Welcome to the TreeHouse Foods Third Quarter 2020 Conference Call. [Operator Instructions]. Please note, this event is being recorded. At this time, I would like to turn the floor over to TreeHouse Food for the reading of the safe harbor statement..

Good morning and thanks for joining us today. Before we get started, I'd like to point out that we've posted the accompanying slides for our call today on our website at treehousefoods.com. This conference call may contain forward-looking statements within the meaning of the Private Securities Ligation Reform Act of 1995.

Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words such as guidance, may, should, could, expects, seeks to, anticipates, plans, believes, estimates, approximately, nearly, intends, predicts, projects, potential, promises or continue or the negative of such terms and other comparable terminology.

These statements are only predictions. The outcome of the events described in these forward-looking statements are subject to known and unknown risks, uncertainties and other factors, including COVID-19.

It may cause the company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31, 2019, TreeHouse's Form 10-Q for the period ending March 31 and June 30, 2020, and other filings with the SEC discuss some of the risk factors that could contribute to these differences.

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made when evaluating the information presented during this conference call.

The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in expectations with regard thereto or any other change in events, conditions or circumstances on which any statement is based.

For purposes of our discussion, our results and outlook are provided on a continuing operations basis, which excludes the impact of the Snacks division, which was sold by last August and the ready-to-eat cereal business. I'd now like to turn the call over to our CEO and President, Mr. Steve Oakland..

traditional, mass, value, specialty e-commerce, et cetera. Of that, about 60% of our retail business in Q3 was captured in the syndicated data. I'll make a point to note that syndicated data category definitions do not align perfectly with our offerings.

In fact, for about 40% of our categories, we utilize custom definitions to accurately and consistently evaluate performance. To illustrate this point, let's think about our broth business for a second. We make broth in 32 - and 48-ounce aseptic cartons. But we don't produce canned broth.

As a result, there's a significant subset included in IRI's standard broth definition that's not part of our offerings. Therefore, fluctuations in the private label category that in measured channels may or may not reflect how our business is performing. Turning back to the top line.

The first green bar within the retail channel box shows that our sales to customers in measured channels this quarter grew by 5%. The second green bar represents TreeHouse net sales in unmeasured channels. This is where many of our value, club, specialty, e-commerce retailers that are not included in scanner data are captured.

Here, we grew 11%, more than twice our measured channel growth. This is an important data point because within this bucket are some of the fastest-growing food retailers in the country, several of which are weighted heavily towards private label, although we normally don't break down our revenue this way.

Given the current dynamics, we think it helps better frame what's happening in our business. Sales for industrial, export and co-man grew 12%, while Food Away From Home declined 22% in the quarter. Let me wrap up with some final thoughts on the pandemic and the current dynamics and then hand it over to Bill.

We will continue to prioritize the health, safety and welfare of our people. Our operations have adapted well, and our COVID response team is doing a great job. While we did not shut down entire plants for days or weeks this quarter, it was not without some disruption.

Many of the communities where we have facilities like Green Bay, Wisconsin; Cedar Rapids, Iowa; Dallas, Texas are struggling to manage through elevated COVID levels. We are convinced that our plants are safe. However, the fact is that we have little control outside of our 4 walls.

COVID-related developments have impacted our staffing levels and could be a limiting factor in our ability to service all of our demand in the fourth quarter. In the quarter, we also overcame short-term disruption in our Cedar Rapids, Iowa and Cambridge, Maryland plants due to storms and Hurricane Isaias.

Finally, this environment continues to be very difficult for anyone to forecast accurately. Our customers' forecasts are not always aligned with their actual demand patterns and this creates certain challenges in matching supply and demand.

While there is a range of possibilities on how the fourth quarter will play out given the resurgence of COVID, we fully anticipate that the eating-at-home trend will continue and there will be higher grocery demand.

We're optimistic and we believe that we are prepared, which gives us confidence to tighten our guidance range accordingly to $2.65 to $2.75 in adjusted EPS. This range does anticipate both higher costs and some modest disruption, particularly related to labor assuredness as we get into the fourth quarter.

With that, let me turn it over to Bill to give you more color on the quarter and the outlook for the remainder of the year. I'll come back afterwards to close and leave you with some more macro thoughts around why we continue to be bullish about the opportunity for TreeHouse and for private label..

Thank you, Steve. Good morning, everyone, and thanks for joining us today. Like Steve, I want to begin by expressing my pride in the organization and my gratitude for the team's hard work and dedication. Our results in the third quarter are the product of our team's effort. So I'll begin where I always do with our results scorecard on Slide 10.

In the third quarter, we performed in line with or above our guidance range for all of the key metrics. As Steve mentioned, our adjusted EBITDA beat the top end of our guidance range by $4 million. Similarly, adjusted EPS was above the top end by $0.06, once again demonstrating the earnings power and leverage in our business model. Turning to Slide 11.

