Q3 2024 TreeHouse Foods Inc Earnings Call
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Welcome to the Treehouse Foods third quarter 2024 conference call.
All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.
Speaker Change: Please note, this event is being recorded. At this time, I would like to turn the call over to Matt Siler of Treehouse Goods for the reading of the Safe Harbor Statement.
Matt Siler: 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.
Speaker Change: Information concerning those risks is contained in the company's filings with the SEC. On September 29th, 2023, we completed the divestiture of our snack bars business. Consistent with prior quarters, we will discuss our results on an adjusted continuing operations basis.
Speaker Change: A reconciliation of non-GAAP measures to their most direct, comparable GAAP measures can be found in the release and the appendix tables of today's earnings deck. With that, let me now turn the call over to our Chairman, CEO, and President, Mr. Steve Oakland.
Steve Oakland: Thank you, Matt. And good morning, everyone. Today, I will discuss our third quarter financial results and provide an update on our operations and our outlook for the remainder of the year.
Steve Oakland: Before we get to the results, I would like to update you on the voluntary recall of frozen griddle products.
Steve Oakland: which we announced last month. As you can see on slide 4, Treehouse Foods initiated the recall of products made in our Brantford, Ontario facility out of a commitment to food safety and quality.
Steve Oakland: The recall was initiated as a result of routine quality assurance testing of our products made at the facility.
Steve Oakland: We have temporarily closed the facility to conduct a deep cleaning, sanitation, and hygienic restoration.
Steve Oakland: Our entire organization is committed to food safety, and we are extremely disappointed to have this event occur in our system, but it recommits all of us to be relentless when it comes to food safety. We expect the facility to resume manufacturing in the first quarter of 2025.
Steve Oakland: Moving to our third quarter results outlined on slide 5. Our organic net sales trend improved. We delivered adjusted net sales of 854 million dollars, which was just below our guidance range.
Steve Oakland: Our performance was impacted by weakening consumer trends across our industry and specifically our category.
Steve Oakland: as the third quarter progressed. Additionally, Hurricane Helene caused some delays in shipping volume out of our North Carolina Distribution Center in the final days of the quarter, which we estimate was an impact of between $5 and $10 million of our top line.
Steve Oakland: Despite these sales results, we still recorded adjusted EBITDA of $103 million, which was at the midpoint of our guidance range. This was driven by our strong adjusted gross profit, a result of the savings associated with our supply chain initiatives.
Steve Oakland: We executed well against the savings initiatives in our supply chain.
Steve Oakland: Securing Anticipated Procurement Savings, which provided the benefits expected this quarter.
Steve Oakland: Let's take a closer look at the consumer trends that we experienced during the third quarter and the categories in which we operate, which are detailed on slide six.
While private brand unit sales were positive in the quarter.
We did see a significant deceleration as the quarter progressed.
Steve Oakland: auction which you can see on the right side of the page. This slowdown was a result of continued pressure on the consumer that impacted the broader market. This trend persisted through October, and we assume that it likely continues in the near term.
Steve Oakland: With that said, overall, private brand industry dynamics remain favorable when compared to historic levels. As you can see on slide 7, specifically,
Steve Oakland: Price gaps are healthy, and private brands continue to take share, but given the lower consumption environment, the share gains are coming from a smaller pie.
Steve Oakland: Finally, as it relates to promotional levels, we have seen the traditional pattern of gradual increases as the calendar year has progressed.
Steve Oakland: While we do expect the typical seasonal ramp in the fourth quarter, we would note that promotions are still below the historic levels seen prior to the pandemic.
Steve Oakland: As you can see on slide 8, private brands have been consistently gaining share over the last two decades.
Steve Oakland: which we believe will continue over the long term. Treehouse remains attractively positioned at the intersection of two incredibly powerful long-term consumer trends, the growth of private brand groceries in North America and a consumer's shift towards snacking.
Steve Oakland: Continuing with the discussion of the long-term opportunity on slide 9, it's clear that many grocery retailers also see further runway for growth in private brands.
and are making their own strategic investments accordingly.
Walmart and Albertsons both launched new private brands recently.
Steve Oakland: Costco's Kirkland brand is well established globally and Aldi continues its store-based expansion across the US with an assortment that is focused almost exclusively on private brands.
Speaker Change: This emphasis underscores the opportunity available to Treehouse to partner with our retail customers, gain share, and create value over the long term.
