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Welcome to the TreeHouse Foods' Third Quarter 2022 Conference Call. All participants will be in a listen-only mode. After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that 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. 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. On August 11, we announced the sale of a significant portion of our Meal Preparation business. On October 03, we completed the divestiture of that business now knows as [indiscernible] for a base purchase price of $950 million. For the purposes of our discussion today, we will first cover our third quarter results on a whole company basis as we own the divested business through the entirety of the quarter. Results for the quarter are provided on a continuing and discontinued operations basis in the press release. However, 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 recasted historical financial for TreeHouse continuum operations for 2019 and 2020 on an annual basis and 2021 and 2022 on a quarterly basis, so that you can best compare past and future operating performance. Please note that these financial statements differ from the GAAP pro forma financials filed shortly after the transaction closed because they take into account historical onetime adjustments and certain costs associated with the divested business, as well as certain pro forma adjustments only required by SEC rules. A reconciliation of non-GAAP measures to their most direct comparable GAAP measures can be found in the release and the appendix table of today's earnings deck. With that, let me now turn the call over to our CEO and President, Mr. Steve Oakland.

Thanks, Pat. I want to close by covering two areas. First, how our new statement of corporate purpose supports our higher growth, higher margin, private label snacking and beverage company, and second, how we think about 2023 and beyond at a high level. Earlier this fall, we held our annual summit with our management team and our top leaders across the company. After a couple of years of COVID followed by many months of strategic review, it was great to get together to not only celebrate our accomplishments, but to position our teams in the best manner possible so that we could hit the ground running on day one. Following the close, we spent time team building, generating ideas and acknowledging the challenges and opportunities as we evolve our organization design into one better suited to support not only a faster growing portfolio, but an organization with a new purpose. Our new corporate purpose statement is to engage and delight one customer at a time. And while you may initially think that by customer we simply mean retail customers. Our intention is to go way beyond that to represent all of our stakeholders, retailers, consumers, employees, and shareholders, as well as the communities in which we operate. We have chosen the words engage and delight very purposefully. Engagement is about participating, it's about listening, connecting and collaborating, and we define delight very simply to exceed our stakeholders expectations. This comes to life in a very tangible way for our retail customers. Our goal is to bring these consumer advantaged categories to life in their stores under their brands. We'll continue to collaborate with our customers and delight them by driving mutually profitable growth for our consumers. As many of you know, there's a real passion around a number of our products, whether it's our chocolate peanut butter cups, our loft house, seasonal cookies, or everything seasoned crackers. Our products have the ability to generate consumer delight, excitement even further, and frankly build private label franchises. As we succeed to engage in delight our customers and consumers, it assures our ability to grow the top line and expand profitability, enabling us to drive long term sustainable growth and shareholder value and for our employees and the communities in which we operate. I've said it before, people and talent are critical to our future. We are focused on employee engagement and satisfaction. We are committed to making TreeHouse the employer of choice in the markets in which we operate. With that, I'll turn our attention to slide 18. Pat walked you through the macro headwinds and their impact on our business this year. More importantly, he covered what the more normalized profitability for our business should look like. I'd like to wrap up my prepared remarks with some final thoughts, more specific to 2023 as you digest today's information and build out your models. First, we expect private label demand to continue to be strong next year, given the economic backdrop during historical downturns. As consumers look to stretch their dollars, private label has benefited. Second, as I shared with you earlier, we have a faster growing higher margin portfolio pre pandemic. These categories grew between three and 5% per year, and although we're not ready to provide formal 2023 guidance given next year's wrap of pricing to recover inflation as well as healthy demand, we would expect revenue growth to be very strong. Third, we will continue to aggressively address labor and supply chain disruption and focus on improving service. Having the labor back in our plants enables us to serve our customers and to deliver cost savings. We are making very good progress in each of these areas, and we expect that will be reflected in our adjusted EBITDA margin progress next year. Finally, I'd like to point out that our net interest will be very different in 2023. Our 500 million debt repayment in October translates into roughly 20 million in interest expense savings on an annual basis. In addition, the interest income on the notes receivable from the transaction will total roughly 40 million next year, of which the first payment is expected in the fourth quarter, netting us a very efficient capital structure. I'll close my remarks today by saying again, we took a tremendous strategic step this year transforming the company. It will take some time to get back to a new normal, but I hope you share my excitement around our future, starting with our new purpose and looking ahead to 2023 and beyond as a simpler, faster growing higher margin snacking and beverage company. With that, let's open the call up to your questions.

[Operator instructions] And our first question comes from Andrew Lazar from Barclays. Please go ahead. Your line is open.

