Q2 2023 TreeHouse Foods Inc Earnings Call
Good morning, and welcome to the Treehouse Foods, Inc. Second quarter 'twenty twenty-three conference call. Please.
Please note that this call is being recorded all lines have been placed on listen only mode.
After the Speakers' remarks, there will be a question and answer session.
To ask a question at this time, please press star one thank you.
I'll now turn the call over to Colleen you May begin your conference.
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.
Before we begin we would like to advise you that all forward looking statements made on today's call are intended to fall within the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are based on current expectations and projections and involve risks and uncertainties that may cause actual results to differ materially from our forward looking statements.
Information concerning those risks is contained in the companys filings with the SEC.
On October three 2022, we completed the divestiture of a significant portion of our meal preparation desktop.
What the prior three 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 of todays 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 Colleen and good morning, everyone.
I am pleased to be here today to discuss our second quarter financial results.
Our outlook for the remainder of the year.
And outlined how treehouse continues to execute against our strategy and track towards our long term targets.
Treehouse today is a stronger more focused company following the actions we took to transform our business.
And this was demonstrated in our second quarter and first half performance.
Further the positive momentum that we've generated so far this year gives us confidence in our ability to deliver on the remainder of 2023.
And continue to create value for our shareholders for years to come.
Now taking a look at slides three and four in our deck we've.
We've outlined key takeaways for the second quarter and presented a summary of our results versus the guidance we provided.
First we delivered a year over year net sales increase of four 1%.
That exceeded our guidance for the quarter.
In addition, we improved adjusted EBITDA by nearly 44%.
At the high end of our guidance.
Second we are delivering improved execution and consistency.
We are continuing to drive better service returning to target levels of 98% across most of our categories in the quarter.
Our supply chain investments and the implementation of our T. Moss initiatives are supporting our results.
We're also successfully building depth and leadership in higher growth higher margin categories.
You can see our strategy in action with our recent acquisition of the Northlake coffee facility to <unk>.
Closed in June .
This transaction enables treehouse to drive greater category depth in our coffee business and strengthen our strategic capabilities.
Third we have purposefully positioned treehouse at the intersection of two incredibly powerful long term consumer trends.
The growth of private label groceries in North America.
And the consumer shift towards snacking.
In addition, we continue to benefit from current macroeconomic tailwind.
Finally, with our strong first half performance and our outlook for the remainder of the year, we are raising our 2023 revenue guidance and narrowing our full year adjusted EBITDA range to 360 million to $370 million.
This updated outlook, which Pat will cover in more detail takes into account the contributions from our coffee facility acquisition.
The next two slides provide some context on the current macro environment and private brands.
On slide five you can see how retailers are increasing shelf prices to reflect inflation.
Particularly in categories in which Treehouse operates.
The absolute dollar savings for a basket of private brands groceries continues to be significant and.
And is even higher today than when we spoke last quarter.
To put it into perspective, when you look at our categories of shopper would save approximately $22 when purchasing a basket of private brands as compared to the same products offered by national brands.
Private brands have gained share for 79 consecutive weeks and on slide six you can see that unit share reached an all time high for the second quarter. This.
This consistently outperforming national brands.
At the same time.
Average price gaps remain above historic levels.
Which is reflective of the importance retailers are continuing to place on private brands.
As consumers experienced pressure from increasing shelf prices the significant price gaps are not only a strong indicator of the value proposition private brands offer but.
But also a tremendous opportunity for treehouse.
Indeed retailers are increasing their investments in our snacking and beverage categories to drive trial and loyalty among consumers.
And we expect that to continue going forward.
Before I turn the call over to Pat I want to share an update on our sustainability efforts.
ESG is an important focus area for many of our customers.
Our ability to deliver on our ESG initiatives.
Not only represents a competitive advantage that positions Treehouse has a better strategic partner for our customers.
But it also supports our prioritization of enhanced execution and operational performance.
Last week, we published our new ESG goals, which have been adjusted to reflect the transformation of our business. Following our divestiture in October of last year.
As you know this divestiture meaningfully reduced our manufacturing and distribution footprint.
Which has enabled us to set new goals, such as reducing our scope, one and two carbon footprint by 25% by 2030.
And set a reduction targets for scope three by the end of 2025.
We look forward to updating you on our progress against these goals in the future.
Turning back to our second quarter results I am proud of all our team has accomplished.
