Q1 2023 TreeHouse Foods Inc. Earnings Call
Welcome to the Treehouse Foods first quarter 2023 conference call.
Call is being recorded at this time I will turn the call over to Treehouse foods for the reading of the Safe Harbor statement.
Good morning, and thanks for joining us today, our press release and earnings deck. Both issued this morning are available in the Investor Relations section of our website at Treehouse Foods Dot com.
Good morning, and thanks for joining us today, our press release and earnings deck. Both issued this morning are available 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 1090 part.
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 infill.
Information concerning those risks is contained in the companys filings with the FCC.
On October 3rd 2022, we completed the divestiture of a significant portion of our meal preparation business.
Consistent with the prior two quarters, we will discuss our results on an adjusted continuing operations basis.
A reconciliation of non-GAAP measures to their most direct comparable GAAP measures can be found in today's press release and the appendix tables of today's earnings deck with that let me turn the call over to our chairman CEO and President Mr. Steve Oakland for his opening remarks.
Thank you Pi and good morning, everyone.
I'm pleased to be here today to share our strong first quarter results and reaffirm our guidance for 2023.
Over the last year, we have optimized our portfolio strengthened our balance sheet and.
And simplified our business today Treehouse foods is a higher growth higher margin business focused on private label snacking and beverages.
Our strategic ambition is profitable growth driven by leadership in consumer trending categories.
I'm excited about all we've accomplished so far in our journey and the direction we're heading.
We continue to see a macro environment that supports private label growth.
Which coupled with our improved supply chain and our investments in our business support our guidance and our algorithm.
Okay.
We had a strong start to the year and I'm very pleased with our performance.
Importantly, I want to express my gratitude to our teams for their hard work as we continue to execute on our strategy.
Looking at our deck slides three and four cover key takeaways and a summary of our first quarter results versus guidance.
First we outperformed the high end of our revenue.
And EBITDA guidance by $30 million and $11 million respectively.
It's clear that we are benefiting from the actions we took last year to transform the company and sharpen our focus.
We are driving better execution and as a result improved financial performance.
Second supply chain improvement and service recovery were both ahead of our expectations in the quarter.
As a result, we fulfill customer demand that was originally planned for shipment in the second quarter.
Third on a year over year basis, our profitability has improved significantly.
As pricing to recover inflation continues to be reflected in our financials.
And fourth looking at our first quarter performance and our second quarter expectations. We are on track for a solid first half and are positioned well for the year.
As a result, we are reaffirming our full year 2023 guidance.
And finally, we are selectively investing in opportunities to drive organic growth and build capabilities across our supply chain.
Okay.
The next two slides slide five and six provide some context on the current macro environment and private label.
Let me take you through those and then I'll turn the call over to Pat to discuss the financials in more detail.
On the left hand side of slide five you can see that retailers are passing along inflation in the form of higher shelf prices.
While inflation is persistent it is slowing in comparison to last year.
We've seen a couple of items like natural gas and weak retreat from their peaks, however input costs remain at historically high levels.
On the right the absolute dollar savings of a basket of private label goods versus national brands is holding steady at about $20.
This is significant.
As it makes the private label value proposition for consumers very attractive.
On slide six on the left you'll see that the average price gaps remain above historic levels.
At the same time private label unit share shown on the right continues to grow.
In fact private label has now gained unit share for 66 consecutive weeks.
The data not only supports a return to the long term trend of private label share growth something that we saw for many years pre pandemic.
It also is reflective.
Of the importance retailers are placing on private label and the investments they are making to drive trial and loyalty.
Our ability to leverage these trends with our more focused portfolio improved execution.
Your service levels and investments in capacity gives us confidence in our long term growth prospects across our attractive snacking and beverage categories.
Before I turn the call over to Pat I wanted to take a moment to recognize his recent appointment to the CFO role and a permanent capacity.
During the last six years since he joined Treehouse that has proven himself as a results driven leader.
And he has made it clear to me since stepping into the role on an interim basis last year that he is the right CFO for Treehouse.
Pat has a deep understanding of our business and our industry and we greatly valued his expertise.
I'm looking forward to continuing our partnership as we drive sustainable growth in the years to come with.
With that I'll turn the call over to Pat.
Thanks, Steve and good morning.
I'm honored to have transitioned to the permanent CFO role at such an important inflection point in our strategic journey.
