Q1 2022 TreeHouse Foods Inc Earnings Call
[music].
Welcome to the Treehouse Foods first quarter 2022 conference call.
All participants will be in a listen only mode.
After todays 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 star one again.
Please note. This event is being recorded at this time I would like to turn the call over to Treehouse foods for reading for the reading of the Safe Harbor statement.
Good morning, and thanks for joining US today. This morning, we issued our earnings release, which is available along with the slide deck in the Investor Relations section of our website at Treehouse Foods Dot com.
Before we begin we'd like to advise you that all forward looking statements made on today's call are intended to fall within the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are based on current expectations and projections and involve risks and uncertainties that may cause actual results to differ materially from our forward looking statements information concerning those risks is contained in the company's filings with the SEC.
In addition, we will be discussing operating and financial results on an adjusted basis reconciliation of these non-GAAP measures referenced during today's discussion to their most directly 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.
Thank you and good day.
Morning, everyone.
Before I get into the details of the quarter, Let me make a couple of quick comments around some strategic and governance updates since our last call.
As a reminder, we announced in mid March.
Lord unanimously decided but the focus of our ongoing strategic review, we will be on reshaping Treehouse by building leadership amped up around a focused group of categories in our higher growth snacking and beverage businesses.
While we will not be speculating on potential outcomes or the timing. It remains ongoing and we will continue to provide updates as we make progress.
We also announced several changes to our board of directors.
We've recently welcomed Scott hospital partner with channel partners and.
Joe Scalzo.
Of simply good foods.
Both are already contributing a great deal of unique financial and industry knowledge and insight.
Scott and Joe will make great additions to Treehouse.
I want to thank Ashley Buchanan and John Gainer.
<unk> down this year.
Excellent perspective to our board and we greatly appreciate their time and contributions.
As we continue our strategic journey to drive growth and create value.
We have done over the last several years to optimize the business.
Our focus on commercial and operational excellence and align our structure with how our customers think.
It has enabled us to execute throughout this dynamic environment.
In the first quarter, our execution was strong.
Our focus on commercial excellence enabled us to successfully implement pricing to recover inflation, while furthering our customer collaboration.
These efforts combined with our ongoing focus on the operations and the continued strong demand for our private label products position us well to deliver our full year guidance.
But before I get further into the first quarter numbers. So let me start as I, usually do by framing the macro environment.
This continues to be an unprecedented operating environment.
On slide four you can see that inflation continues and commodity inputs are still escalating.
While we see improvements in our business labor markets remain tight across the country and they're going to take some time to normalize the supply chain continues to be disruptive, particularly across the ingredients and materials complex.
Often reflected in longer delivery lead times and allocated availability.
Against the backdrop of these macro headwinds private label demand has continued to strengthen with.
With strong growth in both measured and unmeasured channels.
This is very encouraging and is a sign that the private label value proposition is becoming increasingly important to consumers.
This value proposition is being supported by broad consumer trends.
Consumer savings rates as you can see on the left of slide five have now dipped below pre pandemic levels as government stimulus has abated.
On the right you can see that inflation as reflected in higher shelf prices continues to rise. These higher prices are being felt in the grocery store at the gas pump and across the economy further pressuring the consumer.
On slide six on the left you can see that the price gap between branded and private label for our Treehouse categories as wide a.
A key data point supporting our value proposition to the consumer.
Price caps have historically ranged from 26% to 30%.
Gap's widened above this range to the low <unk> more recently.
This will vary from month to month, but gaps at this level present, the consumer with a more attractive private label value proposition.
Today, given the absolute price point inflation, the dollar value savings of a basket of private label goods, there's simply more substantial.
As a result consumer shopping patterns are beginning to shift and we're seeing it in the data.
On the right you can see the private label unit share posted gains on a year over year basis.
These have shifted meaningfully in the recent months and share in the most recent period is now trending slightly above pre pandemic levels.
This reaffirms the strong underlying fundamentals for private label.
Slide seven tracks buying patterns for households, earning above and below $100000 a year.
It's clear that private label unit share is on an upward trajectory with both demographics.
Supporting strengthening demand for private label, regardless of income level.
Let's now turn to the first quarter results on slide eight.
We executed well in the quarter, we again invested in service for our customers and our teams continue to collaborate with them to successfully implement pricing to recover inflation.
It's a muscle that we have now exercised for more than a year and our commercial organization has demonstrated strong capability here.
