Q3 2022 TreeHouse Foods Inc Earnings Call
Political financials for Treehouse, continuing operations for 2019, and 2020 on an annual basis.
And 2021 and 2022 on a quarterly basis. So that you can best compare past and future operating performance.
Please note that these financial statements differ from the GAAP pro forma financials filed shortly after the transaction close because they take into account historical onetime adjustments and certain costs associated with the divested businesses as well as certain pro forma adjustments only required by SEC rules.
A reconciliation of non-GAAP measures to their most direct comparable GAAP measures can be found in the release and the appendix tables of today's earnings deck.
With that let me now turn the call over to our CEO and President Mr. Steve Oakland.
Thank you Pete and thank you all for joining US today, it's been a very busy few months since we last spoke.
We reached a strategic milestone having completed the divestiture of a significant portion of our meal prep business in early October .
The transaction is a major step in our strategic transformation to drive greater focus simplification and growth across our portfolio.
And reflects the culmination of the Board's strategic review process launched literally a year ago.
The $950 million transaction comprised of $530 million in cash.
And a $420 million note receivable.
Represented a compelling value of $13 six times 2022, adjusted EBITDA for the divested business.
I want to express my gratitude to our teams I am proud of all that we've accomplished to date.
Over the last month I had been to several plants met with leaders at key customers and spent time in person with our leadership teams across the organization.
As we embark on this journey as a new treehouse, the outpouring of enthusiasm and ideas has been energizing further building my confidence in our future.
Today, we are a simpler business, having divested 11 categories and 14 plants.
Our portfolio is now more focused around snacking and beverages and on slide five we've listed many of our categories.
We.
Right across attractive growing categories fueled by strong consumer demand trends.
We have positioned ourselves to capture the continued momentum in private label.
And improve the consistency of our execution to drive more profitable growth.
We plan to come back to you in 2023 with an investor day to provide more detail around our future plans.
Slide six gives you a sense of the historical private label growth rates for the categories across our portfolio today.
While 2020 in 2021 were unusual years due to COVID-19.
Over the longer term, we expect these categories to grow in the 3% to 5% range.
As a result.
We now have a stronger financial profile with healthier margins.
Pat will get into this in more detail, but we also have a stronger balance sheet following the transaction.
After the close in October we used $500 million and proceeds to significantly reduce our debt.
Let me now turn to slide seven let's say a couple of words about the macro environment private label and the third quarter before I turn it over to Pat to walk you through the financials.
Okay.
Today, 65% of consumers have a high level of concern about the economy as seen in the first chart.
Inflation is up over 8% and personal savings has declined.
Shelf prices for total edibles on the bottom left.
We have continued to increase.
As a result shopper behavior is shifting.
You have heard this from several retailers.
Consumers are recognizing the strong value proposition for private label.
In the third quarter private label continue to post share gains.
On the left of slide eight.
Youll see price gaps to national brands remain wide.
At 27%, which is at the high end of the historical range of 21% to 24% for the categories within the new Treehouse.
As I've said before this combination of high shelf prices and wide price gaps translates to a basket of private label goods that represents significant savings for the consumer.
On the right, we've taken a shopper basket of national brand goods across our categories and compared it to that same basket for private label.
We estimate the absolute dollar savings for just this one shopping trip is about $20.
Private label value proposition has never been greater on a dollar basis.
On slide nine on the left.
His sales and volume growth for total edibles.
Units for private brands outpaced national brands by 400 basis points.
Narrowing the dataset a bit further the right hand chart indicates the performance in our new Treehouse categories.
Here.
The margin by which private brands outpaced national brands.
More than double.
About 900 basis points in the third quarter.
Demonstrating that our new portfolio is advantaged.
While demand is strong service was 96% in October .
Service continues to improve sequentially, but it's still not back to where we needed to be for us to take advantage of the full opportunity.
We continue to make progress in our efforts to mitigate the disruption and anticipate that service will continue to improve over the next few quarters.
But we do face the challenges in the operating environment, which are impacting our industry.
I'm also pleased by our efforts around continuous improvement across our network.
Which we believe will improve not only capacity and production in the near term.
But we will drive savings and profit improvement well into the future.
With that let me turn it over to Pat to take you through the quarter, our recast financials and guidance and I'll come back at the end to wrap it up and talk about the work we've done to position the new treehouse for the future.
Yeah.
