TreeHouse Foods, Inc. (THS) Earnings Call Transcript & Summary

Good morning, and thanks for joining us today. Before we get started, I'd like to point out that we've posted today's slide deck on our website at treehousefoods.com. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation 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 is subject to known and unknown risks, uncertainties and other factors, including COVID-19 that 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, 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 presentation. The company expressly disclaims any obligation we're undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in the expectations with regard thereto or any other change in events, conditions or circumstances on which any statement is based. We will also be discussing some non-GAAP financial measures, including various adjusted items, organic net sales and free cash flow. Reconciliations between the most directly comparable GAAP measure and the relevant non-GAAP measure and other information about the non-GAAP financial measures can be found in the presentation, which is posted in the Investor Relations section of our website at treehousefoods.com. For purposes of our discussion today, our results and outlook are provided on a continuing operations basis, which excludes the impact of the snack nuts division, which was sold in 2019 and the ready-to-eat cereal business. Now on to our presentation. You'll hear today from Steve Oakland, our CEO and President; and Bill Kelley, our EVP and CFO. With that, let me turn it over to Steve.

Thanks, P.I.. While I wish we could all be together in Florida, it's a pleasure to be part of this year's virtual conference. I'll start by providing an overview of our business today and our plans to capitalize on the opportunity that we have to drive value going forward. Then I'll turn it over to Bill to take you through our financial performance and our outlook. Starting on Slide 4. When you leave here today, I hope you'll take away the following points: First, the changes we have made at TreeHouse over the last several years have strengthened our foundation as North America's leading private-label food company, and enabled us to become more efficient and profitable in delivering on the needs of our customers. Second, we've established a proven track record of delivering on our commitments to customers and shareholders, thanks to our absolute unwavering focus on driving operational and commercial excellence. In addition to our own capabilities, the underlying strengths and fundamental appeal of private-label food and the long-term outlook going forward remain attractive. Fourth, we're well positioned to capitalize on these favorable market trends, as we continue to sharpen our focus in attractive categories where we have depth and advantaged capabilities. The key example of this is our Riviana acquisition, which is on track to create meaningful value. It enables us to deepen our leadership and diversify our presence in the pasta category, enabling us to improve profitability and increase cash flow generation. And finally, we have a strategic road map in place that will maintain our momentum and generate lasting value creation. With our strong balance sheet and robust cash flow, we have opportunities to deploy capital in ways that will fuel growth and enhance our competitive advantage. Stepping back for a minute, although many of you are already familiar with TreeHouse, let me remind you of our company profile at a high level. We are a leading private-label food and beverage maker in North America, with 2020 revenue of $4.35 billion. We also have a robust free cash flow of roughly $300 million a year. Our customers consider us to be the supply chain partner of choice for the reputation of quality and customer satisfaction, a reputation we've worked hard to earn over the last few years. We are driven by our commitment to creating a performance-based culture where we live our values, both with each other and with our customers, to ensure we're making high-quality food and beverages safely and affordably. And our success is powered by a workforce of more than 10,000 team members across 40 plants in the United States, Canada and Italy. And speaking of our colleagues, I want to again express my sincere gratitude to my TreeHouse colleagues for their sustained efforts and hard work, especially as we manage through the challenges of ongoing COVID environment. Thank you, TreeHouse team. As we think about our business, we operate in 2 segments, Snacking & Beverages and Meal Preparation. We currently operate in 29 categories and hold a leadership position in more than half of those categories. Importantly, across nearly all of our categories, we deliver on-trend, premium and better-for-you product offerings. We operate across a wide range of categories and benefit from our scale. But the categories in which we deliver the greatest value for our customers and for TreeHouse, are those in which we are deepest in terms of our scale and capabilities. We've developed a formula for winning based on building and maintaining this depth in the categories where we have a strong foundation, efficient supply chain and a deep customer relationship. Turning to Slide 7. If you've been following the TreeHouse story for a while, you'll know that in December of 2018, we laid out an enterprise strategy to refocus the company around the customer and stabilizing our foundation. These turnaround efforts were orientated around 4 priorities: operational excellence, becoming more efficient in our processes and focusing on service level improvement and lean manufacturing. Commercial excellence, designed to centralize our sales force to better connect with our customers and apply our resources against their needs. Portfolio optimization, focused on the divestiture of underperforming our subscale businesses, that under different ownership had greater potential to flourish. And people and talent, in order to enhance our culture with clearly defined values in an organizational structure that reflect them. I'd like to dig a little deeper into each of these 4 priorities, walking through the efforts we're undertaking and how they have contributed to the strengthened organization that you see today. On Slide 8, you can see that our operational efforts included significant SKU rationalization, supply chain and plant optimization as well as finance and IT systems consolidations. Overall, we were laser-focused on simplifying our systems and instilling a culture of continuous improvement. Throughout these actions, we generated $400 million in run rate cost savings offsetting inflationary headwinds and volume losses, while also improving our customer service levels. This was a very large undertaking, but it was necessary for us to simplify the network and to build the strengthened platform we have today. When the pandemic hit early last year, this work paid off as we were able to swiftly and effectively implement safety protocols to protect our people and to work