Patrick O'donnell
Thanks, Steve, and good morning, everyone. I'd like to start by expressing my gratitude to the entire TreeHouse team for a solid close to the year. I am confident in our plans heading into 2025. I'll start with a summary of our fourth quarter results on slide 13.
Adjusted net sales of $911.4 million and adjusted EBITDA of $118.3 million, both improved versus the prior year, in line with our expectations. Progress on procurement savings drove stronger adjusted gross margin performance. Adjusted EBITDA margin rose to 13%.
Let me walk through these results in greater detail. On slide 14, we've provided a look at our year-over-year net sales drivers. Our adjusted net sales increase of 0.2% was primarily driven by volume and mix, which was up 3.8% and due to strong performance in 8 of our top 10 categories, led by pretzels, in-store bakery, cookies and broth.
This positive volume and mix contribution was offset by the impact of our frozen griddle facility restoration, which provided a drag of 2.8%. Pricing was a headwind of about 70 basis points due to targeted commodity-driven pricing adjustments as we expected. Finally, foreign currency provided a drag of 10 basis points.
Moving to slide 15, I'll walk you through our profit drivers. Volume and mix, including absorption, had no impact on the quarter. PDOC, or pricing net of commodities, was a drag of $23 million as expected, which was driven by higher commodity costs and targeted pricing investments.
Next, operations and supply chain provided a $29 million benefit year-over-year, driven by supply chain cost savings, primarily related to our procurement initiatives. In 2024, we achieved $60 million in gross savings. Lastly, SG&A and other provided a benefit of $4 million year over year, driven by expense management and freight costs.
Moving on to a summary of our capital allocation strategy on slide 16. We remain focused on deploying capital in a manner that enhances returns for shareholders. We have been balanced in our approach over the past three years with a relatively even split between our strategic priorities.
Our first priority remains investing in our business, which we do organically through CapEx and and inorganically by strategically adding depth and capabilities as illustrated by our recent acquisition of Harris Tea.
We will continue to maintain our balance sheet and execute on our share repurchase program when we believe our share price has become dislocated, and we have the cash on hand to do so. In 2024, we returned roughly $150 million to shareholders through our share repurchase program. As we continue in 2025, we will remain disciplined looking at every possible capital deployment decision by evaluating risk-adjusted returns.
Now turning to our outlook for 2025. I'd like to spend a few moments confirming how we are thinking about the year on slide 17. We continue to see a challenging macro food environment and slowing category growth. As it relates to our top point outlook, there are a few factors to consider in our 2025 guidance for adjusted net sales in a range of $3.34 billion to $3.4 billion or approximately flat at the midpoint.
Volume and mix are expected to decline approximately 1% year-over-year due to a couple of factors. Organic volume and mix are expected to decline approximately 1%. Their Harris Tea volume benefit is expected to be offset by our previously announced decision to exit the ready-to-drink business and other margin management actions, along with the impact of the frozen griddle product recall. We expect that commodity-related pricing will be an approximately 1% benefit in 2025.
Moving to profitability. We expect adjusted EBITDA in a range of $345 million to $375 million in 2025. We are confident in the progress that we've made in implementing our supply chain savings initiatives and believe we are on track to deliver continued cost savings in 2025.
Additionally, we have made margin management a priority in the coming year and are executing on this strategy as we speak. We expect free cash flow of at least $130 million driven by improved profitability. Finally, we anticipate net interest expense in a range of $80 million to $90 million and capital expenditures of approximately $125 million, which should continue to move lower as we move beyond a multiyear investment period in both capacity and cost improvements.
With regard to the first quarter, we are expecting adjusted net sales in a range of $785 million to $800 million, which represents a year-over-year decline of approximately 3.5% at the midpoint. Volume and mix are expected to decline approximately 3% year over year. The Harris Tea volume benefit will be more than offset by the onetime impact from the frozen griddle product recall. In terms of profitability, we expect adjusted EBITDA in a range of $38 million to $46 million.
With that, I'll turn it back over to Steve for closing remarks. Steve?
Steven Oakland
Thanks, Pat. 2024 was a difficult year for the food industry and TreeHouse. I'd like to thank the team for managing the business through a tough environment. While we stand to benefit from our categories returning to their historic growth rates, I continue to believe TreeHouse has meaningful margin expansion opportunity. We have been implementing near-term strategies to enhance value that are within our control.