And my time at the company and in particular over the last year.
Deepen my understanding for how we will drive growth into the future and developed a greater appreciation for the opportunities that lie ahead.
We expect to continue to deliver on our financial commitments build credibility and drive long term shareholder value.
<unk> to say Bill East and I look forward to connecting with you all in the coming months.
Earlier, Steve covered our first quarter results in comparison to our guidance slide seven takes you through the financials on a Q1 year over year basis, our progress is clear sales.
Sales grew 16% adjust.
Adjusted EBITDA improved nearly 150%.
And adjusted EBIT margin Rose 530 basis points.
Before I get into the drivers of revenue in the quarter I wanted to build on Steve's comments earlier around our top line.
We attribute the beat to a few factors first our vendor fill rates improved and we saw some easing in the supply chain earlier than we anticipated, which drove better execution in our operation.
This enabled us to increase capacity in certain categories that had previously been more constrained and improve service, allowing us to fulfill certain customer orders in the first quarter.
We had originally planned for shipment in the second quarter.
Our service in the first quarter averaged 95% an improvement of about 100 basis points sequentially.
While we still have some work to do to get back to target, we're making great progress.
Turning now to slide eight to cover our revenue drivers.
As anticipated pricing drove the top line as it reflects our cumulative efforts over the past year to recover inflation.
Volume and mix were flattish in total down 60 basis points versus the prior year and FX contributed negative 30 basis points.
On the right we've provided a unit volume comparison for the industry and Treehouse easing measured channel data.
Total edible consumption on a unit basis declined about 4%.
Within the categories in which we operate national brands also declined 4%.
Total private label outperformed and was flattish.
And Treehouse with similar performing in line with private label.
The message here is that Treehouse continues to gain unit share.
I will take you through slide nine on our adjusted EBITDA drivers.
Recall that last year's first quarter profitability was abnormally low due to the significant level of labor and supply chain disruption as.
As well as continued escalation in input costs.
Volume and mix, including absorption improved $6 million in the quarter.
Penang pricing net of commodities was positive once again as we continue to recover inflation contributing $64 million versus last year.
The change in operations was a headwind of $16 million versus last year.
We continue to make investments in labor retention and engagement as well as around continuous improvement.
As we better position ourselves for future growth.
While supply chain improvement was better than we anticipated in the first quarter.
We don't yet believe we've seen the last of macro disruption.
We still have a couple of categories, where we have room to improve service and anticipate that it will take a couple more quarters to fully bring them back to target levels.
Turning now to our guidance on slide 10, we.
We expect Q2 revenue to be in the range of $810 million to $840 million with pricing continuing to drive the top line.
It is worth noting that in the second quarter, we will be lapping last year's initial pricing actions to recover inflation.
I'll also point out that the second quarter represents our seasonally lowest volume quarter of the year for our new portfolio.
As I noted earlier, our first quarter revenue outperformance was largely due to our ability to fulfill orders that were originally planned for shipment in Q2.
So as you consider our first half revenue we are tracking in line with expectations and profitability continues to improve against last year.
Today, we are reaffirming our full year 2023 guidance.
We continue to expect revenue to grow 6% to 8% and adjusted EBITDA of $345 million to $365 million.
We continue to anticipate net interest expense in the $20 million to $25 million range and capex of $130 million.
In closing I'd be remiss, if I didn't thank our treehouse team our strong start to the year demonstrate better execution and is a testament to the hard work everyone is putting in to service our customers.
With that let me now turn it back over to Steve.
Thanks Pat.
Beyond the 2023 guidance fastest discussed we remain confident that over the next three plus years, we can deliver annual growth of 3% to 5% and revenue and 8% to 10% and adjusted EBITDA.
With free cash flow of at least $200 million.
Our confidence is supported by our clear purpose and ambition and a focus on our strategic growth pillars.
Building a world class supply chain.
Outperforming in categories, where we have competitive advantage defined by category leadership and depth.
And further developing strategic customer partnerships, and finally striving to be a talent leader.
As I've said before we're at a pivot point in our journey.
Our balance sheet is strong.
We generate healthy free cash flow, allowing us to capture near and long term opportunities to build capabilities drive growth and deliver attractive financial returns.
Our first priority for capital allocation is to invest in our business.
<unk> mentioned, we will spend approximately $130 million in Capex this year to strengthen our operations and.
And leverage our network.