Thanks, Steve and good morning, everyone. Let me start by providing our third quarter results on the basis of total Treehouse inclusive.
As seen on slide 10.
The third quarter, we delivered top line growth.
And a sequential improvement of 130 basis points.
EBITDA margin to six 9%.
This result was slightly better than we had anticipated in our guidance due to the more favorable customer and category mix.
With that I will now focus our discussion on the results and outlook of the continuing operations starting on slide 11.
As I mentioned earlier, we have provided the historical comparable information for the continuing operations in the press release and the appendix tables to today.
Third quarter revenue grew 16, 4% to $875 million.
Pricing rose, 27% as the impact of our pricing efforts to recover inflation continue to be realized.
Volume declined four 2% due to continued supply chain disruption, which constrained service.
We intentionally exited some low margin pickle business.
Foreign exchange was unfavorable by 10 basis points.
Slide 12 covers sorry year over year adjusted EBITDA drivers.
Third quarter, adjusted EBIT totaled $77 million or eight 8% margin.
Represents a sequential improvement of 220 basis points as we continue our efforts to address the labor and supply chain disruption that has pressured our margins over the past year.
Volume and mix, including absorption.
<unk> 8 million in the quarter. This was primarily driven by the positive mix from the lower margin business exits I mentioned earlier.
Pricing net of commodities was positive for the first time in several quarters.
$33 million versus last year.
Pricing is now catching up to the commodity inflation, we incurred earlier in the year consistent with the lag effect, we have discussed previously.
Although we have seen several commodities retreat in the near term the vast majority of our inputs remained elevated on a year over year basis.
Input cost inflation has continued across certain commodities such as cocoa and we're also seeing the impact of higher input costs across non trading commodities such as oil.
And some commodity derivatives like corn syrup and Keith.
Turning next to operations later.
Labor and supply chain continues to be a persistent issue affecting the entire industry on a year over year basis, our operations declined 41 million.
We have several plants performing very well, where the commonality is a stable workforce with teams actively engaged in continuous improvement efforts.
We are working to build those common threads across more of our plans and redoubling our efforts around labor and line reliability.
Importantly, we continue to invest heavily in training engagement and retention across the entire network, which are the right steps to improve efficiencies and returns over the longer term.
The supply chain environment continues to be dynamic, but our teams have done a good job securing multiple new suppliers and either working with customers to adjust product specifications based on material availability or working with suppliers to ensure that they have the capacity to meet our needs.
Slide 13 demonstrates the progress we have made thus far to restore surface level and improve on time delivery.
The divestiture.
Reduced our complexity in terms of the numbers.
And categories, which is better enabling us to focus on certain.
On average this year, we've seen a 50 to 100 basis point improvement in surface each quarter.
During the third quarter surfaced averaged 93%.
Hosting improvement each month and as Steve mentioned, our surface that October was 96%.
Similarly, our on time delivery percentage is improving anywhere from 100 to 400 basis points sequentially.
Our teams have demonstrated great agility, as we identify and creatively address disruption and.
And we anticipate continued progress sequentially improving margins as we finish the year and head into 2023.
Turning now to the balance sheet on slide 14, we finished the third quarter with approximately $1 9 billion in total debt.
Shortly after the transaction closed we used $500 million of the proceeds to pay down our term loans rather than <unk>.
Currently totals that sits at about $1 4 billion and we expect our debt covenant leverage to be comfortably below four times at year end.
As part of the transaction close we reevaluated our liquidity.
First we reduced the size of our revolver by $250 million given that we are now a smaller company.
Our revolver remains largely undrawn and total liquidity was just under $800 million at the end of the third quarter.
Second as a condition of the transaction close we reduced the amount of receivables sold under our receivable sales program, which impacted working capital by approximately $90 million.
This had a onetime negative effect on our cash flow, which was recovered in October upon closing.
Because we are now a smaller and simpler business with less sales and therefore less receivables, we anticipate significantly lower utilization of the AAR program versus prior years.
Turning now to guidance on slide 15.
For the fourth quarter, we anticipate revenue growth of 22% to 24% over last year, driven primarily by pricing.
Our assumption on the top line are as follows.
As we discussed back in August we take additional pricing that started flowing through late September early October .
We anticipate labor and supply chain related challenges to continue and while we are making good progress on surface, we do based on production constraints.
We think it will take some time before circus returns to target levels as.
As a result, we anticipate volumes to be flattish in the fourth quarter.
