Q2 2022 TreeHouse Foods Inc Earnings Call
to capture incremental volume, specifically in our snacking and beverage businesses.
More broadly, private label consumer demand continues to accelerate.
posting 22 straight weeks of share gains in the categories that we operate in.
as the underlying fundamentals of private label have strengthened.
Increased demand demonstrates that the value proposition is resonating with consumers.
Input cost inflation continued in the second quarter, particularly in inputs like eggs, wheat and oats.
In response, we have communicated in our implementing additional pricing that will be reflected late in the third quarter.
While the labor and supply chain environment continues to present challenges.
Our operating teams are demonstrating great agility.
as we remain focused on servicing our customers.
We continue to invest in our workforce with retention and engagement, being a high priority. Being a high priority.
We are also taking steps to make our manufacturing work environments more appealing.
Everything from facility upgrades to designing more effective and attractive work schedules.
so that Treehouse can be viewed as the employer of choice in each local market.
Taking all of these factors into account, we are raising our top-line guidance for the full year and reiterating our outlook for adjusted EBITDA. And reiterating our outlook for adjusted EBITDA.
As I noted a few moments ago, private label is gaining momentum.
Inflation is driving shelf prices higher, which you see on the left-hand side of slide 4.
Making the private label value proposition even more compelling to consumers.
Christcats noted on the right, continue to be in the low 30s.
While price caps will vary, at these levels the private label value proposition is very attractive.
The combination of high shelf prices and high price gaps.
translates into a dollar savings for a basket of private label goods that has never been greater.
This is translating into a shift in consumer purchasing behavior toward private later, which you can see on slide 5.
You can see that the pandemic-related trends in the P two years actually began to reverse early this year.
and the private label share gains have been accelerating since March.
For those of you looking for more of these macro data points,
you'll note that we've included a few additional slides in the appendix.
Overall, I am encouraged with our progress and I believe that we are very much on track to continue to improve service and profitability throughout the year as we begin to enter our seasonal peak.
We are effectively managing inflation with pricing.
collaborating with our customers.
and executing on our efforts to drive cost savings across the network.
I want to thank our Treehouse employees for their effort and commitment to making these things happen each and every day.
Before I turn it over to Pat, let me say that we continue to work very diligently to reshape the Treehouse portfolio through a divestment of a significant portion of our
so that we can build leadership and depth around a focused group of categories in our higher-growth snacking and beverage businesses.
We are encouraged with the progress we have made on this process thus far.
but will not be providing further comments on that topic unless and until we have definitive information to share. Thanks for your turn.
With that, let me turn it over to Pat to take you through the details of the quarter.
Thanks, Steve. I'm happy to be here with you today. Having been intimately involved in our strategic evolution and also having led several of our transformation projects over the last five years, it's an honor to be taking this interim role at such a pivotal time for tree house. I'm happy to be here with you today at such a pivotal time for you today.
I'd like to start by echoing Steve's comments and recognizing our teams and expressing our gratitude around everyone's hard work and dedication toward servicing our customers.
Those efforts are particularly evident in our top-line performance this quarter.
With that, I'll cover our second quarter results on slide 6 and 7.
We posted strong revenue growth up 19.4% to 1.2 billion.
Pricing drove 17.7% of the growth, while volume rose 2.1%, offset by 48 basis points of FX.
As Steve mentioned, our teams continue to do an excellent job working with our customers.
providing transparency around commodities.
and implementing pricing to recover inflation.
Our ability to capture growing incremental volume across several categories within snacking and beverages in particular has been encouraging. S County
And I'll review the division results in a minute.
Second quarter, adjusted EBITDA was 67 million or 5.6% margin.
Although March and decline, 360 basis points versus the prior year.
We were very pleased with the 60 basis point sequential improvement.
which was in line with our expectations.
Adjustment diluted EPS was a loss of four cents.
compared to 26 cents of income last year.
On a divisional basis on slide 7, meal prop sales grew 18.3%, driven by pricing of 20.5%.
reflecting recovery of input cost inflation primarily in oils, durum, and oats.
This was partially offset by 1.7% decline in volume mix and 50 basis points of FX.
Although we continue to be constrained across several meal prep categories,
We're encouraged by the progress we're making sequentially, and we expect to continue to build on that through the balance of the year.