Direct operating income for the division grew just over 9% to $145.8 million. Division operating income margin improved 130 basis points, reflecting the impact of our actions to drive improved operating efficiency across our platform as well as higher volumes and improved mix.

Slide 12 walks you across the adjusted EPS drivers from $0.55 last year to the $0.71 this year. Volume and mix, including absorption, contributed $0.05 as our plants continued to run hard to build inventory ahead of our seasonal peak fourth quarter. Pricing net of commodity cost was a drag of $0.07, driven primarily by logistics and warehousing.

Freight did tick up a bit as we lapped the 2019 negotiated rates that have been accounted for in our guidance. We did complete another RFP process and now have new carrier contracts in place. Operations contributed $0.26. Recall that in the third quarter of 2019, we faced several operational challenges as we adjusted to lower volume levels.

This year, we're realizing the benefit of those cost reductions that we've been running the plants, full out in some cases, to rebuild inventory and prepare for fourth quarter shipments. Let me pause here to update you on our COVID-19-related costs.

In the third quarter, we incurred a total of $26 million in COVID-related expenses, of which $9 million is considered to be ongoing costs like overtime in staffing and was absorbed in our adjusted P&L.

You can see within our press release reconciliation tables as the balance worth $17 million in COVID expense was called out as onetime and netted against a $14 million tax benefit related to the CARES Act. SG&A was flat, while other income contribution of $0.04 was driven by investment gains on deferred comp plan assets.

Tax unfavorability of $0.12 was driven by the lap of tax planning benefits that occurred last year. Slide 13 provides our sales drivers by division. Snacking & Beverage organic growth of 5.2% was driven by a combination of volume/mix and pricing.

Meal Prep revenue declined 2% as we were still lapping some carryover volume losses and pricing adjustments and where weakness in the Food Away From Home channel continues. In the quarter, we did see demand for at-home food moderate. However, we continued to see inconsistency in customer forecasts versus order patterns.

This, in turn, has some impact on our ability to ensure that we have the right products in production to meet our customers' needs. As an example, in one instance, we have a customer forecast their needs for a category nearly 50% above prior year levels, but their order came in another 5% higher than that.

This is just one example, but when multiplied by many customers you get a sense of the level of complexity that this can create. Steve also mentioned that COVID-related development has impacted staffing across our networks.

We continue to prioritize wellness for our employees and their families and recognize that the realities of so many kids learning from home creates challenging dynamics.

While we have learned to operate in a way that prioritizes employee health as well as run extra shifts for these high-demand categories, the result has been more demand than is serviceable. We are keenly focused on ensuring that customers recognize the importance of forecast accuracy and order alignment so that we can best fulfill their needs.

Turning now to the divisions beginning on Slide 14. Let me give you an update with our strategic framework as the backdrop. For Snacking & Beverages, we've shared revenue growth for the division and taken it one step further.

Beverages and drink mixes grew 13% led by innovation, in particular, ready-to-drink coffee, new broth labors and new distribution wins. On a reported basis, growth in sweet and savory snacks was masked by the sale of the 2 in-store bakery facilities earlier this year. When you peel that back, you can see that, on an organic basis, revenue is up 2%.

We are seeing gains in areas like cookies and crackers. In one key customer, their launch generated revenue that is nearly double its original projection. On the other hand, sweet and savory also includes bars, which has been weak this year as remote work and school arrangements have slowed on-the-go consumption.

The focus for our Meal Preparation division on Slide 15 is profit growth and cash flow generation. In the quarter, Meal Prep saw more of a disruption related to absenteeism and weather-related circumstances.

Main course meals, which includes pasta and hot cereal, is driving nice profitability as we streamlined production and had increased throughput, especially on pasta. As elevated demand has continued, we have put certain categories with the main course meals on allocation.

Center store grocery with a significant foodservice exposure in pickles, cheese sauce and dressings remains weak.

Specific to pickles, as you know, earlier this year, we scaled back production in light of soft foodservice demand, but we also made the choice to keep people safe and distant in our plants by not bringing in hundreds of temporary workers.

Although we've made good progress addressing labor shortages, crop availability due to hurricanes in the Southeast has added further challenges to the category. Before I move over to the balance sheet, let me update you on our actions to restore assortment and get the deprioritized SKUs back into distribution.

We've included 2 examples on Slide 16 to demonstrate that effort. Within Meal Prep, we've highlighted syrup on the left. The bottom chart is TDP share, whereas unit share is on top indicated in orange. In a normalized environment, private label-served TDP share hovers in the 18% to 19% range and unit share is usually between 26% and 28%.

In the second quarter, the impact of reduced assortment caused TDP share to decline about 120 basis points while unit share fell to 23%. Table syrup was one of the earliest categories where we restored assortment. As you can see, as TDP share has returned to its historical levels, unit share has followed.

You can see a similar pattern in our griddle business, although we still have a bit of work to do to return to pre-COVID levels. Our frozen waffle business is trending in the right direction. Getting these SKUs back on the shelf requires time and effort, especially as retailers are still working remotely.

