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

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

Good morning, and thanks for joining us today. This morning, we issued a press release announcing an agreement to divest a significant portion of our Meal Preparation business, which is available along with the slide deck we're using today 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. 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 metrics and financials on an adjusted basis. Definitions of the non-GAAP measures referenced during today's discussion 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. Pat and I are glad you could join us on short notice today as we announce this significant step towards our strategic evolution. As you all know, the Board launched a robust strategic review process last November to explore alternatives to maximize value. As part of that effort, we are announcing today that we have signed a definitive agreement to sell a significant portion of our Meal Preparation division to Investindustrial. This announcement, which has been unanimously approved by our Board, is a meaningful milestone in our transformation journey. Let me start by summarizing why we are so excited about this transaction, as detailed on Slide 3. Valued at $950 million or 13.6x the 2022 estimated adjusted EBITDA, this represents an attractive and compelling valuation for these categories. Given today's private-label tailwinds, we believe that this is the right time to maximize the value of this business. Importantly, the transaction allows us to reduce complexity across TreeHouse and improve our focus around our private-label snacking and beverage categories, which have a higher growth and margin profile. The transaction will also better enable us to improve our execution and capture the momentum in private label. Proceeds from the transaction will be used to pay down debt, reducing leverage and strengthening our financial profile. Our approach towards capital allocation will continue to be balanced around debt reduction, investments in the business and opportunistically returning capital to shareholders. Let's pause for a moment on Slide 4. As I noted a minute ago, this is truly a defining milestone in our evolutionary process over the last several years. TreeHouse began as a holding company. And if you recall, when I arrived in 2018, the approach was very decentralized. We had 5 separate divisions operating independently on 13 discrete ERP systems. Through our efforts to transform TreeHouse, we have driven operational and commercial excellence, improving our processes and centralizing core functions like sales and supply chain. We have also made progress around optimizing our portfolio and building a culture around accountability. We built a commercial organization that has a proven track record of collaborating with our customers. We have also invested in our operations and supply chain organizations to roll out lean manufacturing in order to drive efficiency and improve service. Today, those principles are guiding how we operate across our manufacturing network. Recall that when we announced the resegmentation of our business into Snacking and Beverages and Meal Preparation, our goal was not only to drive greater focus, but to better enable each division to run their discrete strategies. I've talked to you about the importance of driving greater focus around advantaged high-growth categories. Today's transaction announcement is squarely in line with our strategy to simplify, to allow better execution and to capitalize on the attractive growth opportunities within private label snacking and beverage. I'd be remiss if I didn't express my gratitude to the entire TreeHouse organization for their focus, dedication and agility along this journey. We greatly appreciate each and every one of you and the hard work and effort you put forth every day. Let me now turn it over to Pat to walk through the financial details of the transaction.

Thanks, Steve, and good morning, everyone. Moving on to Slide 5. The total purchase price of $950 mil represents, as Steve mentioned, a multiple of 13.6x estimated 2022 adjusted EBITDA, which we believe is a very attractive valuation for the business. The purchase price is comprised of $530 million in cash and a $420 million seller note. The terms of the note are as follows: We're issuing senior secured debt with typical restrictive covenant terms. There is an escalating interest rate on this note, which starts at 10% for the first 2 years, steps up by 100 basis points annually after that, with the cash sweep beginning in 2024. The rate is capped at 13%. And finally, the note is fully transferable and marketable. The structure of the transaction provides both significant near-term proceeds as well as a steady stream of earnings over the term of the note. In light of the current challenges in the leveraged finance environment, we think this structure enables us to, first, maximize the value of the transaction; second, execute the transaction during what we believe to be the right time to sell these categories; and third, the note is structured in a manner that incents Investindustrial to refinance expeditiously when the broader financing environment improves. We expect to close the transaction in the fourth quarter of this year, subject to regulatory approval and customary closing conditions. We have a well-thought-out deliberate plan that we've agreed upon with Investindustrial to separate the business and ensure a smooth carve-out process. This transition services agreement will facilitate the migration of the appropriate resources for the divested business, everything from shared services to IT support, for the next 6 to 24 months. We do not believe there to be material dis-synergies or tax leakage related to the transaction. Proceeds from the transaction will go toward paying down debt, and we anticipate that by year-end we will be below 4x net debt to EBITDA. Today -- and Steve will get into this in a minute -- we're providing you a high-level look at 2022 for ongoing TreeHouse and the divested business. Following the close, we will plan to come back to you with more detail to help you better understand the remainder of the year for the go-forward company and to help you think about our historical results. As always, we will be as transparent as possible. Finally, I'll just close by saying I'm excited about the transaction and the value and opportunities it unlocks. I also want to express my thanks to our team for their hard work and commitment throughout the strategic review process. With that, let me now turn it back to Steve.