We are also slowly been able to improve service in certain categories, particularly in snacking and beverages.
These efforts coupled with improving private label demand enabled us to deliver first quarter revenue of 114 billion.
Seven 9% from last year.
Given the supply chain constraints and the broad macro factors I highlighted earlier this was a solid start to the year.
This quarter, we again have more demand than these constraints allowed us to fulfill.
We are working very hard to improve service levels, which are in the low ninety's. When you take into account that we have several categories on allocation.
First quarter, adjusted EBIT Ta totaled $58 million adjust.
Adjusted EBITDA margin of 5% declined 460 basis points, driven by inflation labor and supply chain disruption and the timing lag as we implement our pricing.
Adjusted diluted EPS for the first quarter was a loss of <unk> 15.
Compared to 36 last year.
As you saw in our release, we are reaffirming our annual guidance today.
We have work to do to return the business to historic levels of profitability, but I am encouraged with our progress and the start to the year.
I believe that we are on track and we have the building blocks in place to continue to improve service and profitability throughout the year and to position ourselves well for our fourth quarter seasonal peak.
Demand for private label is growing and even in this environment of unprecedented pricing we have several successes with both new product wins and expanded distribution.
In fact in the first quarter in eight of our 10 largest categories. We are outperforming the broader private label market.
Which is return to pre pandemic unit market share levels.
While inflation continues our teams are on top of it and we're working with our customers.
Our March pricing is now in effect and we have communicated additional pricing that will become effective at the beginning of the third quarter.
As we look to drive savings across our network cost control and continuous improvement are also important areas of focus.
Along these lines on the labor front, we're making headway we.
We are seeing slow, but steady success implementing new labor strategies to attract and specifically to retain talent.
We're also doing what we can to mitigate supply chain disruptions.
We're challenges range from ingredients and packaging availability to driver and equipment shortages.
Our solutions span security backup ingredient suppliers to in certain cases, collaborating with our customers to reformulate where necessary.
These are capabilities that will support our customers over the long term.
I'll close by stressing that through all of this we continue to be intently focused on the customer in the near term that means additional investment, but we believe investing in our customer is the right long term decision and will strengthen our relationships and our business.
We will continue to work diligently to fill every order that we can and to supply our customers with food and beverages that provide a strong value proposition to their consumers.
Let me now turn it over to Bill to walk you through the details of the quarter.
Bill.
Thank you, Steve and good morning, everyone.
Turning to slide nine first quarter revenue grew seven 9% versus last year.
Pricing contributed 11, 7%.
Very much in line with the expectations, we communicated back in February , but a low double digit pricing as we enter the year.
I want to make sure I recognize our amazing general managers and commercial teams.
Continue to do an excellent job communicating with our customers and implementing the appropriate pricing to recover these inflationary costs.
It's a testament to both the team and the capabilities that we're building here at Treehouse.
Netted against the pricing volume and mix declined three 7%.
We continue to address supply chain constraints and availability of materials and ingredients across the network. So that we can improve production and in turn service.
Turning to the segments.
I have no prep division net sales grew seven 3% driven.
Driven by 13, three points of pricing, which is largely reflective of the escalation oils dawn and oats.
Pricing was offset in part by five 9% volume and mix decline.
While <unk> continues to face production constraints, we are making solid progress.
The team is on the right track to improve service and doing a good job around expense control.
And pasta.
The challenges are in labor and material availability, namely card in that film packaging.
Within refrigerated dough, we are taking steps to improve production by addressing staffing issues.
Our snack and beverages division delivered first quarter revenue up 9% of which eight 8% was pricing at <unk>, 2% with volume and mix.
Our service has been strong in categories like pencils and broth.
And in a number of categories, we've been able to capture incremental private label demand coming our way.
While snacking and beverages that have several categories that are still constrained such as cookies and crackers, we are working diligently to improve production and restore service at target levels.
Turning to our performance by channel on Slide 10, you can see that our retail measured channels sales grew 5%.
Similar to prior quarters revenue in unmeasured channels is better.
<unk> growth of 6%.
As a reminder, the unmeasured channels include key retailers or the value club and online space.
Slide 11 walks you through our earnings drivers.
But in the mix, including absorption contributed negative <unk> <unk> in the quarter.
As private label to manage strengthen we are doing all that we can to capture that volume.
To date, we have not seen that elasticity impact.
Immediately it's difficult to track because we have production constraints and this is unchartered waters in light of the unprecedented inflation.
