TreeHouse Foods, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Welcome to TreeHouse Foods Fourth Quarter 2020 Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. At this time, I would like to turn the call over to TreeHouse Food for the reading of the safe harbor statement.

[Unidentified Company Representative:]

Good morning and thanks for joining us today. Before we get started, I'd like to point out that we've posted the accompanying slides for our call today on our website at treehousefoods.com. This conference call may contain forward-looking statements within the meaning of the Private Securities Ligation 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.

[Steve Oakland:]

Good morning, everyone, and thank you for joining us. I hope everyone is well as we start the new year. I’d like to again begin my remarks today by expressing my gratitude to our TreeHouse employees, especially the roughly 9,500 frontline workers in our supply chain. Men and women that throughout the pandemic have shown up at work in our factories, in our warehouses to serve our customers. I'm incredibly proud of how well we have managed the challenges of 2020 and continue to do so through this COVID environment. Our strong performance to close out the year was really a product of the entire team's effort and commitment.

[Bill Kelley:]

Thank you, Steve and good morning everyone. Thanks for joining us today. Like Steve, I want to begin by saying thank you to the TreeHouse team. I'm so impressed how well we managed through the year and I am very proud of our strong fourth quarter results. Let me start by recapping the quarter with our scorecard on Slide 11. We delivered against all of our key metrics and outperformed on the top line at $1.18 billion, which includes Riviana. Fourth quarter adjusted EBITDA was $154 million and adjusted EPS totaled $1.07. Turning now to Slide 12 and our revenue drivers, Meal Prep organic growth of 1.3% was driven by a combination of volume, mix, and pricing. The addition of the Riviana pasta business in December added 1.7% growth on top. As Steve mentioned, we closed the acquisition of the majority of Ebro's Riviana brands in mid-December, which added about $12 million in revenue to the fourth quarter.

[Steve Oakland:]

Thanks, Bill. Turning to Slide 19. As we have adapted and embraced the challenges of the pandemic, the overall increase in volume accelerated our ability to achieve our profit, cash flow, and financial leverage targets, a good six months to a year earlier than we anticipated, positioning us to pull forward the next phase of our strategic journey. 2020 wasn't easy, but we were agile. Where we've had strong success, we've identified key learning’s that shape our path forward. We continue to have incredible conviction around the dual engines of our business. Retailers expect excellence across every category we participate in. Our customer’s top three priorities are quality, cost, and service. And while breath can be important in certain instances, we have seen that category depth is what customers truly value. As such, we compete and win consistently in those categories where we have depth and advantage capabilities. We view categories representing 40% of our net sales as growth engines, with strong consumer demand to find pockets of growth and existing depths with opportunities to go even further. These categories typically have the potential to drive low-to-mid single-digit top line growth with improved margins. Let's take broth for an example. In 2020, private label broth grew 27%, and we gained almost 200 basis points a share. This is a great category and we win in broth because one, it's on trend the strong consumer demand given its health conscious and protein rich attributes; two private label share is high, nearly 40; And three, we have strong capabilities, particularly around assortment, seasonal pricing and promotion, and . These capabilities open the door to strong customer partnerships. Finally, we have depth and a comprehensive offering from bone broth to vegetable broth. Broth is just one example, but as we look across the portfolio, there are similar success stories across several of our categories. The same reasons depth, strength of capabilities, and relevance to the consumer. Another 40% of our sales are in cash engines. These are stable, resilient, and attractive categories that deliver strong consistent cash flow. These categories represent opportunities for us to harvest cash for reinvestment, balance sheet strength, and capital return. We'll continue to look for ways to add pieces to make us deeper in these growth engine categories by utilizing the strong cash flow from our cash engine businesses to fuel that strategy. As we continue to optimize, we will also focus on renewing and/or revitalizing certain categories where we believe there's an opportunity to run these businesses better and position them for growth. If we can't do that in our system, we may exit the category and redeploy that capital to fuel growth. This is about maintaining a discipline that leverages the learning’s I spoke about earlier. I believe we have clear opportunities to build on our successes becoming a more focused category leader is a natural evolution of our portfolio strategy, and will allow us to further advance our customer relationships, creating an opportunity to unlock greater profit potential, and generate improved returns for our shareholders. Turning next to Slide 20, our financial flexibility enables us to deploy capital in a number of value creating ways. Going forward, we plan to deploy a balanced capital allocation program, while preserving our balance sheet strength. We will look to invest our free cash flow for growth through disciplined and accretive M&A. The Riviana pasta business acquisition is a great example of the type of bolt-on opportunities that we are considering. And we continue to explore other additions that are highly accretive aligned with our existing category and leverage our core capabilities. Depending on the availability of accretive and value creating M&A opportunities, we plan to return our remaining cash flow to shareholders, while maintaining the strength of our balance sheet and leverage targets. In that vein, we bought back $25 million of stock in the fourth quarter, or approximately 650,000 shares. Our plan in 2021 is to continue to buy back shares to return capital to shareholders and offset dilution from stock issuance. We expect that our efficient capital allocation supported by strong cash flow will enable us to not only achieve our strategic growth algorithm we've outlined on Slide 21, but potentially exceed those targets. In addition to delivering 1% to 2% of organic growth on the top line, we will pursue opportunities to drive additional growth through accretive M&A in focused categories. From a cash flow perspective, a combination of operating leverage OpEx improvements from ongoing initiatives and synergies from acquisitions will fuel our continued strength in our ability to generate approximately $300 million in cash. And finally, we will ensure that translates into profitability, driving at least 10% adjusted EPS growth each year through a combination of acquisitions and enhanced productivity, synergies and share repurchase. I look forward to discussing our strategic evolution further at the Cagney Conference next week. We see tremendous potential in our business, and are driving towards very attractive financial targets that we believe are achievable through continued execution of our focus plan. Before we get into Q&A, excuse me, I wanted to acknowledge the press release we issued last night. As we said, we have held multiple discussions with JANA Partners in the spirit of maintaining constructive dialogue. Today, we are focused on our fourth quarter, and fiscal 2020 results and 2021 guidance, as well as the compelling opportunity that we believe we have to create value going forward. We will not be commenting further on the JANA filing. Let me close by saying that I'm very pleased with our strong finish to the year, and although 2021 is far from an ordinary environment, we have proven that our business model is resilient and adaptable, and we can deliver extraordinary results. With that, let's open the call to your questions.

