Q3 2023 TreeHouse Foods Inc Earnings Call
Hello, and welcome to the Treehouse Foods third quarter 2023 conference call all lines will be in listen only mode.
Speaker 1: Hello, welcome to the Treehouse Foods 3rd Quarter 2023 conference call. All lines will be in listen only mode. After today's presentation, there will be an opportunity to
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Speaker 1: this time I would like to turn the call over to tree house foods for the reading of the safe harbor.
At this time I would like to 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.
Speaker 2: Good morning and thanks for joining us today. Our press release and earning stack, both issued this morning, are available in the Investor Relations section of our website at treehousegoods.com.
Speaker 2: 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 Security's Litigation Reform Act of 1995.
Four 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.
Speaker 2: 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.
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.
Speaker 2: Information concerning those risks is contained in the company's filing for the SEC. On September 29, 2023, we completed the Dev Estature of our snack bars.
On September 29, 2023, we completed the divestiture of our snack bars business for.
For purposes of our discussion today, we will briefly cover our third quarter results on our whole company basis as the third quarter guidance that we previously issued incorporated the snack bars business.
Speaker 2: For purposes of our discussion today, we will briefly cover our third quarter results on a whole company basis. As the third quarter guidance that we previously issued incorporated the snack bars.
Speaker 2: Results for the quarter are also provided on a continuing and discontinued operations basis in the press release. With the snack bars business reported and discontinued operations.
For the quarter are also provided on a continuing and discontinued operations basis, and the press release, but the snack bars business reported in discontinued operations.
The majority of our discussion today around our operating and financial results will center around performance on an adjusted continuing operations basis.
Speaker 2: The majority of our discussion today around our operating and financial results will center around performance on an adjusted continuing operations basis.
We have provided recast historical financials for Treehouse continuing operations for 2019, 2000, 22021, and 2022 on an annual basis in 2022 and 2023 on a quarterly basis. So that you can best compare.
Speaker 2: We have provided recast historical financials for Treehouse Continuing Operations. For 2019, 2020, 2021, and 2022 on an annual basis, and 2022 in 2023 on a quarterly basis, so that you can best compare operating performance.
Their operating performance.
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 stack.
Speaker 2: A reconciliation of non- GAAP measures to their most direct comparable GAAP measures to be found in today's press release and the appendix tables of today's earnings tax.
Speaker 2: With that, let me turn the call over to our chairman, CEO and president, Mr. Steve Oakland, for his opening remarks.
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.
Speaker 3: I'm pleased to be here today to discuss our third quarter financial results and provide an update on our outlook for the remainder of the year.
I am pleased to be here today to discuss our third quarter financial results and provide an update on our outlook for the remainder of the year.
Treehouse has made important progress executing our strategy to date.
Speaker 3: Treehouse has made important progress executing our strategy today.
Speaker 3: Positioning the company to capitalize on industry and consumer trends and create long-term value for our shareholders.
Positioning the company to capitalize on industry and consumer trends and create long term value for our shareholders.
Speaker 3: On slide three, we've noted the key takeaways for the quarter, and we'll discuss each of them in detail on the call. Turning to our results, for the third quarter, we delivered year over year, net sales, and volume growth, and outperformed the broader private brand market in the retail channel.
On slide three we've noted the key takeaways for the quarter and will discuss each of them in detail on the call turning to our results for the third quarter, we delivered year over year net sales and volume growth.
<unk> outperformed the broader private brand market and the retail channel.
We were particularly pleased to see our core retail volume increased 1%.
Speaker 3: We were particularly pleased to see our core retail volume increase 1%, despite a voluntary product recall and a discrete supply chain disruption late in the quarter.
Despite a voluntary product recall and as discrete supply chain disruption late in the quarter.
These factors combined with weaker co manufacturing and food away from home sales and lower than anticipated consumption in select retail categories resulted in sales below our original expectations.
Speaker 3: These factors combined with weaker co-manufacturing and food away from home sales and lower than anticipated consumption in select retail categories resulted in sales below our original expectation.
Importantly, as a result of our team's strong execution.
Speaker 3: Importantly, as a result of our team's strong execution, we grew adjusted EBITDA from continuing operations by nearly 13% year-over-year, in line with the high end of our guidance range.
We grew adjusted EBITDA from continuing operations by nearly 13% year over year.
In line with the high end of our guidance range.
Turning to our outlook briefly.
Speaker 3: Reflected in our full year sales guidance, our significant changes from when we originally issued guidance.
<unk> and our full year sales guidance are significant changes from when we originally issued guidance.
Speaker 3: First, the voluntary recall and discrete supply chain disruption that I mentioned earlier, although behind us now, impacted the end of the third and the beginning of our fourth quarters.
First the voluntary recall and discrete supply chain disruption that I mentioned earlier, although behind US now impacted the end of the third and the beginning of our fourth quarters.
Next the snack bar divestiture was an impact of approximately $160 million on a full year.
Speaker 3: Snack bar divestiture was an impact of approximately $160 million on a full year.
Speaker 3: And finally, the current consumer trends have shifted, which I'll speak to in more detail.
And finally, the current consumer trends have shifted which I'll speak to in more detail.
Speaker 3: Taking this into account, we revised our adjusted net sales expectations for the full year, and now anticipate achieving approximately 4 to 5% year-over-year growth.
Taking this into account we revised our adjusted net sales expectations for the full year and now anticipate achieving approximately 4% to 5% year over year growth.
Against these lower sales, we are reaffirming our adjusted EBITDA guidance range of $360 million to $370 million.
Speaker 3: Against these lower sales, we are reaffirming our adjusted EBITDA guidance range of 360 to $370 million.
Speaker 3: which represents approximately 25% your over your growth at the mid
Which represents approximately 25% year over year growth at the midpoint.
Speaker 3: Given the number of moving parts, Pat will provide more detail in his presentation.
Given the number of moving parts Pat will provide more detail in his presentation.
Speaker 3: on our results, outlook, and our capital allocation strategy.
While our results outlook and our capital allocation strategy.
I do want to highlight that we have deployed nearly $200 million of capital to support the execution of our strategy and create value for our shareholders.
Speaker 3: I do want to highlight that we have deployed nearly $200 million of capital to support the execution of our strategy and create value for our shareholders.
Speaker 3: This includes our recent acquisitions to increase our depth and capabilities and the repurchase of approximately $50 million of company stock. We also expect to deploy CAPEX of approximately $140 million directly into our manufacturing facilities and our supply chain.
This includes our recent acquisitions to increase our depth and capabilities and the repurchase of approximately $50 million of company stock.
We also expect to deploy capex of approximately $140 million directly into our manufacturing facilities and our supply chain. This year.
Speaker 3: One additional item I'd like to highlight is the receipt of approximately $427 million in proceeds from the repayment of our cellar note in October .
One additional item I would like to highlight is the receipt of approximately $427 million in proceeds from the repayment of our seller note in October.
Speaker 3: As you'll remember, this cellanote relates to our meal preparation to vest...
As Youll remember the seller note relates to our mill preparation divestiture and the repayment marks our final step in this transformative transaction our balance sheet strength as an asset and we are focused on deploying capital where we can maximize returns we.
Speaker 3: And the repayment marks a final step in this transformative transaction. Our balance sheet strength is an asset, and we are focused on deploying capital where we can maximize redevelopment.
Speaker 3: We are continuing to strengthen and build on tree houses position as a private brand powerhouse.
We are continuing to strengthen and build on treehouses position as a private brand powerhouse.
In higher growth higher margin snacking and beverage categories.
Speaker 3: in higher growth, higher margin, snacking and beverage categories.
Year to date, our team has remained focused on sustaining and growing our leadership and depth across our categories.
Speaker 3: Year today, our team has remained focused on sustaining and growing our leadership and depth across our categories.
Speaker 3: enhancing our supply chain and delivering superior service and quality to our customers.
Enhancing our supply chain and delivering superior service and quality to our customers.
Noted on slide four our two recent portfolio shaping actions.
Speaker 3: noted on slide 4 are two recent portfolio shaping actions
We closed the sale of our Lakeville, Minnesota facility and snack bar business for approximately $61 million the.
Speaker 3: The snack bar business was not expected to contribute positive adjusted EVTA this year. And although bars can be a good...
The snack bar business was not expected to contribute positive adjusted EBITDA this year and although bars can be a good consumer category.
Speaker 3: Private brand penetration in this category is very low.
Abbott brands penetration in this category is very low.
Speaker 3: With this divestiture, our portfolio is now more focused on categories where we see the greatest opportunity for the company moving forward.