Speaker Change: I would like to conclude by providing some additional perspective on how we plan to manage the business in the near term, which incorporates both challenging consumer trends and slower category growth.
Speaker Change: Given these trends, we continue to focus on the things we can control as an organization, primarily in our supply chain. We have made significant progress on a number of areas, but we still have the opportunity to improve our execution and consistency.
Speaker Change: The foundation we've built with our supply chain initiatives remains strong and we are focusing on executing what you see outlined on slide 10.
Speaker Change: We have visibility to delivering our commitment of $250 million of gross supply chain savings through 2027. The building blocks of these initiatives include driving manufacturing efficiencies through TMOS, our treehouse management operating system.
Procurement Savings Opportunities
and improving the efficiency of our network.
Speaker Change: Additionally, I believe we've positioned the company in the right categories and will capitalize on opportunities to invest in those categories to improve our competitive positioning, depth, capabilities, and execution.
Speaker Change: In this environment, we think it's prudent to focus on profitability and cash flow.
Speaker Change: We are building a strong margin management function, which should allow us to enhance our profitability by allocating our capacity to the most attractive mix of businesses that drives profitability for both Treehouse and our customers.
Speaker Change: Additionally, we have the opportunity to develop a more efficient pricing architecture.
Speaker Change: I'm confident in our ability to drive improved profitability as a result of the progress on these initiatives.
Despite a slower growth environment.
Speaker Change: With that, I will now turn the call over to Pat for further detail on our third quarter results and our updated outlook. Pat.
Thanks, Steve, and good morning, everyone.
Speaker Change: I'd like to start by thanking the entire Treehouse team for their hard work this quarter. You can see a summary of our third quarter results on slide 11. Our adjusted net sales were down just over 1% year over year.
Speaker Change: On slide 12, we have provided further detail on our year-over-year net sales drivers. Our third quarter adjusted net sales were down just over 1%, which reflects a sequential improvement in our trend compared to the past couple of quarters.
Speaker Change: Some of our recent business wins were offset by headwinds from slowing consumption in our categories and the impact of Hurricane Helene, which disrupted distribution in the final days of the quarter.
Speaker Change: Pricing was a headwind of about 50 basis points due to targeted commodity-driven pricing adjustments, as we expected. Additionally, net sales was negatively impacted by the voluntary recall of griddle products, which provided a drag of over 1%.
Speaker Change: Moving on to slide 13, I'll take you through our adjusted EBITDA drivers.
Speaker Change: Volume and mix, including absorption, was down 1 million, driven by lower volume in the quarter.
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Speaker Change: Pricing net of commodities was down 3 million year-over-year and was driven by higher commodity costs and targeted pricing investments. Operations and supply chain were a net $20 million benefit versus the prior year, driven by supply chain cost savings, primarily related to our procurement initiatives.
Speaker Change: Lastly, SG&A & Other was a $3 million drag versus last year, primarily due to less TSA income as we expected.
Speaker Change: Moving on to our capital allocation strategy, which is outlined on slide 14, the board and management continue to be focused on deploying capital in a manner that enhances returns for shareholders.
Speaker Change: Our first priority remains investing in our business, which we do organically through CapEx and inorganically by strategically adding depth and capabilities. We will also continue to maintain our balance sheet strength and execute on our share repurchase program when we feel our stock price is dislocated.
Speaker Change: We will continue to be disciplined and look at all capital deployment decisions by evaluating risk-adjusted returns.
Moving to our Outlook on slide 15.
Speaker Change: We are updating our full-year adjusted net sales to negative 2 to negative 1 percent year-over-year, or $3.37 billion to $3.4 billion.
Speaker Change: Which reflects our expectations that consumer trends will remain below recent quarters as well as the impact of our recent critical recall
Speaker Change: Additionally, we have updated our adjusted EBITDA guidance range to $335 to $345 million.
Speaker Change: This update reflects our expectations that slowing consumption and consumer-driven mixed trends we have experienced throughout the year continue in the fourth quarter, creating further deleveraging of our supply base during peak season.
It also reflects the impact related to our griddle recall.
Speaker Change: Additionally, we are revising our free cash flow expectations to at least $120 million.
Speaker Change: Our guidance for net interest expense of $56 to $62 million and capital expenditures of approximately $145 million remain unchanged.
