adminTreehouse Foods, Inc. (NYSE:THS) Q3 2023 Earnings Conference Call November 6, 2023 8:30 AM ET
Company Participants
Steve Oakland – Chairman, President & CEO
Pat O’Donnell – EVP & CFO
Colleen Fiocchi – IR
Conference Call Participants
Andrew Lazar – Barclays
Rob Dickerson – Jefferies
Matt Smith – Stifel
Carla Casella – J.P. Morgan
Jon Andersen – William Blair
Jim Salera – Stephens Inc.
Operator
Hello. Welcome to the Treehouse Foods Third Quarter 2023 Conference Call. [Operator Instructions]. At this time, I would like to turn the call over to Treehouse Foods for the reading of the Safe Harbor statement.
Colleen Fiocchi
Good morning, and thanks for joining us today. Our press release and earnings deck, both issued this morning, are available in the Investor Relations section of our website at Treehousefoods.com.
Before we begin, we would like to advise you that all forward-looking statements made on today’s call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and projections, and involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. Information concerning those risks is contained in the company’s filings with the SEC. On September 29, 2023, we completed the divestiture of our Snack Bars business. For purposes of our discussion today, we will briefly cover our third quarter results on a whole company basis, as the third quarter guidance that we previously issued incorporated the Snack Bars business. Results for the quarter are also provided on a continuing and discontinued operations basis in the press release, with the Snack Bars business reported in discontinued operations. The majority of our discussion today around our operating and financial results will center around performance on an adjusted continuing operations basis. We have provided recast historical financials for Treehouse continuing operations, for 2019, 2020 2021, and 2022, on an annual basis, and 2022 and 2023 on a quarterly basis, so that you can best compare operating performance. A reconciliation of non-GAAP measures to their most direct comparable GAAP measures can be found in today’s press release and the appendix tables of today’s earnings deck.
With that, let me turn the call over to our Chairman, CEO, and President, Mr. Steve Oakland, for his opening remarks.
Steve Oakland
Thank you, Colleen, and good morning, everyone. I’m pleased to be here today to discuss our third quarter financial results and provide an update on our outlook for the remainder of the year. Treehouse has made important progress, executing our strategy today, positioning the company to capitalize on industry and consumer trends, and create long-term value for our shareholders. On Slide 3, we’ve noted the key takeaways for the quarter, and we’ll discuss each of them in detail on the call. Turning to our results. For the third quarter, we delivered year-over-year net sales and volume growth, and outperformed the broader private brand market in the retail channel. We were particularly pleased to see our core retail volume increase 1% despite a voluntary product recall and a discreet supply chain disruption late in the quarter. These factors, combined with weaker co-manufacturer and food-away-from-home sales, and lower than anticipated consumption in select retail categories, resulted in sales below our original expectations. Importantly, as a result of our team’s strong execution, we grew adjusted EBITDA from continuing operations by nearly 13% year-over-year, in line with the high end of our guidance range.
Turning to our outlook briefly, reflected in our full year sales guidance, are significant changes from when we originally issued guidance. First, the voluntary recall and discreet supply chain disruption that I mentioned earlier, although behind us, now impacted the end of the third and the beginning of our fourth quarters. Next, the Snack Bars divestiture was an impact of approximately $160 million on a full-year. And finally, the current consumer trends have shifted, which I’ll speak to in more detail. Taking this into account, we’ve revised our adjusted net sales expectations for the full year, and now anticipate achieving approximately 4% to 5% year-over-year growth. Against these lower sales, we are reaffirming our adjusted EBITDA guidance range of $360 million to $370 million, which represents approximately 25% year-over-year growth at the midpoint. Given the number of moving parts, Pat will provide more detail in his presentation on our results, outlook, and our capital allocation strategy.
I do want to highlight that we have deployed nearly $200 million of capital to support the execution of our strategy and create value for our shareholders. This includes our recent acquisitions to increase our depth and capabilities, and the repurchase of approximately $50 million of company stock. We also expect to deploy CapEx of approximately $140 million directly into our manufacturing facilities and our supply chain this year. One additional item I’d like to highlight is the receipt of approximately $427 million in proceeds from the repayment of our seller note in October. As you will remember, this seller note relates to our Meal Preparation divestiture, and the repayment marks a final step in this transformative transaction. Our balance sheet strength is an asset, and we are focused on deploying capital where we can maximize returns. We are continuing to strengthen and build on Treehouse’s position as a private brand powerhouse, in higher growth, higher margin snacking and beverage categories. Year-to-date, our team has remained focused on sustaining and growing our leadership and depth across our categories, enhancing our supply chain, and delivering superior service and quality to our customers.