With this divestiture our portfolio is now more focused on categories, where we see the greatest opportunity for the company moving forward.
Separately last month, we announced an agreement to purchase the <unk> pickle business in Canada.
Speaker 3: Separately, last month we announced an agreement to purchase the Bix Pickle business in Canada.
Speaker 3: for a base purchase price of approximately $20 million. Relating primarily...
From a base purchase price of approximately $20 million.
Relating primarily to acquired inventory.
Speaker 3: We expect to close in the fourth quarter. This transaction will enhance our capabilities in our pickle category and expands our presence and scale in Canada. Treehouse has had a co-packing arrangement with Dix for many years.
We expect to close in the fourth quarter. This transaction will enhance our capabilities in our pickle category and expands our presence and scale in Canada Treehouse has had a co packing arrangement with <unk> for many years and we are pleased to bring this additional margin accretive volume in.
Speaker 3: and we are pleased to bring this additional margin accretive volume into our manufacturing network. Turning to our internal...
Our manufacturing network.
Turning to our internal supply chain initiatives, we have continued to invest directly into our supply chain as you can see on slides five and six.
Speaker 3: We have continued to invest directly into our supply chain, as you can see on slides five and six.
Over the next three years, we continue to expect to achieve gross supply chain savings of approximately $250 million.
Speaker 3: Over the next three years, we continue to expect to achieve gross supply chain savings of approximately $250 million.
Which will support our long term adjusted EBITDA targeted growth.
Speaker 3: support our long-term adjusted EBITDA targeted growth. Let me give you an update on our progress on this front.
Let me give you an update on our progress on this front.
Speaker 3: We remain focused on implementing T-MOS and other supply chain initiatives.
We remain focused on implementing T Mos and other supply chain initiatives to contribute to improving execution and margin performance.
Speaker 3: that contribute to improving execution and margin performance.
On T. Mos, we're continuing the rollout of the system across our manufacturing network.
Speaker 3: On T-MOS, we are continuing the rollout of the system across our manufacturing network.
We expect this work to enable us to start 2024.
Speaker 3: We expect this work to enable us to start 2024.
With substantial cost saving processes in place.
Speaker 3: with substantial cost saving processes in play.
In 2023 to date, we've seen a significant improvement of four percentage points and our overall equipment effectiveness or OA as a result of our team our initiatives. As an example, we started our team on this journey at our refrigerated dough manufacturing facility in <unk>.
Speaker 3: In 2023, to date, we've seen a significant improvement of four percentage points in our overall equipment effectiveness, or OEE, as a result of our TMOS initiatives. As an example, we started our TMOS journey at our refrigerated dough manufacturing facility in Texas at the end of 2022.
Texas at the end of 2022.
Speaker 3: You may recall that we took time during the second quarter, our seasonally lowest from a volume perspective.
You may recall that we took time during the second quarter, our seasonally lowest from a volume perspective.
Speaker 3: and pull forward some repairs and maintenance activities at this facility. I'm pleased that we are
To pull forward, some repairs and maintenance activities at this facility.
I am pleased that we are seeing significant results.
Through the end of the third quarter that facility increased production by over 14 million pounds and improved service by over 19 points versus the prior year. This was particularly important for our retail grocery customers, who will want to have refrigerated dough back on their shelves heading into the peak season.
Speaker 3: Through the end of the third quarter, that facility increased production by over 14 million pounds.
Speaker 3: and improve service by over 19 points versus the prior year. This is particularly important for our retail grocery customer.
In the third quarter, we also kicked off our procurement exercise we've completed our initial procedures around scoping and identifying opportunities.
Speaker 3: We've completed our initial procedures around scoping and identifying opportunities.
Speaker 3: and our work here remains on track. And finally, we are progressing on our efforts to make our logistics and distribution network more customer-centric.
And our work here remains on track and finally, we are progressing on our efforts to make our logistics and distribution network more customer centric.
We've completed the first stages of our warehouse consolidation plans and are seeing positive results from the initiatives to improve utilization and logistics efficiency.
Speaker 3: We've completed the first stages of our warehouse consolidation plans and are seeing positive results from the initiatives to improve utilization and logistics efficiency.
Next an update on Treehouse results relative to trends, we've seen across the broader industry, which you can see on slide seven.
Speaker 3: Next, an update on treehouse results relative to trends we've seen across the broader industry, which you can see on slide 7.
Speaker 3: In the third quarter, we saw continued strength in private brand volume compared to national brand.
In the third quarter, we saw continued strength in private brand volume compared to national brands.
For the quarter private brand unit sales in the measured retail channel were flat <unk>.
Speaker 3: For the quarter, private brand unit sales in the measured retail channel were flat compared to national brands which continued to decline.
Compared to national brands, which continued to decline.
Importantly, treehouse outperform deliver.
Speaker 3: delivering organic volume growth in the retail channel of approximately 1%.
Delivering organic volume growth in the retail channel of approximately 1%.
If you include the volume from our recent acquisitions, our retail cases were up 2%.
Speaker 3: If you include the volume from our recent acquisitions, our retail cases were up 2%.
Now turning to food consumption trends, which have been in particular focus in recent months as retailers have seen changes in basket size and mix.
Speaker 3: Now turning to food consumption trends, which have been in particular focus.
Speaker 3: as retailers have seen changes in basket size and mix.
At Treehouse, we've seen retailers more closely align orders to current consumer demand trends.
Speaker 3: At Treehouse, we've seen retailers more closely align orders to current consumer demand.
Speaker 3: as we've moved further past the supply chain disruptions the industry experienced in recent years.
As we've moved further past the supply chain disruptions the industry experienced in recent years.
Speaker 3: In September , we fielded a survey on consumer food consumption.
In September we feel to the survey on.
On consumer food consumption trends, which are on slide eight and.
Speaker 3: which are on slide eight, and now show that among consumers who changed at-home eating habits, their focuses have been on reducing waste and switching to less expensive options.
And now show that among consumers who changed at home eating habits. Their focuses has been on reducing waste and switching to less expensive options.
Notably 65% of respondents say they have switched to store brands and more affordable options.
Speaker 3: Notably, 65% of respondents say they have switched to store brands and more affordable options.
This not only underscores that consumers continue to prioritize value and their grocery purchases, but it also shows the strength of private brands.
Speaker 3: This not only underscores that consumers continue to prioritize value in their grocery purchases, but it also shows the strength
It is clear to us that consumers are continuing to adjust their shopping patterns and response to the macroeconomic environment and pressure on their wallets.
Speaker 3: It is clear to us that consumers are continuing to adjust their shopping patterns in response to the macroeconomic environment and pressure on their wallet.
Speaker 3: We anticipate this continuing near-term supporting private brand strength and growth opportunities.
We anticipate this continuing near term supporting private brand strength and growth opportunities.
Speaker 3: As we've discussed over the past few quarters, grocery retailers have continued to increase shelf prices, including
As we've discussed over the past few quarters grocery retailers have continued to increase shelf prices, including entry house categories to offset the impact of inflation.
Speaker 3: offset the impact of inflation. The fact is that a basket of private brand goods and our categories today generates approximately $18 of absolute savings for the consumer versus the same products offered.
Is that a basket of private brand goods in our categories today generates approximately $18 of absolute savings for the consumer.
Versus the same products offered by National brands.
With pressures on the consumer this value is significant.
Speaker 3: with pressures on the consumer. This value is significant.
Given this price gap private brands now have gained unit share for 92 consecutive weeks.
Speaker 3: Given this price gap, private brands now have gained unit share for 92 consecutive weeks, reaching an all-time high.
<unk>, an all time high for the third quarter the.
Speaker 3: The value proposition in private brands is undeniable.
The value proposition in private brands is undeniable.
Speaker 3: Looking at the chart on slide 10, you can see private brand share gains in 2023 year-to-date compared to 2019's pre-pandemic level.
Looking at the chart on slide 10.
You can see private brand share gains in 2023 year to date compared to 2019 pre pandemic levels.
Speaker 3: These gains continue to support the importance of private brands for retailers and...
These gains continue to support the importance of private brands for retailers and consumers.
Speaker 3: Additionally, we continue to see private brands gain share with Gen Z and millennials.
Additionally, we continue to see private brands gained share with Gen Z and millennials.
Showing how we are winning with the next generation of consumers.
Speaker 3: showing how we are winning with the next generation of consumers.
Speaker 3: supporting long-term private brands consumption trends. We believe the long-
In supporting long term private brands consumption trends.
We believe the long term outlook is quite healthy.