Snacking of beverages grew 21.4% in the quarter, of which 12.7% was pricing and 9% volume and GUN
Strong category trends coupled with improving surface enables necking and beverages to capture incremental demand during the quarter. Strong category trends coupled with improving surface enables necking and beverages to capture incremental demand Strong category trends coupled with improving surface enables necking and beverages to capture incremental demand during the quarter. Strong category trends coupled with improving surface
On slide 8, you can see that we delivered growth across all channels in the quarter.
with healthy gains in both measured and unveasured channels.
Slide 9 takes you through our profit drivers.
Volume and mix, including absorption, contributed 10 million in the quarter as we captured some incremental private label demand, particularly across snacking and beverage.
Total pricing net of commodities was down 1 million versus last year, which captures the continued escalation in commodities year over year netted with our pricing to recover inflation.
As you think about the back cap of the year, we will have further pricing actions to be reflected in our P&L. In
So sequentially, assuming that inflation aligns with our expectations.
its impact will continue to improve as pricing catches up.
Operations and the supply chain declined 33 million versus last year. including
Here, we continue to be burdened by our efforts to mitigate labor and supply change disruption.
especially as it relates to material availability.
As Steve noted earlier, we are also investing heavily in training, retention, and engagement to address the labor challenges and enable us to improve operational efficiency.
Finally, other which contributed negative 2 million year over year, primarily reflects foreign currency impacts.
on the balance sheet.
Our revolver remains largely untrawn, and we have liquidity of close to a billion dollars.
We've finished the second quarter with that covenant leverage of 4.5 times.
below the amended higher covenant ratio of 5.5 times.
Turning to guidance on slide 10.
We are raising our full-year revenue guidance to mid to high teens growth, driven primarily by pricing that will continue to build into the back half of the year as we approach our peak season. We will be and keep a close.
Our guidance also assumes that volume growth for the full year will be in the low single digits.
We are encouraged by the robust private label demand.
and we will continue to work diligently to fill incremental orders as we actively manage constraints and ongoing challenges in labor and materials availability. and ongoing challenges in labor and materials availability.
It will take some time before we are able to restore service levels to target.
The macroenvironment remains challenging and dynamic. And as a result, we are maintaining our adjusted EBITDA guidance of between 385 to 415 million. We are making good progress, but our work to mitigate disruption and improve profitability is ongoing.
With regard to the third quarter,
We anticipate adjusted EBITDA margin improvement of 50 to 100 basis points from the 5.6% level we reported in Q2.
The more recent escalation and inflation and its related pricing bag will put some pressure on the coming quarter's profitability. The more recent escalation and inflation and the more recent escalation and inflation and the more recent escalation and inflation
But as I mentioned earlier, we are taking further pricing action.
That pricing will be reflected late in the third quarter, so as we get into the fourth quarter and our seasonal peak. So as we get into the fourth quarter and our seasonal peak.
we anticipate pricing to more fully offset inflation.
Importantly, over the full cycle, we expect to be able to recover the entirety of the inflationary headwind.
With that, let me now turn it back to Steve.
Thanks, Pat. Before we open up to your questions,
I'd like to close with a few comments on how our value proposition is truly resonating with consumers.
On slide 11, we've included survey results from June .
showing that consumers are making changes to reduce their spending, which include embracing store brands and the value that they represent.
and that once they begin to try these brands.
the vast majority of survey respondents are highly satisfied with the quality that they offer and importantly they intend to keep purchasing store grants. The survey respondents are highly satisfied with the quality that they offer and importantly they intend to keep purchasing store grants.
A likelihood of repeat purchase at 91% in the satisfaction rate of 72%
Tell you that those opportunities are being realized.
These survey results give me confidence that we've turned the corner in terms of consumer behavior.
History would tell you that during periods of economic downturn.
Private label gains trial, new consumers, and as a result, share increases.
Historically, these periods have been step changes for private label.
Today, private label is positioned significantly better than in past periods of economic downturn. In past periods of economic downturn.
First, the quality and assortment of private label has improved dramatically.
The number of options now include a spectrum from natural organic to national grain equivalent to value offerings. The value offerings.
And second, the retail landscape has also changed dramatically.
Growth in terms of number of hours has been driven in a large part.
by private label focused discount retailers.
