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Welcome to the TreeHouse Foods' Fourth Quarter 2022 Conference Call. All participants will be in 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, and thank you for joining us today. Earlier this morning, we issued our earnings release and posted our earnings deck, those of which are available within 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 October 3, 2022 we completed the divestiture of a significant portion of our Meal Preparation business. As such, we'll be discussing our results on an adjusted continuing operations basis. A reconciliation of non-GAAP measures to their most direct comparable GAAP measures can be found in the release and the appendix of today's earnings deck. With that, let me now turn the call over to our CEO and President, Mr. Steve Oakland.

Thanks, Pat. As we begin 2023, we continue to see a macro environment that supports private label growth. That coupled with our improving service levels and our investments in capacity, support our guidance for growth, both short-term and long-term. I'm excited about the direction we're heading and our journey as a more focused private label snacking and beverage company. Last fall, we shared with you our new purpose statement shown on Slide 11, to engage and delight one customer at a time. Our strategic ambition is profitable growth driven by leadership in consumer trending categories. Beyond the 2023 guidance, Pat discussed earlier, we believe that over the next three years plus, we can deliver annual growth of 3% to 5% in revenue; 8% to 10% in adjusted EBITDA; and free cash flow of at least $200 million. We're confident we can deliver that level of growth because we have a clear purpose, ambition and strategy attached to a solid portfolio of categories. Those of you who have followed the company for some time know that for the last several years, we've rallied around operational and commercial excellence, portfolio optimization and people and talent. These tenants continue to ring true to our priorities. And as new TreeHouse, we've sharpened and refined our strategic growth pillars to better reflect how we will engage and delight our stakeholders. As the supply chain for our retail partners, our resources support the nation's biggest and best retailer brands. Leveraging our work and operational excellence, we are now building a world class supply chain. This requires investments in talent and technology. It includes an ongoing commitment to TMOS and continuous improvement, applied to both manufacturing and to our distribution network with a greater customer centricity in mind. The sale of a significant portion of Meal Prep enabled us to better optimize our portfolio and strengthen our balance sheet. Today, we are a higher growth, higher margin business focused on private label snacking and beverages. We will drive profitable growth through category leadership and investment in capabilities. We've talked in the past about how we outperform in categories where we have competitive advantage, defined by a leadership position and having depth. Depth can mean different things in different categories, but it's essentially having the right capabilities, capacity and geographical reach to drive mutually profitable growth for our customers and for TreeHouse. We're at a pivot point in our strategic journey rather than prioritize free cash flow to pay down debt as we have for the last several years. Today, our balance sheet is strong. We will generate healthy free cash flow to invest in our business and build our capabilities, which will be key to our success, which leads me to strategic customer partnerships. We've come a long way toward driving commercial excellence since I first arrived. Today, we are building on our collaborative efforts and taking it to the next level for key customers with whom we have strong alignment and growth prospects. We're going beyond simply the fundamentals to create a more true partnership, joint business planning, innovation solutions, leadership engagement, and long-term agreements are all part of this journey. Finally, people and talent continue to be the heart of our organization. We strive to be a talent leader and to be seen as the employer of choice in the markets in which we operate. We're doing that by better defining career paths, harmonizing and modernizing targets and rewards and through employee engagement. I'm confident that we have the right team, priorities and investments in place and we're in the right categories to drive sustainable revenue, and profitability growth and long-term value creation for our stakeholders. With that, let's open the call up to your questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Andrew Lazar from Barclays. Your line is open.

Great. Good morning, everybody.

Good morning, Andrew.

To start off, I think on the third quarter call, Steve, you identified two sort of large buckets of impacts, right, between where you would end up this year, or where you would end up ‘22 EBITDA, and what you see as sort of your normalized EBITDA range going forward, right? One was PNOC and then one was some of the supply chain disruption. So PNOC has now been positive, right, for two quarters in a row, as pricing is catching up, obviously, making really good progress there. So I guess my question is, how much of the -- I think it was $40 million in supply chain impacts. Do you think you can recover in '23 specifically that kind of underpins your sort of guidance range? And then I just got a follow-up.

Yeah. I guess, we just haven't given an exact number, but Andrew, we do expect to make progress. And I think if you work through our guidance, you'll see that we have to make progress on that line in order to make the numbers we've given you. So we feel good about.

Yeah. And I think your question is how much more do we have to take? A good piece of that was taken already in the month of January and so much of that is already in.

Great. Thanks so much.

Your next question comes from the line of Rob Moskow from Credit Suisse. Your line is open.

Hi, thanks. I was wondering, you're going through capacity constraints at a time when the private label industry probably has a golden opportunity to grow volume. I'm sure a lot of retailers want to give it more shelf space and consumers want to trade down to it. Do you have a sense at retail what your volume growth could have been or could be this year, if you were fully up to speed. And is there a risk of losing shelf space to your competitors who might be a little farther along?