However, we are encouraged by the headway we are making. We anticipate by the end of the year, our assortment will have normalized across the portfolio. Turning now to Slide 17.

During the quarter, we went to the bond market and successfully completed a new issuance of $500 million in 8-year unsecured notes replacing our 2022s, which had a 4 7/8% coupon. Our new notes have a 4% coupon, which is very favorable, particularly when compared to similarly rated companies.

In line with our expectations, free cash flow in the third quarter was a negative $21 million. We have been building inventory in order to service our peak season, along with some safety stock in preparation for the possibility of higher at-home assumption this winter.

While we had originally expected leverage to tick up slightly this quarter, our earnings over-delivery enabled us to finish the third quarter with net debt-to-EBITDA at 3.4x. We've made very nice improvements here, as you can see on the right-hand side of the chart.

Assuming that we close the Ebro transaction before the end of the year, we believe we will finish 2020 within the range of 3 to 3.5x as expected. Let me say a couple of words about capital allocation on Slide 18 before we get into guidance.

Our Board evaluates our capital priorities and opportunities on a regular basis with the goal of achieving the greatest shareholder return yet keeping an eye on the potential leverage impact. Our work here is ongoing, and we will continue to be prudent and deliberate in our capital allocation.

As a reminder, our goals are liquidity, flexibility and value creation. We will evaluate capital allocation alignment with our corporate strategy and assure that we are supported with the right capital structure.

The strength of our earnings this year and our free cash flow have enabled us to be opportunistic and pursue the Ebro acquisition while giving us the flexibility to deliver on our priorities, which continues to be delevering. Moving on to our full year guidance on Slide 19.

We anticipate sales will be in the top half of our guidance range from $4.2 billion to $4.4 billion. Today, we are tightening our ranges for profit estimates with adjusted EPS expected to be $2.65 to $2.75.

We expect adjusted EBITDA to be within the $490 million to $510 million, and free cash flow at the upper end of the range of $250 million to $300 million. Slide 20 walks you through our fourth quarter guidance. We anticipate sales between $1.11 billion to $1.17 billion, adjusted EBITDA of $140 million to $160 million and adjusted EPS of $1 to $1.10.

Steve covered our thinking about the current environment and our considerations from a commercial and operational perspective. While the effect of COVID and COVID-related impacts across the United States remain to be seen, our guidance takes into consideration potential impacts both negative and positive.

Today, our retail customers are very focused on being prepared for the winter season and the holidays, and we have seen some order acceleration in certain categories. At the top end of the range, our guidance assumes that at-home food demand continues to be elevated. The holiday season is strong, and we are able to service our demand well.

Given the difficulty of predicting whether the states implement stay-at-home orders again and the potential for sharp demand increases for food, our guidance has not assumed a pantry-stocking event like we experienced in March. Should that occur, we do believe there is potential for us to over-deliver. However, I want to be cautious here.

As Steve mentioned, as COVID cases increase, that impacts staffing. Ensuring that we have the labor necessary to run our plants is coming at a higher cost. And like a number of other food manufacturers, we are seeing demand greater than supply in several places. So a pantry-stocking event exacerbates that situation.

While we are building inventory and safety stock, should those levels be depleted, we will be working to catch up in the first quarter.

The bottom end of our fourth quarter guidance range captures the possibility for greater disruption at the plant level, additional labor challenges and higher expenses and further deterioration in the Food Away in the from Home channel. Before we move on, I want to say a quick word on the tax rate for the fourth quarter.

Our tax department continues to do a great job on tax planning initiatives, and our guidance has assumed release of the valuation allowance related to certain deferred tax assets of our Canadian entities, which was previously reserved and will favorably impact our fourth quarter adjusted tax rate.

We continue to expect free cash flow to finish the year at the top end of the range of $250 million to $300 million.

While the fourth quarter is our biggest revenue quarter, I will point out that our strong earnings delivery throughout the year has shifted the weight of the fourth quarter contribution from what has been in the 45% to 55% range to be closer to 40% this year.

Most importantly, we believe our guidance appropriately reflects what we believe to be the most likely outcome for the remainder of the year, taking into account both the risks and opportunities. Let me close by saying once again how pleased I am to part of this special organization.

I continue to be so impressed with how committed everyone is to achieving our goal, and I look forward to finishing the year strong.

Steve?.

Thanks, Bill. I'd like to leave you today with a couple of thoughts around why we believe TreeHouse is well positioned for success. We have supported our customers well and delivered strong profitability and cash flow thus far through the pandemic.

We are continuing to see our product assortment return to grocery shelves, and our share numbers and measured channels are improving as a result. At the same time, we also detailed for you today our performance in unmeasured channels remained strong. We believe that for the foreseeable future, demand for food at home will remain elevated.

While we anticipate ongoing variability in the near term, we are confident in our ability to continue to meet the demands of our customers and finish the year strong. Adding to this momentum, we're excited about what the Ebro transaction brings to our business, both in terms of strategic and financial fit.