We will of course continue to monitor that closely.
Moving to the right total peanut pricing net of commodities contributed negative 55 sets versus last year, which in large part reflects the higher cost inventory produced in the fourth quarter that was sold in Q1, partially offset by pricing.
In the quarter operations contributed negative <unk> <unk> versus last year as we continue to address supply chain challenges.
SG&A contributed nine tenths in the quarter, we benefited from expense timing that continues they control we.
We do not anticipate that G&A contribution to be significant going forward.
Finally interest expense favorability contributed 9% in the quarter versus last year due to our successful refinancing early in 2021.
On the balance sheet, our revolver is largely undrawn so between cash on hand, and the revolver, we have strong liquidity of more than $900 million.
As I noted last quarter, we successfully amended our credit facility in February typically start that covenant leverage ratio and provide additional flexibility in 2022.
Our debt covenant leverage in the first quarter was four four times well below our higher amended covenant ratio of five five times.
I would like to point out that we've added our cash flow statement in the press release today, which I think many of you will appreciate.
Turning to guidance today, we are reaffirming our full year 2022 guidance as seen on slide 12.
We expect revenue in 2022 to grow at least 11% driven primarily by pricing, which came in this quarter at almost 12% and will build throughout the year as we take additional pricing actions to recover further escalation in commodities.
Pricing in the first half of the year has been offset in part by lower volumes driven by constraints in service challenges due to labor and supply chain disruption.
But as you saw in our first quarter results increased private label demand coupled with our work to restore service levels are positively impacting our performance. We expect this to continue strengthening both the topline and profitability as the year goes on.
Adjusted EBITDA in 2022 is expected to be between 385 million to $415 million weighted primarily towards the back half of the year.
Okay.
Specific to the second quarter.
We're anticipating flattish to slight sequential improvement in adjusted EBITDA margin from the 5% level, we reported in the first quarter.
We continue to believe adjusted EBITDA margins will improve as the year continues and approach pre pandemic levels in the second half, which on average were in the 11% to 12% range.
As Steve noted earlier this continues to be in dynamic environment and macro factors will continue to play a role in how the year evolves as seen on slide 13.
Our teams are doing a great job navigating through and we believe we have the building blocks in place to capture demand recover inflation and mitigate disruption.
Importantly, private level demand is robust extra Anthony.
The macro environment has become more supportive of private label.
Unit share is growing and is slightly above pre pandemic levels.
We will continue to collaborate with our customers to improve service and capture the growth in private label consumption.
Over the full cycle, we expect to be able to recover the entirety of the inflationary headwinds.
Our pricing actions last year and earlier this year and that will be reflected in our results.
Our teams have also communicated substantially all of the incremental pricing that will be effective in early Q3.
I am confident that we are mobilized to take further pricing should it be warranted.
We also have important tools that we are leveraging to recover inflation, such as lean and continuous improvement.
As well as hedging and buying for our commodities where possible.
On the labor supply chain front. It is critical that we position ourselves for a seasonal peak in the back half of the year and then we mitigate disruption and improved production.
Our teams are focused and are working diligently to restore service levels to meet the growing demand we.
We expect to continue to make progress and by doing so we believe that we can restore the business to historic levels of profitability.
With that I'll pass it back over to Steve to wrap things up.
Thanks Bill.
In my opening remarks, I spoke at length about the macroeconomic environment and the evolving consumer purchasing behavior in recent months, which is translating into unit share gains for private label.
For those of you who've covered treehouse and private label for some time, you'll recall that historically there have been three main factors that support private label growth.
The economy.
<unk> and retailer support.
I'd like to close my remarks today, and say a few words about retailers' support as seen on slide 14.
Private label is a key part of our retail customer strategies.
Our customers all have unique strategies for how they position private label for their consumers, but regardless of whether they are value retailers traditional grocers club stores experiential retailers or pure play E Commerce businesses. The bottom line is the <unk>.
<unk> as a key partner for retailers as they look to drive loyalty.
<unk>.
Consumer experience and ultimately higher profit margin.
As you can also see some of the latest retailer quotes here. It is evident that our customers are focused on private label growth is a key part of their strategies.
When combined with the economic environment, the underlying fundamentals for private label growth are healthy and very much intact.
I have no doubt that our customer relationships are stronger today as a result of our investments to drive commercial excellence as we have transformed our business over the last several years.