Thanks, Pat. Let me now take you through what TreeHouse will look like following the divestiture. Turning to Slide 6. We provided a high-level financial overview for the go-forward company as well as the divested businesses. We are taking a significant step toward achieving our goal of being a more focused leader in attractive private label snacking and beverage categories. Our categories are outlined in the blue box. We expect to generate approximately $3.5 billion in revenue and $330 million in adjusted EBITDA in 2022, which represents a margin of roughly 9%. The divestiture includes 11 categories, listed in the green box, with estimated revenue of $1.6 billion and about $70 million in adjusted EBITDA in 2022, a margin of roughly 4%. In addition to strengthening our financial profile, the transaction improves our strategic focus on higher-growth, higher-margin categories. A simpler company, better able to execute on a more consistent basis. Slide 7 gives you a sense of how meaningful this transaction is in terms of simplifying our operations, reducing the number of categories, plants and SKUs will enhance our ability to focus on categories where we have the opportunity to capture outsized growth. We believe our second quarter results announced just a few days ago are indicative of the potential across snacking and beverage categories. To that point, Slide 8 demonstrates just how compelling the growth prospects of snacking and beverage aisles are and why we are so excited about it. Snacking and beverage is a large category: $170 billion of retail. That as a whole grew 10% in the last 52 weeks, outpacing nearly every other aisle of the grocery store. Within private label specifically, growth has been 8%. Being a more focused business will better position us to continue our momentum in these categories and to benefit from the strong underlying consumer demand for our products. Slide 9 shows how several of our key snacking and beverage categories of crackers, cookies and broth, to name a few are capitalizing on the opportunity to capture growth. As a simpler, more focused business, we will be even more closely aligned to how our customers think about growth and consider the role of snacking and beverage within the store. We'll look to expand our strategic partnerships with customers and see greater opportunities to lead our categories through depth and capabilities. We'll continue to invest to build a world-class supply chain, driving efficiencies and optimizing our footprint, all with the goals in mind to focus on the customer, drive revenue growth and improve profitability. Slide 10 summarizes why we believe the transaction unlocks value for our employees, customers and supplier stakeholders. We learned through COVID that complexity can get in the way of consistent execution. This transaction simplifies the business in a way that better positions both the divested business and TreeHouse to pursue the right strategies for their businesses and thrive with the right capital structure, ownership, and ultimately benefit the stakeholders of both businesses. I believe Investindustrial, with its proven track record of supporting growth and delivering value, is the right partner for the divested businesses, and I'm encouraged by their conviction in the opportunity ahead. For our TreeHouse employees, we will be a faster-growing, more profitable company. We'll continue to build on the values and the culture we have worked hard to foster and will strive to be the employer of choice in the regions in which we operate. On the customer side, our commercial teams have already done a great job of building strong partnerships, working to keep shelves stocked and collaborating successfully around pricing to recover inflation. Our work will continue as we build our strategic relationships beyond the table stakes of cost, quality and service to drive store brand growth and support our customers' private-label strategies. And for our supplier partners, we are committed to maintaining continuity. And importantly, we will be simpler and less complex following the close. In closing, I'm pleased with the transaction, and I'll leave you with a couple of very straightforward thoughts. The $950 million sale of a significant portion of the Meal Prep division represents immediate and compelling value for the business. The transaction significantly reduces complexity across our businesses and improves our ability to drive more consistent execution. We see a tremendous opportunity to help our customers drive growth through private label snacking and beverages. And this transaction then positions us to harness strong demand for our products, accelerate our investments and grow the top line and improve profitability, increasing our value over time. With that, let's open the call up to your questions.

[Operator Instructions] Your first question comes from the line of Andrew Lazar with Barclays.

Steve, to start off more broadly, I guess, TreeHouse's top line growth algorithm has been 1% to 2%. Thinking a bit further out, I guess, how does this transaction change this algorithm, if at all, with this divestiture?

Yes, Andrew. Well, as we said in the prepared remarks, our goal is to build a faster-growing, higher-margin business. And this is a great step in that direction. So we obviously have to get closed. We have a lot of work to do, right? But when we guide next year, I would expect us to guide both of those metrics moving at a faster pace.

Got it. And then, Steve, you've talked a lot about increasingly how important sort of depth is within the categories that you choose to stay in, in private label and having a greater share of where you choose to operate. If you have it, what's sort of the average market share within private label of the categories sort of being divested versus what is remaining?

Sure. I think we are leaders in pasta. If I talk about divested categories, we are leaders in some of those categories. They're just not the same growth and margin profile over time that we think we can be if we focus on snacking and beverage. So when you think about depth, market share is really important. But think about capabilities, right? Do we have natural and organic? Do we have convenience packaging? Do we serve all channels? So I think when you hear us talk about the depth we'll build in the snacking and beverage categories, it will be those capabilities, and those capabilities will then drive share over time. So I would say this transaction was designed to put us in more advantaged categories, more -- categories that are more consumer trend-friendly. And we'll just build depth where we don't have it, right? We have a lot of it in cookies, crackers, pretzels, broths, the ones we showed on the slides, but we have opportunities in single-serve beverage, we have opportunities in crackers, we have opportunities across all those segments. So hopefully that's helpful.

That's helpful. If I could sneak a very quick one in just for Pat, and I'll pass it on. Just in the divested business, it looks like D&A is greater than EBITDA. So I assume that means maybe negative operating profit for that business. So I guess I'm trying to get a sense of whether this is, because of that, accretive to EPS, if you will.