Noted on Slide 4 are two recent portfolio-shaping actions. We closed the sale of our Lakeville, Minnesota facility and Snack Bars business for approximately $61 million. The Snack Bars business was not expected to contribute positive adjusted EBITDA this year. And although bars can be a good consumer category, private brands penetration in this category is very low. With this divestiture, our portfolio is now more focused on categories where we see the greatest opportunity for the company moving forward. Separately, last month we announced an agreement to purchase the Bick’s pickle business in Canada for a base purchase price of approximately $20 million, relating primarily to acquired inventory. We expect to close in the fourth quarter. This transaction will enhance our capabilities in our pickle category, and expands our presence and scale in Canada. Treehouse has had a co-packing arrangement with Bick’s for many years, and we are pleased to bring this additional margin-accretive volume into our manufacturing network.
Turning to our internal supply chain initiatives, we have continued to invest directly into our supply chain, as you can see on Slides 5 and 6. Over the next three years, we continue to expect to achieve gross supply chain savings of approximately $250 million, which will support our long-term adjusted EBITDA targeted growth. Let me give you an update on our progress on this front. We remain focused on implementing TMOS and other supply chain initiatives that contribute to improving execution and margin performance. On TMOS, we are continuing the rollout of the system across our manufacturing network. We expect this work to enable us to start 2024 with substantial cost saving processes in place. In 2023, to date, we’ve seen a significant improvement of four percentage points in our overall equipment effectiveness, or OEE, as a result of our TMOS initiatives. As an example, we started our TMOS journey at our refrigerated dough manufacturing facility in Texas at the end of 2022. You may recall that we took time during the second quarter, our seasonally lowest from a volume perspective, to pull forward some repairs and maintenance activities at this facility. I’m pleased that we are seeing significant results. Through the end of the third quarter, that facility increased production by over 14 million pounds, and improved service by over 19 points versus the prior year. This is particularly important for our retail grocery customers, who will want to have refrigerated dough back on their shelves heading into the peak season. In the third quarter, we also kicked off our procurement exercise. We’ve completed our initial procedures around scoping and identifying opportunities, and our work here remains on track. And finally, we’re progressing on our efforts to make our logistics and distribution network more customer-centric. We’ve completed the first stages of our warehouse consolidation plans, and are seeing positive results from the initiatives to improve utilization and logistics efficiency.
Next, an update on Treehouse results relative to trends we’ve seen across the broader industry, which you can see on Slide 7. In the third quarter, we saw continued strength in private brand volume compared to national brands. For the quarter, private brand unit sales in the measured retail channel were flat compared to national brands, which continued to decline. Importantly, Treehouse outperformed, delivering organic volume growth in the retail channel of approximately 1%. If you include the volume from our recent acquisitions, our retail cases were up 2%. Now, turning to food consumption trends, which have been in particular focus in recent months, as retailers have seen changes in basket size and mix. At Treehouse, we’ve seen retailers more closely align orders to current consumer demand trends, as we’ve moved further past the supply chain disruptions the industry experienced in recent years.
In September, we fielded a survey on consumer food consumption trends, which are on Slide 8, and now show that among consumers who changed at-home eating habits, their focuses have been on reducing waste and switching to less expensive options. Notably, 65% of respondents say they have switched to store brands and more affordable options. This not only underscores that consumers continue to prioritize value in their grocery purchases, but it also shows the strength of private brands. It is clear to us that consumers are continuing to adjust their shopping patterns in response to the macroeconomic environment and pressure on their wallets. We anticipate this continuing near-term, supporting private brand strength and growth opportunities.
As we’ve discussed over the past few quarters, grocery retailers have continued to increase shelf prices, including in Treehouse categories, to offset the impact of inflation. The fact is that a basket of private brand goods in our categories today generates approximately $18 of absolute savings for the consumer versus the same products offered by national brands. With pressures on the consumer, this value is significant. Given this price gap, private brands now have gained unit share for 92 consecutive weeks, reaching an all-time high for the third quarter. The value proposition in private brands is undeniable.