Today, there are also retailers whose private label programs not only drive traffic, but also allow others to make use of the way users are dreamers.
but play a key role in their store image.
And finally, retailers are more committed than ever to their private label strategies.
and are making meaningful investments to support their store grants.
When you combine, the focus are commercial teams that placed on the customer.
The operational improvements we've made over the last several years.
in the investment and effort we are putting towards labor and supply chain disruption.
We are in an excellent position to continue our top one momentum in a second half of the year.
We also have the building blocks in place to improve profitability as we had into our fourth quarter seasonal peak.
Our people are talent and our values. We are all critical to these results.
I'm excited every day by the contributions I see across our organization. And I'm excited about the opportunity we have in front of us to drive long-term sustainable growth. To drive long-term sustainable growth.
With that, let's open the call up to your questions.
We will now begin the question-to-the-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. Two of the draw your question, press the pound key.
And your first questions from the line of Andrew Lazar with Barclays, please go ahead.
Morning everybody. Morning Andrew. Hey there. Stephen the press release, you know, there's a bunch of discussion about the pickup in sort of increasing private label demand and your ability to sort of get after some of those opportunities, particularly in snacks and beverages. And I was wondering if this was the case in meal prep as well. Because I guess I didn't see that mentioned in sort of the meal prep discussion. And I don't know whether with tri-outs was just unable to fulfill the extra demand because of the supply chain challenges there were.
or if there really is some differences between the two segments in terms of what you're seeing on consumer behavior.
Yeah, thank you, Andrew. I would say it's two things. I would say that the supply chain disruption hit meal prep a bit harder, okay, and so the demand is across the private label segment and I think we commented in the scripted remarks about the growth in private label across the categories we participate in. So it is happening across the categories, but there's probably a little more. As the economy has opened up, much of the snacking and beverage mix is those on-the-go items, right?
And so with the economy in a more normal and the consumer in a more normal away from home standpoint, those businesses are doing well. So the demand is incredibly strong in stacking and beverage. It's strong across all of them, but we are a bit more disrupted in meal prep. Thank you for that. And then I guess very just back of the envelope, it seems like fourth quarter EBITDA margins would need to be sort of in a more like the 13% range or so. That's not out of line, I guess, with what the company posted even in the fourth quarter of
Yep, thanks, and so this is Pat. So
I think you touched on some of that. You know, we originally had expected, you know, a level of inflation and we saw that escalate here in the second quarter. You know, we have a little bit of the higher priced inventory on hand that will flow through in the Q3 and so we'll continue to see that profitability increase as we drive through that pricing in the quarter. So, thank you very much for your time here.
The other side of our seasonal peak is you normally see we typically have an increase in profit in that process. And then we are starting to see gradual improvement in our supply chain that she saw. In this quarter we expect to continue to see somehow as we think about labor and material constraints of the lake.
Thank you.
Your next question is from the line of Bill Chappell with the truest securities. Please go ahead.
Thanks, good morning. Morning bill.
Keep going back to the supply chain issues. Can you just give us a little more color of what and where the bottlenecks are and how ok.
you know how what we should be looking for is you start to to get back to kind of normalcy in the back half sure sure i mean i'll break into two buckets right we have labor and then you have packaging ingredients labor we think is the most controllable inside our box right and we've done a lot of what we call labor activation i think we talked in the in the prepare remarks about you know that has focus as shifted its focus to retention so we're starting to see when we run
uh... employment events were starting to see more applicants right so we're seeing more participation it's not a surprise given the inflation given what we all hear about the economy so getting those right people keeping those right people you know training and turning them is really expensive and and very disruptive so on the labor side i feel good about it and we're making slow steady progress
You know as Pat said why do we feel good about the fourth quarter? We are building inventory right we're starting to pick up some pace, so we'll be prepared for that quarter on packaging and materials You know we need that to happen right and our vendors are getting better and the commitments I mean I have literally monthly calls with some of my peers of CEOs at our biggest vendors And we're starting to see that progress pick up, so that's all aligned in our in our guidance
You know, we don't think it will be perfect, but we do think it's going to get dramatically better.
Okay, thank you. And then on an input cost, and certainly there's been some relief in the market over the past month or two.
