TreeHouse Foods – Strategic Update & Mid-term Outlook
– 22 February 2021
Disclaimer
The information, material and content contained in this transcript (“Content”) is for information purposes only and
does not constitute advice of any type or a trade recommendation and should not form the basis of any investment
decision. This transcript has been edited by Third Bridge and may differ from the audio recording of the Interview.
Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability
for the Content or for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the
Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge.
Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification,
reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from,
transferring or selling any Content is strictly prohibited.
Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Dennis Bergeson (DB)
Former VP, Supply Chain Planning & Operations at TreeHouse Foods Inc
Agenda:
1. US private label trends and retailer strategies across TreeHouse Foods’ (NYSE: THS) core categories
2. Update on private label competitive landscape and pricing environment
3. TreeHouse Foods’ products, manufacturing, growth and innovation strategy
4. Riviana Foods acquisition update and branded strategy outlook
5. Mid-term growth and profitability outlook
Contents
Q: Could you outline 2-3 pre-coronavirus category trends relevant to TreeHouse Foods’ meal preparation
and snacking and beverages businesses?
Q: How has the pandemic impacted the private label trends you referenced?
Q: What are some of the most pressing challenges facing the private label industry?
Q: To what extent have quality and procurement processes improved over the last five years?
Q: Why do you think the US private label has such a low penetration rate within retail grocery relative to
European counterparts? How should we frame the potential for US private label to catch up?
Q: How has the emergence of new channels impacted the industry? Is it just e-commerce, or are other
channels such as mass merchandisers also having an impact?
Q: How has consumer buying behaviour changed during the pandemic? You referenced millennials not
necessarily buying the same brands as their parents. Could you elaborate on that?
Q: How would you rate TreeHouse’s ability to take advantage of the elevated at-home consumption
opportunity across its core businesses?
3
3
4
4
4
5
5
5
Q: How could the federal regulation for a USD 15 minimum wage impact TreeHouse’s business model?
6
Q: Can you outline the headwinds caused by freight capacity that could impact margins in the near term? 6
Q: TreeHouse’s management have said they intend to enact price increases to offset cost pressures which
will come through in H2 2021. How successful do you think they will be in getting these price increases?
6
Q: Are there areas you think TreeHouse’s management should focus on to strengthen operational efficiency?7
Q: What has the private label industry done to counter some of the ongoing health and wellness trends, such
7
as improving health credentials and catering for a more convenient, on-the-go offering?
Q: Who are some of the dominant players in the private label snacking and beverages industry competing
directly with TreeHouse for market share?
Q: How would you describe the barriers to entry in the private label industry? How easy is it for new
manufacturers to enter and take share from more prominent players?
Q: What would you pinpoint as TreeHouse’s competitive advantages?
Q: What would you highlight as TreeHouse’s weaknesses?
Q: What are retailers’ key criteria when negotiating contracts? You indicated TreeHouse has superior food
quality. Which other factors do you think are playing an important role in these contracts?
Q: How could national brands counter the threat of private label? You alluded to the potential for Walmart
to enter private label manufacturing.
Q: Could you break down TreeHouse’s snacking and beverages private label business?
7
7
7
8
8
8
9
Q: How do you think the pandemic has impacted TreeHouse’s snacking and beverages private label division?9
Q: Could you share an overview of TreeHouse’s meal preparation business?
Q: You mentioned the snacking and beverages were on-trend. Would you say the same for the meal prep
business? How do you expect TreeHouse’s sales to trend here?
Q: How would you grade TreeHouse’s innovation? How is it meeting the challenges you referenced?
10
10
10
Q: How did you assess TreeHouse’s decision to acquire most of the Riviana US pasta business? What is the
likely strategic rationale for buying a branded business when its own business is primarily private label?
11
Q: TreeHouse has come under pressure from an activist investor calling on the company to conduct a
strategic review, including the possibility of a sale. Which areas of the portfolio do you think it could shed? 11
Q: Could you share a best- and worst-case scenario for TreeHouse over the next six months?