Speaker Change: As it relates to the fourth quarter, we expect adjusted net sales to be in the range of $900 to $930 million.
representing approximately negative one to two percent year-over-year growth.
Speaker Change: Importantly, we expect volume to drive our fourth quarter net sales with a very modest track from pricing.
Speaker Change: Our fourth quarter adjusted EBITDA is expected to be in the range of $116 to $126 million.
Speaker Change: Finally, given the recall in our griddle business and our revised expectations for 2024, I thought it would be helpful to provide some initial perspectives on how we are planning fiscal 2025, which are outlined on slide 16.
Speaker Change: As Steve noted in his remarks, we see a current macro environment exhibiting challenging consumer trends and slowing category growth. As it relates to our top line, our current expectation is that the growth from new business wins and strength in our broth business will likely be offset by the impact of our griddle recall and softness in recent consumption trends that are likely to persist.
Speaker Change: As a result, we will focus on our supply chain and margin management initiatives to improve efficiency and optimize costs to drive year-over-year EBITDA growth that is not dependent on top-line performance, some of which Steve discussed earlier.
Speaker Change: I look forward to providing further context once we report Q4 2024 in February of next year. With that, I'll turn it back over to Steve for closing remarks. Steve.
Steve Oakland: Thanks, Pat. Before we open the call up to your questions, I'd like to reiterate that we are focused on closing out the year as we are on track to deliver organic volume growth in the fourth quarter.
Steve Oakland: And while we are disappointed with the recall event, we are committed to improving our execution and consistency.
Steve Oakland: Looking ahead, I believe we have positioned the company well to capitalize on the opportunities in front of us.
We are focused on the things that we control.
Steve Oakland: including new business opportunities, strengthening the foundation of our supply chain, and margin management initiatives.
and restoring production after the recalls.
Steve Oakland: This should drive improved profitability and cash flow, despite the macro headwinds.
Speaker Change: With that, I'll turn the call over to the operator to open the line for your questions.
Speaker Change: We will now begin the question and answer session. I would like to remind everyone, in order to ask a question, press star, followed by the number one on your telephone keypad.
To withdraw your question, press the pound key.
Speaker Change: and the first question comes from Andrew Lazor of Barclays. Your line is open.
Speaker Change: Thanks so much. Good morning, Steve and Pat. Good morning, Andrew.
Morning.
Speaker Change: I guess, Steve, even excluding the recall, you still paint a, you know, somewhat bleaker outlook, right, for 25, despite private label outperforming brands.
Speaker Change: and Trios having the benefit of the new distribution wins and recovering broth business. And you went through some of the things that are expected to be offsets to that on the top line.
Speaker Change: I guess my question is, like, what do you think changed so dramatically just from last quarter?
Speaker Change: And maybe this is a little bit of a also a broader industry question. Obviously, you've been in the industry a long time I'm still I think a lot of people are a little puzzled right on like where some of this volume is going
You know, if private label isn't outperforming more.
Speaker Change: than it is relative to brands in sort of this kind of environment. It just begs the question, where is it going? I don't know if you have any better perspective than what we see out there, but I'd love your thoughts on that. Cuz clearly something changed pretty dramatically even just than what you guys were thinking about from an industry standpoint last quarter.
Speaker Change: You know, Andrew, thank you. And yes, it did. I mean, it is.
Speaker Change: If you look at just unit volume, right, if I look at where was that coming from for the first half of 24, for example, the mass channel, right, mass channel was leading that charge.
Speaker Change: In the third quarter, we saw the mass channel get negative. And as we look at October, the mass channel is even more dramatically negative.
Speaker Change: Right. The largest grocers in the country have been having a tough time, right? The traditional grocers.
Speaker Change: I'm looking at their data and I see a steep downward trend in private label when you look at August, September, and October.
Speaker Change: So, you know, we're now looking at a private label in our categories anyways, that's maybe just
Speaker Change: Right, so a big change from what we saw, you know, at the beginning of the first six months of the year, right, when we were at the top end of our guidance range on a sales standpoint.
Speaker Change: I would love to say that it's you know the election uncertainty I'd love to say that it's that it's the timing of Thanksgiving all of those things but I think we just have to plant plan for something different and we can't continue to disappoint you on the top line right
Speaker Change: So, we're going to plan for that number to be flat. The fact that we have wins in the fourth quarter allows us to give a guidance range with a positive number, at least in the bottom or the top end of it anyways, right? So we think we can scratch out a little bit of positive because we got some new business wins in the fourth quarter.