I'll also note that beginning in Q4, we will have income related to the transition services agreement that will continue for at least the next year.
The income will offset the related expenses for things like HR.
HR and customer service given.
Given the divested business time to establish its infrastructure.
We are actively working with them to address these cost level for the related TSA services expire.
We are guiding our fourth quarter adjusted EBIT margin to be.
Up to 12%.
Representing strong improvement both on a sequential basis and compared to last year.
On Slide 16, we've also given you a way to think about what the earnings power of the business can be on a more normal less disrupted basis.
Beginning on the left we started with our full year 2022 EBITDA of $280 million.
Which when you do the math for the fourth quarter represents the midpoint of the continuing operations guidance.
The next bar is the net Tina lag effect in the 2022 calendar year, which totals about $80 million we've.
We've had significant inflation this year and we've taken significant pricing as a result.
There is a timing delay in the recovery of those higher input costs.
As I noted earlier in the third quarter, the pricing contribution began to recover.
So when you think about the timing of when we affected new pricing. This year not all of it will be realized in 2022, and some will ramp into next year.
The third bar represents our dollar estimate for this year cost interruption due to the supply chain and service constraints.
And we think will recover over time, a total of about $40 million.
The net impact of these factors totals $120 million.
Over time, the environment will reach a new normal and we.
Believe the earnings power of our business as it is now constructed is about $400 million.
The rate action steps in place, but it will likely take several more quarters to get there.
Before I turn it back to Steve I want to make sure I recognize the effort of our team members.
We have not only been running the business day to day in a very dynamic environment, but we have completed a major divestiture at a strong valuation and a challenging financial market.
We have been hard at work.
I'm so proud of the progress we've made and grateful for the team's contributions.
Confident we will continue to deliver improvements in 2023, and I'm bullish about our prospects as a new treehouse.
With that let me now turn it back to Steve.
Thanks, Pat I want to close by covering two areas first our new statement of corporate purpose supports our higher growth higher margin private label Snacking and beverage company.
How we think about 2023 and beyond at a high level.
Earlier this fall we held our annual summit with our management team and our top leaders across the company.
After a couple of years of Covid, followed by many months of strategic review it was great to get together to not only celebrate our accomplishments but to position our teams in the best manner possible. So that we can hit the ground running on day one following the close.
We spent time team building generating ideas and acknowledging the challenges and opportunities as we evolve our organization design into one better suited to support not only at faster growing portfolio, but an organization with a new purpose.
Our new corporate purpose statement is to engage and delight one customer at a time.
And while you may initially think that by customer, we simply mean retail customers.
Our intention is to go way beyond that.
To represent all of our stakeholders.
Retailers consumers employees and shareholders as well as the communities in which we operate.
We have chosen the words engage and delight very purposefully.
Engagement is about participating it's about listening connecting and collaborating.
And we define delight very simply.
To exceed our stakeholders expectations.
Yes.
This comes to life in a very tangible way for our retail customers.
Our goal is to bring these consumer advantaged categories to life in their stores under their brands, we will continue to collaborate with our customers and delight them.
By driving mutually profitable growth.
For our consumers.
As many of you know there is a real passion around a number of our products.
Whether it's our chocolate peanut butter cups, our lofthouse seasonal cookies or everything season crackers, our products have the ability to generate consumer delight excitement even further and.
And frankly build private label franchises.
As we succeed to engage and delight, our customers and consumers it assures our ability to grow the topline and expand profitability.
Enabling us to drive long term sustainable growth and shareholder value.
And for our employees and the communities in which we operate I've said it before.
People and talent are critical to our future.
We are focused on employee engagement and satisfaction, we are committed to making treehouse the employer of choice in the markets in which we operate.
With that I'll turn our attention to slide 18.
Pat walk you through the macro headwinds and their impact on our business this year.
More importantly, he covered what the more normalized profitability for our business should look like.
I'd like to wrap up my prepared remarks, with some final thoughts more specific to 2023 as you Digest today's information and build out your models.
First we expect private label demand to continue to be strong next year, given the economic backdrop.
During historical downturns as consumers look to stretch their dollars private label has benefited.
Second as I shared with you earlier.
We have a faster growing higher margin portfolio.
Pandemic these categories grew between 3% and 5% per year.
And although we're not ready to provide formal 2023 guidance.
Given next year's rap of pricing to recover inflation as well as healthy demand.
We would expect revenue growth to be very strong.
