Welcome to the TreeHouse Foods', Second Quarter 2024 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

At this time, I would like to turn the call over to Matt Siler of TreeHouse Foods for the reading of the Safe Harbor statement..

Good morning, and thank you for joining us today. Earlier this morning, we issued our Second Quarter earnings release and posted our earnings deck, both of which are available within the investor relations section of our website at treehousefoods.com.

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

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

On September 29th, 2023, we completed the divestiture of our Snack Bars business. Consistent with prior quarters, we will discuss our results on an adjusted continuing operations basis. A reconciliation of non-GAAP measures to their most direct comparable GAAP measures can be found in the release, and the appendix tables in today's earnings deck.

With that, let me now turn the call over to our Chairman, CEO and President, Mr. Steve Oakland..

Driving manufacturing efficiencies through TMOS, our TreeHouse Management Operating System; procurement savings opportunities; and improving the efficiency of our distribution network. The benefits of TMOS can be seen in our Overall Equipment Effectiveness, or OEE.

We have seen good momentum throughout the first half of the year, driving an increase in our service level metrics as planned. We also feel confident in the benefits we can achieve from our recent work across procurement.

This particular supply chain initiative is integral to the roughly $50 million of gross cost savings we outlined as a driver of the improvement in our second half profitability.

More specifically, in many cases, the procurement contracts we have negotiated provide savings in the current year, as well as the opportunity for further savings throughout the life of these agreements.

Finally, work to improve the efficiency of our distribution network continues with logistics utilization and efficiency initiatives providing savings today. We continue to develop long term strategies as it relates to our distribution network consolidation, which will bear more fruit over time. Moving on to an update on one of our broth facilities.

As you can see on Slide 10, our efforts continue to progress as anticipated, and I'm happy to report that we are running the key broth production lines and shipping product from this facility today. We have upgraded our equipment, refined and improved our processes, and are progressing against our internal time line.

Looking ahead, we will continue to work with our customers to fulfill current needs and prepare for the upcoming broth season. We believe the restoration of this facility will provide the planned contributions to net sales and profitability in the back half.

Before I turn the call over to Pat, I'd like to provide a brief update on our sustainability efforts.

Last week, we released our annual Environmental, Social and Governance report, which captured the progress we've made in 2023 relative to our sustainability goals, including reducing greenhouse gas emissions and increasing the use of recycled content.

Sustainability remains an important focus area for many of our customers, and we are continuing to make progress on our initiatives. We believe this work will represent a long term competitive advantage for TreeHouse and better align our business strategy with the priorities of our key stakeholders.

We are pleased with the strides we are making, and encourage you all to read our 2024 report. With that, I'll now turn the call over to Pat for further detail on our second quarter results and our updated 2024 outlook.

Pat?.

One, seasonal volume. Given assortment within our portfolio, we tend to have our highest volume periods in the second half of the year, driven by categories including coffee, creamer, hot cereal, refrigerated dough and broth. We continue to expect that our broth business will be a stronger contributor in the second half. Two, net sales opportunities.

We've talked about the net sales pipeline that our teams have been working to convert. We have good visibility into those contracts and expect an uplift in the third and fourth quarters, as well as into 2025. And three, incremental pricing to recover inflation. In the first half of the year, we executed pricing to recover cocoa inflation.

This pricing is effective beginning in the third quarter, which will benefit our second half net sales. We've provided a similar analysis as it relates to our anticipated adjusted EBITDA performance on Slide 17. The primary drivers of our second half improvement includes the following.

First, the seasonal volume and mix uplift we typically experience in the second half, as well as the conversion of new net sales opportunities from our pipeline and our broth business returning to normalized service levels. Second, supply chain initiatives.

Our teams have been making great progress in executing our supply chain initiatives around TMOS, our distribution network and procurement, which we expect to be the largest contributor to our second half profitability.

And third, the aforementioned cocoa pricing we implemented will also benefit our second half profitability as we get back some of the drag we incurred to our profit in the first half.

In closing, I'm pleased with the improved business momentum heading into the second half of the year, and we will continue to focus on successful execution as we move forward. With that, I'll turn it back over to Steve for closing remarks.