This acquisition is a demonstration of our commitment to executing our strategy and delivering shareholder value, starting with the significant accretion we expect it will contribute to our earnings next year. To be sure, the recent environment has produced a series of events that have not been seen before.

This recession is unlike any in the past, although traditional recession metrics such as consumer sentiment and savings rates are trending towards more in line with prior recessions. The fundamentals of private labels appeal remain intact, and our products are positioned well as the consumer behavior inevitably shifts back towards seeking value.

Today, we are in a position of strength. We have organized our 2 divisions around 2 distinct strategic objectives as laid out on Slide 22. Meal Prep and Snacking & Beverage are now positioned in a manner that better enables success with our customers and allows our categories to flourish in their own unique ways.

We have the right platform and teams in place. We have a solid balance sheet and are generating strong cash flow. We have demonstrated an ability to serve higher demand in line with our customers' needs while at the same time drive improved profitability across the organization.

While we will likely look back at 2020 for how things changed, it's how we rose to meet these challenges that gives me confidence that we are emerging a stronger, healthier TreeHouse. With that, let's open the call up to questions..

[Operator Instructions]. Our first question comes from the line of Ken Goldman with JPMorgan..

I wanted to ask first, it's not often we see acquisitions in this sector being this immediately accretive to EPS. So I'm just curious, can you walk us through some of the underlying assumptions that get you to that $0.20 to $0.30 range.

And I guess, specifically, what are you assuming for year 1 revenue? I know we have LTM, but some of that's affected by COVID and stock-up.

What are you assuming for year 1 margin? And how much of that margin is coming from the underlying business sort of margin versus any expected synergies you might have?.

Sure, Ken. Maybe I'll start on that and I'll hand it to Bill.

I would tell you this is an acquisition that was really strategic, right? We had a chance with COVID to see when you put volume through our pasta assets, how just accretive they are, right? And so the opportunity to assure that we can have that run rate post pandemic made this acquisition very accretive and very attractive.

So we viewed it that way strategically. We viewed it right on point with our Meal Prep strategy. So those were the first 2 things. This current volume mix is made in several of Ebro's plants, we will only be acquiring one of them. And I think that's an important note.

So we will have a chance to load our assets with this volume going forward and much of that accretion comes from there. So I don't know, Bill, if you wanted to give more details on that. I'm not sure we can give everything that you've asked for but....

Sure. Let me just add a bit of color. I may not give you as many numbers here at this point. But the underlying category that we're acquiring here is in the regional branded business, which has a different obviously margin structure than private label.

The synergies that we're expecting to extract, as Steve just articulated, takes advantage of the capabilities that we built at TreeHouse in our ability to run that business very efficiently, quickly is very important and available to us.

We think that the -- our acquisition was based on a run rate that's not included in this kind of COVID-spiked demand. So we think that will be even outside, too, if we need there..

Yes. That's an important point. This was not opportunistic because of the pantry load volume that's going on in pasta. This -- we did not publish a multiple candidly because we didn't want to be cartoonishly low. We thought that the current volumes are above what we've valued the business on. We worked with that team.

And I think we paid a fair value for what we view either the post- or pre-COVID values are, right, and volumes are. So I think we will get some benefit in the near term. It appears COVID is going to hang on for a while. And so if we can get it closed quickly, we'll benefit from that. That will be upside. But we think it's a great long-term fit.

It allows us to leverage -- to get operating leverage on, quite frankly, a scale system that AIPC built that we think just needs to be run harder..

And before we leave it, I can just add just one more piece. In the release, we did cover the fact that this is a -- for tax -- for purposes of this acquisition, it's going to be an asset acquisition. And obviously, there is a tax benefit that it would be immediately synergistic to us as well..

Okay.

And then for my follow-up, can you walk us through how the decision to buy Riviana affects your ability to repurchase stock? And I guess in any way does it indicate that maybe you don't think your stock is as cheap as perhaps maybe some observers believe at this time?.

Maybe I'll -- we'll do the same thing. I'll start. No, we agree with it. We think our stock is really cheap.

And there were a lot of questions over the last few months on why aren't we buying stock, and hopefully, now that's obvious, right? We were in the midst of this transaction and we were locked out both personally and as a company from doing such event.

The beauty of this transaction, and as you saw, is it's so financially compelling that it doesn't inhibit us in any way. It doesn't materially change any of our leverage ratios. And so it doesn't take any of those options off the table. So Bill, if you want to comment any more on that, but....

Yes. I think just to build on Steve's point, the opportunities that our Board was considering before this transaction are still available to the Board. This acquisition is accretive. We're bringing in EBITDA from a leverage perspective. We have lots of flexibility here and we'll continue to prioritize those opportunities.

But this is in no way limiting, which is a benefit of this transaction, quite frankly..

Yes. And I know the last few months have been a little awkward because we couldn't have this conversation. And hopefully, now it's obvious why we couldn't have this conversation. We were able to bring value to not just next year but to every year following that.