[Operator:]

The first question comes from Jon Anderson with William Blair. Your line is open.

[Jon Anderson:]

Good morning, everybody.

[Steve Oakland:]

Good morning, Jon.

[Bill Kelley:]

Good morning, Jon.

[Jon Anderson:]

Couple of questions for you. I'm wondering as you contemplated your 2021 sales guidance, how you're thinking about the underlying growth rate of your key target categories. And perhaps even more importantly, the private label share performance that you expect. I know that there was a lot to deal with throughout 2020, one of which was work to get your fuller SKUs assortments back on shelf. So, maybe just kind of an update on where you are with respect to the getting fuller assortments back on shelf, and how you're thinking about private label market share trends, as we move through 2021 to start? Thanks.

[Bill Kelley:]

Hi, Jon good morning. It's Bill. Thanks for your question. First I’ll just start with your comment on share. You know the TDPs have recovered sequentially and quite nicely all the SKUs, almost all the SKUs that we had are back on shelf and are scanning our shelf. From a consumption volume perspective, it does take a bit of a couple of purchase cycles here to allow consumers to deplete what's already in their pantries, but if you look at the last 3 to 5 IRI reporting cycles, you know, private label is and you have to go all the way back to probably May to see that. So, we once shared in Q4 and we think that we'll continue to build the business back nicely. All of our categories – most of our categories, 15 categories or so are continuing to win share and the once that we highlighted in the deck are our growth engine categories are really, really strong. So, we think we're back on shelf, we're scanning, and we think is performing pretty strong.

[Steve Oakland:]

Yeah, good morning, Jon. The only thing – this is Steve, the only thing else I would say is, there is some noise in last year's numbers at the beginning of the pandemic. If you remember, everything jumped, but private label share early in the pandemic actually jumped pretty dramatically. So, there'll probably be some noise early on, when we lap those last couple weeks of March, first couple weeks of April. So, we'll have to work through that before we get a real look at what the consumer is doing.

[Jon Anderson:]

Fair point, fair point. Second question is on pricing, given the need to implement pricing this year, as costs have increased both ingredient costs and freight, where are you with respect to those discussions? And what maybe has changed in your view? You know, with respect to TreeHouse’s capabilities to implement price, versus maybe you know, several years ago where it may have taken a little bit longer, or there may have been a bit of a lag between price and cost?