We are also in a position to selectively pursue organic and inorganic opportunities that drive category growth are highly synergistic and have attractive financial returns.
That discipline led us to complete a $14 million acquisition to add seasoned pretzel capabilities to our portfolio in April .
The season Pretzel sub category is growing rapidly more than 15% last year.
And it's underdeveloped in private label importantly.
Importantly customers have been coming to us looking for seasoned pretzels.
The season Pretzel acquisition accelerates our ability to serve customer demand in the leadership category for Treehouse.
We plan to have plenty of our new season Pretzel flavors for you to try at our upcoming Investor Day on Tuesday June 13th in New York City.
Our goal of this event is threefold.
To give the financial community a better understanding of how our portfolio work has better positioned us across faster growing higher margin private label snacking and beverage categories.
To showcase our management team.
And to share how we've been making the right investments across the business and maintaining focus on the right priorities to drive sustainable revenue and profit growth and ultimately value creation for all of our stakeholders.
I Hope you can join US next month with that let's open the call up to your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Your first question comes from the line of Andrew Lazar from Barclays. Your line is open.
Great. Thanks, good morning, and congratulations Pat.
Thank you.
Good morning.
I guess some.
When she has provided full year 'twenty three EBITDA guidance I think I called out two main buckets right that it's sort of accounted for the difference between what was reported in 'twenty, two and what you see as sort of normalized EBITDA ultimately of around $400 million and I think these two things were Penang and then supply chain costs.
And we now have Penang that's been positive I think for three quarters in a row now.
In supply chain disruption costs are obviously dwindling quickly, which is nice to see so I guess I was hoping you could maybe square these dynamics with the difference between the $400 million and your current guidance for this year of $3 45 to $3 65.
Just kind of what's what's the what's left accounting for that difference given those two buckets are kind of really moving in the right direction I guess another way of asking it is do you see this year as potentially somewhat conservative knowing that it's only <unk> and you've got a seasonally important fourth quarter.
Yes, Andrew. Thank you Hi, this is Steve I will I'll touch on it I'll, let Pat follow up.
We are off to a great start right and it's early in our year, we have the smallest sequential quarter coming up next.
We look forward to these updates as we go forward, but you did touch on the two areas that are key to our recovery.
And we got off to a great start on it so.
I don't know that I would I wouldn't necessarily call. It conservative, but I think it's it is the right guidance at the right moment right. So if you want to yes, and if I add I do thank you.
Thinking about those right so from a P&L perspective.
We sort of expected inflation to be mid single digit and I think that's what we're seeing across our portfolio. So I think that squares in line with what we expected.
And reflects the pricing that we have so I think that's in line with what we had expected for the year and I think from a supply chain perspective thats largely.
We improved a little bit better here in Q1 than we than we thought which allowed us to accelerate some orders, but I think as we look for the rest of the year, it's largely playing out how we had hope with maybe a little bit of acceleration just in the first quarter. Yeah got it. Thank you and then I guess last.
Lastly, we would be.
Given the supply chain is improving I guess is there a chance that you are able to.
<unk> to pull forward some volume shipments to customers, let's say in <unk> that you might have initially planned for <unk> or is that not really how how it works.
I would I would rather call. It we probably filled the pipeline back up in Q1 right. There was some places that we had categories that we werent getting the retailer completely full.
And so they're happy obviously without right they've got their full assortment of value items at a time when the consumer is really looking for value. So.
You know I think thats really what happened in the first at the end of the first quarter right. We rebuild those pipelines I actually think the more important thing is we know kind of have conversations about merchandising in the back half of the year that we weren't able to have before and so I think that's going to be the interesting conversation and those are starting now so I think we're given the retailer confidence that we can.
Support.
They would like to do in the back half as they try to drive they all want to have a value image right now right and private label is a big part of that so that I think is the opportunity and we'll know more about that as the year unfolds.
Great. Thank you so much.
And your next question comes from the line of Bill Chapell from <unk> Securities. Your line is open.
Thanks, Good morning.
Morning Bill.
Yes.
On the pricing front.
What youre seeing and what Youre seeing at retail you've heard over the past.
Few months both.
The commentary that retailers were kind of over.
Price increases from here and they were pushing back hard but also that they were delaying some of the passing through some of the price increases to consumers to kind of drive volume a little bit faster or drive foot traffic a little faster didn't know if you continued to see either of those.