Steve?.

Thanks Pat. Before I open the call up to your questions, I'd like to end where I started, which is that the business is well positioned for the remainder of the year. To that end, I want to thank the entire TreeHouse team for their hard work and dedication in driving our strategic execution as a private brand leader.

Our topline performance is improving, and we are on track to deliver organic volume growth in both the third and fourth quarters. We are executing on our initiatives across the supply chain, which should help drive gross margin expansion and improve the consistency of our performance in the second half.

And we have restored production capability at our broth facility in line with our plan, and are well positioned to deliver for our customers ahead of the upcoming peak season.

We will continue to prioritize execution, sales and volume growth and margin expansion as our strategy plays out and we capitalize on the benefits from the industry and consumer trends. With that, I'll turn the call over to the operator to open the line for your questions..

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

Hi, Steve and Pat. Good morning..

Good morning. Good morning, Andrew..

Hey there.

Steve, to start off, you've talked a lot about the pipeline in sales that are starting to convert into wins, which is nice to see, I guess how much or how would you dimensionalize how much of the full year is based on wins that you sort of know are converting like you've got the -- It's secured, if you will, and have visibility to it versus ones that could convert, and if they do, I guess would represent either upside to sales growth in '24 or give you more visibility into '25..

Sure. Andrew, the guidance that we've given today counts those things that have been secured, right? And so, if you think about the back half, there's a couple of things at play here. Obviously, restoring our broth facility was key and we've guided that, that's nicely on track. And then as we lap those losses, turning those into wins, right.

And so, the numbers we have in the deck are, you know, reflect just those things that are committed. Are there some opportunities that could maybe impact the fourth quarter? Certainly there are, but they'll actually be more impactful for next year..

Got it. And then you talk about private label share growing in your categories.

I know it's always a harder one, but what about TreeHouse's share of private label in your categories? I mean, have you seen that, I guess stabilize or start to improve, and if not, when would you expect that?.

Sure. And honestly, that's been the most frustrating part of both the exits that we did last year in the broth facility because it's masked that to the outside world. So, we've seen ourselves do well in places like cookies, in places like dough, in places like crackers, but it hasn't been obvious outside the business.

And so, we expect that to turn in the back half. In fact, the guidance that we have, if you look at the midpoint of that, would suggest we'll need to do a little better than the marketplace. So I think that reflects a little gain of share, at least specifically in the fourth quarter, you'll see a gain of share..

Great. Thank you. And then a real quick one, just Pat, if you'll be able to quantify just the amount of the timing shift of the freight benefit from 3Q to 2Q? Thanks so much..

Yes, I think that's a few million dollars of the over delivery that we saw in the second quarter..

Thanks very much..

Great. Thanks, Andrew..

The next question comes from Matt Smith of Stifel. Your line is open..

Hi. Good morning. Pat, I want to ask, you highlighted $50 million of gross productivity savings in the back half of the year. If we go back to the investor day you were targeting, $250 million through 2027.

Are you seeing, have you seen anything in your procurement activities or the supply chain and distribution review where there's potential upside to that $250 million as you move through the years?.

I think we feel really good about delivering that $250 million, Matt. So, I think it's probably, given that that was a multi-year target, it's probably hard to say upside today. I think we feel really good about the progress in terms of what we expect to deliver this year.

And then obviously, everything we do this year helps us into the future years as well as that lapsed. And so, we feel really confident about where we're at and the progress that we're making across all three elements..

Thank you. And could you talk about the bidding environment? You talked about winning a couple of contracts in hand with line of sight into potential future wins.

Are you seeing a fairly rational bidding environment? Has there been any impact from some of the deflationary inputs that we've seen, especially across grains?.

Yes. I don't think we're seeing anything that we would describe as irrational bidding behavior.

I think we are in an environment that we, you know, we feel confident in, and we feel good about the categories that we're in, too, which was one of the changes with our strategy of, in growing categories, we feel like we compete really well, and we're in more of those today than we were before..

Thank you. I'll pass it on..