[Steve Oakland:]

Sure. That's a good question, Jon. You know, I would tell you that when I stepped in, right, almost three years ago, they have just implemented price across the entire system and we had five different sales forces. We didn't have direct customer teams. We didn't have the commercial organization that we have today. There was a lot of great people, but they didn't have the data. They didn't have maybe the systems or the protocol that we've built. So, this is a totally different commercial organization. It's a totally different relationship with the customer and even more importantly, we stand on top of a different service level, right? So, I think we're a much different organization to do this. Our teams are armed with what they need to do it, but I would suggest also our relationship with the customer is so much better. Pricing, as you've heard from the couple of calls that have been out already and from all that you've read about it, is here. I mean there's no question. The retailers understand that. So, we're working very closely to decide what can we mitigate, what do we need to pass on, what's the right movement with the consumer, what's the right decile or all of those things. So we have data, we have systems and we have relationships that we didn't have last time we did that. So, as Bill guided to in his prepared remarks, we'll see most of the impact in the back half, but that's when we need it. So, we expect it to go much differently than it's gone in the past.

[Jon Anderson:]

Thanks so much.

[Operator:]

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

[Robert Moskow:]

Hi. Thanks for the question. Steve, I think the tone on how you're thinking about the portfolio is definitely shifting. It's much more about depths in categories rather than breadth. So, regarding the 20% that's being re-evaluated, how much earnings accretion or dilution are you willing to accept and could you foresee divesting as much as 10% of the business over time? Is there any kind of range as to how much of the portfolio, you think, still needs to be divested?

[Steve Oakland:]

You know I would – I hope we didn't over skew the divested part. I think there is some business in there that we don't run as well as we can run them, right? We've been through an awful lot of different evolution. I think we understand now that we have some businesses where we're not advantaged, right, where we have either the wrong customer mix, the wrong production cycle, something like that, something is wrong in there. And so I think we're going to take some time and try to invest some time in the right people and talent. And as you know that's different people, that's different incentive systems, that's a lot of different things than running a stand-alone business. Actually running all three of those businesses is very different. There's different – you need different objectives in a growth business than you do in a cash business and you need different objectives in a revitalized business than you do in those other two. So, I don't think there'll be as much divestiture as there'll still be us positioning those businesses to work well. There'll probably be a few small things we take out, but I don't think it'll be material. It's more about mixing them than it is about selling them.

[Robert Moskow:]

Okay. And also, you typically give some guidance for first quarter. I didn't see that here, unless I missed it. Can you give us a sense like just roughly, can we expect some organic growth in the first quarter? And it seems like an easy comparison to last year. So, how are we comparing out of the gate in the first quarter?

[Bill Kelley:]

Hi, Rob. It's Bill. Good morning. How to think about the year, overall? We think that on an EPS basis, it's going to split more at 30-70 in terms of first half, second half. We did not guide the Q1 piece, the – your point about organic growth in Q1 and those last two weeks in March and those first two weeks in April where we lap the COVID takeout from last year. Those are going to be significant numbers, and we probably won't crawl over that in the quarter. We did guide that over the full-year our organic basis will be up slightly and more when you add the Riviana piece in, but we'll think about this. This year, more than half and that's only because of – we're very much in this pandemic. And there are still things that can go up and down for us here. We want to make sure we watch it and call it out as directly as we can.

[Steve Oakland:]

Yeah, maybe I can add to that, Rob, for just a second, I would say, your statement on crawling over January and February is right, right? We can crawl over those numbers, right? March, I don't think, I don't know that anybody will count March, right, and March was significant enough that that will be a tough comp just in itself. I would just suggest that we should look at our business and I think Bill mentioned this, but looking at more of the pre-2020 quarterly cadence, right? I think that 70-20 number that Bill mentioned, we have seasonal business. That's right. We sell pie crust, right, and pie crust is a Thanksgiving Christmas business. We have a lot of those kinds of businesses that are back half weighted. So, I would suggest our historic seasonality will be strong, but it will be more like our historic seasonality.

[Bill Kelley:]

And Rob, just one – I'm sorry, I mean. Yeah. One point before we leave this topic. The other piece is around the inflation and the pricing. I think those will build throughout the year. We don't base all that inflation on day one and longer their pricing on day one, so you will see that kind of come together more towards the back half, but to Steve’s points are historical split between 30, 70 first half, second half is where you'll end up seeing this year come out.

[Robert Moskow:]

Maybe one follow-up. I think last quarter you said that some of the new business wins that you had expected and third quarter had been delayed, have you gotten all of those wins you've expected? Are those in the base now or are there still delays?