Looking at the chart on Slide 10, you can see private brand share gains in 2023 year-to-date compared to 2019’s pre-pandemic levels. These gains continue to support the importance of private brands for retailers and consumers. Additionally, we continue to see private brands gain share with Gen Z and millennials, showing how we are winning with the next generation of consumers, and supporting long-term private brands consumption trends. We believe the long-term outlook is quite healthy.
Before I turn the call over to Pat, I’d like to reinforce what we see as the key takeaways for the quarter. First, we delivered volume growth in our retail business and outperformed the broader private brands market in the retail channel, even in the face of disruptions that impacted the quarter. Second, we are driving margin improvement through TMOS and our supply chain initiatives, and are committed to our $250 million savings goal over the next three years. Third, while we have updated our adjusted net sales guidance range for the items that I spoke to earlier, we have reaffirmed our adjusted EBITDA guidance, which puts us on track to exit the year at our targeted $400 million annual run rate. And finally, we are continuing to strategically deploy capital to drive long-term value creation. We’re at a positive inflection point for Treehouse as we look to year-end and into 2024. As a result of our portfolio reshaping, we are focused on the key categories where we have confidence we can win. Our supply chain enhancements are beginning to show in our financial results. And with our full seller note repayment, our balance sheet strength is an asset. We are attractively positioned at the intersection of two incredibly powerful long-term consumer trends, the growth of private brand groceries in North America, and the consumer shift towards snacking, and we continue to benefit from current macroeconomic tailwinds. As we sit here today, we are well on track against our long-term targets.
With that, I’ll turn the call over to Pat.
Pat O’Donnell
Thanks, Steve, and good morning. I’ll start with a summary of our third quarter results on Slide 11. For total Treehouse, including our Snack Barss business that we divested late in the third quarter, we delivered adjusted net sales of approximately $907 million and adjusted EBITDA of approximately $86 million. These results compare to the third quarter guidance that we issued of $950 million to $970 million on the topline, and adjusted EBITDA of $81 million to $89 million. Relative to these expectations, our sales performance was impacted by two factors. First, consumption came in lighter than we anticipated, particularly in our retail crackers, food-away-from-home, and co-manufacturing businesses. In crackers, we delivered strong unit growth in cases of more than 6%, which was higher than the total category unit growth. However, our expectations for this category were predicated on higher consumption. Additionally, our food-away-from-home, and co-manufacturing businesses, continue to be impacted by broader consumer and macro trends, with restaurant foot traffic down again in the third quarter, and consumption falling short of expectations. Second, we were impacted by supply chain disruption late in the quarter, including a voluntary product recall in our broth business, and disruption with a packaging vendor, and our pretzels and cookies businesses. These items adversely impacted our adjusted net sales by approximately $15 million in the quarter. Importantly, our teams have taken actions to address these items. While we are disappointed that our sales fell short of expectations, we were pleased that we’ve delivered adjusted EBITDA toward the high end of our guidance range driven by our TMOS and supply chain savings initiatives that Steve described.
Turning to our results on a continuing operations basis, you’ll see on Slide 12 that we delivered strong year-over-year growth across all of our key financial metrics. Net sales grew by 3.6% to approximately $863 million. Adjusted EBITDA increased by nearly 13% to approximately $90 million. And adjusted EBITDA margin of 10.4% expanded 80 basis points versus last year.
Turning to Slide 13, we’ve provided a look at our year-over-year revenue drivers. Our third quarter net sales were driven by overall volume growth, including the volume from our coffee and seasoned pretzel acquisitions, and our previous pricing actions to recover inflation. To double click into our volume performance, on the right-hand side of the slide, we’ve provided a look at our case volume by channel. As you can see, excluding the volume from the coffee and seasoned pretzel acquisitions, which has been reported as its own bar, our core retail business grew case units by 1% in the quarter. This was better than the broader private brand market where units were flat in the retail measured channel. Including the volume from the coffee and seasoned pretzel acquisitions, our volume in the retail channel was up 2%. It’s also worth noting that our volume growth in retail would have been higher had we not faced the discreet supply chain disruption that I noted earlier. The growth in our retail business was offset by declines in food-away-from-home, and our co-manufacturing business, which supports brands.
On Slide 14, I’ll take you through our adjusted EBITDA drivers. Volume and mix, including absorption, was down $16 million in the quarter, primarily driven by category mix. PNOC, pricing net of commodities, was positive once again, as we continue to lap our previous pricing actions to recover inflation, contributing $28 million versus last year. Operations and supply chain contributed $4 million versus last year. This marks an important milestone as we are starting to more significantly see the impacts of our TMOS and supply chain savings initiatives. Lastly, S&GA and other contributed negative $6 million versus last year due to higher costs associated with our pension and receivable sales program as a result of higher interest rates.
