Welcome to the TreeHouse Foods Third Quarter 2021 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, 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 thanks for joining us today. This morning, we issued two press released, which are available, along with our slide deck in the Investor Relations section of our website at TreeHousefoods.com.

Before we begin, we'd like to advise you that all forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations and projections and involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. Information concerning those risks is contained in the company's filings with the SEC.

In addition, we will be discussing operating and financial results on an adjusted basis. A reconciliation of these non-GAAP measures referenced during today's discussion to their most direct comparable GAAP measures can be found in today's press release on our website. I'd now like to turn the call over to our CEO and President, Mr. Steve Oakland..

Thanks P.I. and good morning everyone. Before I get into the details of the quarter I'd like to address the additional announcement that we made this morning. After careful consideration including engagement with many of our shareholders, the TreeHouse Board has approved a plan to explore strategic alternatives.

As we undertake this exploration of alternatives which may include the sale of the company or a transaction to allow us to focus on our higher growth snacking and beverage businesses by divesting a significant portion of the meal prep business, we will remain focused on supporting our customers and on the actions that we are taking to gain share, optimize our portfolio, and grow our top line.

Our Board and management team are steadfast in our belief that the secular headwinds we are facing are episodic and they will pass. The long-term consumer demand trends and fundamentals of the underlying business remains strong.

We're not speculating on potential outcomes or timing of the review, and we do not intend to comment further unless and until the Board has approved a specific course of action or has determined this further disclosure is appropriate.

We have given you a lot to consider this morning not only in terms of the strategic review but our earnings and the outlook for the remainder of the year. So let me put all of this in the context.

At TreeHouse we are essentially the supply chain for our customer’s private label products, placing us squarely in the middle of the macro disruptions across our industry today.

As you've heard me say many times, private label plays a vital role for our customers and given our size and scale we have an obligation to do all we can to provide food and beverages both for our customers and for their consumers. We're making a conscious decision to support the customer during this difficult time.

The changes we have made to our business over the last several years have enhanced our ability to deliver on our customer’s critical needs by providing better service. As a result, we have strengthened our customer relationships which have been a critical factor in implementing multiple price increases this year to recover inflation.

We have made important progress. In fact this has been one of the most collaborative pricing environments that I have ever seen. Our teams are rising to the challenge in a historically difficult operating environment and I'm confident that our pricing will catch up over the cycle.

Bill will talk about pricing more in a few minutes but I'm proud of how our teams are working closely in partnership with our customers to navigate these unprecedented headwinds. Our strong relationship and improved ability to serve the customers is reflected in our third quarter performance.

In seven of our 10 largest categories we outperformed private label, a trend that we've seen over the last year. We're also seeing demand strengthened in the second half of the year.

As we navigate the pandemic we have invested significantly to support our customers, bearing the rising costs to securing ingredients and transportation and to maintain labor in our plants. Well that has enabled us to maintain strong customer relationships and to expand our top line as you saw in the revised outlook for the fourth quarter.

It comes at significant near term impact on our profitability. We believe these costs are temporary and will impact our performance in the near-term but is the right thing to do for the long term success of our customers and TreeHouse.

As the Board embarks on a strategic review, we as the management team are committed to maintaining our focus on the things that we can control including the pricing actions we have under way and supporting our customers. With that as our framework let's turn to the specifics of the quarter on Slide 4.

Third quarter revenue of $1.1 billion grew 5.3% versus last year. On an organic basis revenue grew 1.7% and was driven by pricing of 3%. Demand for private label products has strengthened in recent months to the point that today we have more demand than the supply chain challenges allow us to fulfill. Third quarter adjusted EBITDA was $109 million.

Adjusted EBITDA margin of 9.9% declined 320 basis points driven by inflation, labor, and supply chain disruption. We delivered adjusted diluted EPS in the third quarter of $0.46 within the range of our guidance that we communicated in August.

Slide 5 outlines the impact of inflation, labor, and supply chain disruptions we've seen across the manufacturing landscape. I want to talk for a moment about how these factors are impacting our business. Inflation across the entire complex continues.

Our commercial organization is working diligently on pricing recovery efforts while the escalation and duration continue to be unprecedented. I'll say it again, I'm very encouraged by the level of collaboration that we are experiencing with our customers.

Labor across all manufacturing has not only become more costly but today's shrinking labor participation and the numerous opportunities for all types of manufacturing labor require a more progressive strategy to staff our plants effectively.