[Steve Oakland:]

Yeah. Most of that is in there. So there is still some stuff happening here now in the first quarter, right? The commercialization process is happening in the first quarter, but they're on track. They'll be in the first quarter, but maybe at the end of the first quarter, but they'll be in the first quarter.

[Robert Moskow:]

Okay. Great. Thank you.

[Steve Oakland:]

Thanks, Rob.

[Operator:]

The next question comes from Rob Dickerson of Jefferies. Your line is open.

[Rob Dickerson:]

Great, thanks so much. Steve, I just had a kind of a general question around your commentary about potentially getting some of these categories you're playing in to low-single-digit to mid-single-digit top-line growth relative to the longer-term guidance and target of one to two and then also what seems like maybe somewhat soft organic sales growth expectations for 2021 once we factor in the acquisition contribution. So, I guess net-net, it seems like, you know 2021 is still kind of this building phase continue the momentum with these categories that we saw in Q4, but then later, we might have more upside on the top line versus seeing that upside in 2021. So, I'm just trying to get a sense as to why organic sales growth wouldn't be a little bit better than what you're kind of implying for 2021 given the momentum you saw in Q4? Thanks.

[Bill Kelley:]

Hi, Rob. It's Bill. Let me see if I can answer your question. Let me know if I get it right. But you're pointing around the 2021 being that is as up as you thought, you know how we think about it is the COVID lap for us will be significant, particularly that part that happens in the first quarter. And then we did add the Riviana piece in. So, on a reported basis we'll get to a stronger number and be up slightly on organic basis. Our long-term algorithm of 1% to 2% is still where we focus and we think as you exit 2021 you'll get back to that organic top-line growth rate to your point.

[Steve Oakland:]

Yeah. And Rob, I think the good number to use as a base for us is the guidance we gave a year ago on this call, right? When we look pre-COVID, if you think about just a year ago, we talked about a world that really was our distribution base what we thought the current company sat on, right? Underlying the numbers you saw, we did grow in all four quarters this year, but that's not what we guided to, right. We guided for that to build as the year went on. And we guided that the fourth quarter was going to be the quarter where we turn the company to real growth, right. And all those efforts that we've made over the first year and a half or two years would come to fruition. That's why the fourth quarter was so strong. We think the promise of 2020 actually happened. It’s just we didn't see it through all the COVID volume. So, as a base, look at the guidance we gave for 2020.

[Rob Dickerson:]

Okay, fair enough. And then just quickly on the COVID-related costs. I think you did by about 15 in the quarter, I thought you had mentioned, maybe 10 to 12 per quarter for 2021. So, I guess first question is, it seems like that's coming down, can that come down a little bit later as we progress through the year and then kind of in relation to the cadence of the actual COVID contribution or the cost would be added back. Steve, are there any parts of the business that you foresee really coming back as the year progresses? And I think you had mentioned the pickle business being somewhat materially hit in 2020, but I'm assuming that there is some assumption that that should bounce back in 2021? And that's it. Thanks.

[Steve Oakland:]

Sure. I can speak to it and then Bill can comment. Yes, I think hopefully things like pickles, you know, we hope to be able to bring that seasonal workforce into sort cucumbers, right. I think there is actually a picture in the deck and that's not how it normally looks. It normally looks with hundreds of people shoulder to shoulder when that happens, and that's not what we can do this year. So, I would hope that business comes back and I would hope food service comes back, right. So I hope there is a direct correlation of our retail volume goes down a little bit that we got our food service business back. Bill, if you have any other thoughts?

[Bill Kelley:]

Yeah. I put some numbers around to your point, the – the first part, we did say, it is between 10 million and 12 million a quarter in a drag on our gross margin related to our COVID expenses that we absorbed in the P&L. That gets better if – I mean if vaccinations happen and the pandemic kind of calms down and you see that virus kind of go away, you expect that to get a lot better for us so that disruption , particularly as people get back to their normal lives and schools are back online and all that things, all that kind of happens. From me – probably from home perspective, our plan to Steve's point is that we have planned that business to recover midway through the year. So, we would expect to cut those losses in half in our 2021 guidance at the midpoint. And so those are opportunities for us, if that gets to be better than our numbers will be better.

[Rob Dickerson:]

All right. Super. Thanks so much.

[Steve Oakland:]

Thanks, Rob.

[Operator:]

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

[Steve Oakland:]

Well, I'd like to thank you all for being with us today. I know it's a busy day for you all, it’s a busy day for us, and we look forward to your thoughts and your questions as we go forward. Have a great day.

[Operator:]

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