Next, I’ll touch on our balance sheet. We repaid approximately $45 million of borrowings under our revolving credit facility in the quarter. Between the remaining availability under the revolver and our cash position, we ended the third quarter with strong liquidity of over $330 million. Additionally, in October, we were pleased to have received the repayment of the seller note that we issued as a part of the Meal Preparation divestiture last year. This wraps up the strategic actions that we took to bring Treehouse’s transformation to life. The repayment further strengthens our balance sheet and net debt profile as you can see on Slide 15, and also meaningfully reduces our covenant leverage. As Steve shared, we will follow our disciplined capital allocation approach in deploying the proceeds from the note.
I’d like now to highlight the work that we’ve done to execute on our capital allocation strategy on Slide 16. We understand that our ability to deliver on our growth targets is predicated on a discipline capital allocation approach. To date, we’ve strategically deployed almost $200 million of capital. Our strong balance sheet is an asset. Our long-term leverage target is three to three and a half times. At the end of the third quarter, we were at three times, the low end of the range. And our leverage will be reduced further by more than one time with the repayment of the seller note, and our expectations for Q4 adjusted EBITDA. The board and management are focused on deploying capital in a disciplined manner that maximizes returns for shareholders. This includes CapEx investments in the business, acquisitions, most recently in pickles, and opportunistic share repurchases, such as the $50 million of share repurchases in the third quarter. With our balance sheet now an asset for the company, we will prioritize capital deployment based upon risk-adjusted returns. Our disciplined approach to capital deployment means that leverage may at times be below our target range. As we’ve discussed, our first priority is investing in our business, which we do organically through CapEx investments, and inorganically by strategically adding depth and capabilities.
Turning now to our guidance on Slide 17. We are revising our full-year net sales outlook from 7.5% to 9.5% year-over-year growth, to approximately 4% to 5% growth, or a range of $3.435 billion to $3.465 billion. This updated range reflects our continuing operations business, and removes the net sales associated with the Snack Bars business. Additionally, the updated range reflects the impact of the voluntary product recall and the discreet supply chain disruption discussed earlier. And finally, we have revised our demand expectations to more closely align with current levels of consumption, particularly in our crackers, co-manufacturing. and food-away-from-home businesses.
From a profitability standpoint, we are reaffirming our full-year adjusted EBITDA range of $360 million to $370 million. Our TMOS and supply chain initiatives are enabling us to deliver against our profitability commitments despite our revised topline expectations. We also expect net interest expense to be in the range of $33 million to 38 million, reflecting less interest income in the fourth quarter due to the repayment of the seller note. And finally, our CapEx expectations are approximately $140 million. With regard to the fourth quarter, we expect sales to be in the range of $910 million to $940 million, representing a decline of approximately 3% at the midpoint. We expect a year-over-year decline in net sales to be driven by the voluntary recall and supply chain disruption. Absent these items, we would expect the combined pricing and volume mix to be flat to slightly down as we have now fully lapped our pricing actions to recover inflation.
Our fourth quarter adjusted EBITDA is expected to be in the range of $103 million to $113 million, representing a decline of approximately 9% at the midpoint. The decline is primarily driven by the expected impact of the voluntary product recall, and discrete supply chain disruption, as well as temporary operating expenses of $5 million to $7 million, driven by the expected wind-down of substantial portions of the transition services agreement related to the Meal Preparation divestiture. Importantly, we continue to expect our TMOS and supply chain savings initiatives will drive sequential and year-over-year improvement in adjusted gross margin, despite our expectation for lower net sales.
Looking further ahead, we continue to be focused on our 2024 to 2027 annual growth targets around sales, adjusted EBITDA, and free cash flow, and believe we have a clear pathway to deliver against these targets. While we are not guiding fiscal year 2024 today, we see opportunities to grow our topline through our core offerings, and continue to build depth and capabilities in our business. We’re on track to exit the year at an adjusted EBITDA run rate of approximately $400 million, and anticipate our planned supply chain savings will drive adjusted EBITDA growth. I’m proud of the work that our Treehouse team is executing to position the business for success and growth, and feel confident in our ability to deliver on our growth targets.