Q: Is there anything further you think investors should know about TreeHouse’s management team and
their ability to execute on priorities?
11
12
TreeHouse Foods – Strategic Update & Mid-term
Outlook
Transcription begins at 00:02:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled TreeHouse Foods – Strategic Update & Mid-term
Outlook. I’m Nyree Hinton and I will be facilitating today’s Interview with Mr Dennis Bergeson, former VP of
Supply Chain Planning and Operations at TreeHouse Foods.
Dennis, before we start today’s Interview, please state I agree or I disagree to the following statement: You
understand the definition of material non-public information and agree not to disclose any such information,
or any other information which is confidential, during this Interview.
DB: I agree.
NH: Thank you, Dennis. Could you give us a brief rundown of your background and previous roles?
DB: Sure. Currently, I’m the Vice President of Planning and Logistics with Dart Container, so still in the
consumer product space, just a different piece of it. I spent three years at TreeHouse Foods and I joined as the
Vice President of Operations in the Condiments Division in 2017. About a year later, and my last two years
there, I led the planning group and I was part of the supply chain leadership team across all of TreeHouse,
when TreeHouse centralised with supply chain. Previously, I’ve had senior roles in supply chain, largely in
operations in various other industries, consumer and industrial-related industries. Anyway, hopefully that’s
what you’re looking for.
[00:03:55]
Q: Could you outline 2-3 pre-coronavirus category trends relevant to TreeHouse Foods’ meal preparation and
snacking and beverages businesses?
DB: I think these are related, but one trend that TreeHouse would see, that you would see is the increasing
share of chains like Whole Foods, Aldi, the introduction of Lidl into the US market, and why those are
significant is those are largely, and Trader Joe’s, those are largely exclusively private label purveyors. As those
chains gain share, it lifts the private label share naturally, so those are a large focus. I think the other trend
that was relevant in my time there was millennials and younger generations not, this is probably an
understatement, but not really having brand affinity. It’s almost being anti-brand. The brands that their
parents may have brought home from the grocery store every week, now were not important to the millennials,
and so where 20 years ago private label was synonymous with generic, now it’s more a place where you some
of the actual real innovation through these other chains. I think that’s driving the private label growth that is
being exhibited in the market right now.
[00:06:03]
Q: How has the pandemic impacted the private label trends you referenced?
DB: My experience with this in the food space is going to be six months ago, since it has been six months since
I’ve been at TreeHouse, but early on in the COVID time period, frankly, I think the brands had an advantage
Private and confidential 3
because it was easier for them to mobilise and get things on the shelf. It was during the grocery stocking
period, a lot of what happened was really just whatever you could get on the shelf for shelf-stable products,
which is the majority of what TreeHouse sells. I know at TreeHouse we quickly amped up to run as much as
we could of most everything we made.
[00:07:12]
Q: What are some of the most pressing challenges facing the private label industry?
DB: This is a little bit of an answer that we might talk about a couple of times because I think it has a couple of
threads. One of them is, does scale matter? I think that’s still an open question. Another one is where are the
threats to private label coming from? The food business has a pretty fair fixed-cost overhang, particularly the
branded companies, and so as demand shifts from branded alternatives to private label alternatives, there’s an
open question of how will the brands respond? Will they start to use their capacity to actually produce private
label products so they can keep their cost profile in control. I think there’s an open question relative to that.
Again, I think there’s a scale issue with niche private label. A lot of the food innovation I think is coming from
niche-y players, and so what’s the impact of that going to be?
I think the one other looming threat, or risk, or another looming threat and risk, is actually the big retailers. I
think about Walmart and then the large grocery chains, so Kroger, Albertsons, those are the type of people
you’d be talking about. It’s them going into private label manufacturing themselves. I think where that
becomes a bigger risk is, as things move to e-commerce, the capital that these companies were deploying for
their growth five years ago was about building new stores. The way you got growth was having a store and
increasing your store count. With e-commerce it’s not going to work that way, so what’s Walmart going to do
with that capital now that they don’t have to build as many stores? There’s a chance they vertically integrate
into key categories that they seem to think are important. You can see that Walmart just did that, they built
one of the first dairies that has been built in years for themselves. I think there’s a threat of the large players
potentially moving that way. That’s something else to watch, I think.