And Andrew, this is Steve. That was the purpose of that slide, right? I think we all thought a year ago that the world would be normalized. Now it's not quite there. The pricing piece is in market. The labor and supply chain piece is getting better, but it's getting better a little slower than we all thought. So we expect that to normalize over the next couple of quarters and hopefully we'll have a little better look at that when we guide in early February.

And the supply chain part, that is high, obviously very consistent with what we've heard from pretty much everybody, right? It's persistent, it's getting better, but it's slow but it's persistent. And I guess the second one would be, I realize it's very hard to talk about sort of 4Q results as the portfolio was before the deal closed, but really just trying to get a sense of if the business is sort of clicking along as you would have initially anticipated relative to that, that initial guidance. And if I just look at, I guess, the difference in EBITDA for instance, pre and post the deal for 4Q of last year in the appendix there it's like a 15% difference. And I look at this year's 4Q the difference between the EBITDA guidance you provided and kind of what the street was estimating, it's like a 30% difference. So there could be seasonality or maybe the divested business was more depressed than the year ago period, but really just trying to gauge whether you were essentially on track to achieve this year's guidance pre divestiture. As we've heard from others, there's clues still supply chain issues that persist. Thanks so much.

Sure. Well, why don't I start and I'll have Pat, I'll have Pat jump in. I would tell you that we are on track from a sales standpoint. We are we're struggling a little bit with the external headwinds, right, the supply chain and inflation. So I do think that business had a softer last year. So yes, there's a little more recovery in the business that we sold, but candidly the -- we're a little bit behind from a labor and supply chain piece. Those external headwinds in the fourth quarter are pressuring margins a little bit more than they are sales.

Great. That's helpful. Thanks so much.

Our next question comes from John Anderson from Franklin Templeton. Please go ahead. Your line is open.

Sure. And I'll touch on the labor and supply chain. Labor first of all is getting slowly, slowly better. You don't hope for the economic situation to be slow, but if it is, I think that'll continue to improve at maybe a little better pace. So we think the labor activation, both -- it's both wages and it's a lot of other things. It's scheduling, it's a number of different things we're doing to make TreeHouse that manufacturing employer of choice. Those actions are helping us. So I would expect that to improve over the next several quarters. With regard to supply chain, we put a slide in the appendix, and I apologize it doesn't give actual numbers on it, but Slide 21 in the appendix. And it's fair to say that our, the on time and full from our vendors is in the low seventies right now on an aggregate, we're turning that low seventies into low nineties service levels, right? And so that's the disruption that, you know, you, you have when, when goods don't arrive, you have to change schedules that you're not as efficient at operator. You know, the commitment I have, I meet with the CEOs of, quite frankly our top four or five vendors on a monthly basis personally, right and that drives, recognition through our organization and their organization that we're working together to get those, right. The commitments I'm getting is that that will continue to improve. So, so I would expect both of those to get pretty close to normal, and again, we'll try to guide this better in February, but I would hope in the next several quarters.

Next question comes from Chris Growe from Stifel. Please go ahead. Your line is open.

Thank you. Good morning. Hi. I had a question for you if I could first just understand the kind of the volume performance in your categories. And for the fourth quarter, you indicated that volume should be about flat and seems like a relatively similar rate of price, maybe up a little. So I just want to understand, you know, why is that better sequentially in the fourth quarter, and is there anything unique that weigh on the third quarter volume that led that decline that you mentioned? For example, walking away from a, from a contract in the pickle business, Anything else that's worth noting for volume currently in the business?

Sure, Chris. You mentioned that and, and I think in Pat's prepared remarks, we talked about a large, and that was a food service pickle volume. When we make volume comments in our, in our scripts, we, we use total company volume, right? Not retail, grocery, private label volume. Our retail grocery private label volume was up a couple percent in the quarter, right? And we think that'll be up in the fourth quarter as well. But a couple things, you know, we did exit a large pickle contract and food service. You know, our, our contract pack business, although small, it's about 10% of our total business tends to be very upscale, premium branded items that we make for other people, and those businesses are down. And so most of the impact on our negative volume is either places where we've chosen to apply that capacity against, much more profitable business or quite frankly, where there, there, there's headwinds in their business. I pointed Slide 12 in our deck, right? And you see that volume mix is positive on lower volume, right? That means that we are applying limited capacity against more profitable business. And so I give our teams a lot of credit for that, and I think reflects that our core business is pretty solid and we expect that to continue.

Yep. That's good. Good answer. Thank you for that color there. I just, one other question I wanted to ask in relation to the pricing you had something like 21% pricing in the quarter and that can cut across more than just, you know, retail businesses. And when I look at, you know, IRI data for your categories, I come out somewhere around 16%. Is that, so is that the retailers holding back on pricing? Are you seeing more of that flow through and to what degree is that 80 year volume performance as the pricing hasn't pushed through quite at the rate in which you push through to the retailers? That makes sense.