Along our journey I'm also confident that we have made great operational strides, we believe that our work around lean and continuous improvement coupled with our actions to mitigate the ongoing disruption will enable us to improve service and produce more what our customers need as we head into our <unk>.
<unk> peak later this year.
And our people our talent and our values are critical to what we do and how we do it.
I am encouraged that we are focusing our capabilities on restoring service and fulfilling the demand being created by the <unk>, we're seeing in private label.
With our building blocks are in place I am confident that our first quarter results position us well to be on track to achieve our full year guidance.
With that let's open the call up to your questions.
Okay.
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 again press Star one.
First question comes from Chris Growe of Stifel. Your line is now open.
Hi, Good morning, Good morning, Chris Good morning, Hi, I had just two questions for you. The first one would just be.
In terms of incremental pricing coming through now in the third quarter is it a meaningful step up in pricing that you're expecting and I guess the degree which you have seen any elasticity. It seems like a lot of your volume at this point has been constrained by supply constraints more than the last system necessarily but I wanted to get a sense of what youre seeing there with that level of pricing in Q.
Like how much incremental is coming through and then we'll look to do to volume.
Hi, Chris This is bill thanks for your question.
The pricing that we've communicated in the market is essentially all communicated all hit in Q3.
It's hard to say with meaningful these days, but it's.
It covers our commodity inflation that we've seen thus far.
And to your point.
So through the P&L in Q3, and we think will be will be set unless there is additional.
Additional inflation coming through I'll, let Steve handle the water electricity, yes sure.
I think Chris first of all Youre right.
Our supply chain limits have really been the inhibitor for us not not the demand piece and so as that slowly improves we think the absolute volume and units are going to improve.
I think.
As the consumer having elasticity, we're starting to see private label share from a unit standpoint pick up I think the consumers we've talked about in the prepared remarks was under a lot of pressure.
And the other conversations we're having with the customers suggest they are trying to to be sure. They have a value offering I mean thats not for every consumer we know that but.
But the customer is really focused on having value offerings in the store and we think that bodes well for the back half.
Okay, and just a bit of a follow on but if you're just looking at the peanut that you put on the on your EPS Bridge.
Just looking out over four quarters, you're talking you're talking almost $2 per share. So I just wanted to get a sense of.
The recovery piece of that meaning that by the third quarter Youll have pricing in place that offsets. The inflation you know and I guess, it's on the back side of that that you can start to earn back some of that lost peanut because that's the way to think about it yes, thats right Chris.
The Q1 result is obviously burdened by a bit of a lag in the.
Inventory capitalization variances that came in through the quarter. If you think about how that looks in Q2. It gets it improves in the back half and improves dramatically and so we think we'll recover those dollars in the back half and for the full year, we should be okay. There.
Okay. Thanks, so much for your time today.
Okay.
The next question comes from the line of Jon Andersen with William Blair. Your line is now open.
Hi, good morning, everybody. Thanks for the question.
Good morning, John Hi, John .
Hi, Bob.
Follow on to the earlier question around.
Great.
So.
Service levels are.
Not where you want them, but it sounds like they are improving and.
And you expect them to improve further.
Could you.
Help us understand maybe how much you think.
The labor and supply chain constraints impacted volume in the first quarter.
And how youre kind of thinking about the improvement or what kind of improvement you expect as you move through the year.
That would be helpful. Thanks.
Sure Hi, John This is bill again.
The service rates.
You know that we have are not close to our goal, but they are improving we've seen labor coming back into our plants and our teams continue to execute.
In terms of the impact on volume for the quarter for the full year, we thought we'd be in a flattish position.
On price and volume with us.
More significant decline in the first quarter. So we've seen that improve a bit and so our efforts are working so we continue to execute we think service will return to normalized levels.
<unk> 1 billion in the back half and as we exit Q4, we back to our normal rates and we continue to focus on that sort of scenario.
Great.
And.
I guess.
I'm wondering with private label unit share improving.
And now above pre pandemic levels.
Who are.
Are you seeing any kind of.
Changes in.
Marketplace dynamics.
National brands, maybe promoting with more frequency or depth or is it kind of fairly steady as she goes given that we are in this high inflation environment.
He is looking to take price to kind of recover those costs.
John I think it is still really disrupted so.
Service levels I think we said in the prepared comments that they are in the low nineties right.
We as an industry have a long way to go to get the customer back to where we need to get the customer at the same time, we're trying to recover this inflation so.
I don't think we've seen that dynamic in the biggest dynamic we've seen and it was in the back end of the quarter was the consumer dynamic and that's their shift to value right. So.