Speaker Change: So, we're going to plan on that, if the consumer is better, we'll be better, but we think that takes pressure off our growth capital, it takes pressure off our organization, lets us focus on getting these recalls behind us, on driving our TMOS savings, driving our procurement savings.
Speaker Change: So, we just think it's one of those moments when we should look inward. We should drive savings, drive cash flow, and then as the consumer comes back, we'll be prepared to do it. But your guess is as good as mine, because I saw spending data that suggests some of the other categories were okay.
Speaker Change: but I don't think that this is inconsistent from what you saw from a lot of the other large-cap food companies. They've seen that total categories volumes down. That's for sure. Yeah, I don't know where it's gone, Andrew. I wish I had a better reflection on it.
Speaker Change: And then a follow-up would be in the vein of sort of controlling, you know, what you can control. I think last quarter you talked about expecting to, at least within your own categories, starting to gain share.
Speaker Change: Within private label in your categories as you went through the third quarter even if we exclude sort of the griddle recall
Speaker Change: You know, no, I think we saw some real glimmers of hope there, right? We lapped the losses that came out of all the COVID, you know, bidding and everything we went through post COVID.
Speaker Change: You know, four of our top five categories, right? Cookies, dough, pretzels, and coffee really performed well in the quarter. The fifth of that is broth, right? And it's on its way back. It's right on where we thought it would be. But, you know, we guided it. It won't be 100% back until the first quarter of 2025.
Speaker Change: So, yes, I see us growing in a number of those places. I think our in-store baked cookie business did a really nice job. It's going to drive some fourth-quarter growth. Our dough business is driving some of that. But, you know, and then, of course, the return of broth is going to be there.
Speaker Change: is going to drive some of that. But we have to do all of those things to scratch out one or 2%, right? And so I just think that's unusual. You know, private label's grown share for, for what, the last couple of decades. We're just growing share of a negative pie right now.
Okay, thanks. I'll leave it there. Appreciate it.
Speaker Change: Your next question comes from Jim Solero with Stephens Inc. Your line is open.
Yes, good morning. Thanks for taking our questions.
Speaker Change: Maybe as a follow up there to some of the commentary on the category, you know, we still see promotional activity is below historical levels. And if I think about, you know, the incentive for some of the branded players to try to drive volume back to their respective categories, if they increase
Speaker Change: that promotional activity kind of back to historical levels. Should we think about that as
Speaker Change: Unknown Speaker having an overall positive or negative impact for you guys, because on one hand I could see a scenario where, you know, it brings volume back.
Speaker Change: Overall, and so, you know, you're competing for a share of a bigger pie, but on the other hand, I could see that it compresses the value gap and maybe it makes private label less attractive. So just any thoughts on kind of where you would land on that dynamic.
Speaker Change: Sure. You know, historically, gaps have been smaller than they are today.
Speaker Change: We have historically seen brands promote really aggressively in the fourth quarter, and we've done okay even with smaller price gaps. So in today's environment, we have a larger price gap, and by the way, those price gaps are percentages. They're percentages of larger numbers, so the penny gap is pretty.
is pretty large right now, largest it's ever been.
Speaker Change: So you've got large penny gaps. So I think to your your point drive traffic to the shelf
Speaker Change: Overall will be good for the categories and private label should whole share, right?
Speaker Change: So we'd love to see more traffic at the shelf. I think that's the challenge. Traffic numbers are down. We've seen that from some of the largest retailer.
Speaker Change: Now, there's some exceptions, you know, Club and there's a couple of places. Unfortunately, those places where traffic is up don't have enough assortment and don't have enough, you know, volume in core food to drive the industry.
Speaker Change: So I think a little bit of promotion, I'd love advertising because we've got to get the consumer engaged in the categories again and back in the grocery store.
Okay, and then
You know, we've seen a lot of large retailers, either
Speaker Change: adding new private label brands or kind of expanding the offering with existing ones. How do you think about the composition of the shelf moving forward? Just as, particularly if consumers are more value seeking, is there an opportunity for you to just gain outside share as private label? Just expand kind of the percentage of the overall shelf facings.