[00:10:11]
Q: To what extent have quality and procurement processes improved over the last five years?
DB: Relative to quality, this is probably what’s relevant, I think. TreeHouse is, in my opinion, a leader in food
safety and quality. I think that’s something that is part of the DNA of the company and I would match it up
against anybody in the industry in that regard. I think TreeHouse is a leader in that regard and I see the
requirements on that, they’re not going to get weaker over time. On procurement, you’re starting to see
automation get involved in procurement practices and processes. The use of bots and automating
requisitioning processes and whatnot. I think you’re going to see trends that, again, try to find ways to
continue to take cost out of the procurement process as non-value-added perhaps.
[00:11:54]
Q: Why do you think the US private label has such a low penetration rate within retail grocery relative to
European counterparts? How should we frame the potential for US private label to catch up?
DB: I don’t know that I have a great answer for why we’re different from Europe. I think some of it has to do
with the different landscape of the grocery stores in the US vs Europe. Again, as you see some more of these
European chains like Lidl and Aldi further penetrating into the US, that’s certainly one thing that can drive
that penetration here, because they’re bringing their business model here. I think the US has more of a
television-centric culture than any part of the world and commercials and brands are proliferated on TV, and
Private and confidential 4
that probably has an impact as well. Again, I think those are changing. As new models of entertainment move
forward and don’t rely on advertising revenue to drive what you’re watching, I think that the brands start to
get crowded out. I think those things potentially have the opportunity to change the game.
[00:13:28]
Q: How has the emergence of new channels impacted the industry? Is it just e-commerce, or are other
channels such as mass merchandisers also having an impact?
DB: I think my perception and perspective at TreeHouse, other companies where I am now, I think the mass
merchandise channel is really not that different and the companies are suited well to delivering through that
channel. E-commerce is trickier and a lot of the distribution networks, I’ll say at companies like TreeHouse, at
companies like where I am now, they’re not set up for things like pick and pack and mixed case or mixed pallet
shipping. These are large warehouses that were built to store pallets, ship pallets and move pallet quantities.
As e-commerce comes through and changes that dynamic, I think you’re seeing a lot of companies that are
these larger legacy companies, they’re going to struggle for a period of time through that transition. I think
that’s a risk that’s inherent in the industry that’ll play out as a cost.
[00:15:20]
Q: How has consumer buying behaviour changed during the pandemic? You referenced millennials not
necessarily buying the same brands as their parents. Could you elaborate on that?
DB: I’ll tell you one other trend that the pandemic has kind of slowed down for a minute. Prior to the
pandemic, in the grocery store, the shopping behaviour was moving from the centre of the store to the
perimeter. Think about going into the grocery store and hot bars and salad bars and fresh bakeries and
whatnot. In many areas of the country, in the grocery store, people weren’t going to the centre of the store to
buy pre-packaged, shelf-stable food. They were going in and buying the fresh materials found on the
perimeter. Again, I think during the pandemic, when that shut down, it pushed people back to the centre of
the store, which is where you find the things that you’re using to cook at home, private label branded or
otherwise. I think that is one dynamic that the pandemic has no doubt, in my opinion, had an impact on,
which throws some of the trends maybe a little off for the last 12 months. From a branded perspective, again,
you just see continued erosion of brands and their percentage sales as a percent of the total, relative to private
label. You see some of the innovation coming in private label. Again, I’ll use the example of Walmart, Walmart
doesn’t just have great value anymore, Walmart has great value and Sam’s Choice. Great value is what it says,
Sam’s Choice is where you’ll see innovation on the shelf, in private label in Walmart.
[00:17:38]
Q: How would you rate TreeHouse’s ability to take advantage of the elevated at-home consumption
opportunity across its core businesses?