The next question comes from the line of Robert Moskow of TD Cowen. Your line is open..

Hi there, Steve..

Good morning, Robert..

I kind of wanted to gauge your thinking on how the portfolio stands today. Do you think that you're done on rationalization efforts? There's been so much over the years, and you yourself said it's been frustrating because it doesn't show the market share gains you're picking up.

Do you think you're done? Or do you -- is there more you have to do? And then secondly, on broth. Are you now fully back to where you were before in terms of sales on broth. Like in the back half of this year, do you expect to be 100% of the business, or are you just making improvement here compared to last year and still have work to do? Thanks..

Sure, sure. Let me touch on the first one. Obviously, looking at your portfolio was good hygiene, right, to constantly be doing that. You saw that we have impaired our ready-to-drink coffee business. That is a very small business, it's like $25 million in sales.

That is a category that -- actually the capital was going in when I arrived, right, and the previous management team had a pro forma and a plan there that, that was going to become a nice private label business.

Well, unfortunately, not all of those things work out, right? I think the private brand share and ready-to-drink coffee is like 1%, right? And so we've worked closely with a number of retail customers that tried that, and that is just one of those categories that the consumer buys brand, not private label. So that one makes sense to us.

And so we think those kinds of things need to happen. But for the most part, Rob, we're in a great place, right? We like the categories we're in, we have a couple of categories that we talk about where we're not as -- we're not as deep as we'd like to be, and we'll make investments.

So I would say it'll be investments rather than divestments, right or rather than exits there. So, the portfolio is in good shape. And then when it comes to broth, I think we'll be very close to fully 100% by the fourth quarter.

It may take us into the first quarter to be absolutely 100%, but we've got the four key lines running in our Cambridge facility today, and we're building momentum there. So, we think we'll start to fill the pipeline in the third quarter and we'll serve the demand.

The interesting thing is, and I think I've spoken to this before, is we actually have more business on the books today than we did before this all happened.

And some of our largest customers and their QA departments have been through this journey with us, and see the investments that we've made and feel very confident in our ability to deliver long term. And so they've actually awarded us some more business, right? So, we feel good about that.

It's a tough thing to run, it's a very complicated process, and that capacity is very valuable, and we're committed to continue to invest in it. So, we feel good about it..

Thank you..

The next question comes from the line of Carla Casella of JP Morgan. Your line is open..

Hi. Thank you for taking the question. You may have said this, I might have missed it.

Did you say what the impairment was related to?.

Yes, we just covered that. So that was on some assets within our ready-to-drink beverage business, where we've made the decision to move on from that business this year..

Yes, Carlos, as I just mentioned that was a very small business that they invested in that, in fact, that capital was literally being put in the ground as I arrived, and it never lived up to the pro forma that the original management team put together for that..

Okay, great. And then you talked about a good new sales pipeline.

I'm just wondering, is it, how much of that is coming from new accounts, or is it depth within existing accounts and kind of whether you see growth coming more from one of those elements or the other going forward?.

I would say it's nicely balanced. I think there's depth in categories, right, where we have brought back a lot of our assortment, but there's new items.

I mean, I take it back to seasoned pretzels, for example, the investments we made in capacity and capability there, that business is, there's a number of wins in that as we go forward, both in this year and into next year.

So it's a combination of depth, things like that, in categories as well as, we still have a number of customers who don't buy every category from us, right. And so we're picking up some categories at existing customers..

Okay, great. Thank you so much..

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

Good morning. In a question regarding the portfolio, a couple of minutes ago, you mentioned that you're probably going to be growing more so than divesting at this point.

Are there further opportunities for M&A? What's the pipeline look like? What's your appetite and what's the -- how are valuations?.

Sure, I think. Thank you, Bill. I think there are some opportunities for us, and I would, though, liken them more to what we did in Coffee, right? It's a build versus buy decision. I still think it's really hard to put capital in the ground at a very fast pace, right? It still takes longer and costs more to build these new factories.

