THS - NYSE

Welcome to the TreeHouse Foods Second Quarter 2025 Conference Call. [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 statement.

Good morning, and thank you for joining us today. Earlier this morning, we issued our second quarter earnings release and posted our earnings deck. These items are available within the Investor Relations section of our website at treehousefoods.com. Before we begin, I 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 these risks is contained in the company's filings with the SEC. 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.

Thanks, Pat. As we continue to navigate the consumer backdrop in 2025, we are keenly focused on further strengthening the foundation of our supply chain and margin management initiatives, leveraging our improved service levels in key categories ahead of our peak seasonal period and pursuing profitable new business opportunities. With that, I'll now turn the call over to the operator to open the line for your questions.

[Operator Instructions] The first question comes from Andrew Lazar of Barclays.

Steve, I guess, first off, based on some of the charts in your slides, the percent price gaps, right, between branded and private label, while still above historical levels, it looked like they've been narrowing a bit relative to last year. As you know, private label has taken some more pricing in the second quarter maybe than did some of the branded players. As a result, it looks like in the second quarter, brands actually saw better volume performance in your categories relative to private label. Just hoping you can provide maybe a bit more color on how the competitive environment played out in the quarter, I guess, relative to your expectations and how you see that dynamic playing out through the balance of the year?

Yes. We don't align exactly with the total universe of private label -- so I guess we look at the second quarter as our biggest businesses did pretty well. There's some margin management involved here, which we expected and we guided to. And the forecast from the customers for the third and fourth quarters, our 2 biggest quarters are pretty solid. So we think the year is going to unfold pretty much how we thought. There is some promotional noise that we know in the back half, and we've accounted for that, we think. So we think the year will fold out just about as we expected.

Got it. Got it. And then just a quick follow-up. I know you guys have been pretty disciplined about the types of assets that you've been willing to sort of pick up, ones that give you more depth maybe in capabilities in certain categories where you want to go deeper or vertically integrate more like what you've done in coffee or tea, what have you. Has the environment along those lines in terms of maybe availability of interesting assets that might fit in terms of improving your depth or capabilities in certain categories increase at all just given how difficult growth has been to come by in the industry. And I'm curious if there's a change in that perspective at all.

Well, Andrew, that's a great catch. We -- this year, '25, we looked at as a year to reset our cost structure, right? And we talked about margin management. We've talked about some plant consolidations now that are public. We've done some organizational streamlining, those kinds of things. But investing in our hot beverage business, coffee and tea, if you look at within private label, coffee and tea over the last few years have done really well, right? And so we think that's a place to position ourselves. The same thing we've done, we've done it more organically in our cookies and crackers business. That's been investments in our plants. So we're trying to be really disciplined on our capital allocation. And the opportunities when we get them to do it inorganically just make it faster, quite frankly, things like the Harris Tea got us to a place we wanted to be much quicker. But that investment will be in those categories that we think are performing the best. We like all of our categories, but several of them, we think, have a little more momentum in them for the near term and the long term, and that's where the capital allocation is going, if we can.

The next question comes from Jim Salera of Stephens Inc.

Steve, I wanted to ask a question regarding innovation. We've heard a lot of companies that have reported talk about innovation as a way to kind of stand out and engage with the consumer, particularly in kind of a softer macro backdrop. How does that flow through in your position? And do we see private label kind of riding on the coattails of some of that innovation and trying to have innovation alongside branded? Or do we find that if branded innovation ticks up, that can maybe pull some attention away from private label? Just any thoughts on kind of the push pull there?

Sure. The nice thing about private label from an innovation standpoint is we are fast followers, right? And if you look at our investments in things like pretzels, right, we have a seasoned pretzel business that is really a result of the innovation in the industry, right, and the dots phenomena, all of those things. So we see branded innovation in categories is really important. The key for us is trying to determine when it really becomes a trend, right? We got to make sure it's not a fad, it's a trend. We have tried to get in too early in the past, and that's not been successful. We have to -- you remember, private label is maybe 20% of a great category, less than that of a lot of categories. So we need that innovation to get moving so that 20% of that is meaningful for us. So there's a lag between branded innovation and private label follow, but we're excited about it. We have it in coffee with cold brew. We have brew over rice, all of those things. We have it in pretzels with seasoned and filled. And we have it in other categories. We have it in broth with bone, those things. So we see innovation as positive for the whole industry and the categories and the key for private label is picking those places to invest so that we can follow quickly.

And maybe thinking about optimizing your supply chain relative to other suppliers that some of the private label partners could go to. Do you feel that your capabilities on innovation are much more -- are you in a structural advantage relative to peers such that you can be much quicker to kind of catch on to if you see something established as a trend and not a fad?

Sure, sure. I think our balance sheet helps us a lot there, right? Our size and scale give us some opportunity there. I think we've been able to move faster on things like pretzels. We've actually made acquisitions in that -- in those spaces when we see the opportunity, right, to get us there faster. I think the work we've done in the coffee business, you'll start to see that over the next couple of years. I think we put not just great assets in place, but great people and great capabilities. So I think that's where our balance sheet helps us, right, especially in a higher cost capital environment. You might have had a time a couple of years ago when capital was much cheaper that it was a little easier for some of the smaller guys to do it. But I think our size and our balance sheet give us some advantage today.

The next question comes from Robert Moskow of TD Cowen.