These include several efficiency opportunities across our supply chain and our overall cost structure that should drive improvement in the near term. As we head into 2025, we are focused on strengthening the foundation of our supply chain and margin management initiatives, restoring production levels in key categories and pursuing profitable new business.
Additionally, as we move through next year and conclude some carryover growth projects, we will begin a multiyear glide path to lower the levels of CapEx, which will drive higher free cash flow conversion. These efforts should drive improved profitability and cash flow regardless of the macro headwinds.
With that, I'll turn the call over to the operator to open the line for your questions.
Operator
(Operator Instructions) Andrew Lazar, Barclays.
Andrew Lazar
I guess first question would be, in fourth quarter, excluding all the onetime dynamics of exiting businesses in the griddle recall, I think you said under underlying volume rose 3.8%. On the same -- yes, on the same basis, if I'm looking at it right, I think you're looking for underlying volume, again, excluding all of these onetime things in the first quarter, that's sort of flattish. I guess if I have that right, what would -- what do you attribute the sort of sequential slowdown to?
Patrick O'donnell
Yes, Andrew, this is Pat. So I think as we started the ramp-up of the broth facility, that was part of what helped us into the fourth quarter as we weren't shipping as broth brought. I think we've also seen an offset in some of the category deceleration that we talked about. As we exited the last couple of months and based on what we can see year-to-date, we're seeing maybe just slightly positive category trends, but largely flat. And so I think that's the way we're thinking about the first quarter.
Andrew Lazar
Got it. Got it. And then Steve, just a little bit more high level sort of from an industry perspective, really across branded and private label. But over the -- whatever past couple of decades, right, the group has, from time to time, dealt with whatever significant fundamental challenges. And each time, while it's taken some time, the group has sort of found its way back to sort of a better place one -- sort of one way or another.
And it just feels like valuations for the group at this stage are almost sort of implying that like this time is different. The challenges the industry currently faces are maybe more enduring or sort of structural in nature.
And I guess I'd just be curious on your thoughts. Obviously, you've been in the industry a long time. And at any given point in time, it's always seemed like the challenges are structural, and then they've proven not to be. And again, I don't want to be dismissive of any of the challenges the industry is facing. I know they're real, but you get a sense of what I'm getting a sense of like, is this time different in your view?
Steven Oakland
Sure. Maybe I'll answer that by pulling it back to TreeHouse and how we look at it. And we're looking at exactly what you just articulated. So obviously, we're not satisfied with our 2024 results, right? We know this business is capable of more than that.
And you've got this environment of high inflation. You've got the GLP-1 question. You've got the consumer pressure question. So you've got a lot of questions around you. We -- and if I take it just back, it's been literally less than 2.5 years, just under 2.5 years ago that we sold the Meal Prep business and created the new TreeHouse, right?
We chose categories when we did that, that had grown historically 3% to 5% in units, okay? And some of those categories have grown at that pace for a decade. Well, obviously, to your point, these things have changed dramatically right now, right? You've got a low growth to no growth environment. Private label dynamics within the categories are good, right?
But the categories aren't good, right? So what I inferred in my prepared remarks, and I hope the group on the call understands is that our management team, our Board, our leaders, think this is an opportunity for exactly what you said to reset ourselves, right, to rethink how we go to market, how we run our business, okay, and do it differently. We talk about you focus on things you can control, right? Well, in our case, it's our supply chain, it's operational excellence, it's efficiency. We think we can drive significantly more profitability and cash flow.
We think it has to start with the guide we gave you today a very conservative volume guidance, right? And that conservative volume guide allows us to focus on execution we can tighten up our spending, things like growth capital, working capital, and we can focus our team on projects that will take out structural costs, right? So we do think it comes back, right? And to your point, it does, right? But what we want to do is be a place where when that happens, we can really leverage that financially.
So our focus in the near term is to drive those things out. I think, Pat, I think our categories were up [0.7 point] in units in January, right? And so if that happens, we'll be a tad better than what we guided. But we thought a conservative guide really a different mindset across TreeHouse and across our teams to focus on making this operation ready for when that happens. And then we're going to know more, right?
