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Welcome To the TreeHouse Foods' Second Quarter Conference Call. All participants will be in listen-only mode. After todays presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the call over to TreeHouse Foods for the reading of the Safe Harbor statements.

Good morning, and thanks for joining us today. This morning, we issued our earnings release, which is available, along with the slide deck, in the Investor Relations section of our website at treehousefoods.com. Before we begin, we would like to advise you that all forward-looking statements made on today's call are intended to fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and projections and involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. Information concerning those risks is contained in the company's filings with the SEC. In addition, we will be discussing operating and financial results on an adjusted basis. A reconciliation of those non-GAAP measures referenced during today's call to their most direct comparable GAAP measures can be found in today's press release on our website. I'd now like to turn the call over to our CEO and President, Mr. Steve Oakland.

Thanks, Pat. Before we open up to your questions, I'd like to close with a few comments on how our value proposition is truly resonating with consumers. On Slide 11, we've included survey results from June, showing that consumers are making changes to reduce their spending, which include embracing store brands and the value that they represent. And that once they begin to try these brands, the vast majority of survey respondents are highly satisfied with the quality that they offer and, importantly, they intend to keep purchasing store brands. The likelihood of repeat purchase at 91% and the satisfaction rate of 72% tell you that those opportunities are being realized. These survey results give me confidence that we've turned the corner in terms of consumer behavior. History would tell you that during periods of economic downturn, private label gains trial, new consumers and, as a result, share increases. Historically, these periods have been step changes for private label. Today, private label is positioned significantly better than in past periods of economic downturn. First, the quality and assortment of private label has improved dramatically. The number of options now include a spectrum from natural and organic to national brand equivalent to value offerings. And second, the retail landscape has also changed dramatically. Growth in terms of number of outlets has been driven in a large part by private label-focused discount retailers. Today, there are also retailers whose private label programs not only drive traffic but play a key role in their store image. And finally, retailers are more committed than ever to their private label strategies and are making meaningful investments to support their store brands. When you combine the focus our commercial teams have placed on the customer, the operational improvements we've made over the last several years and the investment and effort we are putting towards labor and supply chain disruption, we are in an excellent position to continue our top line momentum in the second half of the year. We also have the building blocks in place to improve profitability as we head into our fourth quarter seasonal peak. Our people, our talent and our values are all critical to these results. I'm excited every day by the contributions I see across our organization, and I'm excited about the opportunity we have in front of us to drive long-term sustainable growth. With that, let's open the call up to your questions.

[Operator Instructions] And your first question is from the line of Andrew Lazar with Barclays. Please go ahead.

Steve, in the press release, there's a bunch of discussion about the pickup in sort of increasing private label demand and your ability to sort of get after some of those opportunities, particularly in Snacks & Beverages. And I was wondering if this was the case in Meal Prep as well because I guess I didn't see that mentioned in sort of the Meal Prep discussion. I don't know whether TreeHouse was just unable to fulfill the extra demand because of the supply chain challenges there or if there really is some differences between the two segments in terms of what you're seeing on consumer behavior.

Yes. Thank you, Andrew. I would say it's two things. I would say that the supply chain disruption hit Meal Prep a bit harder, okay? And so the demand is across the private label segment, and I think we commented in the scripted remarks about the growth in private label across the categories we participate in. So it is happening across the categories. But there's probably a little more. As the economy has opened up, much of the Snacking & Beverage mix is those on-the-go items, right? And so with the economy in a more normal and the consumer in a more normal away-from-home standpoint, those businesses are doing well. So the demand is incredibly strong in Snacking & Beverages, it's strong across all of them, but we are a bit more disrupted in Meal Prep.

Your next question is from the line of Bill Chappell with Truist Securities. Please go ahead.

Going back to the supply chain issues, can you just give us a little more color of what and where the bottlenecks are and how -- what we should be looking for as you start to get back to kind of normalcy in the back half?

Sure. Sure. I mean, I'll break it into two buckets, right? We have labor and then you have packaging and ingredients, right? Labor, we think, is the most controllable inside our box, right? And we've done a lot on what we call labor activation. I think we talked in the prepared remarks about that has focus -- has shifted its focus to retention. So we're starting to see -- when we run employment events, we're starting to see more applicants, right? So we're seeing more participation. It's not a surprise given the inflation, given what we all hear about the economy, right? So getting those right people, keeping those right people, training and turning them is really expensive and very disruptive. So on the labor side, I feel good about it, and we're making slow steady progress. And as Pat said, why do we feel good about the fourth quarter? We are building inventory, right? We're starting to pick up some pace so we'll be prepared for that quarter. On packaging and materials, we need that to happen, right? And our vendors are getting better. And the commitments, I mean, I have literally monthly calls with some of my peers, the CEOs in our biggest vendors. And we're starting to see that progress pick up. So that's all aligned in our guidance. We don't think it will be perfect, but we do think it's going to get dramatically better.

And then on input costs, I mean, certainly, there's been some relief in the market over the past month or 2. Should I look at that -- I imagine especially some of your seasonal items and with the packing and what have you, a lot of your costs, you're probably locked in for the remainder of the year. And so is that fair? Or could you see any relief this year? Or is that more next year? And again, I understand the overall cost basket is still higher, I'm just talking more about actual inputs.