Before I turn the call over to Pat I'd like to reinforce what we see as the key takeaways for the quarter.
Speaker 3: Before I turn the call over to Pat, I'd like to reinforce what we see is the key takeaways for the quarter.
Speaker 3: First, we delivered volume growth in our retail business and outperformed the broader private brand's market in the retail channel.
First we delivered volume growth in our retail business and to outperform the broader private brands market in the retail channel.
Speaker 3: even in the face of disruptions that impacted the corridor. Second, we are driving
Even in the face of disruptions that impacted the quarter.
We are driving margin improvement through.
Speaker 3: through TMOS and our supply chain initiatives and are committed to our $250 million savings goal over the next three years.
<unk> and our supply chain initiatives and are committed to our $250 million savings goal over the next three years.
Speaker 3: Third, while we have updated our adjusted net sales guidance range for the items that I-
Third while we have updated our adjusted net sales guidance range for the items that I spoke to earlier.
We have reaffirmed our adjusted EBITDA guidance, which puts us on track to exit the year at our targeted $400 million annual run rate.
Speaker 3: We have reaffirmed our adjusted EBITDA guidance, which puts us on track to exit the year at our targeted $400 million annual run rate.
And finally.
Speaker 3: We are continuing to strategically deploy capital to drive long-term value creation. We are at a positive inflection point for Treehouse as we look to year-end and into 2024.
We are continuing to strategically deploy capital to drive long term value creation.
We are at a positive inflection point for Treehouse as we look to year end and into 2024.
Speaker 3: As a result of our portfolio reshaping, we are focused on the key categories where we have confidence we can win.
As a result of our portfolio reshaping we are focused on the key categories, where we have confidence we can win.
Our supply chain enhancements are beginning to show in our financial results.
Speaker 3: Our supply chain enhancements are beginning to show in our financial results.
Speaker 3: And with our full cellar note repayment, our balance sheet strength is an asset. We are attractively positioned at the intersection of two incredibly powerful long-term consumer trends.
And with our full seller note repayment, our balance sheet strength as an asset.
Our attractively positioned at the intersection of two incredibly powerful long term consumer trends.
Speaker 3: the growth of private brand groceries in North America, and the consumer shift towards snacking.
The growth of private brand groceries in North America.
And the consumer shift towards snacking.
Speaker 3: And we continue to benefit from current macroeconomic tailwinds.
And we continue to benefit from current macroeconomic tailwind.
As we sit here today, we are well on track against our long term targets with.
Speaker 3: As we sit here today, we are well on track against our long-term targets. With that, I'll turn the call over to Pat.
With that I'll turn the call over to Pat.
Thanks, Steve and good morning.
Speaker 4: I'll start with a summary of our third quarter results on slide 11.
I'll start with a summary of our third quarter results on slide 11.
Speaker 4: For total treehouse, including our snack bars business that we divested late in the third quarter.
Our total treehouse, including our snack bar business that we divested late in the third quarter.
Speaker 4: we delivered adjusted net sales of approximately $907 million and adjusted EBITDA of approximately $86 million. These results compare to the third quarter guidance that we issued of $950 to $970 million on the top line and adjusted EBITDA of $81 to $89.
We delivered adjusted net sales of approximately $907 million and adjusted EBITDA of approximately 86 million. These results compare to the third quarter guidance that we issued of $950 million to $970 million on the top line and.
And adjusted EBITDA of $81 million to $89 million.
Relative to these expectations our sales performance was impacted by two factors.
Speaker 4: Relative to these expectations, our sales performance was impacted by two factors. First,
First consumption came in lighter than we anticipated, particularly in our retail crackers food away from home and co manufacturing businesses.
Speaker 4: particularly in our retail crackers, food away from home, and co-manufacturing business.
Speaker 4: crackers we delivered strong unit growth in cases of more than 6% which was higher than the
In crackers, we delivered strong unit growth in cases of more than 6%.
Which was higher than the total category unit growth.
Speaker 4: However, our expectations for this category were predicated on higher consumption.
However, our expectations for this category were predicated on higher consumption.
Speaker 4: Additionally, our food away from home and co-manufacturing businesses continue to be impacted by broader consumer and macro trends.
Additionally, our food away from home and co manufacturing businesses continued to be impacted by broader consumer and macro trends with restaurant foot traffic down again in the third quarter and consumption falling short of expectations.
Speaker 4: with restaurant foot traffic down again in the third quarter and consumption falling short of expectations.
Second.
Speaker 4: Second, we were impacted by supply chain disruption late in the quarter, including a voluntary product recall in our brothels.
We were impacted by supply chain disruption late in the quarter, including a voluntary product recall in our broth business and.
Speaker 4: and destruction with a packaging vendor and our pretzels and cookies.
And disruption with the packaging vendor in our pretzels and cookies businesses.
Speaker 4: These items adversely impacted our adjusted net sales by approximately $15 million in the quarter.
These items adversely impacted our adjusted net sales by approximately $15 million in the quarter.
Speaker 4: our teams have taken actions to address these items.
Importantly, our teams have taken actions to address these items.
While we are disappointed that our sales fell short of expectations. We were pleased that we delivered adjusted EBITDA towards the high end of our guidance range.
Speaker 4: We were pleased that we've delivered Adjusted EBITDA toward the high end of our guidance.
Speaker 4: driven by our TMOS and supply chain savings initiatives that Steve described. Turning to our
Driven by our team and supply chain savings initiatives that Steve described.
Turning to our results on a continuing operations basis if.
Speaker 4: You'll see on slide 12 that we delivered strong year-over-year growth across all of our key financial metrics.
You'll see on slide 12 that we delivered strong year over year growth across all of our key financial metrics.
Speaker 4: Net sales grew by 3.6% to approximately 863 million.
Net sales grew by three 6% to approximately $863 million.
Speaker 4: Adjusted EBITDA increased by nearly 13% to approximately 90%.
Adjusted EBITDA increased by nearly 13% to approximately $90 million.
Speaker 4: and adjusted even a margin of 10.4% expanded 80 basis points versus last year.
And adjusted EBITDA margin of 10, 4% expanded 80 basis points versus last year.
Turning to slide 13, we've provided a look at our year over year revenue drivers our third quarter net sales were driven by overall volume growth, including the volume from our coffee and season pretzel acquisitions, and our previous pricing actions to recover inflation.
Speaker 4: We've provided a look at our year-over-year revenue drivers. Our third quarter net sales were driven by overall volume growth, including the volume from our coffee and seasoned pretzel acquisitions and our previous pricing actions.
To double click into our volume performance on the right hand side of the slide we've provided a look at our case volume by channel.
Speaker 4: To double-click into our volume performance, on the right-hand side of the slide, we've provided a look at our case volume by channel.
As you can see excluding the volume from the coffee and <unk> and <unk> acquisitions.
Speaker 4: As you can see, excluding the volume from the coffee and seasoned pretzel acquisitions, which has been removed.
Which has been reported as its own bar.
Speaker 4: Our core retail business grew case units by 1% in the quarter.
Our core retail business grew case units by 1% in the quarter.
Speaker 4: This was better than the broader private brand market where units were flat in the retail measure channel, including the volume from the coffee and seasoned pretzel acquisitions.
This was better than the broader private brand market for units were flat in the retail measured channel.
Including the volume from the coffee in CS and Presto acquisition, our volume in the retail channel was up 2%.
Speaker 4: It's also worth noting that our volume growth in retail would have been higher had we not faced the discrete supply chain disruption that I noted earlier.
It's also worth noting that our volume growth in retail would have been higher had we not faced the discrete supply chain disruption that I noted earlier.
Speaker 4: The growth in our retail business was offset by declines in food away from home and our co-manufacturing business.
The growth in our retail business was offset by declines in food away from home and our co manufacturing business, which supports brands.
On slide 14, I'll take you through our adjusted EBIT of drivers.
Speaker 4: On slide 14, I'll take you through our adjusted EBITDA drive.
Volume and mix, including absorption was down $16 million in the quarter, primarily driven by category mix.
Speaker 4: Volume and mix, including absorption, was down 16 million in the quarter, primarily driven by category mix.
C&I pricing net of commodities was positive once again as we continue to lap our previous pricing actions to recover inflation.
Speaker 4: PNAC, Pricing Net of Commodities, was positive once again as we continue to lap our previous pricing actions to recover inflation, contributing $28 million.
Contributing $28 million versus last year.
Speaker 4: Operations and supply chain contributed $4 million versus last year.
Operations and supply chain contributed $4 million versus last year.