To address this our HR organization is working with our teams to pivot our labor strategy being creative and looking holistically at the issues. Although very early in we are deploying new strategies and are just beginning to see some of the positive effect as a result.

This is compounded by the supply chain disruption, materials either not showing up on time or not enough of the necessary inputs arriving at our facilities. Our service levels overall are still in the 90s but certain categories have been under more pressure. Any inherent complexity of private label will continue to pressure our service levels.

Nearly all of our meal prep categories are currently on allocation, a clear sign that orders are outpacing our disrupted capacity. Demand has strengthened since we last spoke and that's very encouraging.

As certain Federal stimulus programs expire we are seeing signs of private label recovery while at the same time we are winning new business with existing customers. Turning to Slide 6, you may have seen similar data from us before.

The top green line represents the change in private label dollar sales as compared to two years ago among those states that opted out of enhanced unemployment benefits early in June and July. The orange line represents the same data but among those states where these benefits expired in the fall.

As you can see dollar sales increased meaningfully among those states where the benefits recently expired approaching the growth rate levels of the states that expired in the summer. This aligns with our expectations that as things normalize consumers will return to purchasing private label and share will continue to recover.

Bill will get into this more but we estimate that in the third quarter we had roughly $40 million in unmet demand due to constraints across the network, either not being able to run lines to the lack of labor or because we didn't have the appropriate supplies. Looking forward our near term priorities are very clear.

First labor, we're addressing how to best improve staffing and attendance across our plans. More broadly we are creating an environment that not only empowers our employees to be efficient and productive but also was fulfilling for them individually and professionally. Second, we must continue pricing to offset inflation.

Our pricing is in the market and while there is a lag we will need to continue pricing to cover higher commodity costs. We'll also focus on cost control and lean across the organization. And we'll work with our customers to identify inefficiencies and opportunities for value engineering across the product mix.

And third, we will continue to focus on the customer. Our teams will continue to work diligently to mitigate disruptions and manage through this uncertainty to fill every order that we can, supplying our customers with food and beverage for their consumers.

As we continue to take actions to support our customers in the current environment our results will be affected in the near term. Slide 7 shows our guidance revisions and updates for our outlook for the balance of the year including the impact of the investments we are making to support our customers.

While we expect demand for our products to continue and strength there will certainly be some limits on how much of that demand we will be able to service. Given that we now expect our top line to finish the year in the lower half of our current guidance range. We're looking across the supply chain to address today's disruptions.

It will be costly in the near term as we invest to serve the customer. However, as I noted earlier we will continue to price proactively to offset inflation. We're a complex supply chain business with 29 categories and 40 plants as we are organized today.

We've done a lot over the last several years to focus on continuous improvement and lean to make ourselves more efficient. In this environment of supply chain disruption however, we are making a conscious decision to invest in the customer bearing significant cost to ensure that our products reach our retailer shelves for their consumers.

It is our belief that investing to serve the customer is the right decision and will serve to strengthen our relationship and the business for the long term. This also provides the best backdrop for the strategic alternatives that we will consider. Let me now turn it over to Bill to take you through the details of the quarter and the outlook. Bill. .

Thank you Steve and good morning everyone. On Slide 8 you see that third quarter revenue was $1.1 billion up 5.3% versus last year of which 3 points was pricing related. Had been able to service the $40 million of revenue that Steve mentioned earlier, we would have delivered the top end of our revenue guidance in the quarter.

We're taking creative and dramatic steps to address our service challenges in these very difficult times. On Slides 9 and 10 we have provided revenue by division and by channels. Net sales was 7.4% elevated by 5.2 points from the Pasta acquisition. Organic sales grew nearly 2% of which 4.6 points was pricing.

As noted on our prior calls, the rapid escalation of soybean oil, a meaningful input for dressings business was one the first commodities for which we priced earlier this year. Volume and mix declined 2.8 points driven by supply chain constraints and partially offset by the continued improvement in the food-away-from-home channel.

Food-away-from-home is expected to return to 2019 levels in early 2022. Snacking & Beverage revenue grew 2% of which 1.1% was driven by volume and mix and in particular new product introductions. The balance of the growth was split between pricing and FX. Slide 10 details our top line by channel.