Wouldn't say the competitive dynamic is different I would say the consumer dynamic is different.
That's helpful last quick one on the strategic review I just wanted to understand.
The comments you made at the top.
Should we think of the strategic strategic review is kind of an ongoing as opposed to the kind of.
Wound down.
Based on what you've.
Kind of said previously if you could characterize that for us a little bit.
Particularly in the context of some of the.
Some of the early objectives around.
Yes, sure or sale considerations. Thank you.
Yes, I think so I think we've talked strategically right about.
Getting our portfolio right, we know that our snacking and beverage categories are growing much.
Faster in some cases, they are more attractive from a margin standpoint, so we.
We will continue to invest in those the question is do we.
If we chose to simplify our business a bit would you do that in one large transaction or would you do it and several smaller ones and I think thats really where the board is focused right now is understanding those dynamics and so we'll have more information on that hopefully as we go forward.
But I think what we wanted to make it very clear today that we do see the opportunity to invest in our higher growth snacking and beverage business and we will do that regardless of whether it's.
Through one large transaction or service models.
Thanks, so much.
Your next question comes from the line of Robert Moskow with Credit Suisse. Your line is now open.
Hi, good morning, Rob.
Good morning, I have a couple of questions.
Yes.
In the past.
When you've had unexpected cost inflation first quarter, you've had to guide to a pricing lag in the year.
Hurt your EBITDA at this time, you are saying, Hey, we've already announced the pricing.
And we're going to keep our guidance unchanged.
So is it possible that your pricing is going through a little faster than normal and maybe retailers are getting used to it and then I have a follow up.
Okay.
Okay.
Hey, Rob it's bill.
Our guide at the midpoint accounted for the lag in pricing Q1 was burdened by the inventory in December and January that came through the omicron virus impacted so we have those negative variances there we accounted for that.
And the guidance.
As we've gone through the year inflation is a bit more than we thought and we price a bit more I think the environment is very constructive for pricing. Our teams have done a great job with their commercial partners and our customers are still very much focused on on supply and getting private label on the shelf. So so we think it.
It's going the way, we thought EMEA unfold and we are on track.
And Rob the only other thing I would say is we do have some visibility to our costs in the near term and so as long as we as long as we have.
The right things that are hedgeable hedged in the right things that aren't we have visibility of those I think we can.
We've been more diligent this year in guiding to that in pricing or timing of our pricing.
Our lives within that three dimensions right.
How far out do we see our <unk> our cost structure and then how do we react and make sure that we.
We cover what we can cover before we lose visibility.
Well, just so that we can kind of keep track of it a bit like Ukraine or that's the new news like how much more inflation do you have this year versus what you expected it to.
200, 300 basis points.
When we head into the year, Rob we saw inflation.
Being double digit I think I said on the last call. It was in the mid teens, it's definitely going to be a couple of points higher than that but it's still within the high teens.
And so that's all accounted for in our in our.
Our guidance.
Okay. So just to follow up I think other people have tried to pass this I'm going to try to get some numbers from you and if you can't I totally understand but.
You've had some sales that you've probably lost due to supply chain constraints and I suspect that that's volume that you committed to with customers and then you just weren't able to.
Status by.
So that's one number can you give us any sense as to what that number is on an annualized basis. So that we could consider adding it back.
Say in 2023.
When everything.
It comes back.
If that's possible and then there might be another number out there were like if you could commit to all of the volume that the customers wanted that might be another number that's even bigger.
And can you frame it to me in that way.
Hey, Rod, let me start with the.
The first part of the question I can't really quantify it here's what we know we know that our service levels at around in the night.
90% that we talked about our target is higher than that right $98. Five so we think we could have.
Again service so much more demand how we hit hit our levels from that perspective, we do not have the orders and volume cases are coming in much higher but you have to sort through what could be double ordering and all those pieces I can't really give a number in that in that context, but your intuition is right in that we do have much more.
Demand the private labels call wins are strong as we go throughout the year and into next year, we'll give you more visibility we will have two weeks back about that and then obviously you've got to account for all of that pricing is coming through we have not seen elasticity at this point, we are in unchartered waters.
The magnitude of the pricing and we don't anticipate elasticity, but lastly account for that as well as we go through the year.
Okay understood. Thanks.
Okay.
Okay.
The next question comes from Bill Chappell with curious Securities. Your line is now open.
Thanks, Good morning.