We're going -- the GLP-1 question is going to flush itself out, right, over the next one year or two. A lot of these -- the trends, the food costs, right, commodities will get -- will settle. I mean we can't have a more uncertain environment today with tariffs and all the things that are going on around us. So I think we just should build, and I know some of my peers are working on some of the same issues. And so I think we positioned the business for normalcy and normalcy will happen, right?
It has, to your point, every other time.
Operator
Matt Smith, Stifel.
Matthew Smith
I wanted to kind of ask you about the margin management actions you're taking in 2025. It's hard to kind of tease out what the impact to volumes is based on the guidance, perhaps it's a point or so. And can you talk a little bit more about the phasing of when you expect to see the volume headwind from some of those margin management actions? And if this is kind of a reset in 2025 or if this is more of a go-forward way of managing the business where we could continue to see volume drag that is offset by new contract wins over time.
Steven Oakland
Sure. Maybe I'll touch on the -- how we approach this and when I think it's going to impact us and Pat can talk about (inaudible) right. So in a market that sort of what I just said to Andrew, if you're assuming your business is going to grow 3% to 5%, and that's been the historic trends. you're adding shifts, you're adding capacity, you're taking on complexity that isn't that efficient in your plans. Our margin management allows us to, especially in those capacity constrained areas to really align efficient operations with the best -- where can we give to our customers, what customers and what volume?
Will that be the most effective for them and the most effective for us? And not put that pressure on that team to try to grab that extra piece of business that ends up being inefficient, right? So I think there'll be 1 point or 2 of volume drag throughout the year. But I think it's offset dramatically by the cost to serve that volume. But we've done some really, really good work that suggests some of that volume is really expensive to serve, right?
Now that doesn't mean that as things recover, we won't make CapEx -- capacity expansion expenditures again. But I think there's a chance to pause on that. And also over the next year or 2, I think our TMOS activity -- we're seeing great progress from TMOS. That's adding capacity to our system. So let's let that run for one year or two and free up some capacity and we'll go fill it.
So maybe I'll hand it to Pat to talk about the impact.
Jon Andersen
Yes. And I think you're thinking about that right from a quantification I think you'll see that build throughout the year. Obviously, the first quarter, we've got visibility into what business we want to serve there. And throughout the year, you'll start to see us make choices on bids that we participate in, where we may not want to run down the structural margin in a category and bid too low.
And other parts of the business that, like Steve described that are complex and are within the tail of what we serve that don't make sense for us. So I think about that as probably starting second quarter and then building throughout the year.
Steven Oakland
Yes. It's not going to be draconian. But a couple of points of volume out of our system. The most expensive part of our tail can really impact our margin capability.
Matthew Smith
And just as a tactical follow-up, the margin management actions, the drag on volume, is that going to be -- it looks like the way guidance was laid out, that's not going to be included in what you're calling organic volume. Is that right?
Patrick O'donnell
Yes, I think the way that we describe that, that's right. Maybe the way we described organic might just be what we would call sort of base business, maybe would be another way to say that.
Operator
Jon Andersen, William Blair.
Jon Andersen
A couple of quick questions. On the supply chain cost saving program, I think you mentioned, Pat, that cumulatively, you kind of realized $60 million of gross savings in 2024. Can you talk a little bit about how we should be thinking about the cadence of the balance of that program in '25 and '26?
And then I'm also curious around -- the commentary around the capital expenditure glide path, kind of a multiyear glide path to a lower CapEx rate. I think the CapEx rate was around 4.3% of sales in '24 kind of implied in the 3.8% -- 3.7%, 3.8% range in 2025, how that -- you expect that to kind of -- assuming all else equal, how that glide path might play out over the next two to three years?
Patrick O'donnell
So on the supply chain savings, a lot of what we drove this year was related to our procurement cost savings initiatives, and we're really pleased to see the flow-through of that in the second half of the year primarily. So given that we did a lot of that work in the second half, what we expect to flow through in 2025 will be the carryover impact of that as well as the remainder of the pipeline as we continue to execute on that.
Obviously, in a lower volume environment, it's a little bit harder to drive through kind of ongoing cost savings, and we do see a little bit of inflation. So that number from a manufacturing will be a little bit smaller in this year, but we see ability for TMOS to offset our inflation and deliver a little bit. And then we've had good progress as well on our logistics, and there's still more work to go there.