Speaker 4: This marks an important milestone as we are starting to more significantly see the impacts of our TMOS and supply chain savings.
This marks an important milestone as we are starting to more significantly see the impacts of our team and supply chain savings initiatives.
Lastly, SG&A and other contributed negative $6 million versus last year.
Speaker 4: Lastly, Ashtina and other contributed negative 6 million versus last year.
Speaker 4: due to higher costs associated with our pension and receivable sales program as a result of higher interest rates.
Due to higher costs associated with our pension and receivable sales program as a result of higher interest rates.
Next I'll touch on our balance sheet.
Speaker 4: we repaid approximately $45 million of borrowings under our revolving credit facility in the court.
We repaid approximately 45 million of borrowings under our revolving credit facility in the quarter.
Speaker 4: between the remaining availability under the revolver and our cast position.
Between the remaining availability under the revolver and our cash position. We ended the third quarter with strong liquidity of over $330 million.
Speaker 4: We ended the third quarter with strong liquidity of over $330 million.
Speaker 4: Additionally, in October , we were pleased to have received the repayment of the seller note that we issued as a part of the meal preparation divestiture last year.
Additionally in October we were pleased to have received the repayment of the seller note that we issued as a part of the meal preparation divestiture last year.
This wraps up the strategic actions that we took to bring treehouse this transformation to life.
Speaker 4: This wraps up the strategic actions that we took to bring treehouses transformation to life.
Speaker 4: The repayment further strengthens our balance sheet and net debt profile, as you can see on slide 15, and also meaningfully reduces.
The repayment further strengthened our balance sheet and net debt profile as you can see on slide 15, and also have meaningfully reduces our covenant leverage.
As Steve shared we will follow our disciplined capital allocation approach and deploying the proceeds from the note.
Speaker 4: As Steve shared, we will follow our disciplined capital allocation approach in deploying the proceeds from the.
I'd like now to highlight the work that we've done to execute on our capital allocation strategy on slide 16.
Speaker 4: I'd like now to highlight the work that we've done to execute on our capital allocation strategy on slide 16.
We understand that our ability to deliver on our growth targets is predicated on a disciplined capital allocation approach.
Speaker 4: We understand that our ability to deliver on our growth targets is predicated on a disciplined capital allocation approach.
To date.
Speaker 4: to date, we've strategically deployed almost $200 million of capital.
Strategically deployed almost $200 million of capital.
Our strong balance sheet as an asset.
Our long term leverage target is three to three five times.
Speaker 4: our long-term leverage target is three to three and a half times.
Speaker 4: At the end of the third quarter, we were at three times the low end of the range.
At the end of the third quarter, we were at three times, the low end of that range.
Speaker 4: And our leverage will be reduced further by more than one time with the repayment of the seller note and our expectations for Q4 adjusted EBITDA. The board and management are focused on deploying capital in a disciplined manner that maximizes returns for shareholders. This includes CAFX investments in the business.
And our leverage will be reduced further by more than one time with the repayment of the seller note and our expectations for Q4 adjusted EBITDA. The board and management are focused on deploying capital in a disciplined manner that maximizes returns for shareholders.
This includes capex investments in the business.
Acquisitions, most recently in pickles, and opportunistic share repurchases, such as the $50 million of share repurchases in the third quarter.
Speaker 4: and opportunistic share repurchases, such as the 50 million of share repurchases in the third quarter.
With our balance sheet now an asset for the company, we will prioritize capital deployment based upon risk adjusted returns our disciplined approach to capital deployment means that leverage may at times be below our target range as we've discussed our first priority is investing in our business.
Speaker 4: With our balance sheet now an asset for the company, we will prioritize capital deployment based upon risk-adjusted return.
Speaker 4: Our disciplined approach to capital deployment means that leverage may, at times, be below our target range. As we've discussed, our first priority is investing in our business, which we do organically.
Which we do organically through Capex investments and inorganically by strategically, adding depth and capabilities.
Speaker 4: and inorganically by strategically adding depth and capabilities.
Turning now to our guidance on slide 17.
We are revising our full year net sales outlook from seven five to nine 5% year over year growth to.
Speaker 4: We are revising our full-year net sales outlook from 7.5% to 9.5% year-over-year growth to approximately 4% to 5% growth for a range of $3.435 billion to $3.2 billion.
Two of approximately 4% to 5% growth for a range of 343 5 billion to $3 46 5 billion.
Speaker 4: This updated range reflects our continuing operations business and removes the net sales associated with the snack bar business.
This updated range reflects our continuing operations business and removes the net sales associated with the snack bars business.
Additionally, the updated range reflects the impact of the voluntary product recall and a discrete supply chain disruption discussed earlier.
Speaker 4: Additionally, the updated range reflects the impact of the voluntary product recall and a discrete supply chain disruption discussed earlier.
Speaker 4: And finally, we revised our demand expectations to more closely align with current levels of consumption, particularly in our crackers, home manufacturing, and food away from home businesses.
And finally, we have revised our demand expectations to more closely align with current levels of consumption, particularly in our crackers co manufacturing and food away from home businesses.
From a profitability standpoint, we are reaffirming our full year adjusted EBITDA range of $360 million to $370 million.
Speaker 4: From a profitability standpoint, we are reaffirming our full year adjusted EBITDA range of $360 to $370 million.
Our team us and supply chain initiatives are enabling us to deliver against our profitability commitments. Despite a revised topline expectations.
Speaker 4: Our TMOS and supply chain initiatives are enabling us to deliver against our profitability commitment despite a revised
We also expect net interest expense to be in the range of $33 million to $38 million.
Speaker 4: We also expect net interest expense to be in the range of 33 to 38 million.
Speaker 4: reflecting less interest income in the fourth quarter due to the repayment of the seller note.
Reflecting less interest income in the fourth quarter due to the repayment of the seller note.
Speaker 4: And finally, our CapEx expectations are approximately 140 million.
And finally, our capex expectations are approximately $140 million.
With regard to the fourth quarter, we expect sales to be in the range of $910 million to $940 million.
Speaker 4: With regard to the fourth quarter, we expect sales to be in the range of 910 to 940 million.
Speaker 4: representing decline of approximately 3% at the mid.
Representing a decline of approximately 3% at the midpoint.
Speaker 4: We expect a year-over-year decline in net sales to be driven by the voluntary recall principle.
We expect a year over year decline in net sales to be driven by the voluntary recall and supply chain disruption.
Absent. These items, we would expect that combined pricing and volume mix to be flat to slightly down as we have now fully lapped our pricing actions to recover inflation.
Speaker 4: Absent these items, we would expect the combined pricing and volume mix to be flat to slightly down as we have now fully lapped our pricing actions to recover inflation.
Our fourth quarter adjusted EBITDA is expected to be in the range of $103 million to $113 million, representing a decline of approximately 9% at the midpoint.
Speaker 4: Our fourth order adjusted EBITDA is expected to be in the range of 103 to 113 million, representing a decline of approximately 9% at the mid.
The decline is primarily driven by the expected impact of the voluntary product recall and discrete supply chain disruption as well as temporary operating expenses of five to 7 million.
Speaker 4: The decline is primarily driven by the expected impact of the voluntary product recall and discrete supply chain disruption, as well as temporary operating expenses of $5 to $7 million.
Driven by the expected wind down of substantial portions of the transition services agreement related to the meal preparation divestiture.
Speaker 4: driven by the expected wind down of substantial portions of the transition services agreement related to the meal preparation divestiture.
Speaker 4: Importantly, we continue to expect our TMOS and supply chain savings.
Importantly, we continue to expect our team and supply chain savings initiatives will drive sequential and year over year improvement in adjusted gross margin.
Speaker 4: will drive sequential and year-over-year improvement in adjusted gross margin, despite our expectations.
Despite our expectation for lower net sales.
Looking further ahead, we continue to be focused on our 2024 to 2027 annual growth targets around sales adjusted EBITDA and free cash flow.
Speaker 4: Looking further ahead, we continue to be focused on our 2024 to 2027 annual growth targets around sales, adjusted EBITDA, and pre-cash.
Speaker 4: and believe we have a clear pathway to deliver against these targets.
And believe we have a clear pathway to deliver against these targets.
Speaker 4: While we are not guiding fiscal year 2024 today, we see opportunities to grow our top line through our core offerings and continue to build depth.
While we are not guiding fiscal year 2024 today.
See opportunities to grow our topline through our core offerings and continue to build depth and capabilities in our business.
We are on track to exit the year and an adjusted EBITDA run rate of approximately $400 million and.