I wanted to see if you could drill down a little bit into a couple of categories. You bought the Northlake facility, expanded your coffee capabilities significantly. And you can see in the tracking data, some pretty extraordinarily good demand for ground coffee even with prices being higher, the category volume is still really high. And I want to know if you're seeing that in your results also. Is that segment of your business performing well? And what do you think is going to happen in August when all these brands start raising price?

That's a great question. Yes, we see demand for -- and we see opportunity in ground coffee right now. And we pack ground coffee for both retailers and some large foodservice institutions. And so that's a great new business for us. I talked about investment we made. Farmer Brothers built a wonderful asset there, but we felt it needed to be fully built out. That work is just finishing as we speak right now. So it's giving us capability. We're literally bidding on projects that we could have never bid on before, right, for next year. So we're encouraged by that. We have the Brazilian tariffs coming in place, it will -- that's 40-some percent or the largest coffee or coffee growing country in the world. Hopefully, most of us have a little bit of that hedged and are in a good place with that. I think we'll see what happens over the next few months. There are formulation alternatives. Our team has worked on all of those, but we will probably see, assuming those tariffs stay in place, big assumption, right, as you know, what the volatility of tariffs have been. But I think ground coffee on a per serving basis is still really reasonable compared to every other way to consume coffee. So I think the consumer will be frugal. I think private label will have a nice opportunity because of our price gaps, but I think the category will hold up. I don't think we'll change if you think about a 50% price tariff on 40% of the input cost, I don't think that will change the per serving price enough to change the consumer dynamics. But I do think it's an opportunity for private label because we'll have lower price points on the shelf.

Okay. And a follow-up is on broth. I didn't hear much mention of it. Where are you at in terms of regaining market share in broth after the plant issues that you had? Do you expect to be more competitive in this coming soup season?

Yes. I think -- thank you. It's kind of nice not to talk about it for a quarter, frankly. It's -- we've had fantastic service, like we're virtually weeks of 100% service in broth. -- over the last month or 2. And so it's really nice to see that team delivering. Literally, there were conversations as recently as yesterday with some of our largest partners on the broth forecast and getting it exactly right for November, December, October, November, December, let's call it. And so we feel that business -- that business was one of our fastest growing pre-pandemic, and we feel like it's on the verge to coming back to that.

Your next question comes from Matt Smith of Stifel.

Yes. Really, it's us lapping those supply chain issues and holding steady with where we are today from a consumer standpoint. If the consumer comes back to us a bit, that would all be on top of what we've guided. But if not, we feel really good about what we've guided.

And as a follow-up, you mentioned beginning to lap some of the margin management activity that you pursued in the fourth quarter. Now you have a couple of quarters of experience and the benefit that's flowing through the P&L. Are you looking at a broader range across the business for opportunities for more margin management activity? And how would you scale that opportunity relative to the actions that you've taken over the last couple of quarters?

Hopefully, in the prepared remarks, we got started early. We got started in the fourth quarter of last year. I think we'll see most of that behind us. And we look at '25 as that reset the cost structure, get those things behind us. And then that cost structure, we think, is going to make us much more competitive in a couple of targeted categories. So we see '26 as the start of a growth year, not another margin management year. So we think we've targeted the vast majority of the opportunity there, and it's gone really well. I think you can see in our dollar sales numbers. There are places where we price for some complexity and came to a nice agreement with the customer and other places where we worked with the customer to get that product out of our system. So we had both things happen there, which we hoped would happen and it did, but we hope to get it behind us. So I think we'll be on a normal growth trajectory coming in '26.

The next question comes from Scott Marks with Jefferies.

And what I tried to say in the prepared remarks, there's a sales cycle here, right? When we go to a customer and we decide to exit something together, there's usually 90 days of packaging, that kind of stuff. So that's why that really hit in the second quarter. And so that will be in the third quarter. But the Griddle primarily it's in the fourth quarter, right? And we actually had returns in the fourth quarter, right, product we took back. So there's a significant bump up from griddle in the fourth quarter. So that's why we say third will be similar and fourth will be significantly different.

[Operator Instructions] Our last question today comes from the line of John Baumgartner with Mizuho.

Maybe first off, Steve, in terms of the expectations for increased promotion in H2 that you mentioned, how do you see that playing out? Are you anticipating the balance of that promo between price versus non-price I mean, do you think brands increased resources allocated to feature and display? How do you see that impacting visibility for store brands? And how do you think about potential that retailers maybe deemphasize some store brand programs in H2 in light of the branded activity?

I think the retailers enjoy the margins from branded promotion and the cost that they charge for branded promotion. But I think the message we're getting from the retailer and the forecast we have from the retailers suggests that they're going to support private label as well. So we don't see a big difference in that this year. In fact, like I say, the conversations right now are really confirming supply availability or confirming quantities or confirming all of those things, which would suggest that the merchandising, the support for private label is solid. So I do think there'll be branded spend. I mean we all hear about it. We've listened to the other calls and understand what's going on. You can read that chart a couple of ways with price gaps, if that spending is going on and the percentage of volume on promotion isn't going up, it's about efficiency of that promotional spend, right? It's not driving the kind of units that I think we all thought or all feared would happen. So I think the retailer is committed to both is a long way of saying that.

This concludes 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 thank you all for being with us today, and we look forward to the opportunity to talk to you individually and in person soon. Have a great day.