Should I look at that, I imagine especially some of your seasonal items and with the packing and what have you, a lot of your costs you're probably locked in for the remainder of the year. And so is that fair or could you see any relief this year? Or is that more next year? And again, I understand the overall cost basket is still higher. I'm just talking more about actual inputs. Yeah, maybe I'll touch on it and Pat can follow up. You know, I think you know as we get later in the year, obviously we have the mechanics to understand what our pricing and our costs are going to be.
pretty good visibility to what we're pricing against from a cost standpoint. I'm sure there'll be some little non-hedical stuff that it says, but we have that in our
Yeah, I agree.
Good.
Thank you. Thank you.
Your next question is from the line of Chris Grohe with Steeples. Please go ahead.
Good morning. Good morning. Good morning. Good morning.
Hi, I had a question for you. I'm just curious that as we're seeing obviously very strong pricing coming through from your business, we're seeing less robust pricing in private label at retail. I just curious your experience was seen from retailers, I guess they're holding maybe some pricing back and maybe a benefit that's offered a volume in this short term. And maybe a benefit that's offered a volume in this short term.
You know, I would say that we have seen it all over the board. You know, we operate in so many categories. We've seen some places where the retailer has actually been ahead of us and some places where they've been behind us. I think the gaps as we spoke to in the prepared remarks are solid, which tells me we have a little bit more room and the retailer has a little bit more room to move. They are concerned about their image with their consumer, right? They give value offerings with their consumer.
And so that's why I feel so good about not just the fourth quarter, but as we roll into next year, I think the retailer really wants that value perception. Private label will be a big part of that. We won't be the only thing in it, but we'll be a big part of that. So I think they're going to do their best to keep their pricing sharp. But again, Chris, I would say it's all over the map in our category. Some were ahead of us and some were behind us.
And taking care. That was curious as well about PNOC being virtually flat in the quarter. So I'm looking at a weaker EBITDA margin. Is that in relation to that, the supply chain and the absorption that are weighing on the margin? There should be, I guess, some weight, if you will, that's bad, if you're on the margin from pricing. But with PNOC being flat, the surprise of the margin is still down here over here.
Yeah, Chris, this is Pat. I think you're right. I think we continue to see some level of disruption as we continue to operate both in the material and the labor. So I think you're seeing some of that flow through. We did see additional inflation into Q that will impact us in Q3 as we continue to move forward. So I wouldn't look at that bridge and try to duplicate it for Q3.
Okay, thank you. I do think slide nine shows that pretty well. I think that's what you're referencing. It shows you how tough the operating environment is, and that's why I think we feel so good that if we start to make progress there, which we're seeing, that's the key to the margins returned.
Okay, thanks so much.
Your next question is from the line of Robert Mosco with Credit Suisse. Please go ahead.
suis-de-de-nee tse peote
Good morning. Follow-up on the PNO question. If things have leveled off into Q,
Is that signaling that you have now caught up to your inflation?
I know you're saying that there's extra cost, but the objective of the pricing is to get to level.
So I guess then the follow-up there is, edible oil prices on the commodity markets are down. I think Durham wheat is down too. You know, why are your costs?
going up in relation to that and then follow up.
You know, maybe I'll touch on Pat and follow. You know, I think there is more cost ahead of us. As you know, what we own isn't always aligned exactly with where the commodity markets you would see are we, you know, there's a hedge position in there. So we feel really good to get it within a million bucks for the quarter. You know, we think that's quite an accomplishment. The pricing that's coming is by far the smallest piece of price we've taken today.
Okay, so to your point, there isn't a lot more needed. We do need to get our supply chain correct. And I think we had a question earlier, you know, we have to build a lot of that inventory, Rob. And so, you know, yes, are there mechanisms to get a little bit of savings? Can we help the customer a little bit maybe, but most of that's going to come in next year, the lower price of product or lower cost raw materials. So here's what I'm about to tell you about the product we we have 3 operating systems together.
And what should we expect for PNOF in fourth quarter? Like will your price of the well above inflation? Because I'm having trouble figuring out. I'm having trouble figuring out.
any other way that you could get to your margin target other than price well above.
Yeah, we're out that's right. I mean, as we've talked about in the past, we have to demonstrate to our customers a level of cost in order to go just by that pricing. So we'll, we've done that and we'll continue to do that. And so as we catch up in Q4, relative to the commodities and the, the report, you know, that's what we would expect to see. Yeah, we'll expect it to turn positive. But again, we look at it on a broader basis than that. But for the fourth quarter, we expect that number to be positive.