The commentary from the retailers on pricing or the holdback, so that pricing pass through as we moved into the first quarter.
Bill I think it.
It varies a lot by retailer.
We are seeing private label pricing going up a little bit slower than what we've seen before so I think it's fair to say that theyre still passing it through.
The good news is when we talked about that in the prepared remarks is that our gaps remain above historic levels right. So gaps are really solid.
You know, we tend to get our pricing quicker and so we're on the front end of that curve just given the nature of our of our margin structure of our contracts and the fact that we don't have the other levers of trade and advertising. So I think we're very fortunate to have done the pricing when we did it and have that behind us right.
Got it.
And then second just on <unk>.
And our market share and again, it's hard for us to see across your various categories, but.
I'm trying to understand.
With the improvements over the past 66 weeks.
Well above kind of 2019 levels because as you remember I mean private label kind of across the board lost a lot of shared during the pandemic. Although we've made a long long way back to it but I'm just trying to understand if we're now now.
New highs or working towards new highs.
Yes, we are and we are.
We're at the 20% number now right, which is pre pandemic, we were just below that.
So private labels in good shape now and right. We had nice share growth for private label for for years pre pandemic. It was only the pre pandemic.
Consumer behavior changed a little bit with all the stimulus. It was that was port on them during that period of time, but we're seeing it return to the normal growth rates. So we're just slightly above where we were in 19.
Perfect. Thank you so much.
Your next question comes from the line of Matt Smith from Stifel. Your line is open.
Hi, good morning, Thank you for that.
A question about the margin performance in the quarter it was stronger than expected in part due to the higher volume absorption.
Which benefited from the timing of shipments.
There is still an incremental drag from higher supply chain costs and that's an area that was very elevated in 2022.
So I'm surprised there were higher incrementally higher here in the first quarter.
Those costs the incremental headwind from those costs.
Much more substantial than that when we look at the second quarter through the fourth quarter of 2022. So do you expect to those costs to go lower year over year as we move through the year.
Yes, I think we this is Pat I think we benefited from some positive mix in there too so and I think do you think about the types of categories, we talked a little bit early last year around our late last year around exiting some lower.
Lower margin pickle business in particular, and so I think youre seeing a more positive mix, we do have some.
In the quarter, what I would call a little bit inefficient, maybe more overtime and things that we would have liked that probably.
Push them.
Those inefficiencies that we saw and I think we still are seeing the benefits of <unk>.
Some of our investments and continuous improvement in some of the other things we're doing from a supply chain are slowly starting to pay off and we've got ramp curves around how we expect those to play out through the air and we're really pleased with the progress so far and we feel like we're on the glide path that we had expected to see.
Okay. Thank you for that is if I had a follow up question on the guidance with a stronger first half the second half EBITDA guidance now looks like it's just modestly lower on a year over year basis. So could you talk about what's weighing on EBITDA growth in the second half I know theres some really tough.
<unk> comparisons there, but it would seem like youre pricing is still going to positively offset inflation in the second half of 'twenty three.
Yes, maybe I'll start and I'll, let Pat follow up.
I don't think we look at it that way I think we look at we had a really great start we've guided a solid first half as we have better visibility into it will we'll obviously.
Our report to you what we think the back half looks like I don't think we want it.
Anything to reflect what we think the back half is weaker.
Okay.
Okay.
Yeah.
Okay.
And if we lost them do we lose them.
I will recommend that we can go to the next question.
Okay.
Okay.
Operator.
Hello can you hear me, yes, Gotcha, Alright, we had some technical issues sorry about that your next question comes from William Reuter from Bank of America. Your line is open.
Good morning.
I just have two so you mentioned that you've now lapped.
You are lapping the price increases in the second quarter.
And then there was another question the drafts of the fact that.
Not pushing back a little bit do you feel like at this point you've pushed through all of the price increases that you need or is there opportunity for further price increases here.
Year to come.
I think there'll be some very selective price increases the rest of this year and their individual commodity or cost structure. We've done all of the big macro stuff we needed to do.
We actually hope there'll be some price relief right.
Things like wheat, and some of those other things we could bring down so.
And that won't affect our margins if we did that because that would just simply be passing on that cost. So we think we have the pricing and the place where we need it for the year.
Okay, and then secondarily for me you did the season Pretzel acquisition, which was pretty modest in size.
