Net sales for Q1 2024 were $821 million, a decrease of 3.9% year-over-year but above the guidance range.
Adjusted EBITDA for the quarter was $46 million, within the provided guidance range.
The company reaffirmed its full-year 2024 guidance.
Sales and Growth Initiatives
The net sales pipeline grew over 20% in the last quarter, driven by new customer partnerships.
Secured growth opportunities in Cookies, Refrigerated Dough, Pickles, and Pretzels for the second half of the year.
Broth Business Update
Efforts to restart the Broth business are progressing as planned, with upgraded equipment and trained workforce expected to boost second half profitability.
Supply Chain and Operational Improvements
Continued investment in the supply chain to drive consistent execution and enhance competitive positioning.
Initiatives in TMOS, procurement, and distribution network improvement are expected to generate approximately $50 million in gross cost savings in the second half of the year.
Industry and Consumer Trends
TreeHouse is positioned advantageously at the intersection of the growth of private brand groceries and the shift towards snacking in North America.
Private brands have consistently gained market share over the past two decades, with significant growth potential ahead.
Private brand unit sales showed modest growth compared to a decline in national brands in the categories TreeHouse operates.
Financial Outlook and Guidance
Full-year net sales expected to show flat to 2% year-over-year growth, with adjusted EBITDA projected between $360 million and $390 million.
Free cash flow is anticipated to be at least $130 million for the year.
Q2 net sales are projected to be between $770 million and $800 million, with adjusted EBITDA between $55 million and $65 million.
Capital Allocation and Share Repurchase
Executed a $44 million share repurchase in Q1 as part of the company’s capital allocation strategy.
Continues to focus on investing in the business both organically and through strategic acquisitions.
Second Half Outlook
Expectations of strong net sales improvement and cost savings initiatives to drive significant profitability in the second half.
Adjusted EBITDA performance is anticipated to be more skewed towards the second half compared to historical results due to the Broth facility restart and incremental pricing actions to cover commodity inflation.
Question and Answer
Private Label Price Gaps
Question
Why have the price gaps for private label products widened, despite the decline in branded volume?
Answer
The inclusion of a larger set of customers, including a major hard discounter, in the data has provided a clearer perspective on the market.
Retailers are investing in private label to meet consumer demand for value, as highlighted by recent media coverage.
Cocoa Pricing and Volatility
Question
How is the company approaching pricing in response to cocoa commodity volatility, considering its hedging practices and the potential for pass-through contracts?
Answer
The company hedges cocoa on a more short-term basis compared to national brands, aligning with delivery cycles and contract commitments.
Recent significant inflation in cocoa prices has prompted the company to take pricing actions and engage in factual discussions with customers, who have responded positively.
EBITDA Cadence and Full-Year Outlook
Question
Does the EBITDA cadence guidance suggest a potential for higher normalized earnings power beyond the $400 million previously mentioned, considering the progress in derisking the supply chain?
Answer
The confidence in the back half of the year is driven by top-line progress, a robust cost savings pipeline, and the return to service in broth production, which was a significant factor in not achieving the $400 million target last year.
New Business Wins and Pipeline Impact
Question
What is the timing of when new business wins and the increased pipeline would start impacting the P&L, and how does this contribute to visibility in the back half of the year?
Answer
The pipeline is expected to start delivering results in Q3 and Q4, providing confidence in the back half of the year.
Constructive conversations with regional customers and their continued investment in private label are encouraging.
Broth Plant Disruption and EBITDA Impact
Question
Is the disruption in the broth plant still tracking towards the previously mentioned $20 million EBITDA impact, and how are the costs phased between Q1 and Q2?
Answer
The impact is slightly higher than anticipated, but the company is on track with its plan and believes it will be within the expected range.
The impact was likely more significant in Q1 than Q2 due to the ramp-up curve, but production is ongoing and the company is confident in its progress.
Retailer Promotion of Private Label
Question
Are retailers expected to become more promotional with private label in the second half of the year, similar to the trends observed in the seasonal timeframe?
Answer
Yes, increased promotional activity is anticipated in high seasonal categories like refrigerated dough and coffee, driven by both margin considerations and greater confidence in the supply chain compared to the previous year.
Cocoa Category and Pass-Through Contracts
Question
Considering the significant movements in cocoa prices, is there a possibility of adopting pass-through contracts similar to coffee for this category?
Answer
While pass-through contracts are effective for highly volatile commodities like coffee, the current cocoa price increases appear to be more structurally driven.
If the cost changes are indeed more permanent, pass-through contracts may not be as suitable as the current hedging approach.
Private Label Trends and Business Wins
Question
Are there any other key private label wins or losses, in addition to the recent Walmart announcement, that you can discuss?
Answer
The company has been actively building its pipeline and focusing on capabilities and capacity following the divestiture, leading to a solid pipeline and alignment with growth opportunities.
Working Capital and Payable Days
Question
The working capital use this quarter was mentioned, but payable days were also lower. Is this a deliberate decision to capture better terms, or will payable days return to normal levels in the future?
Answer
The lower payable days are likely a function of timing rather than deliberate decisions, and historical levels are expected to be maintained with no pressure on vendor terms.
Working Capital Guidance
Question
Was there any guidance provided on working capital for the year, particularly regarding whether it will be a use of cash?
Answer
No specific guidance was provided on working capital for the year, but free cash flow is expected to be at least $130 million.
New Business Wins and Broth Facility Progress
Question
Were the new business wins part of the original guidance or are they offsetting any delays in the Broth facility, and is there any change in the competitive bidding environment for private label volumes?
Answer
The new business wins are a natural progression and were not part of the original guidance.
The competitive bidding environment remains category-specific, with the company performing well in areas where it has deep capabilities and cost structure.
Capital Allocation and M&A Landscape
Question
What is the outlook for capital allocation between potential acquisitions and share repurchases, considering the M&A landscape and recent acquisitions?
Answer
The company’s first priority for capital remains investing in the business, primarily through capability-driven acquisitions that address key business gaps and growth opportunities.
While transformational M&A is not expected in the near term, maintaining a strong balance sheet and returning capital to shareholders through share repurchases are also important priorities.
Labor Inflation and Automation
Question
Can you provide insights into labor inflation for manufacturing facilities and any opportunities to leverage automation to address potential challenges?
Answer
The company has observed some labor inflation but has proactively addressed it by ensuring the right labor pool, paying competitive wages, and making investments in shift schedules and other areas to attract and retain talent.
The company’s improved balance sheet and transformation have enabled investments in automation, such as cobots and automated forklifts, to supplement labor where it is tight and enhance workforce efficiency.
OEE Improvement and Manufacturing Efficiency
Question
To what extent is the improvement in Overall Equipment Effectiveness (OEE) due to better visibility in plants, automation, or lower labor turnover and increased employee experience?
Answer
The improvement in OEE is attributed to a combination of factors, including investments in the Toyota Manufacturing Operating System (TMOS) and consistent plant operations, as well as maintenance activities to enhance equipment reliability.
