The Illinois-based firm – which operates in 29 product categories across two divisions (meal prep and snacking & beverage) and runs 40 production facilities across North America and Italy - “has executed a major transformation since 2018, improving the ability to support its private label customers and navigate a challenging operating environment,” said board chair Ann M. Sardini in a statement issued alongside the firm's Q3 results.
Breaking up the company would involve divesting a portion of its meal preparation business (which includes dressings, sauces, jellies, pasta and pickles) to allow it to focus on the "higher-growth" snacking and beverage unit (cookies, frozen waffles, pretzels, snack bars and beverages and drink mixes), said Sardini.
“This progress and the strong long-term consumer demand trends for private label provide a favorable backdrop as the Board thoroughly reviews and considers strategic options with a commitment to maximizing value for all shareholders."
Labor and supply chain woes: 'We're getting creative...'
"We're getting creative around how we staff and schedule our plants, thinking holistically about how we extend our people, so we can improve attendance... On the production side, this includes ensuring we have backup suppliers to prioritizing our customers' most important SKUs. On the transportation side, we completed additional freight RFPs and in some cases we'll utilize the spot market to ensure that we can get inputs and finish product to the right place at the right time."
Bill Kelley, CFO, TreeHouse Foods
‘A progressively challenging operating environment…’
TreeHouse posted a 5.3% increase in net sales to $1.1bn for the three months to Sept 30 (Q3) driven by acquisitions* and higher pricing.
However, volume/mix excluding acquisitions was unfavorable “primarily due to supply chain disruption causing supply shortages and declines in service levels,” said CFO Bill Kelley, while profit margins declined due to inflation and supply chain problems.
Net income from continuing operations dropped to $6.7m in the quarter, compared to $11.4m for the same period of the previous year, said Kelley, who cut the firm's profit forecast for the full year.
“We continue to work diligently to mitigate supply chain disruption, and we are confident that we are implementing the necessary pricing actions to recover higher input costs over the inflationary cycle.”
"As inflation continues, the compounding effect of labor shortages and supply chain disruption have created a progressively challenging operating environment," added CEO Steve Oakland in prepared remarks.
CEO: 'We have more demand than the supply chain challenges allow us to fulfill'
Speaking on the Q3 earnings call this morning, Oakland said TreeHouse had around "$40m in unmet demand [during the quarter] due to constraints across the network, either not being able to run lines to the lack of labor or because we didn't have the appropriate supplies.
"Demand for private label products has strengthened in recent months, to the point that today we have more demand than the supply chain challenges allow us to fulfill."
Nearly all of the firm's meal prep categories are currently on allocation, "a clear sign that orders are outpacing our disrupted capacity," added Oakland. "Demand has strengthened since we last spoke and that's very encouraging. As certain federal stimulus programs expire, we are seeing signs of private label recovery. While at the same time, we are winning new business with existing customers.
"Our board and management team are steadfast in our belief that the secular headwinds we are facing are episodic and they will pass."
Asked by an analyst about the potential sale of part of the meal prep business, he said: "I wouldn't be surprised with the transaction that would approach $2bn. There's probably $2bn of businesses that would provide a great scale platform in the private label industry and would allow us to... simply pull the strategy forward."
*TreeHouse Foods has been cutting SKUs (and jobs) and reengineering its portfolio in recent years, acquiring the majority of Ebro's Riviana Foods US branded pasta business for $242.5m in December 2020, and selling its ready to eat cereals business to Post Holdings for $85m in June 2021.