You mentioned youre still in a position to complete further one is there any way to talk about what size of acquisition you could take on at this point and then related to that how will you balance that with.
Reductions in leverage sure sure I can I'll take the first part of that and I'll have Pat talk about leverage but.
The $14 million and then acquisition, that's really mostly capital equipment isn't something we normally talk about but we really wanted to frame. This for investors right as how different this strategy is today than what it used to be right. It's about driving depth in the categories that week that we are in today and so when we get opportunities to.
Bolster our supply chain.
To add a capability right principles as a key category for us where we are leaders and Thats a key segment. That's growing really quickly. So we actually we have that equipment on order and it's going to take US 18 months to get it we were able to buy it by buying a small vendor right.
So there is opportunities for us to know.
Again, fortify that supply chain and drive growth and protect that algorithm out a year or two and thats really what were trying to do and so we only use that example that too.
To help the financial community to understand how different our strategy is and what it used to be so I don't know Pat if you want to talk about yet in.
Horsepower firepower, but yes, we've talked about we have a target leverage range of three to three five times and so we continue to be at sort of the low end of that target range. So.
We're very comfortable with the leverage level that we have right now yes.
Yes, and I would just say there are opportunities for us to do exactly what we did here in seasoned pretzels that are that are so close in.
That will have great synergistic returns and are great and our returns on capital.
But I don't think those are the larger ones that <unk> seen us in the past they'll come a day when that will be right for us and we'll talk a lot about capital allocation.
At our Investor day.
Very helpful commentary. Thank you.
Your next question comes from the line of Carla Casella from JP Morgan Your line is open.
Hi, Good morning, this is Mike on for Carla.
Just two questions from us so first one being that you mentioned that.
Please slowest in the second quarter and that there was some pull forward this quarter.
Is it safe to assume that the magnitude of this quarter versus what you guys got it to for <unk>.
Earlier was that all the sales pull forward or there's other areas that might have been surprised the upside whether it's pricing or volume.
Yep.
Yes, I think thats the way to think about it the majority of that beat was related to the pull forward. When we think about each one or what we had expected to see from H one revenue.
We're falling right in line with what we thought that that would look like so.
Great. Thank you and then.
One was did you guys or what was the magnitude of the low margin pickle business that you guys exited and when do you guys expect to anniversary that.
Yes, I don't I don't think we've talked about the totality of it but we will lap that here in the second quarter from that perspective, so that will be less of an issue for us in the back half of the year.
Okay, all right great. That's all from us Thank you.
Your next question comes from the line of Hayley Holden from Barclays. Your line is open.
Hi, good morning.
If we if we view the season pickles acquisition more.
Capex spend I guess.
Kind of traditional M&A I was wondering if you could sort of.
Tell us how the rest of the network was looking or if you had capacity constraints in any areas given some of the growth you've seen snapback in the last six months.
No.
It really was basically a capex, but it really extended us into it's the capability to seasoned pretzels and we look forward to trying them because they really are and there's a reason they're growing so fast right there great.
But yes, I mean theres areas in our in our baked goods that wed like to increase capacity theres areas, there's things, we'd like to add to our coffee business Theres things, we'd like to add in and a couple of our other businesses right I don't want to speak to any any individual one specifically, but.
I think if there is opportunities for us too.
Bolster that supply chain or to increase capacity in those tight areas like that.
We would obviously look at those things and but they have great returns and all of those have way over our cost of capital returns.
And the second question I had was.
On the.
<unk>.
Potentially lower cost natural gas.
How quickly do you now passes through to your customers.
As they flow through your P&L sure.
We have a 60 or 90 day agreement and with most of our customers and so on the way up you saw the lag hit us on the way down we would benefit from that lag. So those would be on 60 to 90 days.
And.
That's for a number of customers. Some customers are annual bids right and prices are locked for 12 months. So we'll enjoy that for that period of time.
But again, we try not to make money on the commodity swing right, we try to make money on our on our whole value proposition. So I think if those if those things come down and we pass them on our margins will improve.
But they wanted they wont affect the penny profit per case.
Great. Thank you so much I appreciate it.
And there are no further questions at this time I will turn the call over to Steve Oakland for some final closing comments.
Yes, I just want to say, thank you to everyone today and we hope we will all have a chance to see you at our Investor day coming up in New York City.
Great day take care.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Yeah.