to meet the increased demand for at-home food. With these operational actions in place and a more stable base, we could take the next step in building a commercial organization. We built a commercial team focused on reinforcing customer relationships and improving customer service. Here, we took 2 important steps. The first was centralizing our sales force, establishing a point person for the customer who coordinates internally across functions. The second was leveraging insights to make sure we were serving their needs, delving deep into the data to find pockets of growth and opportunities that we could lean into and leverage our efficient manufacturing capabilities. I'll bring this to life with some examples in a few minutes. As you can see, these efforts have paid generously as we've earned a 34-point increase in overall performance from our customers in 2020. These results aren't just statistics. They reflect a deeper and more synergistic relationship with the customer and how we are better serving them. We are proud of what we've accomplished. To help support our customer relationship building efforts, on Slide 10, you can see how we've taken a number of steps that have enabled a greater focus on our core business. First, as you'll recall, in response to the sharp increase in pandemic demand, we worked with our customers to simplify and prioritize our assortment. The strength of our operations enables us to streamline our SKU offerings and make more of what our customers needed, keeping their shelve stocked with a high-volume private-label basics. By doing so, we ran more physical cases through our plants, driving profitability and cash flow. Over the last few years, we've also undertaken a broad reshaping of our portfolio including divesting the Soup and Infant Feeding business, McCann's Irish Oatmeal, the snack nuts division, and 2 in-store bakery facilities as well as initiating a sale process for ready-to-eat cereal. These were businesses that were identified as either having too small of scale to benefit from our system or a margin contribution that was low. With the bulk of our divestitures behind us, we can pivot to our M&A strategy as we look to bolster our portfolio with acquisitions at an important depth in key categories. The Riviana Pasta acquisition is a great example as it provided us with a number of attractive regional brands across geographies. We'll revisit Riviana in a moment. So the TreeHouse of today has a much stronger foundation operationally, financially and culturally than we did even a year ago when I presented at this conference. And we have built that foundation at just the right time to enable us to capitalize on the trends driving private-label demand. As the retail landscape and shoppers adapted to the pandemic environment, customers' desire to strengthen their own private-label brands is returning. On this slide, you can see commentary directly from major retailers about recommitting to private label and the opportunity they see going forward. And as the only public pure-play private-label company, TreeHouse is uniquely positioned to deliver on that foundational demand. I'll speak to the details around this opportunity in the coming slides. You'll see on Slide 12 that our fourth quarter retail channel sales provide clear evidence that we win consistently in categories where we have the depth, customer relationships and capabilities to truly support our customers. Over 1/3 of our annual revenues comes from categories, we are outperforming the market, even in categories where net sales are contracted. We have achieved these successes by providing the customer with what they're looking for in a private-label manufacturing partner, excellent quality, cost and service. Our plan is to focus on categories where we have deep market position in order to build further momentum, enhance our customer relationships and increase sales, efficiency and profitability. That's our formula for winning. Let me take a few minutes to describe what I mean with a few case examples. Crackers is a great example of our ability to pivot to meet consumer trends and deliver for our customer. We spoke about our success in crackers here last year. But I wanted to revisit the example to showcase our continued commitment to innovation and meeting the evolving needs of our customers. Crackers is a center-store category, where we already had significant presence, thanks to the private brands acquisition. Historically, our strength and capability in the cracker category has been in saltines and entertaining crackers. But by leveraging our analytics, we identified pockets of growth. Using these learnings, we saw an opportunity to leverage our manufacturing capabilities and capitalize on the higher growth subsegment of crackers: the snackers. With that, we focused on optimizing our assortment and implementing efforts like our seasonal shipper program. Both of these were designed to make sure we were able to provide what they wanted, when they wanted it. We also coordinated directly with customers to customize retail execution, partnering to drive value and growth. The impact of our efforts is clear. In 2020, we generated 4% year-over-year growth, outperforming private-label sales in a category and capturing about 200 basis points of share. Single-serve beverage is another category where we leaned in, leveraging consumer insights and taking advantage of positive consumer trends. Single-serve beverage is a fast-growing and highly complex category. With the wider assortment of flavor profiles and strong regional preferences, consumers' copy choices are intensely personal. To rise other challenge, our commercial and operational teams came together to craft a compelling selling story that extended single-serve beverage and incorporated seasonal flavors like pumpkin spice and peppermint into the mix. Our teams managed this while responding to pricing pressures and meeting the growing demands presented by e-commerce. In an already crowded landscape, we were able to succeed in the category. The results speak for themselves, particularly in the fourth quarter as we wrap the carryover lot of pricing adjustments that were primarily impacting single-serve beverage in the first half of 2020. We delivered 10% year-over-year growth in 2020 and outperformed the private-label market. Turning to Slide 15. We touched on Broth during our earnings call last week, but I wanted to reiterate the actions we took and the progress we've made. As a category, Broth is benefiting from consumers staying in and cooking at home. It is an interesting category as Broth performs many functions. In addition to being an ingredient, bone broth has become a protein-rich food for the health conscious. As a base ingredient, private-label share market is high, almost 40%. Of course, we want to capitalize on that. So we followed our plan book and enhanced our capabilities in this category, particularly around assortment, seasonal pricing and promotions and price gap management. Again, our results reflect the progress as we outperformed