DB: While I was there, I think TreeHouse responded, and the employees of TreeHouse responded, by
ramping up production and just pushing everything out you could. There was certainly simplification that
happened during that time frame. If you pick a category like pasta, early in the pandemic, was it important to
have every shape of pasta noodle on the shelf, or was it important to get a lot of the five basic shapes on the
shelf? Those decisions were made and pushed down and pushed out, again, to really maximise the amount of
food that was being put on the shelf. Those were some of the effects of the pandemic. I think you’re starting to
see the rebound of people are starting to think, “Did I really need all 20 shapes of pasta in 17 sizes of boxes and
cartons, or is there a longer-term opportunity here to really simplify what’s on the shelf in the grocery store?”
Again, I haven’t been in that space in a little while, but I know those are decisions that are still playing out
Private and confidential 5
across the industry.
[00:19:21]
Q: How could the federal regulation for a USD 15 minimum wage impact TreeHouse’s business model?
DB: I’m going to answer you, and my opinion is a little different than the USD 15 minimum wage would drive.
I think, first off, in the short term, that’ll have significant cost implications, but the bigger issue is labour
overall anyway. Whether it’s at USD 10 an hour or at USD 15 an hour, the labour-intensive, highly manual
processes in a lot of these factories, people don’t want to come and do that work. I can tell you that during the
pandemic at TreeHouse, during the pandemic at my current employer, just acquiring labour to fill the open
jobs remains a challenge. I think what you’re going to see is a rapid escalation of automation in this space to
the greatest extent possible. Not because of minimum wage pressure, but just because of the challenge of
acquiring sufficient labour to staff these factories. I think that’s the bigger issue.
[00:21:04]
Q: Can you outline the headwinds caused by freight capacity that could impact margins in the near term?
DB: Freight capacity is an issue for everybody, and so the couple of things I think to think about, particularly
as they relate to TreeHouse, but this will be true anywhere, in TreeHouse a fair percentage of the freight, first
off, is customer pick-up-driven freight. To the extent that that part of the business is there, I would say the
exposure at TreeHouse in particular is minimal because TreeHouse isn’t paying that freight. A risk is those
customers are having a challenge managing that freight, getting the capacity or whatever and try to push that
freight over to TreeHouse. That’s a risk of any supplier right now, but that would be a risk at TreeHouse. That
remains to be seen, how they could absorb that, or not. I think the other thing that is where the freight
headwinds may or may not be as prevalent, it’s a lane-by-lane kind of thing. If your factory is in an area, or
your distribution centre is in an area where there are a lot of people bringing other goods into that area, and
you’re a good backhaul, the freight headwinds aren’t as significant as they are if you’re on the other side of
that. Some of this has local and regional implications that, while overall the market is tight, there are certain
locations that aren’t going to feel that.
[00:23:19]
Q: TreeHouse’s management have said they intend to enact price increases to offset cost pressures which will
come through in H2 2021. How successful do you think they will be in getting these price increases?
DB: In my opinion, it’ll depend really on two things. The first one is does the rest of the industry behave the
same? If anybody tries to put pricing out there and nobody else moves, it’s not going to stick. That’s number
one. I think the other thing around that is, and this gets to one of the pieces of TreeHouse, it’s the question of
scale. If the customers are doing a superior job of not allowing TreeHouse to take advantage of supplying them
across multiple categories and work to pick off companies like TreeHouse, TreeHouse isn’t the only one, but
companies like TreeHouse, with small single-category niche players, it’ll be harder to stick to price then if
people look at the total cost across multiple categories that TreeHouse can bring, if that makes sense, for the
total value that TreeHouse brings by bundling multiple categories.
Private and confidential 6
[00:25:07]
Q: Are there areas you think TreeHouse’s management should focus on to strengthen operational efficiency?
DB: I think management is focused on, is and has been, focused on the right areas in that at TreeHouse for
the last three or four years. Quickly after the Conagra acquisition, I think TreeHouse realised they needed to
become an operating company and has spent the last 3-4 years now moving in that direction. I know there are
significant costs that have been taken out of the business and I think the leadership continues to be focused on
that appropriately.