And so, we think there's a couple of assets around that would tuck-in nicely. That may bring some sales and EBITDA along with them, but more importantly, bring capability, capacity in categories where we know there's good private label growth rates. So, I would say it'll be more that kind of thing at this point, but there are a couple around.

And when it comes to valuations, I think those sell at more reasonable valuations than growing businesses, right? When you're buying CapEx or buying capital assets, it's easier to value..

Got it. And then -- and a question, I think it was to Carla's question, but you talked about how you'll be at full capacity in the Broth facility by the fourth quarter, you have some new wins.

Were there any accounts that you permanently lost or that have not come back and felt comfortable buying at the same level that they had before in Broth?.

Yes, sure. That's one of the toughest conversations I have, because I know most of these retailers personally, right? There are some of our smaller customers when we had to allocate current production that we were unable to provide anything meaningful for, and so they were able to find those supplies elsewhere.

So, in the end, that may take some complexity out of our network, but we always hate to disappoint anybody. So there were a couple smaller ones that we had to leave..

Got it. All right, that's all for me. Thank you..

The next question comes from the line of Truist Sec CIB. Your line is open..

Hi, Bill..

Hey, this is Jack Crawford on the line for Bill Chappell. We've seen various reports about a slowdown in QSRs.

Could you give any color on what you're seeing there? And then just remind us what percentage of the business is exposed to foodservice?.

Sure. Food services is small for us, right? It's less than 10% of our business. The only exposure we have to QSR is in our pickle business, and it's with one of the hottest QSR chains in the country. So we've not seen that impact.

But most of our business is grocery, so we see the same numbers, we think food service in general is soft, but it isn't impacting what we've guided so far..

Your next question comes from the line of Jim Salera of Stephens. Your line is open..

Hi, guys. Thanks for taking our question..

Hi, Jim..

I wanted to ask a little bit about some trends we've seen at least in my area. I'm in the Midwest, where on a lot of displays, we've noticed an emerging presence of private label coupled with kind of prominent branding displays on the end cap.

And I'm just wondering if that's something that you guys have seen kind of across your categories and if that's perhaps supporting some of the strong market share trends we continue to see in private label?.

I think our retail partners are listening to their consumer, right. And their consumer, at least a segment of their consumer, is really looking for value. And so private label is a way for them to do that.

If you look at the current price gaps, you can see that the retailer is investing in private label value, the value proposition, right? So I think you have to put that all together. And I don't think it's a Mid-West thing, I think it's a national thing, quite frankly. What we see is the private label is that arrow in the quiver to provide value.

And it's positioned really well with quality assortment and price. And so, I think you'll see that merchandising continue, so….

Okay, that's helpful. And then maybe as a follow up to that, do you have a -- one of the shifts to private label has also been kind of a channel shift away from traditional retail towards dollar and more value-oriented channels.

As we think of your customer exposure, is there any channels that you're either under penetrated or over-penetrated in, that we should think about as consumers shift the channel shopping, even if it's in the near-term, that's maybe a tailwind or headwind relative to your portfolio?.

I would say you're right, it's gone to mass, right, if you look at where the share gains have been, right, it's been mass, hard discount, those kinds of things. We're represented really well in those channels. I mean, we have a core grocery business that we think a lot of.

And you know, those retailers are probably the ones where you're going to see the most leverage of private label. So, we've got a pretty nice balanced distribution base at this time. So we feel really good about it. We have seen that coming, and I would tell you that we talk about sales pipeline. That's a place we've leaned in, right, to balance that.

And the number of the wins that you're seeing are going to be in those channels where we know there's growth right now. So, well, that's the nice thing about a pipeline this size. We can lean in or lean out in certain places to try to manage that..

Okay, great. Thanks for the call, guys. I'll hop back in the queue..

Thanks, Jim..

This concludes our Q&A session. I would now turn the conference back over to Steve Oakland for the closing remarks..

Well, I'd just like to thank everyone for being with us today. I know it's a dynamic moment, given all of the things going on in the public markets.

But, I'd reiterate that I think we're positioned really well, and I'm really pleased and proud of the team, and I look forward to being with you three months from now when we share the pivot that's happening here at TreeHouse. Have a great day..

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