Third we will continue to aggressively address labor and supply chain disruption and focus on improving service.
Having the labor back in our plants enables us to serve our customers and to deliver cost savings we.
We are making very good progress in each of these areas.
And we expect that will be reflected in our adjusted EBITDA margin progress next year.
Finally, I'd like to point out that our net interest will be very different in 2023.
Our $500 million debt repayment in October translates into roughly $20 million in <unk>.
Interest expense savings on an annual basis.
In addition, the interest income on our notes receivable from the transaction.
Will total roughly $40 million next year.
Of which the first payment is expected in the fourth quarter.
Netting us a very efficient capital structure.
I'll close my remarks today by saying again.
We took a tremendous strategic step this year transforming the company.
It will take some time to get back to a new normal, but I hope you share my excitement around our future.
Starting with our new purpose and looking ahead to 2023 and beyond is a simpler faster growing higher margin snacking and beverage company.
With that let's open the call up to your questions.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again, we'll pause for just a moment to compile the Q&A roster.
And our first question comes from Andrew Lazar from Barclays. Please go ahead. Your line is open.
Great. Thank you and good morning, everybody good morning, Andrew.
Maybe to start off Steve.
Thanks for sharing your thoughts on what you think the sort of normalized earnings power can be of the of the business as it's currently constructed now.
And I realize this is not guidance for for <unk> 23 per se, but if we look at peanut for for starters I.
I think you mentioned in the prepared remarks for the first time in quite a while alright, peanuts finally turned positive in the third quarter pricing is sort of better caught up to costs. So if we think about that that $80 million in Penang lag right.
Over the last year or so I guess why would that be expected to be a drag at all in 'twenty three specifically, if it's already turned positive unless I guess.
Youre expecting incremental inflation from here for which you would need to take incremental pricing.
Andrew This is Pat I think the way to look at that is thats. The drag that we sort of experienced to date and so as we continue to normalize that that drag or that lag would go away and so.
I think youre right. If there were incremental inflation that could be a drag on 2023, but that most of the pricing that we've taken to date is end market and effective and will lap a lot of that pricing into 2023 throughout the year.
So you at least expect a good portion and we don't know exactly how much yet, but a good portion of that $80 million, probably wouldn't it wouldn't necessarily be a factor in 'twenty three at least as we're thinking of things here today I know that can change.
Yes, I think thats right, because I think that pricing has been in market for some time now.
Andrew This is Steve.
That was the purpose of that slide right I think.
We all thought.
A year ago, the world would be normalized now it's not quite there.
The pricing pieces in market.
The labor and supply chain piece is getting better, but it is getting better a little slower than we all thought.
So we expect that to normalize over the next couple of quarters.
Hopefully we will have a little better look at that when we guide in early February .
In the supply chain that is obviously very consistent with what we've heard from from pretty much everybody.
It's getting better, but it's slow, but it's persistent and I guess the second one would be.
It's very hard to talk about sort of <unk> results as the portfolio was before the deal closed.
But really just trying to get a sense of if the business is sort of clicking along as you would have.
We anticipated relative to that initial guidance if I just look at I guess the difference in EBITDA for instance, pre and post the deal for <unk> of last year.
In the appendix there, it's like a 15% difference.
Look at this year's <unk> the difference between the EBITDA guidance, you provided and kind of what the street was estimating it's like a 30% difference. So there can be seasonality or maybe the divested business was more depressed than the year ago period, but really just trying to gauge whether you were essentially on track to achieve this year's guidance pre divestiture.
As you've heard from others clues still supply chain issues that persist. Thanks, so much.
Sure.
Why don't I start and I'll have Pat I'll, let Pat jump in I would tell you that we are on track from a sales standpoint.
We're struggling a little bit with the external headwinds right.
Supply chain inflation so.
I do think that business had a softer last year, so yes, theres a little more recovery recovery in the business that we sold.
But candidly the we're a little bit behind from a labor and supply chain piece those external headwinds in the fourth quarter are pressuring margins a little bit more than they are sales.
Great. That's helpful. Thanks, so much.
Our next question comes from Jon Andersen from Franklin Templeton. Please go ahead. Your line is open.
Good morning, It's John Anderson with William Blair Good morning.
Good morning.
I was just kind of circle back on Andrew's first question.
The bridge that you provided.
The normalized EBITDA of $400 million I'm curious, if you could talk a little bit more about.
The.