Your next question is from the line of Chris Growe with Stifel. Please go ahead.

I had a question for you. I've just been curious of this. We're seeing, obviously, very strong pricing coming through from your business. We're seeing less robust pricing in private label at retail. I'm just curious of your experience you're seeing from retailers. I guess they're holding maybe some pricing back. And maybe what benefit that's offered to volume in the short term.

I would say that we have seen it all over the board. We operate in so many categories. We've seen some places where the retailer has actually been ahead of us and some places where they've been behind us. I think the gaps, as we spoke to in the prepared remarks, are solid, which tells me we have a little bit more room and the retailer has a little bit more room to move. They are concerned about their image with their consumer, right? They're trying to give value offerings with their consumer. And so that's why I feel so good about not just the fourth quarter, but as we roll into next year. I think the retailer really wants that value perception. Private label will be a big part of that. We won't be the only thing in it, but will be a big part of that. So I think they're going to do their best to keep their pricing sharp. But again, Chris, I would say it's all over the map in our category, some were ahead of us and some were behind us.

I do think Slide 9 shows that pretty well. I think that's what you're referencing. It shows you how tough the operating environment is, and that's why I think we feel so good that if we'd start to make progress there, which we're seeing, that's the key to the margins returning.

Your next question is from the line of Robert Moskow with Credit Suisse. Please go ahead.

Steve and Pat, a follow-up on the PNOC question. It seems to have leveled off in 2Q. Is that signaling that you have now caught up to your inflation? I know you're saying that there's extra cost. But the objective of the pricing, I guess, is to get to level. So I guess then the follow-up there is, edible oil prices on the commodity markets are down. I think durum wheat is down too. Why are your costs going up in relation to that? And then I have a follow-up.

Maybe I'll touch on it and Pat can follow up. I think there is more cost ahead of us. As you know, what we own isn't always aligned exactly where the commodity markets you would see are. There's a hedge position in there. So we feel really good to get it within $1 million for the quarter. We think that's quite an accomplishment. The pricing that's coming is by far the smallest piece of price we've taken to date, okay? So to your point, there isn't a lot more needed. We do need to get our supply chain correct. And I think we had a question earlier, we have to build a lot of that inventory, Rob. And so, yes, there are mechanisms to get a little bit of savings. But can we help the customer a little bit, maybe. But most of that's going to come in next year, the lower priced product or lower cost raw materials.

Yes. We'll expect it to turn positive. But again, we look at it on a broader basis to net. But for the fourth quarter, we expect that number to be positive.

Your next question is from the line of Jon Andersen with William Blair. Please go ahead.

Bigger picture question just on the acceleration in private label demand that you're seeing. In the past, what have you seen in terms of the duration of these kind of step-ups in consumer demand? Are they -- is this something we can really view as sustainable for the foreseeable future? Does it kind of come and go quickly? Just trying to understand a little bit more about kind of the strength that we're seeing here and how we should think about that persisting as we look forward.

Sure. Sure, Jon. I think -- it's hard to say this, but I think the last real economic recession we had was 2008, 2009. But if you go back in the data, you'll see each one of those recessions, there was a step change in private label share market, right? And what gives me some real good feelings about this is, and I mentioned this in the scripted comments again, is if you think of how different the -- both the assortment and the quality of private label is today and the retailer landscape, right? The retailer landscape. I mean there are, what, over 1,000 new hard discount European retailers that are focused on private label in North America that didn't exist in 2008, right? Our largest customers have both -- have cut their assortment to natural and organic to national brand equivalent and to value. So the biggest mainstream retailers have multiple assortment. You've got the mass retailers launching big private label brands against it. So I think the quality and assortment is dramatically different than what the consumer saw in past recessions. And so none of us can forecast how long this will last. Will it be a soft landing, how deep it will be. All of those questions that everybody asks every day. But I think we're going to do better. And so what it has shown in the past is you get a bunch of trial you wouldn't have ordinarily gotten and that trial tends to be sticky to a certain percent. With the way we're positioned today, I would think that will be better. It certainly has to be another step change. The question is, how big?

Right. And we still feel really good about our cash flow even though inventory is going to be a little more expensive, as you know. I don't think the supply chain is going to let us build too much of it. So we're hoping to set the thing right on a pin for enough inventory for the first quarter.

The last question today comes from the line of Carla Casella with JPMorgan. Please go ahead.

This is Mike on for Carla. We just wanted to ask about the M&A environment. I know you guys won't comment on the potential divestments or -- it's going to be a portion of the Meal Prep business that you're looking at divesting. But anything you're seeing on the Snacking & Bev side? And then sort of as a follow-up to the last question, just given your good liquidity, would you guys consider calling the bonds?

I think -- well, first of all, I'll jump back to you. I think 4% bonds in the current high-yield market are quite a lever for us. I mean we -- as you know, we have, I think, 6 more years on those. So that looks really, really attractive today. So we're proud of those, we'll hang on to them. But with regard to M&A, there's some small stuff out there, I think. Quite frankly, with the leverage loan market so tight, I think most of the sponsor-led stuff is on pause. But we think there'll be stuff coming forward here as it starts to open up and normalize, right? Yes. Okay. I think that's our last question. And I would just like to thank you all for being with us today, and we look forward to the opportunity to see you in person soon. Take care. Have a great day.