With that, let me now turn it back over to Steve.
Steve Oakland
Thanks, Pat. Before we open the call up to your questions, I wanted to thank the entire Treehouse team for their hard work and dedication in driving our leadership as a private brand powerhouse. I’m proud of the work our team has accomplished this year in setting up Treehouse for success as a focused private brand leader. Today, we continue to make progress on our strategy and prioritize execution, growth, and margin expansion. Looking ahead, we remain focused on delivering for our customers and consumers, and extending our leadership in private brands. This, in turn, will create enhanced value for our shareholders.
With that, I’ll turn the call over to the operator to open the lineup for your questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from the line of Andrew Lazar with Barclays. Your line is open.
Andrew Lazar
Great. Thanks. Good morning, everybody. Hey, Steve, we just think about the retail business specifically for a minute, you’ve talked for a while about the portion of your business that are in those categories where you’ve got depth, and that percentage I know has increased with some of the actions you’ve taken recently around capital deployment, and some of the areas where you have less depth. And it seems like the areas where you have less are still sort of this sort of ongoing drag that I know you’re trying to minimize. I guess. what percentage roughly of that retail business is now in the areas where you have depth versus you feel like you don’t have necessarily the appropriate depth? And I guess more importantly, as you think forward into 2024, again, just in in retail for the moment, are the areas where you don’t have the appropriate depth that you’d like, are those likely to continue to be a drag on that retail business into next year? Or do you have sort of a handle on that, or can you compartmentalize it to some extent where the rest of it makes up for it? Just trying to get a sense of how, as we think even into the early part of next year, how much of a drag we should, if any, expect that part to be and how you address it, I guess, longer term going forward.
Steve Oakland
Sure. Thank you, Andrew. I would say that in our new construction, well over half of our categories, we have the depth to be effective, and we’re growing. I think you’ll see us do things like we did in coffee. Coffee is one of those categories where we – it’s a great category, but we were a pod packer, right? We needed more capability in order to really take advantage of that and be that vendor for the customer. And we think the Northlake acquisition has solved that. So, we think there’s opportunities, both with organic investment and CapEx, and we’re doing those things, or with some simple bolt-ons. I think the effort we’re making in pickles will strengthen our pickle business and give us scale in the Canadian market. So, I think we have targeted activities in each one of those categories that need help, and we’ve got clear line of sight to them. And the question will be whether we do it organically or inorganically. The good news is, the inorganic opportunities are really not that big. I think you’ve seen us do that – a couple of these in the last couple of months. And I think we can bolster these categories very comfortably within our capital structure. Hopefully, that’s helpful.
Andrew Lazar
Yes. And then just one that’s a little broader. I realize there are some broader, right, consumption trends happening that you laid out in one of the slides that – and we’re hearing from a lot of the folks in the industry, both private label and branded. But I guess, even with all of that understood, are you still maybe a bit surprised that the private label sort of trade-down behavior maybe hasn’t been even greater than we’ve seen thus far, given just some of the economic pressure that we know some lower income consumers are currently under or what’s the best case? And if so, why do you think that is?
Steve Oakland
Well, I think there’s all kinds of things being written on how much savings was left and when is the consumer really going to run out of that, right? When are they really going to be stressed enough? I think the trends have shifted our way. I mean, private label is basically flat. The categories are down significantly for the brands. We performed in this quarter a little better than that. The guidance that we gave you for the fourth quarter, we thought it was prudent to just embed category trends that are flat to down just a bit. We think we can over time outperform those. The good news is, it is shifting our way. We were really pleased to see our retail business up just over a point. If you add the acquisition business in, it’s about 2%. So, on 2% volume growth, we can lever that over time, and I think you saw that in our margins, right? So, we think it’s coming our way. It has been slower than I think we all thought.
Andrew Lazar
Yep. And a very super quick clarification. You talk a lot in this quarter about sort of unit case volume increases as opposed to sort of, I guess, pound volume. Is that different than the way you’ve talked about it in past quarters, or am I just sort of imagining that? Thanks so much.
Pat O’Donnell
No, I think we’ve probably talked about both, Andrew, and I would say those numbers are roughly the same. So, there’s no mystery in that. I think the case is easy for us to kind of track consistently.
Steve Oakland
Especially on the new businesses where we don’t own the systems yet. We haven’t converted the Farmer Brothers’ systems yet. So, it’s harder for us to see things outside without it being on our system. So, cases and units are virtually the same.