Frame associated with closing the $80 million gap on peanuts, and the $40 million gap on labor and supply chain and some of the mechanics of doing that.
It sounds like.
On the <unk> its just the matter of benefiting over time from the pricing Thats already in the market correct me if I'm wrong on that.
But if there's some more color around maybe the actions you are taking and the progress you're seeing with respect to labor and supply chain again, so it's kind of the timeframe associated with it best that you can estimate at this point to close those gaps.
And some of the mechanics of making that happen. Thanks, so much.
Yes, John I'll start with the pricing this is Pat.
I think we took several different ways of pricing throughout the year. So I think each quarter, we had sort of a wave of pricing that hit with the most recent sort of wave, culminating here in Q into Q4 at the end of Q3, and so you really wont lap all of that pricing until you get into Q4 of next year.
And candidly, we even have some pricing that will be effective in January some some business from that perspective. So we'll continue to see that throughout next year as we've had kind of waves of pricing each year from that from that perspective, the more significant pricing from one dollar magnitude perspective was earlier than later, but certainly there was pricing throughout the year.
Sure and I'll touch on the.
The labor and supply chain labor Labor first of all is getting slowly slowly better.
You don't hope for the economic situation to be slow, but if it is I think that will continue to improve with maybe a little better pace. So we think the labor activation. Both it's both wages and it's a lot of other things that scheduling. It's it's a number of different things, we're doing to make treehouse that manufacturing employer of choice.
Those those actions are helping us so I would expect that to improve over the next several quarters.
With regard to supply chain, we put a slide in the appendix and I apologize it doesn't give actual numbers on it but slide 21 in the appendix.
And it's fair to say that the on time in full from our vendors is in the low seventies right now.
On an aggregate, we're turning that low <unk> into low Ninety's service levels right and so that's the disruption that you have when goods don't arrive you have to change schedules that youre not as efficient an operator.
Bob.
The commitment I have I meet with the Ceos of quite frankly, our top four or five vendors on a monthly basis personally right and that drives recognition through organization and their organization that we're working together to get those right. The commitments I'm getting is that that will continue to improve so so I would expect both of those two.
Get pretty close to normal.
And again, we'll try to guide this better in February but I would open the next several quarters.
Thanks, so much I appreciate it.
Next question comes from Chris Growe from Stifel. Please go ahead. Your line is open.
Thank you good morning.
Hi.
I had a question for you if I could first just to understand the kind of a volume performance in your categories and for the fourth quarter, you indicated that volumes should be about flat.
And it seems like a relatively similar rate of pricing maybe up a little so I just want to understand.
Is that better sequentially in the fourth quarter and is there anything unique that way in the third quarter volume that led to that decline that you mentioned that youre going to be walking away from a contract pickle business anything else Thats worth noting for volume currently in the business.
Sure Chris.
You mentioned that and I think in <unk> prepared remarks, we talked about a large and that was a foodservice vehicle volume when we make volume comments in our in our scripts we.
We use total company volume right not retail grocery private label volume our retail grocery private label volume was up a couple percent in the quarter right and we think that'll be up in the fourth quarter as well.
A couple of things we did exit a large.
Political contract in foodservice.
Our contract pack business, although small it's about 10% of our total business tends to be very upscale premium.
Branded items that we make for other people in those businesses are down.
And so so most of the impact on our negative volume is either places, where we've chosen to apply that capacity against much more profitable business or quite frankly, where there are headwinds in their business I point, you to slide 12 in our deck and you will see the volume mix is positive on lower.
That means that we are applying limited capacity against more profitable business and so I give our teams a lot of credit for that and I think reflects that our core business is pretty solid and we expect that to continue.
That's good answer thank you for that color there.
And just one other question I wanted to ask in relation to the pricing.
You had something like 21% pricing in the quarter and then I can cut across more than just retail businesses and when I look at IRI data for your categories I come out somewhere around 16% is that so is that the retailers holding back on pricing are you seeing more of that flow through and to what degree is that 80% of your volume performance as the price.
Season pushed through quite at the rate at which you pushed through to the retailers.
No.
Chris Thats, a thats a tough one because it's so different by customer by category right and we have categories, where customers were way out ahead of US and took price ahead of us with the National brands work and then we have categories, where they really held it and Theres a couple of retailers in the country that are gaining share in private label and using private label in this high inflationary environment.
To send a message to draw traffic right.