The unmeasured retail channel which includes key retailers in the value club and online space continued to drive growth of 6% this quarter. This compares to a decline of 2% in the measured channels, a sequential improvement over the second quarter. Looking forward we expect unmeasured channel growth continue to outpace measured channels.

Slide 11 provides our earnings drivers. Volume and mix including absorption rate negative $0.26 of impact. Moving to the right I want to spend some time on PNOC, pricing net of commodities and give you a sense of both our pricing progress as well as the cost impact of rising interest [ph].

I want to be sure to recognize our commercial teams and a very fine job they've done coordinating and communicating with our customers and implementing multiple price increases this year. As Steve noted and I will reiterate we will describe the pricing environment as very constructive.

Our intense focus on service and strong communication with the customer is enabling us to have a very good dialogue around pricing. This gives me confidence that we will be able to continue to price and recover the continued input cost escalation over the cycle.

The pricing actions we took early in the year are not being reflected in our P&L as expected. In the third quarter, pricing contributed $0.43 partially offsetting inflation we incurred in the first half of the year. The continued cost escalation in commodities, packaging, freight, and labor is outpacing our pricing recovery.

In the third quarter the higher input costs was a negative $0.88. Total PNOC or the net of these two is negative $0.45. Also in the third quarter operations contributed $0.22 in total versus last year.

While the comparison to the prior year is positive, the correlated disruption impacting labor and supply chain cost the company by about $0.07 in the quarter. Across our 29 categories and 40 plants, we've been working hard to mitigate the impact.

The balance of the operations largely represents the higher cost inventory produced in the third quarter that will impact us negatively in the fourth quarter as we sell that product. SG&A was a benefit of $0.16. This is due to the reversal of variable compensation plan accruals and continued cost management of discretionary spending.

Finally, interest expense favorability contributed $0.08 in the quarter versus last year. Turning to Slide 12, I would like to make a few points on our balance sheet. In the last 12 months we have paid down more than $300 million in debt, reducing total debt from $2.2 billion to $1.9 billion. This is our lowest debt level since 2015.

We've also reduced our weighted average cost of debt by 100 basis points due to the refinancing completed earlier this year. This action lowered our annual interest costs by approximately $20 million. Our revolver is largely undrawn, so between cash on hand and the revolver we have strong liquidity of nearly $800 million.

As anticipated we have generated cash in the third quarter and will do so again in the fourth quarter. Financial leverage in the third quarter was 3.9 times as we built inventories of repair and anticipate continued supply chain interruption.

Turning now to Slide 13, our revised guidance for remainder of the year takes into account the following; similar Q3 we anticipate we'll have some limitations on our ability to meet all of the demand indicated by our customer orders. And we think revenue in 2021 will be between $4.2 billion to $4.325 billion.

We do not see signs of inflation in society. Although we are on track to affect our zonal [ph] pricing actions, we will now full recover all of this year’s inflation in the calendar year due to the timing lag.

While we are exploring many avenues to mitigate the lack of labor availability and supply chain dynamics, in the near-term our cost to service to customer will be significantly higher. As a result of these factors we are reducing our debate guidance to 155 million to 175 million which compares to $230 million to $260 million previously.

We anticipate that most of our investments to serve the customer will impact us on the COGS line resulting in a sequential and year-over-year erosion in gross margin in the fourth quarter. This translates into full year adjusted EPS of $1.08 to $1.28 down from our revised August guidance of $2 and $2.50 per share.

We're disappointed be sharing a second guidance revision. While I echo Steve’s earlier comment, we believe these near term investments to support our customers will serve to strengthen our relationships and the business over the long-term. We are reducing our 2021 free cash flow guidance to at least $100 million.

I'll point out here that as we manage our working capital and focus on serving our customers, we're making conscious decisions to build inventory which shoots our inflation is more costly. As a result, the working capital contribution from inventory this year will be lower. Our debt repayment and liquidity is largely unaffected.

Slide 14 covers our fourth quarter guidance and our expectations for adjusted EPS between $0.00 and $0.20. Before turning it back over I think it's important to give you a way I think about normalized profitability and the large moving parts of disruption this year specifically in three areas.

First, private label demand and changing consumption patterns; second, inflation and pricing; and third, labor and supply chain disruptions. We do not believe these factors represent structural changes to the business so I want to try and quantify the impact on 2021 and our underlying profitability in broad strokes.