And we just thought that was, quite frankly, a long-term perspective that we had to take rather than -- and knowing that, in fact, we have all options on the table now..

Your next question comes from the line of Jon Andersen with William Blair..

I just have 1 question, it's around the organic growth rate in the quarter. And I appreciate the disclosure that you provided on -- particularly on Slide 9, I think that's extremely helpful.

I think coming in at about 70 basis points of organic growth, that seemed a little bit below, I think, what you were thinking when you talked about the second half of the year as of the end of the second quarter. I may be wrong on that, you can correct me if I'm wrong.

But as I think about it, you think about the syndicated data for private label, the kind of the new business wins that you were presumably shipping in the quarter in addition to reassorting the shelves, getting the fuller assortments back on shelf. I guess I and some others I speak with anticipating perhaps a stronger figure there.

So I don't know if you can talk a little bit more about some of the puts and takes and how you think about that organic growth rate, both in the quarter and going forward?.

Sure. Thanks, Jon. We agree with you. We guided a midpoint that was a little bit above where we are. I mean, obviously, we put both -- we put some risk and some opportunity in our range always. But we guided just a little bit more of that because of the forecast we got from customers. And we saw demand really volatile in the quarter.

We saw some customers forecast some stuff that just didn't come through in their real forecast, in their actual results. So we saw a little bit of that. We did see it build towards the end of the quarter and I think Bill mentioned in the recorded remarks that we see that happening today.

So I think it's been pretty hard to call, right? And I would say that we're pleased with the return of the SKUs to the shelf. I think it's important to remember that unlike branded SKUs, we don't have a national retail sales force here. These are the retailers SKUs.

So those go back on the shelf when the retailer puts the tag up, when the retailer decides to reset that section. So there's a little bit of a lag there.

But I think what we tried to show, I believe, on Slide 8 was that we feel comfortable that the whole premise of private label, we took basically two quarters pared the assortment back, ran very, very effectively. And that cash flow and those earnings, we thought were well worth that couple of months of share loss. So we see the share coming back.

We thought it -- I guess it's coming back I guess as expected. We did think the volume would be a little stronger in the quarter, but it appears to be coming now. So we think the year-end number is going to be where the year-end number is.

I don't know, Bill, if you want to give any more detail on that?.

Yes. Thanks, Steve. Jon, the other point I would just add to Steve's comments, demand is strong in these categories.

What we've had to do, obviously, is in these unprecedented times, is just tightening further integrated business planning process and even add a bit more technology to help our customers in get a much more consistent look at their forecast.

And that ability to streamline that process will allow us to service that demand in a stronger way, and that will keep moving us through our ranges. The other -- only other point I'd make is that Food Away from Home continues to be impacted by the pandemic, and we have to be cautious in that category..

Yes. And I would also -- I'd go back to, if you remember our original guidance, we said we'd be flattish in this quarter and we'd start to grow in the fourth quarter. So the orange bar that we show on Page 9 continues to get smaller, right? There's a carryover business loss and pricing lap. We've gotten more and more of that behind us.

I do think we had planned earlier in the year for innovation to offset maybe a little more of that, some of that's been delayed. So I think we'll see a stronger fourth quarter. The only reservation we have in the fourth quarter is COVID has made into the heartland of America now, right? It's out of the big cities in America, it's in the small markets.

It's in the Green Bays, it's in those kinds of markets. We didn't want to guide anything that we would have to put people at risk to service. So that's where our factories are. We're -- so far, as Bill said in the prepared remarks, we've done a pretty good job of that, but we want to make sure that, that doesn't spike here in the next 6 or 8 weeks..

Maybe I'll just do a quick follow-up. The carryover losses and pricing adjustment was -- came down significantly, as you pointed out in the third quarter, relative to the run rate in the first half of the year.

Where do we go from here? And when does that go away completely, I guess? When do we stop talking about that?.

I think as we get into Q4, it tails off quite nicely. And then in Slide 9, we did break out ISB differently as well. And so both of those are kind of getting behind us. So you'll see the -- more impact of the new business wins come through and clearing away fairly quickly here..

And I think we won't -- we don't plan the -- unless there'd be some material changes that we've not seen yet, we don't plan to guide that way in the future..

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

I wanted to ask is -- and I know there's a lot of ways to cut this.

But if I look -- if I think about your retail channel sales were up 7%, the number you have on that slide, what do you think your categories grew? So did you take share? If I'm just looking at that one little slice of your sales, did you take share in that kind of retail channel?.

I'd tell you, if you know they're up 5%, but that needs to be weighed against the orange bar of losses. If you do that, it's up low single digits, which is holding share in private label. Private label for our categories through that period was up basically low single digits, and we were up low single digits.

So we would tell you in measured channels, if you put those two bars together, the big orange bar and the green box, measured channels was low single digits, unmeasured channels was high single digits. A little bit of that is foodservice. So foodservice would be a little worse than that in its decline. So we feel like we held share nicely..