[00:26:00]
Q: What has the private label industry done to counter some of the ongoing health and wellness trends, such
as improving health credentials and catering for a more convenient, on-the-go offering?
DB: I don’t really have a good answer for that one. I’m not really sure. I think the answer lies in some of the
smaller niche people, not necessarily the larger companies like TreeHouse. I think TreeHouse is more of a
follower there than a leader.
[00:26:40]
Q: Who are some of the dominant players in the private label snacking and beverages industry competing
directly with TreeHouse for market share?
DB: Again, I don’t know all of them. I think one of the big other company that comes to mind that has the size
and scale of TreeHouse is SunOpta. I know they compete in several similar categories to TreeHouse.
Otherwise, it’s a lot of smaller regional, single-category players. There’s not another, other again than perhaps
SunOpta. There are not a lot of other large, multi-category players out there.
[00:27:35]
Q: How would you describe the barriers to entry in the private label industry? How easy is it for new
manufacturers to enter and take share from more prominent players?
DB: My opinion is it doesn’t take a lot to get going in the food business and to get an idea and get it out there.
I think what’s tougher is to get national scope, national coverage and national scale. I think an increasing
barrier is going to be labour in any of these type of spaces, and so that’s something to watch. The barriers to
entry, frankly, are quite low, to put new food products out there. Barrier to entry that’s higher is having a
nation-wide, multi-category scale, it takes a lot of capital to do that.
NH: Do you think the pandemic has intensified or reduced these barriers to entry?
DB: I don’t know, I haven’t thought about that. I would imagine they are similar.
[00:29:19]
Q: What would you pinpoint as TreeHouse’s competitive advantages?
Private and confidential 7
DB: Number one is food safety, food safety and quality. You don’t see TreeHouse on the FDA site with recalls.
It is a strength of the company, number one. Number two, while I would say TreeHouse isn’t out there as
leading edge, the food quality of the things they make is high. It’s an interesting one since it’s a division that’s
for sale, but as an example or a product line that’s for sale, in ready-to-eat cereal, if you stack up the
TreeHouse-produced alternative vs a branded alternative of a similar cereal, in a blind panel test TreeHouse’s
private label routinely is viewed as the superior product, taste, texture, whatnot on a ready-to-eat cereal.
TreeHouse is not putting an inferior product out there. In many cases, they’re putting a superior product, with
high food safety on the shelf with someone else’s name on it. I think you can see that in what they do as a
strength. Again, scale. There are not many companies that can load a truck up with 30 different categories of
private label food on that truck and deliver it to a grocer or to a distribution centre, whatever, for a chain,
without running through someone like Sysco or a food distributor to get it. Again, I think that’s a strength of
TreeHouse, is the breadth of the offering.
[00:31:51]
Q: What would you highlight as TreeHouse’s weaknesses?
DB: In my opinion, the two things I would say are you have to be careful with the scale, that you don’t let the
cost of that scale swamp you, and again, I think TreeHouse over the last 2-3 years has done a good job
recognising that and moving costs out and keeping costs down, or working to keep costs down. I think the
other thing, and again I mentioned this earlier, is it takes a real discipline in the selling side not to let a
customer take advantage of you by picking you off category by category, vs the total value you bring of putting
10 categories on a truck or 15 on a truck, where some of these other smaller players can’t do that. What’s the
benefit to you as a customer of that? One-stop shop is worth a lot. I can tell you, as a customer, you’ll have
lower inventories, you’ll turn your inventories quicker and those kind of things. TreeHouse offers you some
benefits in that space that there are not many others out there in private label can offer.
[00:33:41]
Q: What are retailers’ key criteria when negotiating contracts? You indicated TreeHouse has superior food
quality. Which other factors do you think are playing an important role in these contracts?