Speaker Change: You know I think our retail partners know their consumers really well and I think you you saw Albertsons launch a new private label brand in this last you know what six months and then and then we obviously saw better goods at Walmart.
Speaker Change: So, I think they understand exactly that target and they're doing it for exactly the reasons you said. Right? They recognize that a new consumer today is looking for both value and has a lot of loyalty to the store.
Speaker Change: So we we think there's going to be new avenues for us to grow. We participate by the way in both of those new brands. So you know we'll be supporting those retailers.
Speaker Change: So yes, I do think so and I think they recognize private label is gaining share
Speaker Change: regardless of the where the pies going. So they're trying to, you know, skate where the puck is going, right? They're going to private label. So
Speaker Change: We see opportunities going forward, it's just really frustrating that we can't deliver a more consistent set of top-line results in this environment, but we need the consumer to come to us.
Speaker Change: Okay, great. I appreciate all the thoughts. Back in the queue. Thank you.
Speaker Change: Your next question comes from John Anderson with William Lair. Your line is open.
Good morning. Thanks for the questions, everybody.
Speaker Change: with the ongoing kind of volume mix declines. And I'm wondering, Steve, are you seeing a tougher sliding in your particular private label categories right now? In other words,
Speaker Change: The unit performance in in the categories that you're levered to
Unknown Speaker. Thank you.
Speaker Change: Softer than private label more broadly across the store and kind of if so why or are you just kind of seeing the overall Performance of private label across the store Kind of soft at present, thanks
Speaker Change: Yeah, John, you know, I do think there is some variability by category, right? We have a couple categories that are having a really tough time. Hot cereal, for example, is having a tough time. But in general, I would say it's an overall comment.
Speaker Change: Right, I think we've seen and I think we've seen it traditional grocery
Speaker Change: on private label, they maybe are having some of the toughest times. We've got some, you know, we've got some data that would suggest in October they're down nearly double digits, right? And so that's a tough environment for our categories, but for all the center store private label categories.
Speaker Change: I'm sure there are outliers right in dairy and those kinds of things we don't watch those categories very closely so I apologize for that.
Speaker Change: I stayed much closer to what's going on in Center Store.
Okay, you know, just pivoting to...
Speaker Change: to the focus around, you know, supply chain initiatives, cost savings,
Speaker Change: your gross cost out target of $250 million, you know, where you sit, say, you know, exiting 2024 on that objective, and how to think about the incremental savings in 2025.
Surrounding that program.
and also our
Speaker Change: Are you kind of, are any of the savings associated with that initiative, you know, volume dependent?
Speaker Change: or are these things that, you know, you've kind of got top line outlook out there and however that kind of comes in.
Speaker Change: you know, you're going to be able to kind of deliver on the savings. So kind of the cadence where you are at the end of this year, incremental savings in 25, and if there's any volume dependence on that. Thank you.
Speaker Change: Unknown Speaker Sure. Yeah. Hey, Thomas, Pat, I can I can start. And, you know, I think we're pleased if you if you saw our chart, you know, in this quarter's materials, you know, we did see $20 million positive of supply chain, which
Speaker Change: I don't think we've seen over the last several quarters and that is the flow through of some of the initiatives.
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Speaker Change: One of the main levers, you know, we think about team officer is one of the ways that we can just drive service and efficiency.
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Speaker Change: in the next year and then start to trail off, you know, the following year and then the last part that we focus on would be
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to do the work around.
Speaker Change: Driving out how many miles we could be travel, putting inventory closer to customers and...
Speaker Change: and being able to deliver service and take some cost off that way. You know, that's work that is ongoing right now. And so we, you know, we've not yet realized those. So I think those will start to come. I think we've done a really good job of being efficient in the current freight environment. So we've had favorable, you know, sort of annual RFP results.
Speaker Change: and that space that have helped us and we've been doing really good work to drive full truck loads and those types of things to be efficient within what we do.
Thank you.
Speaker Change: Your next question comes from Rob Gibson with Jeffries. Your line is open.
Great, thanks so much.
Speaker Change: I just kind of wanted to touch on some of the drivers of revenue growth kind of near term and maybe as we kind of get into the early part of next year. You know, I kind of, let's just say, I guess, for argument's sake, like Q4 sales are at the midpoint, at least, or, you know, around flattish net.
So,
Volume's still growing in the fourth quarter, you know.