On Slide 15 we started with our [indiscernible] EBIT guidance of approximately $300 million which we believe that this is a much closer and normalized annual level of profitability for the company. As you move from left to right we have layered on our estimates for the full year impact of the macro disruptions.

First, on demand and private label consumption. Recall that in the first half of the year we cited softer private label consumption trends due to the macro environment such as branded promotional activity in certain categories and government stimulus supporting consumers trading up to brands.

We talked in August about this impacting revenue in both the quarter and the year and we estimated this to be $40 million impact to EBIT this year. Turning to inflation, our original guidance contemplated input cost headwinds of approximately $100 million to $110 million.

The additional inflationary headwind is another $125 million, more than double our original estimate. Our pricing actions suites covered this inflation in the market and confirmed by customers. I showed you earlier how pricing is starting to be reflected in our third quarter results.

Our realized Q3 price increase of 3% is expected to accelerate 4% to 5% in Q4 building to low double-digits in 2022. We estimate that the tiny lag in calendar 2021 is approximately $75 million.

It's important to understand that over the course of this cycle we are confident we have the initiatives in place to recover the entirety of the inflation headwinds.

Finally, because trends related to labor and supply chain disruption is affecting our ability to meet strength in demand, for us these challenges are especially acute across our 40 plant network.

Despite the near-term costs we believe the right thing to do for our business over the long-term is to continue to serve the customer to the best of our ability. We estimate that the incremental cost this year is approximately $60 million. We've also captured the benefit of the reversal of the variable compensation accrual of $35 million.

The net of these factors represent the near term impact that has driven our 2021 EBIT guidance to $165 million at the midpoint. While the magnitude and the velocity of change across the landscape continues to be unprecedented, we strongly believe that these disruptions will at some point normalize.

It will take some time, it could be a few quarters or more. What I do know and what I do have confidence is around our teams and the initiatives we have put in place to mitigate the disruption. Private label demand is strengthening. Our pricing is confirmed and we're mobilized to effectively address further inflation with additional pricing.

We're getting creative around how we staff and schedule our plans, thinking holistically about how we attain our people so we can improve attendance. We're getting ample opportunities across the entire supply chain spectrum. On the production side this includes ensuring we have backup suppliers to prioritizing our customers most important skews.

On the transportation side we have completed additional freight RFPs and in some cases we will utilize the spot market to ensure that we can get inputs and finish product to the right place at the right time. And we will further leverage lean and continuous improvement learnings throughout the network.

When we come back to you in February at our year-end earnings call, we will give you more specific direction on 2022. With that let me now turn it back over to Steve to wrap things up so that we can get to your questions. .

Thanks Bill. I will keep my closing remarks short today and leave you with three thoughts. First, we are encouraged by the strengthening demand. Today we have more orders than we can fill. As our customers focus on surety of supply, we're winning business and outperforming in an environment where we've been taking a great deal of pricing.

We are pricing that is in effect in the month of December which is unprecedented for as long as I've been in the food business. This is a difficult environment for everyone but customers have been appreciative of the level of detail, transparency, and communication we are providing.

This cements my belief that we're making the right decision to invest in the customer. We are making a clear choice to bear the near-term cost of servicing our customers to help keep their shelves stocked. As a result, we are outperforming in our largest categories.

When things normalize and they will, we will be a stronger business and benefit from having served the customer during this time of unprecedented disruption. The alternative would have been to spend less and choose not to service as much demand.

Well, that might have been a near term solution for our earnings, I don't believe it's the right long term decision for the business. And finally, we'll stay focused on running the business as the Board conducts its review. As I mentioned earlier, we won't be speculating on potential outcomes or timing of the review.

When we have something definitive to report, we will do so in a timely manner. With that, let's open the call up to your questions..

[Operator Instructions]. The first question comes from Jon Andersen of William Blair. Your line is open..

Thank you. Good morning, everybody..

Good morning Jon. .

A couple of questions. One, Steve you mentioned that -- a couple of times that the demand is strengthening for private label. I understand that you're having some supply chain disruption issues now so the demand is exceeding your ability to supply.

But can you talk a little bit more about, when you say about stronger demand and talk about stronger demand for private label, are you seeing private label share gains begin again, are you seeing private label have more success now, vis-à-vis branded offerings or are you talking more specifically about your business within the private label segment, just trying to kind of parse that out a little bit more?.

Sure. I would say, good morning Jon, I would say it's a couple of things. Yes, the macro data and we shared a slide that suggests the impact of government stimulus and where that's happened earlier, where it's come off later, and the share gains there. So the macro share data is improving.