So I'd say think of 2025 providing probably a little bit less from a procurement savings, but that's well on its way. We'll get some manufacturing and we'll get to start to work on our logistics, which were kind of the pillars of what we talked about.
And then we'll just look at based on volumes, what are the structural things we've got to do to make sure we're aligning after with the volume that we do have. Then as it relates to CapEx, we are winding up a couple of multiyear projects in 2025. And I think for this business, we've said historically 3% to 3.5% is probably the level of CapEx.
I think on the high end would be what you need to go to drive more growth. And so on the low end, if you're not trying to track back growth, you're probably closer to the low end of that over time, if you're not making those types of investments. And so that would be a little bit of how we think about the glide path and we'll obviously -- we'll update that as we get closer to it but --
Jon Andersen
Makes sense. One quick follow-up. I think it dates back a little ways down, but at one point, you (inaudible) kind of a view of where you may be in 2027 from a margin perspective, and I think it implied EBITDA margin around 12%.
In light of some of the kind of the pivot that you're making here based on the macro and category performance like you're going to be scrutinizing some of the category customer relationships a little bit more for margin management. does that change the kind of the complexion of long-term algo a bit lower top line, but offset by improved profitability or gross profit dollars?
Patrick O'donnell
I'm not sure one, we would say at this point, we're going to go a lot about that, but I think that will be the real case. And I think, obviously, the work to go drive that type of margin on a lower volume requires a little bit more effort. So I don't think we're going to see anything different. But obviously, as we get greater line of sight and we see the benefits of that payoff, we can update as we go along.
Operator
Jim Salera, Stephens Inc.
James Salera
I was hoping you could maybe give a little more detail around the softness in private label consumption, the sequential step down in 4Q from 3Q. You did call out some strength in pretzels, cookies and the in-store bakery, which, at least conceptually, I would think are a little bit more discretionary than some of the other categories in-store. So you would think the consumer spending there and maybe as a little pressured in other areas, that would actually be a benefit to private label. Just any color you've got to offer around that would be helpful.
Steven Oakland
Sure. A couple of things. I think we actually took some share in a couple of those categories, right? Our pretzels team has been performing incredibly well. And if you remember, a couple of years ago, we made an investment to bring seasoned pretzels to market, that is starting now to pay off.
So I think in ISB as well, there's some new business in that group. So I think, frankly, that's executional. And unfortunately, when we have the hangover of our frozen griddle, those things are hard to show through. But -- so we actually had some executional strength there. Honestly, we have historically seen brands peak in December.
That's been a historical peak. Obviously, you've got holidays, you've got all those things happening. So -- and you've got a lot of promotional support. But we -- I mean -- and I've listened to the other calls on the few calls that have been out. I just think we had a soft consumer environment in the month of December.
Like we saw it decelerate as we got into the quarter. I don't know if that's a consumer paying for Christmas. I don't know what those things are. But we saw the volume decelerate. We saw -- I mean, we gained a tiny bit of share we had a tiny bit positive, which is still better than the category dynamics.
But I think it was more a macro category issue or a macro consumer spending issue than it was a private label issue. And like we said, we saw about 7/10 improvement in January, right, that small improvement in January. Now we are at record share levels, right? So I'm not sure so much sure it's a private label issue as it is just a macro issue.
James Salera
Okay. That's good. And maybe just a follow-up question to that. If we think about 2025, and again ignoring all the onetime headwinds, how should we think about general kind of category improvement versus operational execution leading to share gains as the drivers of the kind of base business volume?
Steven Oakland
I think we are planning for volume to be flat, which as I said in my opening comments, that's a conservative point of view that allows us -- I think the underlying categories -- I mean, if there are anything like January, might be (inaudible).
But that allows us a little bit of room to do a little bit of distribution changes and things to improve our margins, right? The Harris Tea acquisition, we thought that's a great mix, it's profitable volume. We thought bringing that in gave us an umbrella to operate under to make the rest of the business -- to position the rest of the business in a much better place.
So I think what you'll see there, we'll win some pretzel business, we'll win some of those great categories where we're performing really well. And then we'll use that opportunity to position the rest of the business for a more profitable run going forward.