Speaker 4: We are on track to exit the year at an adjusted EBITDA run rate of approximately $400 million.
Speaker 4: and anticipate our plan's supply chain savings will drive adjusted EBITDA growth. I'm proud of the work that our treehouse team is executing.
And anticipate our planned supply chain savings will drive adjusted EBITDA growth.
I'm proud of the work that our Treehouse team is executing to position the business for success and growth.
Speaker 4: and feel confident in our ability to deliver on our growth targets. With that, let me know if you have any questions.
And feel confident in our ability to deliver on our growth targets.
With that let me now turn it back over to Steve.
Thanks Pat.
Speaker 3: Thanks, Pat. Before we open the call up to your questions, I wanted to thank the entire Treehouse team for their hard work and dedication in driving our leadership as a private brand powerhouse.
Before we open the call up to your questions I wanted to thank the entire treehouse team for their hard work and dedication in driving our leadership as a private brand powerhouse.
Speaker 3: I'm proud of the work our team has accomplished this year in setting up Treehouse for success as a focused private brand leader.
I am proud of the work our team has accomplished this year and setting up treehouse for success as a focused private brand leader.
Speaker 3: Today, we continue to make progress on our strategy.
Today, we continue to make progress on our strategy.
Speaker 3: and prioritize execution, growth, and margin expansion.
And prioritize execution growth and margin expansion.
Speaker 3: Looking ahead, we remain focused on delivering for our customers and consumers and extending our leadership.
Looking ahead, we remain focused on delivering for our customers and consumers and.
And extending our leadership in private brands.
This in turn will create enhanced value for our shareholders.
Speaker 3: This, in turn, will create enhanced value for our shareholders.
Speaker 1: With that, I'll turn the call over to the operator to open the lineup for your questions. We will now begin the question-and-answer session. I would like to remind everyone in order to
With that I'll turn the call over to the operator to open the lineup for your questions.
We will now begin the question and answer session I would like.
Remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad to withdraw.
Sorry, your question simply press Star one again.
Speaker 1: Your first question comes from the line of Andrew Lazar with Barclays. Your line is open. Great. Thanks.
Your first question comes from the line of Andrew Lazar with Barclays. Your line is open.
Great. Thanks, Good morning, everybody good morning, Andrew.
Speaker 5: Steve, if we just think about the retail business specifically for a minute.
Steve if we if we just think about the retail business specifically for a minute.
Speaker 5: You've talked for a while about the portion of your business that are in those categories where you've got depth, and that percentage I know has increased with some of the actions you've taken recently around capital deployment, and some of the areas where you have less depth. And it seems like the areas where you have less are still sort of this ongoing drag that I know you're trying to minimize.
You've talked for a while about the portion of your business that are in those categories, where you've got depth in that percentage I know has increased with some of the some of the actions you've taken recently around capital deployment.
Some of the areas, where you have less stuff and it seems like the areas where you have less.
Are still sort of this sort of ongoing drag that I know you're trying to to minimize.
Speaker 5: I guess what percentage roughly of that retail business is now in the areas where you have depth versus feel like you don't have necessarily the appropriate depth? And I guess more importantly, as you think forward into 24, again, just in retail for
I guess what percentage roughly of that retail business is now in the areas, where you have depth versus feel like you don't have necessarily the appropriate depth.
And I guess more importantly.
As you think forward into 'twenty four.
Again, just at retail for the moment.
Speaker 5: Are there areas where you don't have the appropriate steps that you'd like?
Yes.
The areas, where you don't have the appropriate desktops that you'd like.
Are those likely to continue to be a drag on that retail business into next year or do you have sort of a handle on that or can you compartmentalize it to some extent.
Speaker 5: Are those likely to continue to be a drag on that retail business into next year? Or do you have sort of a handle on that or can you compartmentalize it to some extent where the rest of it makes up for it? Just trying to get a sense of how, you know, as we think even into the early part of next year, how much of a drag we should, if any, expect that part to be and how you address it, I guess, longer term going forward.
The rest of it makes up for it I'm just trying to get a sense of how.
As we think even through the early part of next year, how much of a drag we should if any expect that part to be and how do you address it I guess longer term going forward.
Speaker 3: Sure. Sure. Thank you, Andrew. You know, I would say that in our new new construction, well over half of our categories, we have the depth to be effective and we're growing.
Sure sure. Thank you Andrew.
I would say that on our new new construction well over half of our categories. We have the depth to be effective and we're growing.
Speaker 3: You know, I think you'll see us do things like we did in coffee. Coffee is one of those categories where we, it's a great category, but we were a pot packer, right? We needed more capability in order to really take advantage of that and be that vendor for the customer.
I think youll see us do things like we did in coffee coffee is one of those categories, where we it's a great category, but we were a pod packer right we needed more capability in order to really take advantage of that and be that vendor for the customer and we think the northlake acquisition.
Speaker 3: And we think the Northlake acquisition has solved that. So we think there's opportunities both with, you know, organic investment and CapEx, and we're doing those things, or with some simple bolt-ons. I think the effort we're making in pickles will strengthen our pickle business and give us scale in the Canadian market. So I think we have targeted activities.
As solve that so we think theres opportunities, both with organic investment in Capex, and we're doing those things or with some simple bolt ons. So I think the effort were making in pickles will strengthen our pickle business and gives us scale in the Canadian market. So I think we have targeted activities in each one of those categories that need help.
Speaker 3: in each one of those categories that need help. And we've got clear line of sight to them. And the question will be whether we do it organically or inorganically. The good news is the inorganic opportunities are really not that big. I think you've seen us do that a couple of these in the last couple of months. And I think we can bolster these categories very comfortably within our capital structure.
And we've got clear line of sight to them in the <unk>.
Question will be whether we do it organically or inorganically. The good news is the inorganic opportunities are really not that big I think you've seen us do that a couple of these in the last couple of couple of months and I think we can bolster these categories very comfortably within our.
Within our capital structure.
That's helpful.
Speaker 5: Yeah, and then just one that's a little broader. I realize there are some broader consumption trends happening that you laid out in one of the slides that we're hearing from a lot of the folks in the industry, both private label and branded. But I guess, even with all of that, you know, understood, are you still maybe a bit surprised that the private label sort of
And then just one that's a little broader I realize there are some broader consumption trends happening that you laid out in one of the slides that were hearing from a lot of the folks in the industry, both private label and branded but I guess, even with all of that.
Understood are you still maybe a bit surprised that the.
Private label sort of trade.
Trade down behavior, maybe hasnt been even even greater.
And then we've seen thus far given just some of the economic pressure that we know some lower income consumers are currently under.
I'm trying to ask if that's the case and if so why do you think that is.
Speaker 3: Well, you know, I, I think there's all kinds of things being written on how much savings was left. And when are when's the consumer really in a run out of that? Right? When when are they really going to be be stressed enough? I think the trends have shifted our way. I mean, private labels basically flat, the categories are down significantly for the brands.
Well.
I think there's all kinds of things being written on how much savings was left in winter wins, the consumer really going to run out of that right. When are they really going to be to be stressed enough.
I think the trends have shifted our way I mean private labels basically flat the categories are down significantly for the brands.
Speaker 3: We performed in this quarter a little better than that. The guidance that we gave you for the fourth quarter, we thought it was prudent to just embed category trends, you know, that are flat to down just a bit.
We performed in this quarter, a little better than that the guidance that we gave you for the fourth quarter. We thought it was prudent to just in bed category trends that are flat to down just a bit.
Speaker 3: We think we can, over time, outperform those. The good news is, it is shifting our way. We were really pleased to see our retail business up just over a point. If you add the acquisition business in, it's about 2%. So, you know, on 2% volume growth, we can lever that over time, and I think you saw that in our margins, right?
We think we can overtime outperformed those.
Good news is is shifting our way we were really pleased to see our retail business up just over a point if you add the acquisition business and that's about 2%.
So on 2% volume growth, we can we can lever that over time and I think you saw that in our margins right. So.
Speaker 3: So we think it's coming our way. It has been slower than I think we all thought.
Think it's coming our way it has been slower than I think we all thought.
And a very super quick clarification.
Speaker 5: And a very super quick clarification. You talk a lot in this quarter about. Sort of unit case.
You talked a lot in this quarter about.
Sort of a unit case volume increases.
Speaker 5: as opposed to sort of, I guess, pound volume. Is that different than the way you've talked about it in past quarters, or am I just sort of imagining?
As opposed to sort of I guess pound volume is that is that different than the way you've talked about it in past quarters or am I, just sort of imagining that.