the private-label market and delivered 29% year-over-year growth, whether broth, crackers or single-serve beverage, the reoccurring themes from our repeated successes are clear. Depth in the category, robust capabilities in the area and sustained relevance to the consumer. And finally, pasta, as we've shown you before, pasta is a key depth category where TreeHouse's growth is outpacing the category. It's also a product that is very much on trend in terms of the increased demand for in-home meal prep. Our recent acquisition of the Riviana Pasta business was aimed at leaning into this category even further and driving that attractive depth that we see. Riviana's suite of well-known regional brands has allowed us to deepen our presence in the category, improving our operational efficiencies and enhanced our service for national and regional customers by our dual offering of branded and private-label pasta. While this is still in early days, we are pleased with the strong progress we're making on Riviana. We completed the acquisition in December, and the integration is progressing well. The $170 million to $180 million of revenue added just one Riviana production facility is both a testament to the asset itself as well as our capabilities in the pasta category. And beyond the top line, we expect it will add $25 million to $30 million in EBITDA and $0.20 to $0.30 accretion per share in 2021. We also expect additional upside as we capture synergies in the business going forward. Riviana is a great example of the types of bolt-on opportunities we are considering. It aligns with our existing categories, is accretive to the line and represents a great opportunity for us to leverage our efficient operations to expand margins and capture profitability. We've made a lot of progress, but believe we have a lot of opportunity ahead to deliver significant long-term value. Having completed our efforts to streamline our operations, optimize the portfolio and dive deep into advantaged categories. The next stage in our evolution is to continue to invest in our business and lean into growth areas where we already have strong market position. We are going to leverage our strong balance sheet and cash flow to pursue financially accretive and strategic opportunities. And while we can be aggressive about pursuing outside opportunities, we'll continue to focus on driving organic growth and maintaining a robust balance sheet. Moving to Slide 18. This slide is really a diagram to represent our approach. And as I mentioned last week on our earnings call, we think about our business in 3 areas as we execute our strategy. We have our cash engines and our growth engines, each representing about 40% of our business. Our cash engines include categories that have reliable and stable sales, where we are efficient and have expanded margins to generate strong cash flow. In our growth engine categories, we see demand dynamics outpacing supply. Here, we're doubling down on leveraging our existing debt in the category and pursue growth opportunities through accretive M&A. Outside of these categories, about 20% of our net sales come from categories we expect to review and revitalize. Here, we'll either have opportunities to improve efficiencies and cut costs to expand our margins and turn those businesses into cash engines or we'll review whether we may be able to find a better home for a particular business, and invest the capital generated from a sale into our growth engines to further accelerate our top line growth. I'm confident that this next step in our strategic evolution will enable us to deepen our customer relationships and create an opportunity to unlock greater profit expansion and potential, and improve returns for our stockholders. Of course, it is imperative that any evolution we pursue will be underpinned by a strong balance sheet and a balanced capital allocation framework that has the overarching goal of maximizing returns for our shareholders. This is what we show on Slide 19. The cornerstone of this effort is centered on making deliberate and significantly accretive bolt-on acquisitions, which is an important component to driving profitable growth. At the same time, we will remain laser-focused on maintaining a strong balance sheet with manageable leverage while returning capital to our shareholders. Our target leverage, as defined by our bank covenants, remains between 3 and 3.5x. Our goal is to produce approximately $300 million of free cash flow. As we execute our strategy, we are fortunate to be guided by a tremendous board made up of the individuals with skills and expertise we need to ensure we capitalize on the opportunities ahead to create value. At the highest level, our Board's commitment to maintaining strength, independence and complementary talent is plainly evident by our recent refreshment and governance improvements. Jill Rahman and Ashley Buchanan joined the Board last November and have already made an impact. While Jill brings prestigious experience in CPG strategy, marketing and operations, Ashley brings an incredible knowledge of retail private label and merchandising. The counsel from Jill and Ashley and our Board has been measurably valuable to me and the rest of the management team as we set out our course. As you know, Jill and Ashley joined an engaged and experienced Board that has recently been refreshed with more than half our directors joining in the past 3 years. That refreshment focused on adding skills, spinning consumer products, retail strategies, operations, business turnaround and more as well as increased diversity of gender, ethnicity and experience. Beyond the Board level, the diversity of thought, background and experience of our people has been and will continue to be a key driver of our ongoing success. To that end, we're developing a strategic plan that will contain interconnected future work streams to focus on increasing BIPOC representation across our salaried workforce. We outlined these diversity, equity and inclusion efforts into our first-ever ESG report, which was released last year in recognition of the need to integrate ESG into our business strategy. We believe that in order to continue achieving our mission amid the intensifying social challenges, we must integrate environmental, social and governance practices into every aspect of our business from our daily procedures to our long-term planning. We have deliberately expanded our efforts to map out a robust and holistic approach to environmental stewardship, stakeholder value creation and enterprise governance. The key elements of our ESG strategy are reflected on this slide, and they include plastics and packaging, supply chain and operations, employee engagement, ESG integration and transparency. We believe by focusing on these 5 overarching topics, we'll be able to drive systemic, meaningful progress in important ESG areas. With that, let me turn it over to Bill to review our recent results and talk about how the plans I've just discussed translate into our guidance for 2021 and our long-term outlook.