But we also talked about how we continue to perform well in our top categories. So, our strategy is working right, to serve the customer through this and, we talk about this, but it's unprecedented, right.

The work that we're doing together with the customer and the fact that we're being awarded new business through this disruption, would suggest that we are performing really well share wise and that's at the same time when we see the overall macro, private label, we're starting to recover. So I think it's both..

Okay. And then on, I know you're not prepared to talk about 2022 at this point, but when I think about your business in 2020, your EBIT was around 300 million, that was the original plan this year, a little more than 300 million. We're now looking at a little more than half that 165 million.

As we broadly about 2022, the waterfall you put together on Slide 15 I believe, would suggest that much of this is transitory or temporary in nature.

How should we think about what 2022, is it getting back to a run rate of 300 million in EBIT or are there investments as you put it in the customer relationships and service levels that are going to prohibit you from getting back to that kind of level for some longer period of time? Thank you. .

Yeah. Thanks, Jon. I'll start and I'll let Bill help me here. But, obviously we're not prepared to guide next year.

We'll do that in our fourth quarter call, and but we did really want to leave you and Slide 15 was designed to leave you with some thoughts on the earnings power of the company, which we think are actually better than they've been in the past.

So if you think about what we talked about today, the work we've done on commercial excellence and the work we're doing to invest in the customer today, is resulting in very strong top line growth and new business, right.

It's also allowing us to recover unprecedented inflation, right and we are convinced that across this cycle, our costs and our pricing, those lines will cross. So we feel good about those things.

The question is, when will supply chain normalize? We're convinced that will happen and when it does given the fact that private label is also improving, we think we're going to be in a position to take an outside share of that, an outside share that. So we'll try to get more information as we go forward.

We'll do it on our next call on our thoughts on next year. But I think the model that you have to build and why we thought this was so important, is when that recovers, we should be in a better position than we've ever been to take advantage of it..

So maybe the quick follow-up is, on Slide 15, the $60 million that you've identified as supply chain disruption, impact on EBIT this year, is that -- what's the run rate view of that on an annualized basis, does that reflect -- because that -- I don't know when that started, what your expectation -- the cadence of that, do you know what I mean, is there a way to think about supply chain issues persist, what could that mean on a full year basis in 2022? Thanks..

Hey Jon, let me see if I can add a few pieces of color here for you. First and foremost as Steve mentioned, as you acknowledge, we won't have much detail on 2022. But going to give you a couple of things to think about, first is pricing. So in Q3, our pricing was up 3%, it was probably closer to 3.5% as we lapped a one-time trade to a year ago.

We expect that to be about 4.5% in Q4, and then again to 2022, we'll get into the low double digits as far as pricing. And so when you look at the Slide 15 that we gave you, when you think about kind of the pricing lag, and then the supply chain disruption, those are the two pieces that we have to focus on.

At a point in time to Steve's point, somewhere in the cycle, the pricing will recover the inflation. And the lag will be handled by us getting back to normal operations in terms of having enough labor to service the demand, as well as having enough labor to do our typical cost programs that we allow to take costs out in the manufacturing facilities.

And then as the inflation declines, we'll moderate how that comes down with pricing. So we have an ability, we think over the cycle to recovery. The point around next year, I think it's just too early to tell.

The margins that we execute with, we are in our midpoint of our guidance, we're predicting that to be very similar to Q4, which is extraordinarily low compared to our normal run rates. And it's really driven by those labor challenges.

We're making a lot of headway there, we have a unique labor strategy that we're applying to, to help solve that in the plants. But we're just not in a position to call the timing. But over the cycle, we think we'll fully get back to a normalized $200 million EBIT, which is what we showed on that slide..

Okay, thanks so much. I will pass it on..

Your next question -- the next question comes from Andrew Lazar of Barclays. Your line is open..

Hey everybody. .

Good Morning, Andrew. .

Steven, I wanted to start off first with the comments around the clear and conscious decision to invest in the customer. And I think, as you mentioned the alternative, I think most would agree it didn't make a lot of sense. And so you take sort of some of the near-term pain to invest in the customer.

And as you said, you're winning some new business, perhaps as a result of that choice as well.