Speaker 3: No, I think we've probably talked about both. Andrew and I would say those numbers are roughly the same. So there's no mystery in that. I think that the case is easy for us to kind of track consistently. Especially on the new businesses where we don't own the systems yet. We haven't converted the Farmer Brothers systems yet. So it's harder for us to see things outside without it being on our system. So cases and units are virtually the same.
No I think we've probably talked about both Andrew and I would say those numbers are roughly the same. So there is no no mystery in that I think the case is easy for us to to kind of track consistently, especially on the new businesses, where we don't own the systems, yet we haven't converted the.
The farmer brothers systems, yet so it's harder for us to see things outside.
Without it being on our system, so cases and units are virtually the same.
Great. Thanks, so much.
Okay.
Speaker 1: Your next question comes from the line of Rob Dickerson with Jeffries. Your line is open.
Your next question comes from the line of Rob Dickerson with Jefferies. Your line is open.
Speaker 6: Great. Thanks so much. Steve, I'm just kind of curious, you know,
Great. Thanks, so much.
Steve I'm I'm, just kind of curious.
Speaker 6: You speak to kind of, you know, private label overall, you know, clearly you don't play in all of private label and then, you know, we always kind of speak about private label trends.
Can you speak to kind of private label overall.
Clearly you don't play in all of private label.
And then we're always going to speak to you about private label trends.
How that can benefit treehouse relative to brands, but I'm kind of more curious just about what youre seeing in competitive activity.
Speaker 6: how that can benefit tree house, you know, relative to brands. But I'm kind of more curious just about what you're seeing in competitive activity and within your categories or those core categories.
Within your categories or those core categories with some scale within private label like do you feel like there's more innovation coming maybe.
Speaker 6: within Private Label? Do you feel like there's more innovation coming, maybe ability, agility from other maybe less skilled Private Label players has been increasing? Just trying to gauge what's happening within your categories on the Private Label.
<unk> agility from other maybe less skilled private label players.
<unk> been increasing just trying to gauge whats happening within your categories on the private label side. Thanks sure sure well just another reset there Rob what we try to do in our presentations, we tried to market really clearly where we look at total private label and most of the data you will see is just our categories. Because we know how hard it is for people outside.
Speaker 3: Sure, sure. Well, well, just another reset there, Rob, what we try to do in our presentations, we try to market really clearly where we look at total private label. And most of the data you'll see is just our categories because we know how hard it is for people outside of treehouse to really look at our categories. Right. So we try to give you data in our in our presentation decks that are the treehouse categories aggregated. Right.
Three house to really look at our categories right. So we try to give you a data in our in our presentation decks that are the treehouse categories aggregated right.
Speaker 3: But I would say, you know, in our categories, we see maybe less innovation from the private label competitors.
But I would say.
In our categories.
We see maybe less innovation from the from the private label competitor and I think most of our competitors are smaller private companies many of them have very different balance sheets than us right.
Speaker 3: And I think most of our competitors are smaller private companies, many of them have very different balance sheets than us, right? You know, they've got they've got different private equity investors. They've got leverage at a much higher rate than we do, especially now. I mean, we're virtually unlevered in our balance sheet. So I think we are able to make investments in technology, in capability and packaging at a faster pace right now. We see that than our competitive set.
They've got they've got different private equity investors, they've got leveraged at a much higher rate than we do especially now I mean, we're virtually on leverage on our balance sheet. So.
I think we are able to make investments in technology and capability and packaging.
At a faster pace right now we see that than our competitive set now we are pleased to see this may sound strange, but we're pleased to see marketing coming back in categories like crackers.
Speaker 3: Now, we are pleased to see this may sound strange, but we're pleased to see marketing coming back in categories like crackers.
Speaker 3: you know, and broth and those things, because we want the brands drive the consumer to the shelf.
<unk> brought in those things because we want the brands drive the consumer to the shelf right. The retailer doesn't put a lot of media behind private label, They will merchandize and so when that decision is made at the shelf when the brand's spring people to shell through through media, that's great for us regardless of what that is so we think the <unk>.
Speaker 3: Right. The retailer doesn't put a lot of media behind private label. They will merchandise.
<unk> gaps are so significant today, we think that the absolute penny price points as the most significant it's ever been so we welcome the brands, even the brands promotional spending because it drives traffic to the shelf. So we think right now no I would expect our private label competitors.
Speaker 3: So we welcome even the brand's promotional spending because it drives traffic to the shelf.
Speaker 3: So we think right now, I would expect our private label competitors, as interest rates normalize as those things, then the competitive set will normalize. But I would suggest it's a little less.
As interest rates normalize as those things than the competitive set will normalize, but I would suggest it's a little less.
Speaker 6: Competitive in the category and we're looking forward to the to the brands bringing more attention to it. All right. Got it
Competitive in the category and we're looking forward to the to.
So the brands, bringing more attention to it.
Alright got it.
Great and then I guess just quickly.
Speaker 6: Kind of with respect to the balance sheet and go forward cap allocation needs, you know, I think you put on a slide. I heard you say, you know, kind of clear priority, you know, is still to kind of fund the business on an organic basis.
With respect to the balance sheet.
Go forward capital allocation needs. Thank you put on the side or would you say.
Kind of clear priority is still to go to fund the business on an organic basis.
Speaker 6: Um, I think this year CapEx is maybe a little bit higher, you know, that you kind of run historically. I'm just curious. Uh, and maybe I just don't remember, um, kind of, you know, are are there other CapEx needs as you now, you know, kind of look at the supply chain.
I think this year Capex is maybe a little bit higher than your kind of run historically.
Curious and maybe I just don't remember.
Or are there other capex needs as you know kind of look at the supply chain.
Speaker 6: You know, you clearly have had some more incremental time, let's say relative to when you had your investor day. And if we're thinking forward even into next year, are there projects that you say, you know what, yeah, we could probably be a little bit higher than average as we get through next year, but still clearly have a very clean balance sheet with plenty of cash.
Clearly you've had some more incremental time, let's say relative to when you had your investor day, if we're thinking forward even into next year.
Are there projects that you say you know what yes.
Could probably be a little bit higher than average as well.
Get through next year, but still clearly have a very clean balance sheet with plenty of cash.
Speaker 4: Yeah, that's exactly right way to think about it. You know, we we weren't able to do all of the repairs and.
Yes, that's exactly right the way to think about it we werent able to do all of the repairs and upgrades and things that we would have liked to during kind of the Covid times and then the subsequent supply chain disruption times and so we now have the ability and we have a list of projects that allow us to go put that capital to work in our plants and to help us drive.
Speaker 4: and upgrades and things that we would have liked to during kind of the COVID times and then the subsequent supply chain disruption times. And so we now have the ability and we have a list of projects that allow us to go.
Speaker 4: put that capital to work in our plants and to help us drive the supply chain savings that we think we can deliver, you know, over the kind of 2024 to 27 horizon. And so we think by making those investments now, you know, that'll help pay for itself as we think about the next several years. And, you know, some of that will help us drive the supply chain savings. Some of that will unlock capacity for us to help drive the top line.
The supply chain savings that we think we can deliver.
Over that kind of 2024 to 27 horizon and so we think by making those investments now that will help pay for itself as we think about the next several years and.
Some of that will help us drive the supply chain savings some of that will unlock capacity for us to help drive the top line.
Speaker 4: And then some of that will help with innovation and things like that where we can bring products to our customers. And so we want to make those investments now while we can because we think it's prudent and we think that delivers over the medium term.
And then some of that will help.
Innovation and things like that where we can bring products to our customers and so.
We want to make those investments now while we can because we think it's prudent and we think that delivers over the medium term.
Alright Super Thank you.
Okay.
Your next question comes from the line of Matt, Matt, Matt with Stifel. Your line is open.
Speaker 1: Your next question comes from the line of Matt Smith with Stiefel. Your line is open.
Hi, good morning good.
Morning, Matt.
Speaker 6: I wanted to ask about inflation and where you're seeing inflation in the business today. I realize that PNAC was a positive contributor this quarter, but you lap a lot of the pricing benefits as we head into the fourth quarter. So can you talk about.
Wanted to ask about inflation, and where youre seeing inflation in the business today I realize that <unk> was a positive contributor this quarter, but you lap a lot of the pricing benefits as we head into the fourth quarter. So can you talk about the inflation you're seeing in the business today and if you think thats at a level, where you would need to take regular priced.