Rob, I think, if -- Pat said a minute ago about half of our categories are operating at the right service levels. So if you thought a point or two on half of our business is probably out there to get, right, would be my guess. And my understanding and look, I have the benefit of top to tops with virtually all of our customers or our largest customers. And I think we're performing as well or better. And I think, that if you take you back to Slide 5 in our deck, when you look at where private label is in macro, and how we're doing, right? So I don't think we're at risk of losing business for that reason, right. So I think we're performing and we're leveraging our scale pretty well right now. So if anything, I think we're grabbing maybe a little bit of that. In some of the dual supply customers, they're offering us an extra division or two, that kind of thing, because I think we are actually recovering faster than some of our peer set. I can tell you we have a full court press on. I can tell you that we're doing everything we can to get ourselves in a position to take advantage of this opportunity. And I think you're absolutely right. It's a great time for private label, right, and we're prioritizing everything. The little bit of business we lost, Pat touched on it in his comments, a little bit of business we - that, our national branded co-pack business that's down, we're trying to repurpose that capacity as fast as we can to private label.

Okay. And a follow-up would be, when you developed your long-term plan, 3% to 5% top line and then the 8% to 10% EBITDA margin. Your capital investments, like, how much capacity are you going to add to your existing footprint to deliver that 3% to 5%? And also, are there productivity targets like on a percent of COGS basis that are helping you get all that margin expansion, it's a lot of margin expansion in that guide?

Yeah. I would say that, there's both of those, Rob. The capital that we -- that we've guided to will facilitate the capacity to meet that number. We have balanced those two numbers. So we will have plenty of capacity to meet that growth rate. And then, the capital and the TMOS work, we haven't talked a lot about TMOS, but TMOS is in its early stages, but we've got a lot of success so far. So we're very confident in the margin expansion. We can get that without taking price to the customer, I guess is the real answer there.

But historically, Rob, I think what your question is, historically, those categories have grown at 3% to 5% and it's mostly volume-driven, a little bit of inflation.

Mostly volume. Thank you.

Mostly volume. Yes. All right. Thanks.

Your next question comes from the line of Bill Chappell from Truist Securities. Your line is open.

Thanks. Good morning.

Good morning, Bill.

First one kind of a follow-up on pricing. What we've heard and I think everyone's heard over the past few months is, I guess, one retailer or a couple retailers took pricing from the manufacturers, but didn't raise it at the store level, just to kind of accelerate or some customer traffic, accelerates some private label share. Did you see that in any of your categories and it showed - has that now reversed as we moved into 2023?

I would say in a macro, Bill, it's hard to say each individual item on each individual retailer, there's a couple of especially, the hard discounters and some of the large mass customers have been really aggressive on private label. There's no question. But I think most of our pricing has been pass-through. The gaps remain healthy, but most of our pricing has been pass-through. I mean, there's an occasional market on an occasional item that someone gets hot. But I wouldn't say that's the norm, I think it's the exception.

Yeah. And we hold ourselves to 98.1, which is a pretty aggressive target in private label. So I think there's a couple of places. One place we do want to touch on. I know our top line number wasn't quite what we had hoped it was going to be. I think it was solid 22%, but not what we'd hoped. We had a couple weather events in the fourth quarter. Obviously, we had a hurricane which affects our pickle business and some of our other things, but we also -- we have a cookie facility in a buffalo suburb of Tonawanda, New York. And that community got hit with what 5 feet and 6 feet of snow. We had damage in that facility that we couldn't get fixed and that would lingered into the month of January for us. And so we've had a few things that we've got to get -- we've got to get to and we are in the midst of that. But there were a couple of things outside our control that hit us that maybe softened our sales number. It was not demand driven. There was plenty of demand in the quarter. We just had a couple of categories that Mother Nature got in the way of.

Yeah. We will just have one or two, we think that will linger into the back half because we've got to do some physical investment in the structures, right.

Got it. Thanks so much.

Your next question comes from the line of Chris Growe from Stifel. Your line is open.

Hi. Good morning.

Good morning, Chris.

Yeah. And Chris, our co-man (ph) volume like most is branded in some cases super premium brands, right, which are getting hit pretty hard. I would say though, if we guided our units to flat, if you go back to slide, well, I think it's what's Slide 5 in our deck, it suggests that our core retail business has to grow nicely, right, low-single digits in order for that to happen. So we expect our core retail business to grow this year nicely in units. And that will be leverageable. That's why we can guide the kind of margin performance that we're guiding.

Okay. And then just a final question, if I could. And with the balance sheet now in a much better place, you're holding that notes that could make the balance sheet look even better. You're quickly in a better position. So when you talk about investing in the business, Steve, or improving capabilities, how much of that is an internal comment? How much of that is an ability to acquire now if that's an opportunity to help kind of fast-forward some of that action?