So I guess my first question is, how do you ensure that relationship that in theory is getting strengthened here, sort of matters when things normalize and I asked that because, as we all know, private labels inherently are a pretty competitive world and I know, just historically, it just seems like a lot of the investments, let's say TreeHouse or others have made in scale and being sort of a better supplier and being a more efficient supplier for retailers across a whole bunch of private label categories, it just seems to me it's sort of never played out in a way where key retail customers have said, hey, that's something we value and we'll truly be less willing to maybe go to some small regional player, just because they can give you a penny less per pound of a deal, it just never seemed like it's completely come full circle to really benefit TreeHouse longer term and I'm wondering if you think this time is different, again, when things normalize and why that would be?.

Well Andrew, I think this time is about as different as it can get, right. And a surety of supply has become such a key metric. We're seeing longer-term agreements, we're seeing price transparency in agreements, we're seeing a different customer environment, there's no question.

But we're also focused strategically on core retailers and core segments, right. We were running our two segments fundamentally differently. We're running our growth business differently than we're running our cash business. And so I think we better are aligning our business units with how the customer thinks.

So, unfortunately all of this disruption in the last year or so you haven't seen the progress we're making strategically. We think it's all of those things.

But what gives me comfort is the relation -- is the customer agreements, the more long-term agreements, the more commodity escalator type clauses that are in agreements today, that's starting to build momentum. And that tells me that there's a longer term connection here..

That's helpful. That's helpful, thank you. And then when we think about, and thank you for breaking out some of the pieces on Slide 15, that's helpful. And I would agree that the vast majority of that, over the course of a cycle will be will be transitory.

The one piece that I guess, could potentially be more structural, and this wouldn't just be for TreeHouse, of course, but for everybody would be just sort of what it's going to take to keep the labor force at sort of at the plant and engaged and I don't know, whether that's just longer term wages for the industry as a whole go higher.

But I guess, do you think there's an element of that, that could end up being somewhat structural, and maybe impair to some extent that sort of 300 million sort of EBIT mark that you highlighted?.

You know, I don't think it'll impair our EBIT but I do think it is structural. And we typically don't price for labor, we typically price for commodities and for freight. And what we've done in this case is we've priced for the structural change, what we view as the structural change in labor.

And so we assume that we should through efficiency be able to take a couple points out of our cost structure every year, tough to do in a COVID environment, but a very reasonable expectation. I think most CPG has that expectation. But this time is different.

I do think that labor is a structural change and we have a point of view on that for this year, next year that is built into our pricing. And that's a communication that we're having with a customer. I think the customer sees it, and they agree with it.

So I do think there'll be a structural change but I think, hopefully that's going to be almost behind us. So I don't think it's going to hurt our long term earnings power..

Right. Thank you so much.

Very quickly, last one would be depending on what you ultimately do or don't do with the portfolio going forward, I guess how much scale do you think is important for a broad based, private label supplier like TreeHouse to have with the customer because you mentioned that a possibility is potentially divesting a very large portion of your sales base and so I'm just trying to get a sense of how that would impact if it does your relationship with customers to whom you are now supply over 30 different categories of private label product, even though I know not all of these categories are created equal in terms of margin structure to you and competitiveness within the category and things of that nature, just trying to get a sense of like, how much scale is needed or how little is too little based on what you want to try and accomplish going forward? Thanks so much..

Sure Andrew. Well, I would just leave you on -- we've talked a lot about our strategy of depth versus breadth. And, one of the options we said was the best thing the piece of the meal prep business simply allows us to pull our strategy forward. We have talked about those businesses as growth engines and cash engines.

And should we -- used the cash engine businesses to generate funds to invest in the growth business. And so if we decided to pull that forward, we would simply have that cash available sooner and be able to execute that strategy a little faster. I think both of those businesses are plenty of scale in our industry.

The important thing is that you're -- that you serve the customer well in the particular category. So I think we would never put something out there that wouldn't allow that to happen but we think there are plenty of alternatives and I don't want to prejudge what will happen here. The Board is going to do a full review of all alternatives.

But there are plenty of alternatives that will bring a number of options that would -- that scale will not be a barrier to..

Great, thank you so much. .

Okay, take care..

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

Thank you. Good morning..

Good morning, Chris. .

Hi, I had a question and it was a bit of a follow on to earlier questions.