In this environment, there's been a lot of disruptions to the availability of product from competitors and I know you've had some of your own little COVID issues in facilities.

Would you expect to be gaining share as we move ahead? I think of all the items you put in place over the last year with your production ability, all of your efficiency initiatives, you've got innovation coming, is there anything that TreeHouse can gain market share going forward?.

Yes. I can tell you that we've had several of our large customers come to us and ask where we can help. Many of the larger customers have multiple vendors. They have a primary and a secondary vendor in their key categories, and we've had customers ask us in what categories do we have capacity where we can help fulfill that backup supply.

So yes, we think there's some opportunity to gain share. We're cautious on that because some of those are the categories that are the tightest, right? They're the pastas, they're the dry dinners, they're the refrigerated dose, they are the things that where the capacity is tight to begin with. But yes, we think we can gain a little bit of share..

Okay. And I just want -- a final question, which is in relation to the fourth quarter. Just given your guidance in relation to the prior year, the EPS is down. It's down -- certainly if I exclude the tax benefit, you expect there the lower tax rate.

Is -- what are the factors that you keep in mind there for that fourth quarter earnings performance? And I'm sure there's a degree of conservatism in there as well.

But just the items that we have to keep in mind for potentially weighing on earnings year-over-year?.

So Chris, on the opportunity side and what can make it higher, obviously, is if there is more COVID demand and a COVID resurgence. To a certain extent, we have an ability there to leverage our network even further and grow.

I think the risk that you have to contemplate is the COVID-related issues, right? So we've been really good about keeping our plants up and running.

We've been impacted like most of our manufacturers in the space have been impacted by just some of the labor issues related to COVID-related issues as people kind of have to deal with child care, elder care and working through various disruption outside of the building.

So we have to worry about some of the costs that will be included in our adjusted P&L. If those were to run a bit higher, we have to contemplate that in the guidance..

Chris, in the simplest of terms, when we were here the last time, we guided a back half of a midpoint of $1.70. We over-performed in the third quarter. The new guidance is $1.76 for the back half.

So it probably says, well, a little bit of that over-performance in the first -- in the second quarter -- or excuse me, the first half of the back half, which is the third quarter. Well, a little bit of that over-performance in the third quarter get eaten up in wages and cost in overtime, those kinds of things.

We have the potential for that to happen, right? We'll see how it goes..

And to your point, we wanted to be transparent about the tax opportunity, so you see that coming through as well..

Your next question comes from the line of David Driscoll with DD Research..

I had a follow-up question related to the acquisition and then just a bigger picture question. On the acquisition and on your current pasta operations, I think you said, Steve, in the script, that prior to COVID, your pasta operations were running 70% to 80% of capacity and now you're running over 100% capacity utilization within your pasta assets.

You bought a pasta company, but you didn't buy all the manufacturing that they had. You bought 1 plant and you said that there were -- some of the Ebro pasta was produced in plants that you are not acquiring. So I don't understand how you're actually going to make it all.

If you're making more than 100% in your existing stuff and you bought -- and you've got this acquisition, where do you -- how do you make this pasta that you're buying if you're not acquiring all of their manufacturing assets? And I'm sorry if I completely missed something, but help me out right there.

And then I have a bigger picture question I'd like to ask..

No. Sure, David. As is common in these kinds of transitions, we have a transition services agreement with them and we have a contract pack agreement to get us through the COVID surges of demand and they've got plenty of capacity on their side to do that.

So we've acquired one that we think long term we need, and we've run -- we've done this acquisition based on what we think the run model is long term to better load the toll system. But in the interim, we have plenty of access to their current capacity..

Okay. All right. That makes sense. And then the bigger question is on brands versus private label. When -- there's a lot of talk right now, McConnell was on yesterday. Mitch McConnell, it was on yesterday talking, about wanting to get a stimulus bill by the end of the year.

Would you agree that the stimulus bills seemingly drive people more towards branded food purchases? Is that something that we have to watch out for when we think about TreeHouse revenues that if, in fact, there is a sizable stimulus bill, that it's, I hate to say it like this, but a negative for private label products as these middle-income, low-income consumers have money, they seem to be trending more towards brands.

Does your data tell you that or do you see it in a different light?.

David, we don't see it that way. We see, and that's what we tried to show on Slide 8. We saw it as distribution, right? When we pared the assortment back and simplified the assortment, it was great for the company and it was a great trade-off, that assortment for earnings and cash. But we lost share.

So we think having assortment back, we don't think the fundamental premise of private label is different at all. Especially if you think about the growth in those unmeasured channels, you all know who those retailers are, they're doing really well through this whole thing and many of them are primarily private label retailers.

So no, we wouldn't feel that as a risk. We did see a pantry load and cutting our distribution as causing those issues, not a consumer behavior..

Your next question comes from the line of Robert Moskow with Crédit Suisse..

I was hoping that name, Mitch McConnell, would end up on this earnings call, but I guess these are unusual times.