So it's really a tough one to say, but I think in general.
Are the category pricing is up right I think the retailers had pass through in general.
Could pick up an individual category and that may be may be higher or maybe lower but.
I think as we look across our especially our major our major customers. We track each one of those and I think most of them have passed our pricing through.
Okay. Thank you for the time today, yes, thanks, Chris.
Our next question comes from Bill Chappell from <unk> Securities. Please go ahead. Your line is open.
Thanks, Good morning, good morning Bill.
Maybe just a follow up on kind of the volume.
Maybe.
Yes, how much.
The service levels and also the pickle business affect.
The volumes in the quarter and then the expectation for volume in 2023.
Sure sure Phil It's Matt So I would say I would think about it it's about half and half so about half of the sort of volume is related to.
The lag in service and then the other half would be related to the pickle business and then I guess the way we try to think about the volumes.
As we continue to make sequential improvement in service right. We've said its slow but steady we expect that to continue as we think about sort of a normalization of the of the supply chain environment that we talked about heading into 2023.
Yes.
I would also take you back to a year ago, a year ago in the third quarter.
We had pretty solid surplus right that was the beginning of <unk>.
We started to get disruption in our factories, but our inventory levels were really good. So I think service was like 97% to commit and I think we said in the prepared remarks, if we didn't it was 93 or so percent in.
In the third quarter of this year. So we did not have those same supply chain headwinds a year ago. So we did have a better and better.
Inventory base, but that started to decline pretty aggressively as we went into the specifically the first and second quarter. So we think.
The volume lap given that we think service will be significantly better than the first and second quarters. This year. We also think the economic environment is going to drive demand and so you add those two things together, we think there's nice volume upside in the first two quarters, we will try to quantify that when we get closer.
Got it and then just I guess on that particular business think of it as the.
Original business. So is it a one two point drag going forward and then separately kind of accounting question.
As I look at that yes.
Note receivable are sellers note.
How is that.
Looking at it into your leverage is that a contra item so that it's an asset that offset that.
Net leverage is actually lower like it does on the interest expense line with interest income or.
Does it not affect.
How we should be looking at your leverage ratio going forward. Thanks.
I'm going to let Pat offer with us.
That's exactly the feeling that I have right we have a.
We've got an asset out there a debt instrument paying a 10% interest, but unfortunately, we don't get to counted against our leverage but that's why we made the statements at the end of my remarks right on the interest rate. The Paydown in fact does affect our leverage ratio, but the reality is outside of our leverage ratio we've got an instrument.
Paying us $40 million in interest rate and so.
Net impact of the company is dramatically different than it was a year ago and so the cash flow that we can invest in our business.
<unk> is very different this year than next and so we've got constrained.
Growing categories, we now have the resources to invest in them to take advantage of that so I don't know attitude.
No I think I think the interest they know what generate significant interest, let's generate cash rate that casualties.
Our net debt calculation and then the cash flow business as Steve said, yes, but unfortunately, no we don't get to offset the two in our leverage calculation.
Got it thank you.
Yeah.
Our next question comes from Robert Moskow from Credit Suisse. Please go ahead. Your line is open.
Okay.
Hi, Thank you for the question good morning, Rob Pat I, just wanted to make sure I understood what's changed in the guidance for continuing ops.
I thought that in second quarter, you estimated EBITDA for continuing ops of $3 30.
And the slide 16 indicates that it's now the starting point is 280. So is that correct that you've lowered guidance by 50 million and if so can you give a little more color as to the labor challenges that you're having.
Kaufman.
Yeah, Hey, Brian This is Pat So I think the $3 30 was sort of it wasn't really a guidance that was our sort of estimate of the business at the time.
We completed the transaction.
I think your your thoughts are right in that.
The fourth quarter guidance really reflects the current environment when.
When we talk to you in August the supply chain was recovering.
At a reasonable pace, but it's dynamic and that that recovery hasnt progressed as fast as we would have anticipated.
We are seeing good progress across many of our plants, but we do have a select few plans in certain markets, where labor remains challenging line reliability is an issue where we're facing material shortages.
Steve talked about sort of the supplier on time in full issue that we're experiencing and how we need to try to convert that into more positive service.
I will say being a simpler more focused company with a smaller footprint is benefiting us so those handful of plants, where we're experiencing it.
The greater disruption.
We're able to focus more of our time and effort on those couple of plants to help drive some of the improvement and so we are seeing the benefits of that as I think you heard in our prepared remarks service in October it did tick up to sort of 96% or so.