But I guess from the standpoint where we do -- you do view and many of these cause is transitory in the cycle and your pricing is catching up, I understand the near term disruption but I want to understand if you believe you can capture these costs over the course of the cycle in particular with that strong pricing coming through next year? What ultimately led to or what's the outcome of the strategic alternative review, meaning if you think you can get this back, is there something else going on and like within meal prep in particular, that's challenging the business that you want to try to solve for now?.

You know, Chris, I would just say that our Board and our management team are about shareholder value. And there's been a disconnect, we think, for some time in TreeHouse’s cash generation and TreeHouse’s growth opportunities, and quite frankly our share price.

And so if we have a chance to do better for our investors, we're going to do that, regardless of the timing. We think the backdrop, as you just said, and the backdrop as I explained on an earlier question, whether you buy 100 shares of our stock today or you're looking to buy all of them, you're buying it based on your conviction on the future.

And we're convinced that the conviction on the future is really bright. And so if there's a disconnect between the marketplace and -- the public marketplace and another marketplace, our Board feels an obligation to review that and to give our shareholders the best possible options..

Okay, thank you. In an environment where you're obviously considering alternatives, but in particular focus on the meal prep business, historically you talked about that TCO segment of your business you called kind of reviewer revitalised. You also had your cash engines.

If I think about the businesses from that breakdown you had historically, is that the review and revitalize and the cash engine that would be most likely for you to consider selling if you were to sell just pieces of the business, I don't know if that's a fair question or not but trying to understand how to think of it in those previous buckets you had?.

I would just say that, I wouldn't be surprised with a transaction that would approach $2 billion. There's probably $2 billion of businesses that would provide a great scale platform in the private label industry, and would allow us to do what I said earlier, simply pull the strategy forward. Those are our cash generators.

If we can monetize those and invest heavily in that snacking and beverage, that high growth platform, that makes sense. But you know what, I hate to get too involved in this because I think the Board is going to -- we talked very openly about the sale of the company as an option, and about all options.

And so, I just want to make sure that we don’t jump the Board here, let us run a process and we will be back to you when it is perfect. .

Okay, I appreciate that color. Its good perspective Steve, thank you. .

Thanks Chris. .

The next question comes from Robert Moskow of Credit Suisse. Your line is open. .

Hi. I think most of these questions have been asked. But I guess I would like to know, a lot of your food peers have run into supply chain problems, all of them have.

But it just seems like TreeHouse’s, the impact on TreeHouse has been bigger than the rest, both on the magnitude of your guidance cut and also just now you are talking about a strategic review of the whole business.

So, maybe you could -- maybe in the context of the 60 million you need to spend, what part of the supply -- why is that your supply chain seems to be having a feeling more pain than the rest?.

You know Rob, I would say there is a couple of things. You have seen the peer set have gross margin down anywhere from 250 basis points to 500 basis points. So, we probably fall right in the middle. The one thing I think to remember about us is we are only a supply chain business, right.

We don’t have marketing levers, we don’t have many of the other levers that you have in your branded lives, that I had in my prior life [ph]. But also just the nature of our complexity, okay. We make a multiple of everything we make. We do it over a multiple of plants for a company our size. That really works well in a normalized environment.

But when your vendors, labor gets short and I ask for 15 varieties of the same item, we are probably the more difficult and the complex customer to serve for our vendor. We ship an awful lot of freight for our size but we ship it out of 100 ship points versus a dozen ship points that a similar size CPG company would do.

So I think we are just -- the complexity of private label is inherent and it is reflected TreeHouse and it is probably reflected in the impact..

Okay, and a follow up. Slide 17 says you outperformed in seven of your largest categories, but I noticed that you didn't include Pasta or beverages. And these are categories where you have been investing.

So can you tell me what's happening specifically there, are you losing share, and can you be more specific?.

You know, no. I think with all the noise in our Pasta acquisition, I mean, our Pasta business in total was up a lot. It's up in branded, it's up in different regions. So I think we just chose not -- we will speak to that maybe in a future call.

So we didn't miss that in any reason, in particular, other than the fact that there's noise in it from what's in last year, not in this year. So no, we just look at the largest categories where we're focused and those are working. So we didn't pull any out or exclude any, because we're losing share..

Can you tell me a little bit about how they're performing, though, like is Pasta meeting your expectations, is beverage?.

Yeah, sure. The Pasta business is incredibly strong. It is impacted by the labor issues that we have today. And I saw -- I think our pasta business is incredibly strong, it was reflected in our -- I don’t know Bill, if you have the exact data in front of you, I'm sorry, I'm trying to dig as we speak for the exact data. But our Pasta business is good.