We are executing on our strategy and are well positioned to deliver on our targets through the back half of the year and capitalize on the significant growth prospects ahead.
With that I'll turn the call over to Pat.
Thanks, Steve and good morning.
I'd like to start by expressing my gratitude to the entire treehouse team for their hard work and diligent execution and servicing our customers and delivering another successful quarter.
Starting with our second quarter results on slide seven.
We continue to benefit from greater focus and improved execution with solid performance across all our key financial metrics.
Net sales grew by 4% to $844 million.
Adjusted EBITDA increased by nearly 44% to $76 4 million and.
And adjusted EBITDA margin of nine 1% expanded 250 basis points versus last year.
Turning to slide eight we've provided a look at our year over year revenue drivers on a quarter to date and year to date basis.
Overall these revenue drivers played out slightly better than we anticipated.
Pricing drove the top line contributing double digit growth versus the prior year.
This reflects our cumulative efforts to recover inflation.
Volume and mix decline versus the prior year our performance in the second quarter was in part timing related.
Recall that last quarter, we talked about how our ability to restore service levels faster than anticipated in certain categories.
Enables us to fulfill customer shipments in the first quarter that were initially planned for the second quarter.
To better understand our results without the timing impact between quarters. We've provided a look at our year to date volume and mix performance, which was down approximately 4%.
A portion of this decline was driven by consumption as unit sales are down across total food and beverage private brands. While also down on a unit basis are performing modestly better.
Youll recall that approximately 15% of our business is toll manufacturing which supports brands.
In addition, we continue to lap prior exits of low margin business and distribution losses.
On slide nine I'll take you through our adjusted EBIT of drivers.
And mix, including absorption was down $3 million in the quarter.
Peanut pricing net of commodities was positive once again as we continue to recover inflation contributing $61 million versus last year.
Operations and supply chain were a headwind of $31 million versus last year.
We've made great progress in stabilizing our supply chain network and returning service levels back to target of 98% and most of our categories.
That progress has been in part due to increased investment around labor retention and engagement in our manufacturing facilities.
We continue to be focused on executing our supply chain savings initiatives to bring these costs down over time.
In addition to our labor investments. We also took the opportunity in the second quarter to invest in the resiliency of our machinery with increased repairs and maintenance spend.
These items drove an increase in our costs for this quarter in particular that we've highlighted on slide nine <unk>.
Importantly, as a result of this investment we expect our throughput to benefit in the second half of the year, which is our seasonal peak.
Lastly, SG&A and foreign currency impacts contributed a negative $4 million.
Turning to slide 10.
I'd like to give you a better look at the progress we are making in our operations as I noted we've returned our service levels back to target, which you can see on the left hand side of the slide.
In addition, we continue to be on track with our plans to deploy our Treehouse management operating system also known as T. Mos across our manufacturing network by the end of 2024.
To date at the 16 facilities, where we have meaningfully implemented our tmall initiatives we.
We are seeing consistent year over year improvement in our overall equipment effectiveness as you can see on the right hand side of the slide.
Half of those facilities have delivered greater than 5% improvement in OE and three facilities have delivered double digit improvement.
We will remain focused as we continue our team ahs rollout across the network and expect our improved operating effectiveness to enable greater throughput reduce downtime and improve our profitability over time.
Turning to slide 11, our.
Our balance sheet remains strong.
I will highlight that our use of the revolving credit facility ticked up in the quarter, primarily to finance the acquisition of the Northlake, Texas coffee facility.
In addition, we have continued to invest in inventory to service our customers.
Importantly, we ended the second quarter with liquidity of over $280 million between the remaining availability under the revolver and our cash position.
We continue to be at the low end of our target leverage range of three to three five times.
Turning now to our guidance on slide 12.
We are raising our full year net sales outlook from 6% to 8% year over year growth to seven five to nine 5% growth.
This increase primarily reflects the incremental volume from the acquisition of the Northlake, Texas coffee facility.
<unk> acquisition is contributing to our topline in the second half of the year and we anticipate seeing benefits to our profitability over time as we integrate the business.
With our strong performance in the first half and our outlook for the remainder of the year.
We are narrowing our adjusted EBITDA guidance to a range of $360 million to $370 million.
We also expect net interest expense to be in the range of $27 million to $32 million, reflecting our increased use of the revolving credit facility that I previously noted and.
And continue to expect Capex of $130 million.
With regard to the remainder of the year, we expect our top line growth to be driven primarily by volume and mix.