DB: Certainly, prior service is something that plays into it. If you’ve been a supplier, if you’re the incumbent,
how you’d service the business will matter. You have that. Trade dollars and things like that are not a
significant issue in private label, I’m not going to say they’re a non-issue, but they’re a lot less significant than
in the branded space. It’s really about capacity and capability and service at the end of the day. I think food
quality is table stakes and it’s those other factors.
[00:35:13]
Q: How could national brands counter the threat of private label? You alluded to the potential for Walmart to
enter private label manufacturing.
DB: Certainly, what the brands can do, and it’s just around cost management really, is whether it’s the
retailers vertically integrating or whether it’s the branded companies taking some of their excess capacity
where they’re not able for whatever reason to eliminate the capacity, I guess is the way I’ll say it, they can
improve their cost position that way. Those are some of the things that can happen. One point I would make,
and I’ve seen this in multiple companies that I’ve worked for and I think there’s a misperception out there, in
my opinion. I’m an operations guy, so it would be fair to say this is a bias, but my opinion is it’s actually more
expensive to produce private label products than branded products. The reason for that is, and I’m just going
to use macaroni and cheese as kind of an example to talk through, when Kraft makes macaroni and cheese,
Private and confidential 8
they line up that blue box and they line up that macaroni and cheese and they just hit the “go” button and they
go. They make however many of those little blue boxes they make, and they’re all the same and they’re making
that for day after day, a week at a time or more on those lines.
A private label manufacturer doesn’t work that way. A private label manufacturer, Walmart wants a little bit of
a different recipe than Kroger has, than Albertsons has, than name your chain. They’re all in a different box,
they all have something a little different about them and none of them are pushing the volume individually
that Kraft macaroni and cheese are. So you’ve got the cost of managing that complexity which has more
change overs, more ingredients, more raw materials, different cartons, etc, just on the production line. It
actually costs more to make it. Private labels cost less on the shelf because marketing dollars aren’t spent on it.
Why their price point is lower isn’t because they’re necessarily cheaper to make, it’s because on the shelf there
are not marketing dollars and all associated with them that’s part of the cost of the product. There’s not the
brand equity that you have to maintain with commercials and advertisements and whatnot. A challenge for the
private label manufacturer is really being excellent, better than the brands, on cost because the expectation is
on shelf these are cheaper and the buyers at the retailers are really good at saying, “Because it needs to be
cheaper on the shelf, we should be paying less for it,” which isn’t necessarily the… it’s hard to make that work,
let me say it that way. Hopefully, that makes some sense. That’s probably a real squeeze on any private label
manufacturer.
[00:39:18]
Q: Could you break down TreeHouse’s snacking and beverages private label business?
DB: Snacking and beverage is made up of multiple categories. The majority of the baked items in the
TreeHouse portfolio are in snacking and beverages. There’s a snack bars piece of the business. Broth sits in
snacking and beverages as a beverage. There’s a tea business. Powdered beverages. What that category is at
TreeHouse is these I’m going to call them sticks of powered drinks that you put them in your water bottle and
off you go. Some of those are just flavouring, some of those are electrolyte replacement and whatnot, those do
fit into the health and wellness niche that I know TreeHouse is working to manage. Then coffee is a big piece
of that division and TreeHouse is expanding into ready-to-drink, which at TreeHouse would be cold-brewed
coffee in the cans and bottles. That’s what makes up that division.
[00:41:16]
Q: How do you think the pandemic has impacted TreeHouse’s snacking and beverages private label division?
DB: This is an opinion, I’m not there at the moment. I would expect categories like coffee, for one, to kind of
take off. People aren’t going to Starbucks, they’re having their coffee at home. Where TreeHouse is, K-cups is
coffee for TreeHouse. Again, kids snacking at home, snack bars, cookies, crackers, pretzels, those are all in that
category and in that division. Again, snacking is kind of on-trend, and with kids at home, it would appear more
of that is happening. Then broth in particular, I remember, before I left, that fuels a lot of home cooking,
protein, again just cooking more at home, eating more at home, so another category that, in my opinion,
would be seeing strong results from what’s going on in COVID.