Speaker Change: We haven't dimensionalized the actual dollar impact necessarily exactly for what you know
which could be in Q4.
Speaker Change: Nor do I know exactly what you know the kind of that dollar recovery piece could be on the broth side
Speaker Change: So maybe I just kind of asked it that like, you know, we have the frozen waffle. I wouldn't q4
Speaker Change: Does that fully offset the broth recovery kind of year-over-year given, you know, last year's Q4 work?
Speaker Change: Could that, you know, could the note of the tooth be positive? That's the first question.
Speaker Change: Yeah, Rob, this is Pat. I think those are largely offsetting. I think, you know, we're making the progress we'd hoped to make on RAW.
Speaker Change: Some of the consumption softness as well is probably a headwind relative to maybe some of the distribution we want. It's just at lower volumes than we had hoped, given the softer consumption.
Speaker Change: Okay, okay, cool. That makes sense. Um, and then I guess just
Speaker Change: You know kind of a broad question They were kind of focused on your categories relative to the store
Speaker Change: You know, over the past few months, at least, you know, we've, we have seen shoppers, you know, maybe buying a little bit more kind of meal related items, right? Like pasta, chicken, what have you.
Speaker Change: and kind of snacks more broadly. I mean, not every, you know, specific area of snacks is.
Unknown Executive, Patrick ODonnell
So, you know, I'm curious, like...
Speaker Change: When you think about your portfolio, you know, within snacks, like, are there, are there specific areas where, you know, you are trying to maybe push a little bit harder because it's working? I go back to the investor day when you.
Speaker Change: You had the pretzel twist that, you know, on a brand, it started growing really well.
Speaker Change: Just trying to kind of gauge kind of, you know, how you're viewing kind of, you know, broader snacks relative to the store. And then, you know, are there areas where you say, hey, this is working? Yes, we're totally leaning into that area right now, maybe relative to other parts of the portfolio. That's all. Thank you so much.
Speaker Change: Sure, Rob. You know, I think you touched on one of them, which is pretzels. And that Salty Snack business for us is doing really well. Our pretzels business was a highlight for the third quarter, and that momentum will continue both into fourth and into first quarter with new business wins in pretzels.
Speaker Change: The other place that's strong for us is cookies. We're not a big manufacturer in there, so it's a large growth rate on a small number. But our in-store bake cookie business is really good as well. You know, the things that are sold in the in-store bakery section.
Speaker Change: We see we see cookies as strong, we see pretzels as strong, we think there's some other opportunities you know in our hot beverage business etc that we think will give us some growth but we're going to lean into those two in particular so that's probably consistent with what you've seen in other
and other segments of the story.
Speaker Change: Unknown Speaker But we do think the consumer is buying different assortment in the grocery store to deal with the pressure on their wallet.
Okay, great. Thanks so much, Steve.
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Your next question comes from Matt Smith with Stifel.
Your live report.
Speaker Change: Hi, good morning, Steve. Thanks for taking my question. I wanted to come back to the frozen griddle recall and just get a sense from you that the confidence and visibility you have into the restart of that facility you mentioned you expected to
Speaker Change: to kind of come back online for production in the first quarter. Just your level of conviction behind that based on how you've seen the issue unfold so far.
Speaker Change: Sure, sure. I, you know, I, I think these are, these are obviously very disappointing. I'd go back to the fact that we ask our supply chain to do three things, right? We ask it to provide quality, you know, quality first, which was where we put food safety.
Speaker Change: to do cost and then do service. And you've seen us talk a lot externally about the work that T-MOS has driven on cost and service, okay? This recall is a result of our own diligence inside our own facilities. And so we've made equal investments this year, incremental investments in our food safety teams.
Speaker Change: to drive food safety through our organization, and we identified gaps in that facility, right?
Speaker Change: And the fact that I think we've identified those gaps, we have the resources behind it to make it right.
Speaker Change: I think we'll be in good shape to get it started in the first quarter. So I don't think there's, I mean, there's obviously always risk, but I feel really good about that, given the fact that we have the resources on it and that we drove this decision.
Speaker Change: and I think it's also given us learnings across our system, right?
Speaker Change: The technology today is so much greater when it comes to how you test and the resources available to all of us as food companies.
Speaker Change: I think the increase in recalls that you've seen is a result of that commitment. And I mean, I think we're learning a lot. We're fortifying our system. And I think this will be...