So I guess I'm trying to balance out the upside to your business from retailers expanding private label with the limitations of what you can do for them from your supply chain because I read that retailers are trying to expand the number of vendors that they work with to provide more flexibility during COVID, given the supply chain restraints.

So how do you determine whether to take this incremental business? And do you push those customers who are asking for the business for longer-term strategic relationships? Is that your response to them when they ask you for that incremental supply?.

Rob, I think, fortunately, we're -- we deal with virtually every mainstream retailer in the United States and Canada right now, right? So there isn't a retailer that we don't know well and we don't -- we're not able to have a very candid conversation, is this opportunistic? Do we need to just help you for a couple of months or a week? If so, that may come at one price.

If we need to -- if we have an opportunity to be with you for a long term, that might be a different set of economics, right? So I think we understand those things. We can have great relationships with them. So I think we can make each one of those decisions.

And they're all individually different, right? The largest mass retailers are very different than the super regionals, I would say. So I think we know everybody well enough that we're able to make those decisions one by one and either price them accordingly if it's a short-term thing to cover your costs or make a commitment for the longer term.

I think a lot of people are looking a little longer term. This has shown them that most private label manufacturers, in order to be competitive, can't have a lot of excess capacity. And that they need to be longer term versus shorter term in many cases. So I think we've seen more of that lately..

And if I can just go back to David's question a little bit. I thought in the first half of the year, the message was the consumers just don't have the sense of urgency to trade down to private label. They've gotten the benefit of the stimulus package, there's a lot of disposable income. So -- and that's why brands took market share.

Is that still what's happening now? Or do you feel like things are coming back more into balance?.

I think the data would suggest that a lot of people that entered the grocery store are the folks because, as you know, and we showed it on Slide 9 the decline in foodservice, right? The folks who'd left the grocery store over the last 20 years are the same folks who'd left brands for other alternatives for food consumption.

And when they came back, they -- a lot of them bought brands, right? And our data would suggest that a lot of older and higher income folks came back to the grocery store, it's not a surprise that they went back and bought brand.

So I don't think the people who bought private label before the recession or before all of this hit stopped buying private label made. I'm sure there was some of that. But I think the data would suggest that those who typically bought brands maybe with the stimulus haven't been forced to trade down.

So we haven't gotten the incremental lift, but I don't think it's taken our core customer away, if that makes sense..

And I think, just to add just one piece there. The other thing that we have to consider is working with our retail partners and kind of their requests, we prioritize the right SKUs. As we bring our SKUs back online, you'll see our demand kind of pull through better, right, and that's well on its way and kind of working well.

So I think that assortment is going to be better for that private label consumer and that's going to help as well..

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

First, just a quick question on the acquisition. I mean what gives you confidence that this passes kind of FTC in light of kind of the whole trial and tribulations of the cereal business? Because if I remember correctly, the market share in pasta is fairly consolidated amongst 3 or 4 players and not that different from cereal.

So just trying to understand what gives you confidence that this -- in this current administration, and maybe that does change, goes by as quickly as -- or doesn't have the same issues that cereal did?.

Well, if you remember, the cereal deal was a private label manufacturer trying to buy a private label manufacturer. Only 20% of our business is in brand. These are the other regional brands.

I hope that map that we showed in my remarks gives you a good sense that there isn't overlap, right, that we didn't buy market share in markets where we have market share. We did not buy the Ronzoni brand, which lines up against our Mueller's brand.

So I think that both the Ebro legal staff and our legal staff were very capable in laying out -- very careful and capable in laying out a transaction that didn't trip any of those concerns.

And there are -- if you remember, there is a great, big international competitor in the pasta business in Barilla and then there's De Cecco and there's a number of other folks in the pasta category today..

Got it.

So you don't see it as an issue?.

No..

And I think there are many competitors in the pasta market, just to that point..

We didn't buy all the regional brands, to be clear, but I think the way the map lays out, well, it should give you a pretty good sense that we put a lot of thought into that..

Okay.

And then second, and I think we're all asking the same question, but just trying to understand on top line organic growth, did you get the distribution gains that you expected this fall because I guess, I understand David or Rob or other's questions, I think we were all expecting faster growth or faster-than-category growth as we moved into the fall and.

It feels like we've kind of moved up the goalpost again.

And so just trying to understand just because you see some excitement in October, how does that give you confidence that we're not just keeping -- pushing it further and further out? I mean is there any data point that you can say like private label steady, we're gaining our distribution gains and now we have hard metrics that were off the running? Or is this just more intuitively you feel good about the most recent month?.

I think the -- if I may get back to the total distribution points that we showed in the slide and that -- those trends are there early, but they're all pointing in the right direction. And I think the idea here is that this is building nicely.

And the other point that we've made in the different segments of the business, our Snacking & Beverages growth was pretty strong and we think those category is going to be up. Obviously, we're challenged by a few categories, pickles is one, given to some of the challenges in COVID. But we don't have any fundamental concern here that's new.

