude of your your guidance cut and also just now you're talking about a strategic review of the whole business.
So maybe you could maybe in the context of the 60 million you need to spend.
What what part of the supply why is it that your supply chain seems to be having a feeling.
Feeling even more pain than the rest.
You know, Rob I would say, there's a couple of things you've.
<unk> seen the peer set have gross margin down anywhere from 250 basis points to 500 basis points. So we probably fall right in the middle but one thing I think to remember about US is we are only a supply chain business right. We don't have marketing levers we don't have.
Many of the other levers that you have in your branded lives right that I had in my prior life.
But also just the nature of our complexity okay.
We make a multiple of everything we make right we do it over a multiple of plants for a company our size.
That really works well in a normalized environment.
But when when your vendors labor gets short.
I ask for a <unk> varieties at the same item.
We're probably the more difficult the more complex customer to serve for our vendor.
We shipped an awful lot of freight for our size, but we ship it out of 100 ship points versus that doesn't ship points that are similar sized CPG company would do so I think we're just the complexity of private label is inherent.
And thats reflected in Treehouse, and it's probably reflected in the impact.
Okay, and a follow up slide 17 says you outperformed even.
Even if your largest categories, but I noticed that you didn't include pasta or beverages and these are categories, where you have been investing.
So.
Can you tell me what's happening specifically there.
Are you losing share and.
Can you be more specific.
No no.
I think with all the noise in our in our pasta acquisition I mean, our pasta business in total was up a lot it's up in branded it's up in different regions.
So I think we just chose not to we will speak to that maybe in a future call. So we didn't we didn't miss that and any reason in particular other than the fact that theres noise in it from what's in last year not in this year.
So no we just look at the largest categories, where we're focused and those those are working so.
When we didn't pull any out of or exclude any because we're losing share.
Can you tell me a little bit about how they're performing though like as pasta meeting your expectations as beverage.
Sure.
Okay, Yeah sure.
The parcel business is incredibly strong.
It is impacted by the labor issues that we have today.
And I saw I think our pasta business is incredibly strong it was reflected in our bill.
Bill if you have the exact data in front of you I'm, sorry, I'm trying to dig or as we speak to the exact data, but our parcel business is good and the only thing going on in single serve better and I'm, assuming when you say beverages, you mean single serve beverage not ready to drink.
Correct, Yeah, because we're ready to drink business quite frankly is on fire single serve beverage at existing customers is performing extremely strong. We did have one customer change during the quarter that probably has a sequential.
Negative lag on that quarter, but the absolute business is strong and deere to date business is strong. So I don't know do you have the data in front of me Yeah. Let me just add let me speak Rob I had a little context on Ribena and in particular.
That acquisition, we made a year ago overall.
Overall, it's going very well and we're pleased that Q3 revenue for <unk> was $33 million, which ways.
That hampered by the supply chain disruption and their allocation and dorm is spiking, but.
But we expect that EPS for the year of 28 to 30, and we have that is already there.
On the revenue side in a normalized environment, we think it will be it'll be fine service has been.
Challenged a bit just due to the overall supply disruption.
But as you may have seen no Ebro day close the California facility and we're moving that volume into our plants and so we're on track for the most part synergies are good so our parts of the business is strong.
Okay. Thank you.
Yep.
The next question comes from.
Bill Chappell of Truth Securities.
Your line is open.
Thanks, Good morning.
Hi, Bill.
Just trying to understand kind of price gaps and how they are today and how they are moving forward I mean, it seems like and I think part of the model is it's a little bit takes a little bit longer for you to pass all pricing with every retailer versus like a national branded competitor and I don't think that's changed.
Just trying to wonder.
Had the price gaps gotten wider where private label is picking up because of that and then as is your pricing fully goes through.
The next few months, maybe that changes in the price gaps tightening and private label kind of loses or.
Losing some of its momentum or the retailers gone ahead and taken the pricing and Youre, just not going to benefit from until the price goes through.
Hey, Bill this is bill Kelly.
The price gaps that we see today.
Or just.
Close to a normalized rate slightly higher but not anywhere any significance as you can.
Imagine lots of noise with the promotional pieces and some of the trade and the leverage that CPG pulls to <unk>.
To manage their margin profile, but we think.
The pricing is coming through you've heard from the CPG periods pricing is coming through as well. So we think those gaps will be will.
It will be near historical rate and it will be positive for us as we move forward.
But as of today, you don't think price gaps are a reason why private label starting to bounce back. It's just the it's more stimulus checks and other things.
Yes, I think it's more consumer behavior than than price gap, yes, we think the price gaps are normalized across our system. I mean, there is a few categories, where the price gaps are high there's a few where they are tight but we would say they're near normal levels, maybe a little bit higher than normal levels, but not not dramatically.
Got it and then just one other on the on the supply chain.
Going back you and most of your peers that are kind of a remarkable.
Our.
Job during the first Lockdowns pandemics supply chain pressures and stuff like that how is that you know that much different is it just it didn't happen as fast and you didn't have to do kind of emergency operations or and crept up on so many people or what or is there something I'm missing.
I mean, if you think about when we were essential workers right. The initial the initial lockdown.
Our vendors were lined up to support US right. Our trucking companies were lined up to support us because other industries were closed right and the demand for labor wasn't as high the demand for labor as the economy Reopens is enormous right. I mean, you can't open a newspaper of Wall Street Journal without an announcement for.
Either a large retailer or a large E comm retailer or.
Someone that's going to hire tens of thousands of workers right. So I think.
And then and then the at the beginning the stimulus hadn't built up and the consumers are in that.
Individuals' pocketbooks, so I think the there was a very different science center at the beginning it was about keeping our people safe.
Distancing folks doing all those things now it's about availability and theres. So much competing for the resources right. The competition for trucks the competition for ingredients and packaging all of those things is is fundamentally different than what happened at the beginning.
Got it thanks for the color.
Thank you.
The last question today comes from.
Carla Casella of Jpmorgan Your line is open.
Hi, I'm wondering if the asset samples.
Is your thought there because we're selling assets to pay down debt or with proceeds to be half two or be considered for debt pay down.
Hi, Carlos Good morning, I think per our agreement, we will be quite robust and invest in our business as appropriate we're very comfortable with our debt structure as we have in place and that depending on the outcome of the strategic reviews, and we will update the capital strategy Accordingly.
Okay, great. Thank you.
This concludes our question and answer session.
I'd like to turn the conference back over to Steve Oakland for closing remarks.
Well I'd like to thank you all and I'm sure we'll be we'll be together soon so have a great day and appreciate all of your thoughts and your questions.
And we'll talk to you soon take care.
This concludes today's conference call you may now disconnect.
Okay.
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