Leading the volume from the Coffey acquisition.
It's worth noting that the pricing contribution will step down in the second half of the year as we lap additional pricing actions taken last year.
With that on slide 13.
We expect third quarter net sales to be in the range of $950 million to $970 million, representing approximately 10% growth at the midpoint versus last year.
In terms of profit.
We expect third quarter adjusted EBITDA to be in the range of $81 million to $89 million, representing approximately 11% growth at the midpoint versus last year.
Our full year adjusted EBITDA guidance captures the expectation for a strong momentum in our business operations to continue in the fourth quarter, we expect.
Sequential and year over year improvement in gross margin to be driven primarily by our key mass and supply chain savings initiatives.
In addition to help you model operating expenses, we've assumed our full year adjusted EBITDA guidance.
We'll have about $5 million to $7 million and temporary operating expenses.
<unk> from the expected wind down of substantial portions of the transition services agreement related to the meal preparation divestiture.
Following the expiration of the TSA agreement, we expect to implement cost reduction actions that will offset this we expect to have more clarity around the timing of the TSA wind down and related implications to operating expenses. When we report our third quarter results in November .
With that let me now turn it back over to Steve.
Thanks Pat.
I'd like to end, where I began.
Which is the treehouse is incredibly well positioned due to the transformative changes we've made to our portfolio and the tailwind we're seeing across private label snacking in beverage.
Our first half performance was reflective of the positive momentum underway.
And underpins our confidence in our team's ability to deliver on our full year outlook and our long term targets, which are noted on slide 14.
These themes are a continuation of what we discussed at our recent Investor day.
We believe that our strategy provides significant opportunity to create shareholder value and look forward to updating you on our progress.
With that let's open the call up to your questions.
Operator.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Thank you.
Your first question comes from Rob Dickerson with Jefferies. Your line is now open.
Okay.
Great. Thanks, so much.
Hey, Rod Linda.
Good morning, Robert.
Okay.
I guess just.
First question just housekeeping.
The contribution from the North Lake facility this year.
Are you are you providing those numbers.
Yeah, Rob I think the majority of the increase in our revenue guidance. This year it will be the contribution from the northlake facility.
From a profit standpoint, I think we indicated that's sort of a modest $1 million.
At $10 million headwind that we've incorporated into our guidance and then over time as we integrate that business and get the benefit to the vertical integration.
We will start to see the profit pickup in terms of contribution but for this year as we continue to put them on our systems and the like.
That that contribution is somewhat modest.
Okay Fair enough and then I guess just more broadly.
While I respect.
The timing shift.
Q1 Q2.
As you were Phil as you fill the orders in Q1.
Just curious.
Back when we think about.
Food.
Volumes overall, and then kind of how.
Private label sitting in construct is there.
Anything you're seeing kind of in the overall marketplace.
With suggest maybe consumption is a little softer maybe it continues to get softer or maybe you think you could actually see a little bit positive, but as you get through the back half driven.
The other got it.
Macro consumer pressures that are expected.
Yes sure Rob.
I think a couple of things I would I would take you back to the slides in our deck on share gain right.
Private label continues to gain share in this environment. The consumer is cautious right total volumes are down but private label is performing significantly better.
Why we can guide the back half of a little better volume is because if you remember last year was the most disrupted we were in the in the third and fourth quarter right. So our service levels. We didn't service the demand that was in front of us.
Our supply chain is in a very different place so we.
We have great line of sight to the demand in the back half.
We feel comfortable that we're going to be able to fill more of it than we did a year ago. So.
Our guidance assumes that if the economy does come towards us and Theres, a little bit of Theres continued consumer shift the trends, we see continue and you get a little bit of organic growth just from consumer takeaway that would be on top of what we've guided.
Got it alright, thanks, I'll pass it on.
Okay.
Your next question comes from Matt Smith with Stifel. Your line is open.
Hi, Good morning, Steve Good morning, Matt.
Just curious in your conversations with retailers given the strong private label performance easing even as price gaps are expanding here with private label pricing at a higher rate than brand with the moment when we get to the second half of the year do you expect that price gap dynamic to shift and are you, having conversations with retailers or <unk>.
<unk> that theyre going to lean into private label given some of the volume weakness, we're seeing across various categories.
Yes.
Private label actually allows retailers to show value proposition right overall price points or so so high right.
In that slide in our deck, where we show that if you buy a basket of our goods versus a basket of branded goods.
