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Monday, March 27, 2023

TreeHouse Foods continues to be challenged by supply chain issues

OAK BROOK, SICK. — The interconnectedness of the food and beverage supply chain was evident in TreeHouse Foods, Inc.’s third-quarter financial results. With on-time deliveries from suppliers in the low 70s combined, the company is struggling to meet service levels in the low 90s.

“The service continues to improve sequentially, but it’s not yet back to where we need it to be for us to take advantage of every opportunity,” Steven T. Oakland, president and chief executive officer, said during a Nov. 7 conference call with securities analysts. We are making progress in our efforts to mitigate the outage and anticipate that service will continue to improve in the coming quarters. But we are facing the challenges in the operating environment, which are affecting our industry.”

Adding to the pressure has been the continuing difficulty of attracting and retaining labor. Processing plants that are fully staffed and have a stable workforce can improve service levels and focus on continuous improvement, said Patrick M. O’Donnell, the company’s vice president and controller.

Supply chain issues during the quarter hampered the company’s ability to tap into consumer demand for lower-priced private label products. For the quarter ended September 30, TreeHouse Foods posted a loss of $90.5 million. During the same quarter of the prior year, quarterly net income was $6.7 million, equal to 12¢ per share on common stock.

Sales for the quarter increased to $875 million from $752 million a year earlier. Higher prices contributed 21% to the increase in sales, while volume/mix fell 4%. Gross profit as a percentage of net sales was 14.8% during the third quarter of fiscal 2022 compared to 16.7% a year earlier. The decrease was mainly due to incremental costs related to labor and supply chain disruption due to the macro environment, as well as warehouse capacity challenges, according to the company.

TreeHouse Foods completed the divestiture of a significant portion of its food preparation business on October 3.

“Today, we are a simpler business, having sold 11 categories and 14 plants,” Mr. Oakland said. “Our portfolio is now more focused on snacks and beverages.

“We operate in attractive growth categories, driven by strong consumer demand trends. We have positioned ourselves to capture the continued momentum in private label and improve the consistency of our execution to drive more profitable growth.”

Mr. O’Donnell said the divestment will help the company improve its service levels.

“The divestment significantly reduced our complexity in terms of number of plants and categories, allowing us to better focus on service,” he said. “On average this year, we’ve seen a 50 to 100 basis point improvement in service each quarter. During the third quarter, service averaged 93%, seeing improvement every month and…our service in October was 96%.”

Looking ahead to fiscal 2023, the TreeHouse Foods management team expects private label demand to continue to be strong.

“During historic recessions, when consumers are looking to stretch their dollars, private label has benefited,” Mr. Oakland said. “…We have a faster-growing, higher-margin portfolio. Before the pandemic, these categories grew between 3% and 5% per year. And while we are not ready to provide formal guidance for 2023, given next year’s price adjustment to catch up with inflation, as well as healthy demand, we would expect revenue growth to be very strong.”

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