Andrew Lazar
Great. Thanks so much.
Operator
Your next question comes from the line of Rob Dickerson with Jefferies. Your line is open.
Rob Dickerson
Great, thanks so much. Steve, I’m just kind of curious, you speak to kind of private label overall. Clearly, you don’t play in all of private label. And then we always kind of speak about private label trends and how that can benefit Treehouse relative to brands. But I’m kind of more curious about what you’re seeing in competitive activity kind of within your categories or those core categories with some scale within private label. Like do you feel like there’s kind of more innovation coming, maybe ability, agility from other maybe less scaled private label players has been increasing? Just trying to gauge what’s happening within your categories on the private label side. Thanks.
Steve Oakland
Sure. Well, just another reset there, Rob. What we try to do in our presentations, we try to market really clearly where we look at total private label. And most of the data you’ll see is just our categories because we know how hard it is for people outside of Treehouse to really look at our categories, right? So, we try to give you data in our presentation decks that are the Treehouse categories aggregated, right? Yes, but I would say, in our categories, we see maybe less innovation from the private label competitor. And I think most of our competitors are smaller private companies. Many of them have very different balance sheets than us, right? They’ve got different private equity investors. They’ve got leverage at a much higher rate than we do, especially now. I mean, we’re virtually unlevered in our balance sheet. So, I think we are able to make investments in technology, in capability, in packaging, at a faster pace right now. We see that than our competitive set. Now, we are pleased to see, and this may sound strange, but we’re pleased to see marketing coming back in categories like crackers and broth and those things, because we want – the brands drive the consumer to the shelf, right? The retailer doesn’t put a lot of media behind private label. They will merchandise. And so, when that decision is made at the shelf, when the brands bring people to the shelf through media, that’s great for us, right, regardless of what that is. So, we think the price gaps are so significant today, we think that the absolute penny price point is the most significant it’s ever been. So, we welcome the brands, even the brands’ promotional spending because it drives traffic to the shelf. So, we think right now – now, I would expect our private label competitors, as interest rates normalize, as those things, then the competitive set will normalize, but I would suggest it’s a little less competitive in the category, and we’re looking forward to the brand bringing more attention to it.
Rob Dickerson
All right got it. Great. And then I guess just quickly, kind of with respect to the balance sheet and go-forward capital allocation needs, I think you put on a slide, I heard you say kind of clear priority is still to kind of fund the business on an organic basis. I think this year CapEx is maybe a little bit higher than you’ve kind of run historically. I’m just curious, and maybe I just don’t remember, kind of, are there other CapEx needs as you now kind of look at the supply chain, you clearly have had some more incremental time, let’s say relative to when you had your investor day, if we’re thinking forward even into next year, are there projects that you say, you know what, yes, we could probably be a little bit higher than average as we get through next year, but still clearly have a very clean balance sheet with plenty of cash? Thanks.
Pat O’Donnell
Yes, that’s exactly the right way to think about it. We weren’t able to do all of the repairs and upgrades and things that we would’ve liked to during kind of the COVID times and then the subsequent supply chain disruption times. And so, we now have the ability, and we have a list of projects that allow us to go put that capital to work in our plants and to help us drive the supply chain savings that we think we can deliver over the kind of 2024 to 2027 horizon. And so, we think by making those investments now, that’ll help pay for itself as we think about the next several years, and some of that’ll help us drive the supply chain savings. Some of that will unlock capacity for us to help drive the topline. And then some of that will help with innovation and things like that where we can bring products to our customers. And so, we want to make those investments now while we can, because we think it’s prudent, and we think that delivers over the medium term.
Rob Dickerson
All right, super. Thank you.
Operator
Your next question comes from the line of Matt Smith with Stifel. Your line is open.
Matt Smith
Hi, good morning. I wanted to ask about inflation and where you’re seeing inflation in the business today. I realize that PNOC was a positive contributor this quarter, but you lap a lot of the pricing benefits as we head into the fourth quarter. So, can you talk about that the inflation you’re seeing in the business today, and if you think that’s at a level where you would need to take regular pricing as a part of the contract negotiation process. And the reason I’m asking is that we’re seeing private level price gap on a percentage basis actually narrow today on the retail shelf. And I’m curious as to your opinion and as to when you think retailers will have caught up on that private label pricing, we might actually see that gap begin to expand again.