Operator
Rob Dickerson, Jefferies.
Robert Dickerson
Great. Maybe just one kind of technical question and one broader question. For the quarter, volume mix was up 3.8%, and then we have the line that shows kind of facilities restoration impact, right, which I assume that's the griddle business.
Steven Oakland
That's correct.
Robert Dickerson
Okay. And then when we go back last year to Q4, I believe it was about a 4% drag from the broth dislocation kind of from that disruption. So I guess, if I try to kind of like net broth, let's say, to griddle, would you say that, that 4% drag from last year's Q4 was essentially recovered in this year's Q4? That's the first question.
Patrick O'donnell
Yes, Rob, this is Pat. So I would say some of that, (inaudible) that we saw in the prior year in 2023 is recovered over the course of the year. I think as we've described it in the past, we do think it's going to take through Q1 to get broth service levels back up.
And so we're seeing that. So I wouldn't say it's fully recovered in that time frame. It's a seasonal item, and so it takes a little bit from a capacity standpoint to go fill that pipeline back up. So we weren't quite there in the fourth quarter.
Robert Dickerson
Okay. Cool. Perfect. And then just, Steve, you had the comment in the prepared remarks around kind of expectations for promotional activity to increase. I kind of took that both branded and private label.
So I guess, just kind of my first part of the question is just kind of in this like lighter volume environment? And then kind of your comment on kind of trying to push the margin on a lower volume base is the idea as you kind of get through Q1, like the environment, let's just say, doesn't improve materially that as we kind of get through the year, both branded and private label could actually start to promote a little bit more to try to get those volumes and hopefully, kind of the lower absolute price point on a promoted private label item becomes more attractive in this environment. That's all.
Steven Oakland
Sure. I think the assumption is branded, right? I think that they're still below -- I mean, at some point, we have to stop using pre-pandemic, right? It's going (inaudible)very far. Nobody's going to remember what it was, right?
But the promotion levels are still not at historic norms, right? So there's room for promotions to grow based on that we expect branded promotion volumes. Look, it's a low volume environment, right? So we expect them to try to find ways to target that and be effective. We contemplated that in our flat guidance, right? We think that's (inaudible) in. When it comes to promotion for us, that's something we work on with the retailer. It's not trade for us. It's not the same line. It's built into the contracts that we have.
So if we're -- if we need to do that or they need to do that, we'll work on that together, but it won't have financial impact to us the way promotion does in branded accounting, right? So -- but my feeling is the gaps are pretty substantial right now. I think they can sustain. And the value proposition for private label, I think, is the best it's ever been from a quality and assortment and price point -- so price gap. So I don't -- I think we'll weather and we can deliver the numbers that we have comfortably without us having to do much.
And that assumes brands are aggressive.
Robert Dickerson
Okay. Super. And then maybe just one last quick one on Harris Tea. 4% at a contribution to '25 just as you step into that business, and I'm sure you buried it pretty quickly or closely, sorry, before you purchased it. Kind of out of the gate, is there like kind of a larger increased distribution opportunity.
Is there something strategic that kind of pairs with coffee that we just aren't discussing, right? I mean clearly, I understand kind of what the CAGR on that business has been the category. Just trying to understand kind of what do you do with the out of the gate?
Steven Oakland
Well, I think, yes, number one, it's a great category. Typically, that is a category that is bought with coffee, right, the hot beverage group in most retailers is altogether. And so they bring an even deeper group of relationships with that particular category than we do. But also, we have a small tea business, right? And we pack tea for some of the some of the most specialty food service retailers and things.
We have a very high-end tea business that didn't have the procurement and blending capabilities. So it brings vertical integration to the business we already had and that's where the little extra synergy for TreeHouse besides just the integration stuff, right? So I think we -- and this is a really deep group from an expertise level. So they are clear category experts. So I think what we felt they could run our existing tea business better than we were running, right?
No knock on our tea. Just we felt there was going to be synergy on our tea business.
Operator
Carla Casella, JPMorgan.
Carla Casella
Just on the griddle facility shutdown and more broadly than that, can you talk about what you're seeing in terms of you talked about account wins. I'm wondering if you're seeing any account losses and if you -- if there's a kind of net-net wins versus losses way to think about the business.