Yes. I mean I think that's what the math would sort of suggest as you tried to lay it out. We've obviously talked about the impacts of the pricing environment, the commodity environment. So I do think you've got to take that into account as you think about that business and the broader impact commodity has on those particular categories.

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

Just a few kind of tack-ons here. Steve, what percent of your sales going forward are going to be snacks and beverage? It's a little hard to tell from the slide. Secondly, you just made a pasta acquisition in 2020. What changed your mind about that category? And then I'll ask a follow-up.

Sure. Rob, it will be roughly 60% of the company. So it basically flips it. We were probably 60% center store grocery and 40% snack and bev, and it flips it to 60-40 the other way. And those are very, very rough numbers, okay? And your question about pasta. Pasta is a great category. And the transaction we did with Riviana for our shareholders is a great value. If you remember, with synergies, we paid mid- to high single digits for that, and we sold it for significantly more. So building -- we always felt that building our pasta business and building those assets was the right decision. We had the opportunity to monetize the synergies.

To the EBITDA, I mean there's not a lot of EBITDA in the business you're selling here. So did pasta's EBITDA go lower in the time that you owned it? Or...

No, I think -- yes, pasta's EBITDA has been hurt by a lot of inflation, right? There's been a lot of volatility in durum wheat, it's actually going the other way right now. But that's been incredibly volatile. But no, the pasta business and the synergies delivered. But pasta is by far the biggest business in the divestiture.

So it is. Okay. Lastly, how easy is it to market this debt to another financial holder? And also, is it just secured by the assets that you're selling to the buyer here? Or do they have a broader guarantee over the next couple of years?

Yes. So Rob, this is Pat. I'll try to take that. So we tried to negotiate a deal here that has very marketable terms. And so we do think there are characteristics there that would allow us to do that. It is fully assignable. I think we tried to say that in the comments. In terms of the underlying collateral, it is largely the assets of the domestic -- of the business. And that's really it.

Yes. Rob, this also sits on top of a very large equity check from Investindustrial. So we have great visibility in this asset, specifically the pasta business, specifically the dressings businesses. So we have great visibility into the -- those businesses and the tailwinds that they are experiencing right now. So we feel really good about it. But should we ever get to that point, there's plenty of both equity and assets sitting behind it.

Right. And the 4x leverage ratio, that doesn't include any calculation for this debt, right? That's separate?

That's right.

Yes, that's correct.

Your next question comes from the line of William Reuter with Bank of America.

Just a couple. I want to make sure I understand the form of this debt. So are you guaranteeing this $420 million of debt? Or is it only going to be guaranteed by the purchaser?

By the purchaser.

Okay. So the total proceeds that will be used for debt reduction will be $950 million, is that correct?

Look, we'll have cash immediately of about $530 million. That's, I think, the cash we're looking at immediately to paying down debt. And then over the term, we'll continue our balanced capital allocation approach, I think, is the way to think about that.

I was hoping in the prepared remarks that Pat's remarks clarified this, but the debt is designed to do 2 things, really, right? The debt was designed to execute this transaction at the value that we got, right? This is the moment to sell this business. We're selling into the tailwind of private label, right? So it's an opportunity for Investindustrial to get off to a great start and an opportunity for them to pay the kind of multiple they paid for it. Unfortunately, the things that are driving private label right now are probably stalling the credit markets, right? The same economic winds that are pushing private label forward are pushing the debt market sideways. And so us carrying the note just simply allowed that to happen. But the terms that we talked about really designed it to be a great, both cash and financial return for us in the time that we own it. But they're also designed to incent them to refinance that debt when the markets open up. And so I think it's a nice balance here. It allowed us to get the value. We get a great return on it in the interim. And we would expect them, as things normalize -- and by the way, they're normalizing in the last week or so. So the financial markets are resilient. And as those open up, we would expect it to be refinanced. Should that not happen, we have all of the covenants that we need so that we could market the debt. And I think given the interest rates and the terms that you could see on the prepared remarks, it should be an attractive asset to someone who owns debt for a living.

That makes sense. And then just lastly for me. Prior to the transaction, you guys maintained a leverage target of 3 to 3.5x. Does that still hold as your leverage target as we think about the next year or 2? Or has that changed in any way?

No, I don't think that's changed in a significant way. I think I go back to our comments around we'll continue to maintain that very disciplined, balanced kind of capital allocation approach as we think about it moving forward.

Yes. And I think Rob Moskow's comment on the fact that we have this asset and the note paying that interest rate significantly above any interest that we pay, so our total interest expense is going to be significantly lower given this interest income. I think that complicates the calculation a little bit, but -- and needs to be taken into account when you think about it.

At this time, there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Steve Oakland for closing remarks.

I would just like to thank you for being with us today. We recognize these are -- this was a short notice. And I want to take one more chance to thank the TreeHouse employees. We started our strategic evaluation in November. There's been an awful lot of work that's gone through this and awful lot of uncertainty, and I'm really glad we can bring that to a conclusion, and we look forward to being with you all and reporting the results and reporting the implications as we go forward. Have a great day.

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