You know, Chris, that's a tough one because it's so different by customer, by category, right? And we have categories where customers were way out ahead of us and took price ahead of us if the national brands were, and then we have categories where they really held it, and there's a couple of retailers in the country that are gaining share in private label and using private label in this high inflationary environment to send a message to draw traffic, right? So, it's really a tough one to say, but I think in general our, the category pricing is up, right? I think the retailers have passed through in general. You could pick an individual category and that may maybe higher or maybe lower, but, but I think as we look across our, especially our major, our major customers, we track each one of those and I think most of them have passed our pricing through.

Our next question comes from Bill Chappell from Truist Securities. Please go ahead, your line is open.

Just a follow up on kind of the volume, maybe what any idea of how much the service levels and also the pickle business affect the volumes in the quarter and then kind of the expectations for the volume in 2023?

Sure. Bill, so I would say I would think about it as about half and half. So about half of the sort of volume is related to sort of the lag and service. And then the other half would be related to the pickle business. And, and I guess the way we try to think about the, the volumes is as we continue to make sequential improvement in service, right, we've said it's slow bit steady. We, you know, we expect that to continue as we think about sort of the normalization of the, of the supply chain environment that we talked about, you know, headed into 2023. Yeah. And I would also take it back to a year ago, a, a year ago in the third quarter we had pretty solid service, right? That was the beginning. We started to get disruption on our factories, but our inventory levels were really good. So I think service was like 97% to commit. And I think we, we said the prepared remarks, if we didn't, it was 93 or so percent in in the third quarter this year. So, you know, we did not have those same supply chain headwinds a year ago. So we did have a better, better inventory base, but that started to decline pretty aggressively as we went into the, specifically the first and second quarters. So we think the, the, the volume lap, given that we think service will be significantly better in the first and second quarters this year we also think the economic environment is going to drive demand. And so you add those two things together, we think there's nice volume upside in the first two quarters. We'll try to quantify that when we get closer.

Got it. And then just I guess on that pickle business, I just think of it as the, I guess, original business. So is it a one two point drag going forward? And then separately, a kind of accounting geek question as I look at that, I guess note receivable or seller's note, how is that calculated into your leverage? Is that a contra item so that it's an asset that offsets debt so your net leverage is actually lower, like it does on the interest expense line with interest income? Or does it not affect, you know, how we should be looking at your leverage ratio going forward? Thanks.

Our next question comes from Rob Moskow from Credit Suisse. Please go ahead. Your line is open.

And there'll probably be some non-commodity pricing that happens in the fourth quarter. It's very cumbersome with a lot of retailers to do pricing between Thanksgiving and Christmas, but that pricing will roll out right after that on some of the non-commodity things that Pat mentioned either in the prepared remarks or the remarks here on Q&A.

And when you say non-commodity, do you mean labor overhead?

No, it's usually things like casing and corn starch and some of the -- some of the derivative products of commodities have been priced pretty aggressively this quarter. They tend to be small percentages of formulas, but they are material increases and so those increases will roll in into the next year. We don't see inflation anywhere near what we saw a year ago, but we do see inflation in the first quarter.

Our next question comes from Connor Rattigan from Consumer Edge Research. Please go ahead. Your line is open.

Hey there. Good morning. Thanks for the question. So just stepping back and thinking about private label as a whole we've seen remarkable consumer resilience in the face of rising prices across CPG and with price cap versus branded products, largely widening savings, dwindling and seemingly a slowing economy. It really seems like a perfect storm for a major step change in private label shifts, yet that's really largely yet to materialize across many categories in retail. I guess could you just share some thoughts on maybe what's taking so long for many consumers to take that plunge and trade down?

Connor, that's a great question. We do have information, from some of our largest customers. Some of the, the discount retailers that service virtually all private label, their traffic is up dramatically. I think you heard in the Walmart called talked about the trade down in their mix and the new consumers walking into their stores. So I would suggest that it's happening. It may not be happening at the pace that it will, but if what we see the continued decline in the economic situation continues we're convinced it'll continue to happen. And I can tell you the retail is doing their best to position private label to drive trial, right? They are forward to merchandising, they're looking forward to promoting doing those things that they want to do. So we're working hard with a number of customers. The supply chain is limiting our ability to do that in all cases, but where we can we're positioning the business to do that. I don’t know if that's helpful or not, but I think you're right. I just think it's going to happen over a little longer period of time.

Our next question comes from Hale Holden from Barclays. Please go ahead. Your line is open.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Steve Oakland for closing remarks.

Yes. I'd like to again, thank everybody for being with us today, and we look forward to all the follow up calls we'll have in the future. So have a great day.