NH: How should we frame profitability prospects for this division, in a scenario where the pandemic
continues for a bit longer than we’re anticipating?
DB: Again, I can’t speak to what their costs are necessarily, but I think these are categories that are on-trend
and it would not be unreasonable to expect strong results from those categories through COVID.
Private and confidential 9
[00:43:39]
Q: Could you share an overview of TreeHouse’s meal preparation business?
DB: Meal preparation is what I would call more of what’s historically in the centre of the store. To answer the
question you just asked me about snacking and beverage on the front end here, I would expect this division
has been benefited by COVID because it drove people from the perimeter to the centre. This is a centre-of-the-
store-heavy category. Where this division serves the perimeter would have been more in the food away-from-
home categories. Think about through customers like Sysco, and the dressing that sits on the salad bar isn’t
the same packaging and the retail-ready that’s on the shelf. Same dressing maybe, but different channel to get
there, if you will. Again, I think this part of TreeHouse definitely will have benefited strongly from COVID.
You’ve got things like the historical condiments division, or categories, so salad dressing, mayonnaise, pickles,
sauces, syrups, salsa, things like that. You’ve got dried dinners in the this part of the business, so anything
from typical macaroni and cheese, to rice-type meals. Then refrigerated dough-type products, think about
crescent rolls or cinnamon rolls and what not. Those are the things that are predominant in this division.
[00:45:56]
Q: You mentioned the snacking and beverages were on-trend. Would you say the same for the meal prep
business? How do you expect TreeHouse’s sales to trend here?
DB: I think, in meal preparation, there are a couple of categories like pasta, I think still fits in that on-trend. I
think the biggest challenge in that division is really managing the transition from the centre of the store to the
perimeter, and for the things in the centre of the store, so let’s say things like salad dressing, managing the
transition from traditional salad dressings to more organic salad dressings, or organic, cage-free egg
mayonnaise, organic mayonnaise. Not using corn oil but using olive oil or whatever the trend is today. It’s
moving for the things that are in the centre of the store, how do you attach that healthier label to it and then
how do you again help extend those products to the perimeter? I think those are the challenges for that
division. Clearly at TreeHouse, when I think about those two divisions, meal preparation has certainly got a
different presence in the food away-from-home sector than the snacking and beverages does. That doesn’t
mean it’s all or nothing, but meal preparation certainly has a stronger presence, I’ll say, in that arena than
snacking and beverages does, and so it’s more important to it in the long run.
[00:48:13]
Q: How would you grade TreeHouse’s innovation? How is it meeting the challenges you referenced?
DB: I think TreeHouse has got the capability to innovate, I’m going to say, in the kitchen. The challenge is,
and again I’m just going to use a brand vs TreeHouse, if Kraft decides to innovate in packaging, they just do it.
If Kraft decides to add a flavour or make a change, Kraft just does it. They go out there, certainly, and do
consumer panels and things like that, but Kraft owns the decision and goes. TreeHouse doesn’t own the
decision. Everyone of TreeHouse’s customers owns the decision independently. To drive some of these
innovations, and again to get scale, you’ve got to bring everybody from Walmart to Karl’s Grocery Store along
with you and that’s just a different challenge. Again, I think TreeHouse in innovation, they certainly have some
of the capability, but especially in meal preparation I would say it’s important to be a fast follower more than a
leader, because they’re not driving the change.
Private and confidential 10
[00:50:09]
Q: How did you assess TreeHouse’s decision to acquire most of the Riviana US pasta business? What is the
likely strategic rationale for buying a branded business when its own business is primarily private label?
DB: The short answer is, I don’t know. One of the few places that TreeHouse had brands and strong brands
prior to that acquisition was in pasta. TreeHouse already, through the American Italian Pasta acquisition,
which is really the nucleus of TreeHouse’s pasta business, owns strong brands. Mueller’s is the one that comes
to my mind just because I grew up eating it. I think it’s not going to be new to the sales team and to the
commercial team in managing those brands in the pasta category. It just gives them some brands to offer in
regions of the country that weren’t… these pasta brands are largely regional brands. I think it just gives
TreeHouse more national coverage with branded pasta, that they didn’t have the full landscape covered. I
think it gives them some flexibility in operations. There is bound to be some cost synergy that they can take
advantage of as well. While on the one hand I was a little surprised that they went and picked up a branded
business, it’s probably the one place in TreeHouse that it makes some sense.