We're managing through a very difficult environment, but we're getting SKUs back online. We're getting the distribution points back up. Takeaway is happening at the retailer level. It's coming..

Yes. I'd go back to say that we guided the third quarter to be flattish. We grew 700 basis points on a smaller distribution base. That distribution base is coming back now, as we showed you in the slide. So that's why we feel good that we'll get back to the growth rates that we originally guided to..

Your next question comes from the line of John Baumgartner with Wells Fargo..

I guess, first off, Steve, just thinking through the environment here. It looks as though private label TDPs are recovering sequentially.

So can you speak to what you're hearing or seeing going into 2021 in terms of the bidding environment? And how active is it relative to normalized levels? Are retailers shying away because of COVID uncertainty and that makes relations more sticky than you have already? Just curious how that ties into the market share opportunities that may be ahead for you..

Sure. I would say it's trying to normalize. I think through the first 6 months of this or so, everybody was really hunkered down trying to run their business. They were concerned about new item commercialization, those kinds of things.

We actually did a couple of things, Bill spoke to one of them in his script that's been very successful in the cookie and cracker business. But I think they're trying to get it normalized. So I think there'll be the normal opportunities for us that we normally have.

So I would think by the first quarter of '21, it will be in a normalized unless we have a big COVID spike. Obviously, everything is conditioned on that, but I see it coming back to normal levels. Nothing concerning, nothing either side..

Yes. I mean, just to add before you leave the topic. The -- our results have been good in the bid process. Our customer feedback has been very positive, and we have really good success in commercializing in this odd COVID environment. There will always be some turnover in the bid process.

We don't want to win every single one of them because I think we have a chance to protect profitability. But I think it's strong there, and we're doing very well..

Okay. Great. And then specifically on the natural and organic part of the portfolio, I think we've been surprised with how strong the growth has been in that space this year, maybe it ties back to the stimulus benefits in the first half of the year.

But given the challenges impacting some of the start-up brands that are out there, to what extent are you seeing any changes in dialogue or acceleration of distribution opportunities for you in that part of the portfolio? I mean is there any sort of beneficial disruption that sticks longer term in terms of the NOL portfolio coming out of COVID?.

I would suggest that our strength is with a couple of those traditional retailers that have more tiers of private label and have a strong premium or natural organic offering or the true natural and organic retailer, right? So in some cases, those retailers are doing pretty well. It's doing well in e-comm, right? So one of them is tied to e-comm.

So I would say those things have been opportunities. But I don't know, Bill, if you've seen anything else besides that. It's really been driven by a couple of key retailers who are focused on that for private label..

Yes. I would also just say our breadth of our categories here is helpful in that we have such an offering in the space. So I think it's -- there's some benefit there..

The last question for today comes from the line of Rob Dickerson with Jefferies..

I just had a broader question on profitability and margins. Obviously, margins down a bit in Meal Preparations for we've been explaining and then -- but very impressive performance in Snacking & Beverages.

So obviously, I understand, right, you're not giving 2021 guidance, but I'm just curious given all these moving parts, you had some, right, the COVID-driven costs, there could be some incremental on the labor side, but then there's also some offsetting with fixed cost absorption.

If we think forward into, let's say, the next 12 to 18 months, I'm assuming you're going to try to capture as much of that margin lift on that Snacking & Beverage business while at the same time hoping to recover some, the profitability piece, on Meal Preparation.

So I'm just curious like what can you do to try to keep the profitability uptick where you've seen it sticky as you go forward with the understanding that I'm sure some has to be given back. That's it..

Yes. Maybe I can start and Steve can add. The -- first of all, how we think about the margin profile, and to your point, we're not giving long-term guidance.

But as things evolve this year, we're just really pleased with the way our manufacturing operations have stood up our ability to be very effective and efficient in this incremental environment has been helpful.

We'll get back to, right, we'll get back to some of the efficiencies our TMOS program and our lean programs that will continue to drive some opportunities there to expand our margins. We don't think of an inflationary commodity environment, not at this point. So we think things will come back to us in that regard, so we'll be kind of very efficient.

And we'll always have to make some investments in order to maintain that capability, but we think there's an opportunity here to continue to drive margin expansion as we go forward..

The only other thing I would say is it's important to remember that the bulk of the Food Away from Home declines weigh on the Meal Prep division and so that's under-absorbed overhead in plants. That's a number of costs that are weighing on them. So I think the Snacking & Beverage business is great, and they're making great progress.

I think we should assume that in a normalized environment, if Food Away from Home comes back, even just materially if it comes back, it will take some pressure off of Meal Prep's margins. And you'll see a more true picture of what that business can deliver..

This concludes our question-and-answer session. I would now like to turn the conference back to Steve Oakland for closing remarks..

Well, I would just like to thank you all for being here today and appreciate your questions, and we look forward to the next couple of months. And I hope you all stay well and stay safe, and we'll hope for a clean and healthy holiday season. Take care..

This concludes today's conference call. You may now disconnect..