Chris, thank you. Yeah. We feel really good about the opportunities in our business, right? So I think, first of all, we've looked internally, and we think there's an opportunity to invest in capability internally. And I think Rob asked the question on capacity for the future to fund all this growth -- to fund the growth we're missing right now. So I think it will focus internally. If we have the chance to buy that capacity, and I would say assets, capabilities, we would do that if that can accelerate the path, right? I think acquisition for us would be capability driven, not necessarily new businesses, not adjacencies, those things that we've done in the past. It would all be about -- we think we're in a great group of categories. We just need to be able to sell more, the demand is there. So if the assets are there, we'll use M&A to do it. And there's a couple of places I think you may see us do that.

Okay. Thank you for that color, then.

Thanks.

Your next question comes from the line of Connor Rattigan from Consumer Edge Research. Your line is open.

Hey, guys. Good morning. Thanks for the question.

Good morning, Connor.

So in this slide, I think it was Slide 15, where you showed the price gaps versus national brands. It looks like the price gap expanded somewhat in November, but then contracted again in December. And it sits roughly where it was at last year. Just kind of curious how that looks in January. So in the IRR data that we see, it seems that this private label pricing is running somewhat ahead of branded on a year-over-year basis and look to your categories. And so that was somewhat seem to imply a narrowing price gap? And I guess just is there any concern that a narrowing price gap may lead to moderating private label share gains?

I'd say a couple of things. Let me step back and talk about December. For us to have the kind of fourth quarter we had in a good, solid December, December is a very much a national brand month. And like you say, it fell back to where it normally is. When people entertain for the holidays, people lean in, right? So it's not uncommon for the month of December, specifically in November, for Thanksgiving to have stronger branded shares, right? So if you go back and look at our business over time, you see that, right? So we performed as we expected. We performed over the holidays and had a good solid fourth quarter. No, I would suggest that our volume trends, and we obviously have access to many of our retailer's daily scanner data, right, and weekly scanner data. Our volumes are not slowing down based on price cap. So that has not impacted our demand signal yet.

Okay. Perfect. Thanks for the color, guys. Appreciate it.

Thank you.

Your next question comes from the line of Rob Dickerson from Jefferies. Your line is open.

Great. Thanks so much. Just a couple of questions. I guess first question, kind of more broadly speaking, just given kind of the macro backdrop where the consumer is and all the pricing taken, especially on the branded side. Do you -- is a sense here, right? I mean the operating environment is obviously in a great spot for you on the private label side, but let's just say we don't really see a lot of branded deflation. Like would you say that over the next three years, just given your guiding at this point, that you believe maybe you were entering some sort of beneficial cycle that could be a little longer term, just given kind of where the price deltas are and given elevated absolute prices on the branded side? That's the first question.

Rob, I would say we guided based on a much more historic level. I think you're right, these are different times, right? The absolute price gap -- we're looking at percentage price gaps, but that absolute penny gap is high. So if that when things normalize, could that drive more private label adoption? We'll see. I think -- and I've said this a number of times, I think private label is positioned, and I had a conversation on Friday, frankly, to put one of our largest customers. And they're convinced that their private label assortment, quality and presentations the best it's ever been. So I think time will tell, right? I think, though, if we can get back to historic growth rates, we build a hell of a TreeHouse, right? If it gets better than that, that would be great. But I don't think we need that to happen for us to execute the way we've guided.

Cool.

Great. Thanks Rob.

Yeah. No problem.

And your next question comes from the line of Carla Casella from JPMorgan. Your line is open.

Though I do think capital allocation is a great question, right? And when I arrived, we had to prioritize paying down debt, right? We now have our balance sheet in a really good place where we can have a much more balanced capital allocation strategy. We will maintain a very strong balance sheet. We're there now. We'll continue that, but we can also now invest in our business. That will be our primary look is how can we get -- because we think the returns in our business are so strong. And then what are the other opportunities? Can we return some capital to shareholders? And what else can we do with it? But we now have a much more balanced opportunity than we've had in the past where we really want to get our debt structure right and our balance sheet right. And having the transaction allowed us to make a big step change there. So that's why we feel better about the growth numbers that we're able to talk about today because we can invest to drive them.

And your next question comes from the line of William Reuter from Bank of America. Your line is open.

Good morning. Earlier, when you were talking about how half of your CapEx is going to be for driving capacity expansion and better innovation for your customers, I think you made some reference to potentially purchasing capacity. I guess, is that on the radar in terms of other facilities for sale that may allow you to, I guess, more aggressively grow -- that would speed up your ability to grow the top line?

I think there will be some stuff available, yes. But it has to be right. And we're incredibly careful there. And it has to meet the right category, the right location and the right capability. So there may be some opportunities for some very small purchases, and there may be some -- I don't think anything would be huge, but there may be some other opportunities out there. So those things happen when they happen. We can't speculate on exact timing of that.

That’s make sense. All right. Great. That’s all from me. Thank you.

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

I just want to say thank you for everyone for joining us today, and we look forward to seeing you in person soon. Thank you so much. Have a great day.