NH: Do you think TreeHouse’s Riviana acquisition paves the way for further branded M&A?
DB: If I look at TreeHouse’s mission and vision, if I look at the words that come from Mr Oakland and his
leadership team when they speak publicly, I don’t hear them talking about moving strongly into the branded
space. It’s a question better for them than me, but I don’t see it as part of what TreeHouse is doing. Except in
the pasta business, they’re not really set up and equipped to manage a branded business at scale.
[00:53:01]
Q: TreeHouse has come under pressure from an activist investor calling on the company to conduct a strategic
review, including the possibility of a sale. Which areas of the portfolio do you think it could shed?
DB: I don’t know anything inside about it. I know what you read or I read publicly that’s going on with this. I
am sure their share price is driving a lot of what is going on. Their share price has clearly lagged the market
and expectations, and so I think it’s an opportunity that I’m surprised didn’t happen sooner in some respects.
There are some smaller categories at TreeHouse that someone might or might not look to rationalise. I think if
someone went to their Cagny presentation from, I think it was last week, and looked at their slide on their
portfolio and just looked at categories where they talked about not having a leadership role in private label,
those are places you could look. There are a couple of them that would be more challenging than others if you
did them individually, because TreeHouse has a couple of factories, particularly in the condiments area, so in
meal preparation, that are multi-category sites, and so picking off one category and leaving another becomes a
little bit of a challenge, I think. I would point to their Cagny presentation and look at the ones, again, where
they don’t assess themselves as industry leaders. Those would be the ones I’d be looking at.
[00:55:31]
Q: Could you share a best- and worst-case scenario for TreeHouse over the next six months?
DB: I don’t know, I guess it depends on where you sit what best- and worst-case means, first off. I think one
scenario is certainly Jana Partners, that are in there, drive some change and maybe there is not a single
TreeHouse six months or a year from now. Maybe there are two TreeHouses, a snacking and beverages
company and a meal preparation company. Maybe those things, the portfolios shift a little bit, or maybe a
couple of pieces spin out in the process, I don’t know. Again, I don’t know if that’s a best-case or a worst-case,
it depends on where you sit as an investor and what it does for you, I guess. Again, I come back to, is
TreeHouse getting value for scale? I think that ends up being the premise of TreeHouse when the prior CEO,
Sam Reed, built the company and grew it to, at the peak was USD 6bn-6.5bn before a few pieces were sold and
shed and whatnot. That scale and that scope mattered and would make a difference in private label. I don’t
Private and confidential 11
think they’re getting rewarded for it, and it is probably that they’re not realising 100% of that value in the
market. The real question at the end of the day is, is that something that the retailers value or not? If not, I
think you’re going to see a different result than what you have today. If that’s something that is of value to
those retailers, then I think if TreeHouse has to do a little surgery on a few categories and can really take
advantage of that scale and scope, good things are coming.
[00:58:07]
Q: Is there anything further you think investors should know about TreeHouse’s management team and their
ability to execute on priorities?
DB: I don’t have anything other than what you can see when they come and present and are out there. I have
to think for a moment, but I think the leadership team has been fairly stable now for the last little over a year. I
think that that’s a good thing. There had been a lot of change at that level, for the two years prior. I think it’s a
good group of people and the results speak for themselves.
[00:59:06]
NH: That brings us to the end of today’s Interview. Let me close by saying thank you for your input, Dennis,
and thank you, clients, for joining Third Bridge Forum’s Interview today. Clients, if you would like to speak to
Dennis in a private call or meeting, please let your relationship manager know. Goodbye.
Transcription ends at 00:59:17 of the recorded material
Private and confidential 12