I mean, as we've talked about in the past, we have to demonstrate to our customers a level of cost in order to go justify that pricing. So we'll we've done that and we'll continue to do that. So as we catch up in Q4, relative to commodities and the we've bought, that's what we would expect to see. Yeah, we'll expect it to turn positive. But again, we look at it on a broader basis than that. But for the fourth quarter, we expect that number to be positive. Okay. All right. Thanks.
Your next question is from the lineup, John Anderson with William Blair. Please go ahead.
Yeah, good morning. Thanks for the questions.
Big, bigger picture question just on the acceleration and private label demand that you're seeing. In the past.
You know, what have you seen in terms of the duration of these kind of step ups in consumer demand? Are they? Is this something we can really view as sustainable for the foreseeable future? Does it kind of, you know, come and go quickly? I'm just trying to understand a little bit more about kind of the strength that we're seeing here and how we should think about that persisting, you know, as we look forward.
Sure, John . You know, I think it's hard to say this, but I think the last real economic recession we had was 2008, 2009. But if you go back in the data, you'll see each one of those recessions, there was a step change in private label share market, right? And what gives me some real good feelings about this is, and I mentioned this in the scripted comments again, is if you think of how different both the assortment and the quality of private label is today and the retailer landscape.
right to retailer landscape i mean there are what over a thousand new hard discount european retailers that are focus on private private label in north america that didn't exist in two thousand eight
right are our largest customers have both you know have a have cut their assortment to natural organic to national brand equivalent and the value so the biggest mainstream retailers have multiple assortment you know you've got you know the mass retailers launching big private label brand
So I think the quality and assortment is dramatically different than what the consumer saw in past recessions.
And so, you know, none of us can forecast how long this will last. We'll be a soft landing, how deep will it be all of those questions that everybody has, you know, every day. But I think we're going to do better. And so, what it has shown in the past is you get a bunch of trials, you wouldn't have ordinarily gotten. And that trial tends to be sticky to a certain percent. With a way we're positioned today, I would think that'll be better. It certainly has to be another step change. The question is how big?
Okay, that makes sense. I wanted to ask on the cash flow front, you know, you tend to generate the majority of your cash in the second half of the year. And I'm wondering how you're thinking of, you know, if that will happen again this year, whether you have kind of a...
kind of a range that you could talk about for free cash for the year and capital allocation going forward how you expect to allocate that and what your priorities are. Thank you.
We didn't guide cash flow this year, but I think directionally your statement is right. As you think about cash generation being highest in Q4, as we move through the back after the year, and we have our seasonal peak. As we think about capital allocation, I think it's going to be consistent with how we've thought about this before, as we continue to strengthen our balance sheet, think about leveraging our debt.
leveraging our debt and then moving forward. So our priorities are not different from a cash flow perspective than what we've communicated previously. Right. And you know, we still feel really good about our cash flow, even though inventory is going to be a little more expensive, as you know. I don't think the supply chain is going to let us build too much of it. So we're hoping to set the thing right on the pin for enough inventory for the first quarter.
Okay, thanks so much.
The last question today comes from the line of Carla Casella with JP Morgan. Please go ahead.
Good morning, this is Mike on for Carla. We just wanted to ask about the M&A environment. I know you guys want to comment on the potential divestment or some of you important to know for whether you're thinking about divesting, but anything you see on the snacking and bedside and sort of as a false the last question, just giving you good liquidity, would you guys consider calling the bonds?
You know, I think, well, first of all, I'll jump back to you. I think 4% bonds in the current yield market are quite a lever for us. I mean, as you know, we have, I think, six more years on those. So that looks really, really attractive today. So we're proud of those. We'll hang on to them. But with regard to M&A, there's some small stuff out there. I think, quite frankly, with the leverage loan market so tight, I think most of the sponsor-led stuff is on pause.
But we think there'll be stuff come forward here as it starts to open up and normalize.
Thank you. Thank you. Thank you.
Con.
or
Okay, I think that's our last question and I would just like to thank you all for being with us today and we look forward to the opportunity to see you in person soon. Take care, have a great day.
This concludes today's conference call. You may now disconnect.