Steven Oakland
I think our customers have been with us really strongly, both on our broth, recall and on our griddle recall. We think the distribution base as we come out of this will be very similar to the distribution base when we went into it. And I think that's just our transparency. There were no consumer injuries on this. This was -- this is the rigor that we put into an older facility that we own.
And I think their QA groups really appreciate our vigilance on it. I think it was the right thing to do. It was expensive, and I know the retailers don't like this kind of thing, but they appreciate having a partner with the kind of vigilance that we have. So far, we think our distribution will be neutral.
Carla Casella
Okay. Great. And then just any conversations you've had with the rating agencies? I know I asked this all the time, but the CCC rating on the bonds (inaudible) wondering if you've got any kind of insights to maybe get your rating up and what you may need to do?
Patrick O'donnell
Yes. I think it's no different from other stakeholders who are just looking for consistency of execution and delivering on what we set out. And so I think as we do that, you'll see it. I think as we keep leverage low as well. I think that's another kind of mechanical trigger point as well that we'll need to think about. And certainly, even with our refi, we felt like pricing we got in the first quarter was probably reflected what your sentiment is on the rating as well.
Steven Oakland
Yes. Carla, I would just say our bondholders and our lenders look at as favorable to that credit rating. So we think the underlying earnings power of the business shows through, and we understand the rating agencies conservative stance and we're anxious for that for us to have the returns and the results that we can show through to them as well.
Operator
William Reuter, Bank of America.
William Reuter
I just have two. The first, your leverage is kind of down near the bottom of your target range of 3 to 3.5x. Should we assume that, I guess, the majority of cash at this point will either be deployed towards M&A or if there are no opportunities towards share repurchases?
Patrick O'donnell
Yes. And so I think the way to think about that is we obviously did M&A in January. And so we did put some of that cash that we had on the balance sheet to use early in the quarter -- in the first quarter of 2025 for the Harris Tea acquisition. And so from a leverage standpoint, you may see that move up just a little bit from where we said our target was and then we'll work that down over the course of the year, but certainly not levering up the company by any stretch, but that will change a little bit in the first couple of quarters of 2025.
Steven Oakland
Yes. We think by year-end though, we'll be in an even lower position. I think the Slide 16, we thought it was important. We talked about capital allocation and the discipline that we have. We think that pie chart really gives you a sense that we have, in fact, invested in our business. We have, in fact, kept our balance sheet strong and opportunistically return cash to shareholders. So we don't see any change in that going forward.
William Reuter
Got it. And then given the diversity of your product portfolio, it's a little bit difficult from the outside to track how your commodities may look for the year. I guess, in general, are you going to see either inflation or deflation? Or should they be relatively flat?
Patrick O'donnell
Yes, we're going to see sort of low to mid-single-digit inflation is what we've got visibility to right now. there are large chunks of that, that are in coffee and cocoa, which if you follow those, those have been up somewhat more dramatically than other commodities.
And then there's probably some things in some edible oils and some other ingredients that we use that are up a little bit year over year. So we'll watch that as we go through the year, but that's what we've got visibility to right now. And we've assumed some level of pricing in our top line guidance for that.
Steven Oakland
And we've talked a number of times, much of our coffee pricing is pass-through, right, is on timing pass-through, and we hedge it accordingly based on those pass-through agreements. So that's a mechanical exercise, and that's probably the largest single piece of it.
William Reuter
Okay. So does it stand to reason that it sounds like from the last answer that largely you did push through price increases, and let's exclude (inaudible) pass-throughs on that or coffee, I can't remember which one you just mentioned, but you price for the majority of the other commodity inflation you saw for the year?
Steven Oakland
I'd say that activity is happening right now. I would say it's more current -- I wouldn't say we've done it, I'd say it's been done. And obviously, there's positions in front of that stuff. So that gives us the time to do the customer lead time stuff.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Steve Oakland, Chairman CEO and President of TreeHouse Foods for closing remarks.
Steven Oakland
Well, I'd like to thank everyone for being with us today. I'm sure that this is what you plan for Valentine's Day, but we appreciate you being with us. And hope that we hope you have a great evening. And we look forward to talking to you live between and again next quarter. Have a great day.
Operator
This concludes today's conference call. You may now disconnect.