Pat O’Donnell
Yes, so I would say from an inflation standpoint, we went into this year thinking we would see sort of mid-single digit inflation, and I think that’s what we’ve experienced. And so, at this point, we don’t have line of sight as we start our planning process for next year, significant change in inflation headed into 2024. So, we feel like our pricing is in a good spot. As it relates to the price gaps, I think we did price earlier I think than some of the competition. So, you are seeing some of that private label pricing continue to flow through, and we’ll start to lap that in the macro kind of sense here over the next several quarters. I do think some of the price gap narrowing is more related to brand merchandising, which we’re okay. I think our price gaps still remain very healthy relative to 2019 when you had more normalized levels of merchandising more broadly. And so, we’re very comfortable generally with where the price gaps are. And so, we don’t think that’s really been an issue for us.
Steve Oakland
Yes, and any pricing I think that we would see into next year would be very discreet, a specific ingredient or a specific category, but not broad-based.
Matt Smith
Okay. Thank you for that. And if I could just ask one more question here, which is that you’ve outlined some headwinds in the away-from-home and co-manufacturing areas of your portfolio. Can you talk about how those businesses have trended on a sequential basis? Did you expect stronger sales in the second half and that just didn’t materialize? Or are those businesses weakening relative to the first half?
Pat O’Donnell
I think they’re slightly weaker relative to the first half. We weren’t expecting significant growth coming out of those sectors. I think we saw food service traffic decelerate a bit towards the end of the third quarter. And so, that drove down a couple of the categories in the food-away-from-home business. And then from a co-manufacturing, we support some significant brands there. And so, we saw that decelerate a little bit, which is more just a reflection of some of the broader macro trends. So, we use those channels I think in a way that helps us keep our plants operating, and so – and get some throughput through them. And so, that’s a bit about how we think about them. So, we’ll look, continue to grow with those customers as necessary, but we try to reflect what we’re seeing from a trend standpoint.
Matt Smith
Great. Thank you for that all. I’ll leave it there and pass it on.
Operator
Your next question comes from the line of Carla Casella with J.P. Morgan. Your line is open.
Carla Casella
Hi, thanks for taking the question. You mentioned you’re going to be in the inside your three to three and a half times leverage target, or you’re kind of there now, but you’re going to bring your leverage down a turn with these – with the asset sale. Thoughts to take it back up to that level, and I guess what you’re seeing in the M&A market, or are you comfortable staying below it, if you’re there for a while?
Pat O’Donnell
Yes, I think what we tried to illustrate is, we think from our cost to capital being in that kind of three to three and a half times is the right place to be over the longer term, but we’re not in a hurry to go try to drive that as a goal. And so, we’re going to be very disciplined in our approach on capital allocation, and we’re going to pick the investments that drive the highest return. And so, we’ll continue to invest in the business, and that could be – we try to think through build versus buy scenarios, generally speaking, when – in terms of what we’ve done to date. And so, you’ll see us continue to look at how we invest our capital that way, and then we’ll want to maintain that strong balance sheet. So, we’re not looking to go do that. And so, we’ll continue to evaluate what investments make the most sense, what drives the best risk-adjusted return. And then lastly, we’ll think about returning capital as needed.
Steve Oakland
Yes, Carla, I think the biggest thing there is, we’ve got lots of room now. This is really a byproduct of transformation of the company that we started a year ago. So, now the company’s got a lot of flexibility and we have a balance sheet, I think Pat said in the prepared remarks, it’s an asset for us. So, there’s plenty of room to invest in our business and keep our balance sheet incredibly strong.
Carla Casella
Any thoughts on whether the agent rate – I mean, ratings look relatively low for a three times levered credit? Have you had any conversations with the rating agencies?
Pat O’Donnell
Yes, we have ongoing dialogue with the rating agencies, and we expect as we continue to improve leverage, they’ll continue to look at how we’re progressing. We’ve got to deliver some quarters here in terms of profit as well. That’s the other side of leverage, and we look forward to delivering that.
Steve Oakland
Yes. And to be fair, we were unable to give them an exact timing for that note to be paid off. So, and they did not – I don’t think in their calculation, they give us credit for the note as net. So, I think now that that’s cash, they’ll have to re-look at it.
Carla Casella
Right. Great. Okay, thanks.
Operator
Your next question comes from the line of Jon Andersen with William Blair. Your line is open.