And the only thing going on in single serve -- and I'm assuming when you say beverages, you mean single serve beverage not ready to drink?.

Correct. .

Yeah. Because ready to drink business, quite frankly, is on fire. Single serve beverage at existing customers is performing extremely strong. We did have one customer change during the quarter that probably has a sequential negative lag on that quarter. But the absolute business is strong and year-to-date business is strong.

So Bill, do you have the data in front of you. [Multiple Speakers].

Right, I have a little context on Riviana in particular and that acquisition we made a year ago. Overall it is going very well and we're pleased.

The Q3 revenue for Riviana was 33 million, which was a bit hampered by the supply chain disruption and their allocation and dorm is spiking, but we expected EPS for the year of $0.20 to $0.30 and Riviana is already there. On the revenue side, in a normalized environment we think it'll be fine.

Service has been challenging a bit just due to the overall supply disruption. But as you may have seen, Ebro [ph] did close their California facility, and we're moving that volume into our plants. And so we're on track, for the most part synergies are good. So our Pasta business is strong. .

Okay, thank you..

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

Thanks, good morning. .

Hi Bill. .

Just trying to understand kind of price gaps and how they are today and how they are moving forward. I mean, it seems like and I think part of the model is, it's a little bit takes a little bit longer for you to pass off pricing with every retailer versus like a national branded competitor, and I don't think that's changed.

So just trying to wonder, have the price gaps gotten wider, where private label is picking up because of that, and then as your pricing fully goes through in the next few months, maybe that that changes and the price gaps tighten and private label kind of loses or loses some of its momentum, or the retailer is going ahead and taking the pricing, and you're just not going to benefit from it until the price goes through?.

Hi Bill, it is Bill Kelley. The price gaps that we see today are just -- they're close to a normalized rate, slightly higher, but not anywhere of any significance. As you can imagine, lots of noise with the promotional pieces and some of the trade and the leverage that CPG pulls to manage their margin profile.

But we think the pricing is coming through, you've heard from the CPG peers, pricing is coming through as well. So we think those gaps will be near historical rate, and it'll be positive for us as we move forward..

But as of today, you don't think price gaps are a reason why private label is starting to bounce back, it's just -- it's more stimulus checks and other things?.

Yeah, I think it's more consumer behavior than price gap. We think the price gaps are normalized across our system. I mean, there's a few categories where the price gaps are high. There's a few where they're tight, but we would say they're near normal levels, maybe a little bit higher than normal levels, but not dramatically. .

Got it. And then just one other on the supply chain, going back, you and most of your peers had a kind of remarkable job during the first lockdowns, pandemics, supply chain pressures, stuff like that. How was that, that much different.

Is it just, it didn't happen as fast and you didn't have to do kind of emergency operations or and crept up on so many people or was there something I'm missing?.

No. I mean, if you think about when we were essential workers, right, the initial lockdown our vendors were lined up to support us. Our trucking companies were lined up to support us because our other industries were closed. And the demand for labor wasn't as high. The demand for labor as the economy reopens is enormous, right.

I mean, you can't open a newspaper or a Wall Street Journal without an announcement from either a large retailer or a large e-comm retailer or someone that's going to hire 10s of 1000s of workers. So I think the -- and then at the beginning the stimulus hadn't built up and the consumers are in that individual's pocketbook.

So I think it was a very different sense. At the beginning, it was about keeping our people safe, distancing folks, doing all those things, now it's about availability.

And there's so much competing for the resources, the competition for drugs, the competition for ingredients and packaging, all of those things is fundamentally different than what happened at the beginning..

Got it, thanks for the color. .

Thank you..

The last question today comes from Carla Casella of J.P. Morgan. Your line is open..

Hi, I'm wondering if the asset sales, is that a -- is your thought there between the selling assets to pay down debt or would proceeds be -- have to or be considered for debt pay down?.

Hi Carla, good morning. I think per agreement, we will be required to invest in our business as appropriate. We're pretty comfortable with our debt structure as we have in place and that depending on the outcome of this feature -- then we will update the capital strategy accordingly..

Okay, great. Thank you..

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

Well, I'd like to thank you all and I'm sure we'll be together soon. So have a great day and appreciate all of your thoughts and your questions. And, we'll talk to you soon. Take care..

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