And while supply chain is a big factor.
We are also seeing some additional inflation in some of our non traded commodities things like well it's.
Our commodity derivatives like casing in corn syrup, which will will price more as needed.
But we're making positive progress on a sequential basis this year and we've improved the profit meaningfully meaningfully since the beginning of the year.
Yes, Rob this is Steve I would suggest that that the third quarter actuals and the guidance show the solid progress, but given the disruption that remains so those external headwinds that remain we thought the guidance had to reflect that.
We have the opportunity to get in the higher end of that guidance if that.
If we can continue to mitigate that but we thought it was prudent to put those those numbers in there if that continues.
Well I guess.
It is a significant reduction in the guidance for the continuing ops.
Isn't it.
The full year.
And a significant.
Improvement in the guidance for the divested businesses.
Yes, I don't think we can do that math, Rob because I don't know that we know what Q4 for the divested business really looks like in terms of that mix of yes.
Yes, we don't have a sense of how they're performing relative to the original guidance we put out.
Yes, I don't think we.
I can't comment on there.
On their progress.
Can you give us any kind of color on what percent of the portfolio you still need to take pricing on in January .
I think theres, a very small amount Rob that we just have contracts that renew sort of on the in the January timeframe and so we'll put out that pricing in connection with those contracts and there'll probably be some non commodity pricing that happens in the fourth quarter.
It's very cumbersome with a lot of retailers to do pricing between Thanksgiving and Christmas, but that pricing will rollout right. After that on some of the non commodity things that Pat mentioned in either.
In the prepared remarks, the remarks here in Q&A.
And we say non commodity do you mean labor overhead no. It's usually it's usually things like casing and corn storage and some of the some of the derivative.
Products of commodities have been priced pretty aggressively this quarter they tend to be small percentages of formulas, but theyre material increases and so those increases were rolling into next year, we don't see inflation anywhere near what we saw a year ago, but we do see inflation in the first quarter.
I agree alright, thank you.
Our next question comes from Connor <unk> from consumer Edge Research. Please go ahead. Your line is open.
Hey, there good morning, Thanks for the question good morning.
Okay.
I've been thinking about private label as a whole we've seen remarkable consumer resilience in the face of rising prices across CPG and with Prescott versus branded products, largely widening savings dwindling and seemingly a slowing economy. It really seems like a perfect storm for a major step change in private label share, yes, that's really largely yet to materialize across many categories.
Retail I guess can you just share some thoughts on maybe what is taking so long for many consumers to take that plunge and trade down.
Yeah.
The counter that's a great question.
We do we do have information from some of our largest customers.
Some of the discount retailers that.
Service virtually all private label their traffic is up dramatically I think you heard in the Walmart calls I think Doug Mcmillon talked about the trade down in their mix and the new consumers walking into their stores.
So I would suggest that it's.
It's happening it may not be happening at the pace that it will but if the if what we see.
The decline in the economic situation continues.
Convinced that it will continue to happen and I can tell you the retailers doing their best to position private label.
To drive trial right there, they're looking forward to merchandising theyre looking forward to.
Promoting doing those those things that they want to do so we're working hard with a number of customers. The supply chain is limiting our ability to do that in all cases, but where we can.
Positioning the business to do that.
That's helpful or not but.
I think youre right I, just think it's going to it's going to happen over a little longer period of time.
No that was great. Thank you.
Our next question comes from Hale Holden from Barclays. Please go ahead. Your line is open.
Hi, good morning, Thanks for taking my question.
On the seller note.
From the divested business I was wondering how long you guys were planning on holding that or what type of market conditions, you would look forward to potentially monetize that onto the market.
Yes. This is Pat.
It's difficult to speculate on the on the state of the leveraged loan market. So I don't know that we can really comment on a timeframe from that perspective, I think certainly the way that that node is structured and the interest rate that it drives we're sort of happy with the <unk>.
Cash interest that that provides and so we'll continue to monitor those markets to see.
What might make sense, but we're sort of happy with where we sit right now in terms of the structure of that note.
Great. Thank you very much.
And this will conclude our question and answer session I would like to turn the conference back over to Steve Robinson for closing remarks.
Yes, Hi, I would like to again, thank everybody for being with US today, and we look forward to all the follow up calls we'll have in the future. So have a great day.
This concludes today's conference call.