Speaker 7: the inflation you're seeing in the business today and if you think that's at a level where you would need to take regular pricing as a part of the contract negotiation process. And the reason I'm asking is that we're seeing private level price gap on a percentage basis actually narrow today on the retail shelf. And I'm curious as to your opinion as to when you think
As a part of the contract negotiation process and the reason I'm asking is that we're seeing private label price gap on a percentage basis actually narrowed today on the retail shelf and then.
I'm curious as to your opinion as to when you think.
Speaker 7: retailers will have caught up on that private label pricing, we might actually see that that gap begin to expand again.
Retailers will have caught up on that private label pricing, we might actually see that gap begin to expand again.
Yes, so I would say from an inflation standpoint, we went into this year thinking we would see sort of mid single digit inflation and I think that's what we've experienced and so at this point, we don't have line of sight as we start our planning process for next year to significant change in inflation headed into 2024, So we feel like our pricing is in it.
Speaker 4: Yeah, so I would say from an inflation standpoint, we went into this year thinking, you know, we would see sort of mid-single-digit inflation, and I think that's what we've experienced. And so at this point, we don't have line of sight, you know, as we start our planning process for next year to, you know, significant change in inflation headed into 2024. So we feel like our pricing is in a good spot, you know, as it relates to the price gaps.
Good spot as it.
Relates to the price gaps I think.
Speaker 4: Um, you know, we, we did price earlier, I think, than some of the competition. So you are seeing some of that private label pricing continue to flow through and we'll start to lap that in the, in the macro kind of, uh, send.
We did price earlier I think than some of the competition. So you are seeing some of that private label pricing continuing to flow through and we will start to lap that in the in the macro kind of sense here over the next several quarters.
Speaker 4: here over the next several quarters. You know, I do think some of the price gap narrowing is more related to brand merchandising, which we're okay. I think our price gaps still remain very healthy relative to 2019 when you had more normalized levels of merchandising more broadly. And so we're very comfortable generally with where the price gaps are, and so we don't think that's really been an issue for us.
I do think some of the price scrap.
Narrowing is more related to brand merchandising, which we're okay I think our price gaps still remain.
Very healthy relative to 2019, when you had more normalized levels of merchandising more broadly and so we're very comfortable generally with where the price gaps are and so we don't think that's really been an issue for us.
Speaker 3: Yeah, and any pricing I think that we would see in the next year would be very discreet, a specific ingredient or a specific category, but not broadband.
Yes in any pricing I think that we would see into next year would be very discrete specific ingredient or specific category, but not not broad based.
Speaker 7: Okay, thank you for that. And if I could just ask one more question here, which is that you outlined some headwinds in the away from home and co-manufacturing areas of your portfolio. Can you talk about how those businesses have trended on a sequential basis? Did you expect stronger sales in the second half and that just didn't materialize? Or are those businesses weakening relative to the first half?
Okay. Thank you for that and if I could just ask one more question here, which is that.
I don't want some headwinds in the away from home and co manufacturing areas of your portfolio can you talk about how that business trended on a sequential basis did you expect stronger sales in the second half and that just didnt materialize or those businesses weakening relative to the first half.
Speaker 4: You know, I think they're slightly weaker relative to the first half. We weren't expecting significant growth coming out of those sectors. I think we saw, you know, food service traffic decelerate a bit towards the end of the third quarter, and so that drove down a couple of the categories in the food away from home business.
I think there are slightly weaker relative to the first half, we werent expecting significant growth coming out of those sectors. I think we saw foodservice traffic decelerate a bit towards the end of the third quarter and so that drove down a couple of the categories in the food away from home business and then from a co manufacturing.
Speaker 4: And then from a co-manufacturing, you know, we support some significant brands there. And so, you know, we saw that decelerate a little bit, which is more just a reflection of some of the broader macro trends. So, you know, we use those channels, I think, in a way that helps us keep our plants, you know, operating and so, and get some throughput through them. And so that's a bit about how we think about them. So we'll continue to grow with those customers as necessary, but we try to reflect what we're seeing from a trend standpoint. Thank you.
We support some significant brands there and so.
We saw that decelerate, a little bit which is more just a reflection of some of the broader macro trends.
We used those channels I think in a way that helps us keep our plants operating and so.
Get some throughput through them and so that's a bit about how we think about them. So we'll have continued to grow with those customers as necessary, but we tried to reflect what we're seeing from a trend standpoint.
Great. Thank you for that so I'll leave it there and pass it on.
Speaker 1: Your next question comes from the line of Carla Casella with J.P. Morgan.
Your next question comes from the line of Carla Casella with Jpmorgan. Your line is open.
Hi, Thanks for taking the question.
Speaker 1: Hi, thanks for taking the question. You mentioned you're going to be inside your three to three and a half times leverage target, or you're kind of there now, but you're gonna bring your leverage down a turn.
You mentioned, you're you you're going to be the inside your three to three five times leverage target or you're kind of there now, but youre going to bring your leverage down a turn with these with the asset sale.
Speaker 1: the asset sale. Thoughts to take it back up to that level and I guess what you're seeing in the M&A market or are you comfortable staying below it?
Not to take it back up to that level and I guess, what youre seeing in the M&A market or are you comfortable staying below it.
There for a while.
Yeah, I think what we will be tried to illustrate it is we think from our cost of capital being in that kind of three to three five times is the right place to be over the longer term, but we're not in a hurry to go try to drive that as a goal and so we're going to be very disciplined in our approach on capital allocation and we're going to pick the investor.
Speaker 4: Yeah, I you know, I think what we what we tried to illustrate is we think from our cost of capital being in that kind of three to three and a half times is the right place to be over the longer term. But we're not in a hurry to go try to drive that as a goal. And so we're going to be very disciplined in our approach on capital allocation. And we're going to pick
Speaker 4: the investments that drive the highest return. And so, you know, we'll continue to invest in the business. And that could be, you know, we try to think through build versus buy scenarios, generally speaking, in terms of what we've done to date. And so you'll see us continue to look at how we invest our capital that way. And then, you know, we'll want to maintain that strong balance sheet. So we're not we're not looking to go do that. And so we'll continue to evaluate what investments make the most sense, what drives the best risk adjusted return.
<unk> that drive the highest return and so we will continue to invest in the business and that could be we try to think through build versus buy scenario is generally speaking in terms of what we've done to date and so youll see us continue to look at how we invest our capital that way and then we'll want to maintain that strong balance sheet. So we're not we're not looking to go do.
That and so we'll continue to evaluate what investments make the most ex most sense what drives the best risk adjusted return and then lastly, we will think about returning capital.
Speaker 4: And then lastly, we'll think about returning capital as we as needed.
Nina.
Yes, Carl I think the biggest thing there is we've got lots of room now.
Speaker 3: Yeah, Carla, I think the biggest thing there is we've got lots of room now. You know, this is really a byproduct of transformation of the company that we started a year ago. So now the company's got a lot of flexibility and we have a balance sheet. I think Pat said in the prepared remarks, it's an asset for us. So there's plenty of room to invest in our business and keep our balance sheet incredibly strong.
This is really a byproduct of transformation of the company that we started a year ago. So now the company has got a lot of flexibility and we have in our balance sheet I think Pat said in the prepared remarks, it's an asset for us. So there's plenty of room to invest in our business and keep our balance sheet incredibly strong.
Speaker 8: Any thoughts on whether the ratings look relatively low for a three-times-leveraged credit?
Any thoughts on whether the agency REIT and your ratings book relatively low for three times Levered credit are you have you had any conversations with the rating agencies.
Yes, we have ongoing dialogue with the rating agencies and we expect as we continue to improve leverage though they'll continue to look at.
Speaker 4: Yeah, we have ongoing dialogue with the rating agencies, and we expect as we continue to improve leverage, they'll continue to look at how we're progressing. We've got to deliver some quarters here in terms of profit as well. That's the other side of leverage, and we look forward to delivering that.
How we're progressing we've got to deliver some quarters here in terms of profit as well as the other side of leverage and we look forward to delivering that.
Speaker 3: Yeah, and to be fair, we were unable to give them an exact timing for that note to be paid off, so, and they did not, I don't think in their calculation they give us credit for the note as net. So, I think now that that's cash, they'll have to relook at it.
And to be fair, we were unable to give them an exact timing for that node to be paid off so they did not I don't think in their calculation. They give us credit for the notice is net so I think now that thats cash they will have to re look at it.
Alright, great Okay. Thanks.
Your next question comes from the line of Jon Andersen with William Blair. Your line is open.
Speaker 1: Your next question comes from the line of John Anderson with William Blair.
Hi, good morning, everybody. Thanks for the questions two quick ones and I apologize in advance if these have already been asked.