Hey, Bill good morning, Rob.
Can you just speak.
On service levels I'm, just trying to understand yes. This has been an issue, especially going back to that two years ago started a pandemic.
I guess part of the part of the problem was private label in general wasn't getting.
And you in particular wasn't getting product to the stores. So brand took share. So is there something new that's really continuing to keep the service levels low over the past year.
Year or does it just take a long time to come.
We really work through these things.
Bill I think you've probably heard a number of our brands or other peers talk about the supply chain challenges. They are predominantly on do we have the right number of people in our plants to produce the total demand that is improving and our strategies. There we focused on hiring training and now on retention.
We've made great progress on the on the people front of this but there still is.
Supply chain in our materials and ingredients complex packaging those kinds of things and so we're working with our vendors, we're working with our customers to give them much more visibility to exactly what we need so we can get it there on time.
But I think the last piece of this that needs to be needs.
<unk> needs to be solved as really the inbound materials and inbound packaging.
And we are more complex right. So so we do ask for more variants of the same thing from our vendors and our peers and so we are making great progress there, but we have a ways to go and I think that's our biggest okay.
No that helps and then on the pricing front.
Trying to understand because a lot of I guess the branded peers. It seems like you've already done pricing and I think I'm right in saying that.
We will the consumer see a whole lot of change in your pricing on the shelf.
Third quarter. The retailers go ahead and take that pricing. So I'm just trying to understand.
If price gaps will shrink and that will have an impact on your volume or the price gaps are already where there'll be three months from now.
I think we're encouraged by the price gaps because it tells us that with the pricing we have in the market, we're providing value to that retailer.
And the key to private label and the retailers focus right now is having that value offering in each one of the categories and so.
We don't see that as an inhibitor at all I would tell you private label naturally will take probably more frequent lower price increases right because.
Margins are lower we price on actual experience right.
Not on forward curves, we don't have the umbrella of the brands have to set sort of category pricing. So I think it's natural for us to take pricing more often probably slightly less.
From a percentage standpoint.
But the encouraging thing for US is we don't see a problem with the price gap and the umbrella that we're operating under.
<unk> is providing and I mentioned this in the in the prepared remarks.
A lot of pricing in some of these categories was up substantially so a 30% price gap today.
Today is a lot more pennies per unit, so is a little bit more of an absolute penny savings and it has been historically.
And so when you add those things together, we think the umbrella is going to be fine.
Great. Thanks, so much.
The last question today comes from Carla Casella with Jpmorgan. Your line is now open.
Hi, Thanks for the question. This is Oliver brought mint on for Carla If you could just provide some more color on the gross margin outlook in which commodities are the most situation aerie.
And your ability to hedge those commodities.
Hi, Oliver It's bill. Thank you for your for your question.
If you think about just kind of how we manage the margin piece and the cloud is going forward obviously.
Inflation is up as I said mid teens to high teens, we do look to coverage to offset the half of our basket about 50% or so is what we can cover either in commodities our forward contracts and so we take that coverage out about six months.
Obviously at the peak here, we don't want to get.
Two over our skis and coverage that we keep managing through that as far as some of the commodities, obviously edible oils.
It is up.
<unk> driven by crude oil is up.
Which impacts our crackers and cookies and bill business, and obviously durum wheat impacting impacting.
We have pricing out there to cover our inflation or keep managing through that as we have all year. We also have continuous improvement programs, where we've actually gotten back to our lean efforts and really have some good traction in our plants in terms of taking out waste and Lori and those pieces so with all that.
And together, we think we will be very close to the midpoint of our guidance given the inflation that we're seeing.
Okay.
Awesome, Thanks for that and just a second question.
In the prepared remarks, you commented on where we are.
Leverage is there a <unk>.
<unk> target.
And would you contemplate any any debt pay down with a potential asset sale.
Yes, I won't comment on any transaction by far from a leverage perspective, we like to keep the leverage between three and three five times Q1 is the quarter, where we burn cash as we build the inventory and work through this rest of this disruption as you get into the second half of the year in Q4, we build cash nicely and we will look to continue.
<unk> continued to de lever from that perspective as things normalize.
Awesome. Thank you so much.
This concludes our question and answer session I would like to turn the conference back over to Steve Oakland for closing remarks.
Yes, I'd just like to thank everyone for being with US today and wish you a great day look forward to talking to you soon thank you.
This concludes today's conference call you may now disconnect.
[music].
Okay.
Okay.