Jon Andersen
Good morning, everybody. Thanks for the questions. Two quick ones, and I apologize in advance if these have already been asked. Core retail units were up 1% in the quarter. Where was that relative to kind of your expectation and your guidance going in? And then what should we expect sequentially in the fourth quarter and into 2024 on that core retail unit growth? And then the second question is, with kind of the supply chain disruption that you mentioned, was referred to in the press release. why not kind of optimize the supply chain across the businesses you have today before considering acquiring more? And I’m thinking about that kind of capital allocation decision, maybe returning more cash to shareholders through share repurchases before adding more complexity to the business through M&A. Thank you.
Pat O’Donnell
Yes, Jon, I can start with the first part. I think generally the trends we’ve seen in core retail over the year have been, private label has been relatively flat, and we’ve seen brands down 3%, 4%. And so, our expectation was something similar to see that. So, we’re really pleased to see the 1% case volume increase over the quarter. That – as we’ve pointed out, there’s some movement in there, a couple of category, we had one category crackers where we thought we could do a little bit better than we did, but generally speaking, that’s how we’re thinking about this year.
Steve Oakland
And Jon, this is Steve. You made a really good question here with regard to fortifying those places that might be weak in our system. And we took the opportunity to do that this quarter in our broth business. One of our broth plants was not performing how we wanted it to. We shut the whole thing down. We basically did a full rebuild on it, took the entire staff out and did really comprehensive training. And so, that business has been a drag on us for a number of years. And we – I’m convinced, quite frankly, that it’ll be – as we go into 2024, it’s going to be a contributor to Treehouse. Now, we also did that a couple more times. We did it in the spring, we talked about it in our cookies business. That was a facility that needed some capital. We did it in the second quarter in our refrigerated dough business. And now we’ve done it in this business. And so, I think we’ve got most of those behind us. So, I agree with you. We’re going to be very careful on complexity. Remember, our strategy is to go deeper in existing categories. So, not to add that additional amount of complexity, but we have actually addressed three of the main areas that have been historic drags on Treehouse. We’ve got those behind us, we think. And so, that’s going to set us up for a really nice 2024.
Jon Andersen
Thanks so much.
Operator
The last question today comes from the line of Jim Salera with Stephens. Your line is open.
Jim Salera
Hi guys, thanks for fitting us in. I wanted to ask, you talked about kind of the private brand price gaps wider than the historical range. Does that give some opportunity for, I’ll say like higher tier private label brands, like a Simple Truth at Kroger or GreenWise at Publix, to kind of expand their portfolio of offerings? And then as a follow-on to that, does that give you guys an opportunity to support that kind of higher tier private label growth and up margin parts of the business?
Steve Oakland
Jim, I do think it gives a chance for retailers. I mean, Simple Truth, you mentioned one brand. I believe that’s the largest natural organic brand in the country now, right? So, I do think different retailers are using private label very differently. We clearly have large customers who want just sheer value out of their private label program, but given the gaps and given the – where the consumer’s head is and all consumers, right, regardless of what they’re buying, there is an opportunity to do more natural, organic, more value-added. And we do see that happening within our business, right? We see strength in those categories. And there’s a lot of talk about all the different changes in purchase behavior, but health and wellness continues to be strong. So, natural organic ingredients continue to grow. They’re not enormous in private label, but they continue to grow.
Jim Salera
Okay, that’s helpful. And then I apologize if you guys addressed this already, but I believe you mentioned on the Farmer Brothers, you’re still migrating systems. Is there any near-term lumpiness in orders that we might expect? And I know sometimes when you’re transferring systems over, it can create headaches on the operation side. Just anything we should be aware of there?
Pat O’Donnell
No, we’re not anticipating that. We’re expecting that’ll be wrapped up here in the fourth quarter. Obviously, we do the necessary things to avoid that type of lumpiness in terms of pre-building inventory and those types of things. And so, we’ll manage through that transition. I think that’s something we’ve been able to manage well as we’ve done a number of these over time in terms of system transitions.
Steve Oakland
Sure. And I would just say, that one’s so small, we know the key customers really well. So, we have a handle on the key customers. We’ll make sure the product is there, and we ship those customers’ other items. So, I think we can manage that one seamlessly.
Jim Salera
Okay. Excellent. Thanks, guys.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Steve Oakland for closing remarks.
Steve Oakland
Well, I’d like to thank you all for being with us, and we look forward to the opportunity to speak to you each individually. So, have a great day. Take care.
Operator
This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.
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