I mean, the Brennan good numbers $80 right and that's a that's just a big headline number so the retailer is interested in having.
Having showing that their consumer value right and so private label gives them that opportunity.
We know there'll be more promotion from both branded and private label. This fall and we're really excited about that we have not been able to promote private label and our key seasonal categories. In a couple of years. So I think youll see private label merchandize Youll see private label promoted.
This fall and I think the retailers doing that to send that message to their consumer right that there is value in there and they're in their store.
Okay. Thank you for that and maybe a follow up for Pat when we think about the impact of the expiring TSA is an incremental drag.
On EBITDA in the fourth quarter is that something that will carry on into next year as you put cost savings programs into place to offset the stranded overhead.
I think theres, a little uncertainty for us that timing our expectation when we put that out there to help you model in terms of how we were thinking about the year and so we'll take action. This will take US a few months to go implement that do we think there'll be significant impacts overall to our profit from exiting the TSA we don't.
But it may take us a little bit of time, just depending upon when in the fourth quarter, we exit and so we'll get back to you as we get through Q3 earnings because we will have better line of sight at that point, but.
At this point, we don't see significant significant impacts from from the TSA.
Yes, given the complexity of taking a business the size, we sold off of our systems and putting them on theirs.
Setting that data on our <unk>.
<unk> is really hard to do right. So once we have a better line of sight to the exact timing, but we wanted to when you. When you do your models. We wanted you to know that we expect both strong sales and strong margins in the fourth quarter and there'll be a little bit of drag and we wanted you to understand youll, probably see a little of that will probably hit our SG&A line in the quarter, assuming that in fact, that's when it happens and Thats.
What we assume right now and that's what we budgeted frankly all year.
Alright, I appreciate the color I'll pass it on.
Your next question comes from Bill Chappell with Carolina.
Your line is now open.
Yes.
Thanks, Good morning, good morning.
Bill.
I guess, one more time.
<unk> volumes did you could you give it did you give.
Like Brown on.
Okay.
So parts drove the volume.
Bill you're breaking up.
What I heard you ask hopefully I'm correct here is did we give any color on what drove the volume in Q2.
Correct Okay.
Yeah. So.
Disposition.
Sure.
Sorry, I, probably a chunk of that into a couple pieces. We tried to cover I think one we saw like others have experienced we have seen overall consumption.
Alan just a little bit and I would say the other bigger impact would be the timing challenge that we talked about where we felt the pipeline up a little bit in Q1 and that obviously impacted.
Q2, sales, which which we anticipated when we guided and then thirdly, we did exit.
Some lower margin business that we've talked about and so this this quarter sort of the last quarter, where we'll lap.
Some of those.
Exits and distribution losses that we talked about so we see line of sight towards.
More volume growth in the second half of the year starting in Q3.
Okay.
Yes, I guess I'm, just trying to understand how much of it was decline in consumption versus the other two parts.
Yes, I think it's kind of hard to say I think the fact that we knew we had a full channel right. When we ended the first quarter right given how strong our service was on how strong their order pattern was.
And then the categories being down a point or two right I think our categories were down one.
One to two points in consumption for the.
If you look at the measured data so somewhere in the middle of those two things was the bulk of it right.
Yes.
Follow up to that just trying to understand.
Do you think that's more of a year over year insurance mobility trends.
Are you seeing something.
In certain categories.
Change.
Oh, no I mean, I think private label is performing really well in its category right. I mean, we talked about that <unk> got them almost got 80 weeks of share gain right.
So private label is doing fine in its categories.
I think the consumers just cautious right.
And as I said in the earlier comment we feel good about the back half because we see the demand signals that we're getting and we know that our supply chains in a better position to fill.
Fill that demand.
So if private label continues to gain share it's not unreasonable to think that those volume those units will turn positive if that does that's above what we've what we've guided to but.
I think where we can meet the numbers, we've put out just with our improved service on the demand we see.
Right now.
Great. Thanks, so much.
There are no further questions at this time with that I will turn the call back to Steve Oakland.
Well I'd like to thank you all for being with US today I know, it's a busy day.
We are getting ready to go into our seasonal peak and we look forward to sharing that information with you. After our third quarter results I know theres a lot of IR events going to happen in the next few months and hopefully we'll see you in person if not we'll talk to you soon take care.
This will conclude today's conference call. Thank you for joining US today you may now disconnect.
Okay.
Yeah.
Yeah.
Yeah.
Okay.