Speaker Change: This will make us stronger as a business long term, so I feel like we have our arms around it and we're doing the right things, so I feel good about the first quarter.
Thanks Steve, I'll pass it along. Thank you.
Unknown Speaker 05. Okay.
Speaker Change: Your next question comes from Bill Reuter with Bank of America. Your line is open.
Hi, I just have to
Speaker Change: The first, you know, clearly you've been doing this a long time, and
Speaker Change: Your partners are, you know, partnerships are strong, you're important to all of them. I was just wondering if you've gotten any sense that given there have been a couple challenging issues with regard to the broth and the waffles, if there have been any sort of changes to the relationships that could impact the business longer term.
Speaker Change: You know, I would say, and I think you've heard us talk about this, I think we've taken the customer on this journey with us, right? And the facility that makes Frozen Griddle had, you know, half a dozen audits by our customers and outside.
Facilities.
Speaker Change: in the last 12 months, right? And those audits came back positive. So I think our customer realizes that we've gone that step farther to guarantee food safety and our commitment to it. And so I think those journeys have actually strengthened our relationships. Everybody's frustrated when these things happen, but our broth business as we recover will be bigger than our broth business was before.
Speaker Change: And I think our waffle business will recover similarly. So, it's a little early to give that exact number, but I think our waffle business looks like it's gonna be in really good shape.
Good. Good.
Speaker Change: All good to hear. And then secondarily, when you were discussing capital allocation, you did reference that you're going to look opportunistically at share repurchases.
Speaker Change: Unknown Speaker You're still pretty much near your leverage target. I guess I'm wondering if M&A is something which you're currently evaluating. I have heard that there are increasing numbers of targets that might be more willing to
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Speaker Change: Move a little bit on price. So just what the outlook is there
Speaker Change: Sure, sure. I think the first thing is our capital allocation strategy, you know and priorities remain unchanged, right? It's going to be to invest in our business number one and and we when it comes to M&A in our business We look at build versus buy, right? We think there's we have a couple of categories that have great opportunity in them and we would like to increase our capabilities
Speaker Change: If we can buy those capabilities cheaper than we can build them, then we'll buy them. We did that in coffee, for example. Other places we've invested, like crackers, built the capability. So I think in the near term, you'll see M&A simply be that build versus buy decision.
Speaker Change: We'll maintain that balance reach strength that you talked about. We love our leverage ratio in the zone that it's in today.
Speaker Change: We'll look to buy shares great. That's all for me. Thank you. Thank you
Unknown Speaker 05. Unknown Speaker 05.
Speaker Change: The last question today comes from Carla Casella with J.P. Morgan. Your line is open.
Speaker Change: Hi, thank you. I'm just curious if we look at your
Speaker Change: sales by channel grocery versus Coman versus away from home. It looks like you know as away from home has grown is that any of the driver of your margin improvement? Your margins have been coming in better than we've expected but even on software sales. I'm just curious if any of that is just a channel mix?
Speaker Change: Hey Carla, this is Pat. No, I would say the margin improvement really comes from our supply chain productivity initiatives and so
Speaker Change: In this quarter in particular, we think that we're starting to see the benefits of the procurement. I don't think that the channel mix is necessarily driving any change in margin there.
Speaker Change: Yeah, food service is relatively small. We have a couple categories, pickles, etc. We're, we're, you know, food service is really a relevant segment. But, you know, we're mostly a retail grocery business and
and I think we expect that to continue.
Speaker Change: And I'm sorry, did you give the dollar impact of the supply chain savings expected for fourth quarter?
Unknown Speaker 05. Thank you.
Speaker Change: No, I don't think we specifically quantified that, but I think as we looked out, we felt like there was a gross of $50 million, and we got a net of $20 million this quarter when you look at our bridge. So I think we feel like we're on track to do what we needed to do on that gross basis.
Speaker Change: Okay, great. Thanks. The rest of my questions have been answered. Great.
Speaker Change: This concludes our question and answer session. I would now like to turn the conference back over to Steve Oakland for closing remarks.
Steve Oakland: I'd like to thank you all for being with us today. I'd like to thank you for your questions and hopefully we'll be back together in person soon. Have a great day.
This concludes today's conference call. You may now disconnect.
Speaker Change: William Reuter, Robert Moskow, Matthew Smith, Robert Dickerson, Steven Oakland, James Salera