Speaker 5: Good morning, everybody. Thanks for the questions. Two quick ones, and I apologize in advance if these have already been asked.
Okay.
Speaker 9: Uh, core retail units were up a percent in the quarter. Where was that relative to kind of your, your expectation and your guidance going in and then what, what should we expect sequentially in the 4th quarter and into 2024 on that core retail unit. Uh, growth and then the 2nd question is, um.
Core retail units were up 1% in the quarter.
Where was that relative to kind of your expectation and your guidance going in and then what should we expect.
Sequentially in the fourth quarter and into 2024 core retail unit grew.
Growth and then the second question is.
Speaker 9: with kind of the supply chain disruption that you mentioned was referred to in the press release, you know, why not kind of optimize the supply chain across the businesses you have today before considering acquiring more? I'm thinking about that kind of capital allocation decision, you know, maybe returning more cash to shareholders who share purchases before adding more complexity to the business through M&A. Thank you.
With kind of the supply chain disruption that you mentioned.
It was referred to in the press release.
Yes.
Why not kind of optimize the supply chain across the businesses you have today before considering acquiring more I am thinking about that kind of capital allocation decision, maybe returning more cash to shareholders through share repurchases before adding more complexity to the business through M&A. Thank you.
Yes, John I can start with the first part I think generally the trends we've seen in core retail over the year have been private label has been relatively flat and we've seen brands down three 4% and so our expectation was something similar to see to see that so we're really pleased to see the 1%.
Speaker 4: Yeah. John , I can start with the first part. I think generally the trends we've seen in core retail over the year have been, you know, private label has been relatively flat and we've seen, you know, brands, you know, down three, 4%. And so our expectation was, you know, something similar to see that. So we're really pleased to see the 1%.
Speaker 4: you know, case volume increase over the quarter, you know, that as we pointed out, you know, there's some movement in there, you know, a couple categories, one category crackers where we thought we could do a little bit better than we did. But generally speaking, that's how we're thinking about this year.
Case volume increase over the quarter.
As we pointed out Theres some movement in there a couple of category one category crackers, where we thought we could do a little bit better than we did but generally speaking that's how we're thinking about this year.
John John This is Steve you made a really good question here with regard to fortifying those places it might be weak in our system and we took the opportunity to do that this quarter and our broth business one of our broad plants was not performing how we wanted it to.
Speaker 3: John , this is Steve. You made a really good question here with regard to fortifying those places that might be weak in our system.
Speaker 3: And we took the opportunity to do that this quarter in our broth business. One of our broth plants was not performing how we wanted it to. We shut the whole thing down. We basically did a full rebuild on it, took the entire staff out and did really comprehensive training. And so that that business has been a drag on us for a number of years. And we I'm convinced, quite frankly, that it will it'll be as we go into 2020 and 2024, it's going to be a contributor to.
We shut the whole thing down we basically did a full rebuild on it.
Took the entire staff out and did really comprehensive training and so that business has been a drag on us for a number of years and we unconvinced quite frankly that it will it will be as we go into two into 2024, it's going to be a contributor to Treehouse now. We also did that a couple more times, we did it in the spring we talked about.
Speaker 3: Now, we also did that a couple more times, you know, we did it in the spring, we talked about it in our cookies business, that was a facility that needed some capital.
And our cookies business that was a facility that needed some capital we did it in the second quarter in our in our.
Speaker 3: We did it in the second quarter in our refrigerated dough business, and now we've done it in this business. And so I think we've got most of those behind us. So I agree with you, we're going to be very careful on complexity. Remember our strategy is to go deeper in existing categories, so not to add that additional amount of complexity. But we have actually addressed...
Refrigerated dough business and now we've done it in in this business and so I think we've got most of those behind us. So I agree with you we're going to be very careful on complexity remember our strategy is to go deeper in existing categories. So not to add that that additional amount of complexity, but we have actually addressed.
Speaker 3: Three of the main areas that have been historic drags on tree house We've got those behind us. We think and so that's gonna set us up for a really nice 24
Three of the main areas that had been historic drags on Treehouse.
We've got those behind US, we think and so that's going to set us up for a really nice 24.
Thanks, so much.
The last question today comes from the line of Jim <unk> with Stephens. Your line is open.
Speaker 1: The last question today comes from the line of Jim Salera with CPD.
Hi, guys. Thanks for fitness.
Speaker 3: Hi guys. Thanks for putting this in. I wanted to ask, you know, you talked about kind of the private brand price gaps wider than the historical range.
John.
I wanted to ask.
<unk> talked about kind of the private brand price gaps wider than the historical range.
Speaker 10: Does that give some opportunity for, I'll say, like higher tier, private label brands, like a Simple Truth at Kroger or Greenwise at Publix to kind of expand their portfolio of offerings? And then as a follow on to that, does that give you guys an opportunity?
That gives some opportunity for I'll say like higher to your private label brands like simple truth that Kroger Green wise at Publix kind of expand their portfolio of offerings and then as a follow on to that does that give you guys an opportunity to support that kind of higher to your private label growth and op margin.
Speaker 10: support that kind of higher tier private label growth and, you know, up margin parts of the
Parts of the business.
Speaker 3: You know, Jim, I do think it gives a chance for retailers. I mean, simple truth. You mentioned one brand. I believe that's the largest natural organic brand in the country now, right? So I do think different retailers are using private label very different.
Jim I do think it gives a chance for.
Our retailers I mean simple truth, you mentioned, one Brendan I don't believe that's the largest natural and organic brand in the country now right. So I do think different retailers are using private label very differently. We clearly have large customers, who want just sheer value out of their private label program.
Speaker 3: We clearly have large customers who want just sheer value out of their private label program, but given the gaps and given where the consumer's head is and all consumers, right, regardless of what they're buying, there is an opportunity to do more natural, organic, more value-added, and we do see that happening within our business, right? We see strength in those categories.
Given the gaps and given the.
Where the consumer's head is an all consumers regardless of what they are buying.
There is an opportunity to do more natural organic more value added and we do see that happening within our business right. We see strength in those in those categories.
Speaker 3: And, you know, there's a lot of talk about all the different changes in purchase behavior, but health and wellness continues to be strong. So natural organic ingredients continue to grow. They're not enormous in private label, but they continue to grow.
A lot of talk about <unk>.
All of the different changes in purchase behavior.
But health and wellness continues to be strong so natural organic ingredients continued growth, they're not enormous in private label, but they continue to grow.
Speaker 10: Okay, that's helpful. And then I apologize if you guys addressed this already, but I believe you mentioned on the Farmer Brothers, you're still migrating systems. Is there any near-term lumpiness in orders that we might expect? I know sometimes when you're transferring systems over, it can create headaches on the operation side. Is there anything we should be aware of there?
Okay. That's helpful. And then I apologize if you guys addressed this already but I believe you mentioned on the farmer brothers still migrating systems is there any near term lumpiness in orders that we might expect and I know, sometimes when you're transferring systems over it can create headaches on the operation side.
Anything we should be aware of there.
No we're not anticipating that we're expecting and that'll be wrapped up here in the fourth quarter. Obviously, we do the necessary things to avoid that type of lumpiness in terms of prebuilt.
Speaker 3: No, we're not anticipating that. We're expecting that'll be wrapped up here in the fourth quarter. Obviously, we do the necessary things to avoid that type of lumpiness in terms of pre-building inventory and those types of things. And so we'll manage through that transition. I think that's something we've been able to manage while as we've done a number of these over time in terms of system transitions. Sure. And I would just say that one's so small. We know that key customers really well.
Pre building inventory and those types of things and so we'll manage through that transition I think thats.
Something we've been able to manage while as we've done a number of these over time in terms of system transitions sure and I would just say that one is so small we know the key customers really well. So we have a handle on the key customers, we will make sure the products there and we ship those customers other items. So.
Speaker 3: So we have a handle on the key customers. We'll make sure the product's there. And we ship those customers other items. So I think we can manage that one seamlessly.
I think we can we can manage that went seamlessly.
Okay excellent thanks, guys.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Steve Oakland for closing remarks.
Speaker 1: concludes our question and answer session. I would like to turn the conference back over to
Speaker 3: Well, I'd like to thank you all for being with us and we look forward to the opportunity to speak to you each individually. So have a great day. Take care.
Well I'd like to thank you all for being with US and we look forward to the opportunity to speak to you. Each individually so have a great day take care.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
Speaker 1: That concludes today's conference call. Thank you for joining.
Okay.
Yeah.
Yeah.
Yeah.
Yes.
Yeah.
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Yeah.
Okay.