Thank you, Steve. Turning now to Slide 23. Our full year and Q4 earnings reported last week are evidence that our platform today is much stronger, culturally, operationally and commercially. The progress we've made is reflected in the strong top line growth for both the fourth quarter and 2020 as a whole, especially in the robust organic growth we achieved in our Snacking & Beverage segment. This organic growth is proof that we succeeded at adapting and embracing the challenges of the pandemic, while our overall increase in volume allowed us to achieve profit, cash flow and financial leverage targets ahead of schedule. These results are no small feat. And again, I want to thank our team members for their hard work and continued focus throughout this difficult period. On Slide 24, we show a more detailed breakdown of our revenue composition. Unsurprisingly, Food Away From Home saw a significant contraction as the pandemic and resulting stay-at-home orders force people to well, stay home and cook for themselves. However, driven partly by the pantry stocking earlier in 2020, this downswing in Food Away From Home was offset by really strong retail sales, particularly in unmeasured channels, which include some of our fastest growing categories. To reiterate Steve's earlier point, for any strategic initiative, it is imperative that we have the balance sheet to back it up. We made some tremendous strides to strengthen our financial profile last year reaching the lower end of our leverage and more than doubling our free cash flow to nearly $300 million, a figure that we will maintain or build on as part of our 2021 guidance, which I'll touch upon next. Before covering guidance, I want to share our macro thoughts around inflationary headwinds in 2021 as well as how we plan to address them. We are expecting $100 million to $110 million of higher agricultural ingredient costs and increased employee costs driven by the tight labor markets and rising freight. These are pressures that are already beginning to impact us, where our teams have several initiatives underway to offset these costs. We are in the process of taking pricing actions across a number of our categories to offset input cost inflation. However, we do not expect to fully realize the impact of our actions in our P&L until the second half of 2021. In addition to these pricing actions, we will also look to our continuous improvement and lean manufacturing efforts to help us offset things like higher wages. And we anticipate improved utilization efficiencies from our Riviana integration efforts. We see tremendous potential in our business and believe our evolved strategic focus will deliver meaningful net sales growth, expanded margins and strong free cash flow in 2021. We are driving towards some very attractive financial targets that we believe are achievable to continued execution on our focused plan. In terms of the cadence of earnings for 2021, I want to reiterate a point we made last week. We anticipate that the distribution of our earnings in 2021 will be roughly in line with our historical norms. This implies a first half versus second half weighting of roughly 30-70. As always, underpinning every business decision we make, is management's and our Board's commitment to shareholder value creation. We are evolving our strategy to maintain momentum and generate lasting value creation. By advancing our customer relationships, deepening our strong positions in categories where we have the capabilities and leadership, we are confident that we will unlock greater profit expansion potential and generate improved returns. And finally, as Steve noted last week, we've reiterated our longer-term growth objectives, which include revenue growth of 1% or 2%, significant free cash flow generation and a boost to the bottom line. We are confident that we will realize these targets. Thanks to our continued focus on operational improvements and margin expansion, along with our focus on investing in growth areas to improve our business and increase profitability. Importantly, we expect to accelerate our growth. Particularly on the top line through acquisitions that enhance our depth and capabilities across advantaged categories. We are confident about our next step in the strategic evolution of TreeHouse. Going forward, we'll be better positioned to deepen relationships with customers, leverage past learnings and overall deliver sustainable, long-term growth and shareholder value. And with that, we would like to open it up to questions.