PI Aquino - AES Partners Sam K. Reed - TreeHouse Foods, Inc. Dennis F. Riordan - TreeHouse Foods, Inc. Matthew J. Foulston - TreeHouse Foods, Inc..

Christopher Growe - Stifel, Nicolaus & Co., Inc. David Cristopher Driscoll - Citigroup Global Markets, Inc. John Joseph Baumgartner - Wells Fargo Securities LLC Farha Aslam - Stephens, Inc. Joshua A. Levine - JPMorgan Securities LLC Evan Morris - Bank of America Merrill Lynch Robert Moskow - Credit Suisse Securities (USA) LLC William B.

Chappell - SunTrust Robinson Humphrey, Inc. Brett Hundley - Vertical Group Amit Sharma - BMO Capital Markets (United States) Jon R. Andersen - William Blair & Co. LLC Akshay Jagdale - Jefferies LLC Aatish Shah - Susquehanna Financial Group LLLP.

Welcome to the TreeHouse Foods First Quarter 2017 Conference Call. This call is being recorded. At this time, I would like to turn the call over to TreeHouse Foods for the reading of the Safe Harbor statement..

Good morning. Before we get started, I'd like to point out that we posted the accompanying slides for our call today on our website at treehousefoods.com/investor-relations. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words such as guidance, may, should, could, expects, seeks to, anticipates, plans, believes, estimates, approximately, nearly, intends, predicts, projects, potential, promises, or continue, or the negative of such terms and other comparable terminology.

These statements are only predictions.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause the company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievement expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31, 2016 and other filings with the SEC discuss some of the risk factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented during this conference call.

The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in expectations with regard thereto, or any other change in events, conditions or circumstances on which any statement is based.

For the purpose of our discussion today, statements such as Private Brands or the former Private Brands business refer to the recently acquired TreeHouse Private Brands business. Private label, on the other hand, refers to the customer and corporate brand industry.

I'd now like to turn the call over to the Chairman and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed..

Thank you, PI. Good morning, all, and welcome back to our TreeHouse. Dennis, Matthew and I will provide you with an early view of the year as well as a progress report on delivering our transformation through simplification.

The launch of our 2017 campaign has generated a combination of significant strategic progress, strong organic growth and steady operational gains, thanks to private label integration and supply chain simplification.

Our customers, especially those devoted to their own house brands, have welcomed our new go-to-market organization with commitment to delivering the TreeHouse promise of unmatched quality, value and service.

While we have gotten off to an uneven start financially in the new year, the effects of these foundational changes can readily be detected in our food and beverage marketplace.

As the consumer spending element of gross domestic product posted its lowest quarterly gain since 2003, the entire grocery industry, retailers and suppliers alike, have struggled to sustain forward momentum, particularly in core categories and traditional channels, as shown on slide 4.

In contrast to many others, particularly global brands, TreeHouse has posted another quarter of superior organic growth, thanks to our singular capability of responding to a continuously evolving marketplace.

However short-term market conditions may vary, our competitive advantage will only grow as long-term macro trends in demographics, nutrition and technology favor the unique customer and consumer propositions that only private label affords.

As often has been the case following large scale consolidation and organizational realignment, our initial top line advances have temporarily outdistanced their bottom line counterparts. While this phenomenon has affected the quality of our first quarter earnings, I regard it as transitory in nature.

The ways and means to achieve our strategic transformation and expand our margins are readily at hand.

As Dennis and Matthew will soon elaborate, our early progress in integrating the former Private Brands and instilling the discipline of simplification across our broad customer base, product portfolio, and supply chain, constitutes a prelude to stronger performance to come. Let me give you a few examples from the past quarter.

First, with regard to customer portfolio strategy, pro forma organic growth of 4% with our large scale strategic customers, the green box in our customer portfolio construct, illustrated on slide 5, were led by gains in our Beverages and Baked Goods division serving the market's largest supermarket chains, mass merchants and warehouse clubs.

This growth was matched by an approximately equal decline in revenue of red box customers, evidencing our strategic shift away from marginal contract backing of national brands.

Next, category portfolio strategy, renewed category leadership in single serve beverages where first quarter branded revenues were flat, private label increased 25%, and TreeHouse grew 50%.

In aggregate, the double-digit shift expanding our green box presence, again on slide 5, in growth categories was paired with an offsetting decline in red box categories with limited growth and margin potential. Thirdly, simplification.

Identification of 3,100 SKUs and 260 customers concentrated in no growth, low margin sectors down for consolidation or discontinuation by year's end. Next, cost reduction. Confirmation that the Private Brands integration, related supply chain, and parallel head count productivity programs are all on target, and within budget.

Also with regard to strategic growth, extension of our e-commerce presence to include snacks, which along with single serve beverages are the two most frequently purchased food categories on Internet fulfillment sites.

Expansion of our aseptic broth and on-trends beverage capacity was accompanied by announcement of the divestiture of our structurally challenged canned soup and Infant Feeding business. And lastly, organizational development.

All elements of our go-to-market, supply chain, functional support and administrative service teams have been reoriented as legacy TreeHouse and Private Brands were united as one under a new category rather than channel-based enterprise.

This reorganization has also fostered the development of a highly skilled category of operating line and functional staff management ready to deliver our promise of transformation.

After four decades observing the senior ranks of our industry, I am confident that once we identify a worthy successor to Dennis to lead this team in planning 2018 and beyond, we will once again have a full and permanent TreeHousehold capable of superior long term strategic growth and shareholder value.

With that, Dennis and Matthew will now address the operational and financial elements of our progress and outlook. I will return later with a summary of our strategic prospects, programs and probabilities.

Dennis?.

Thanks, Sam. On our last earnings call, I used the term momentum to describe our close of 2016 and our start in 2017. Three months later, I can still feel the positive momentum, but this time with an additional three months of seeing growth in our core businesses.

Let me give you an update on some of the changes we made to our organization structure, as seen on slide 6, and how these changes are working out so far. On the positive side, the new sales organization is fully in place and doing a much better job of selling the products we make.

I've heard from many members of our sales teams who are excited about these changes. By giving them a finite set of product categories to sell, our sales people are now better able to provide customers with the in-depth knowledge necessary to sell our capabilities and strengths within a division of complementary products.

It's great that our teams are excited about the change, but the most important criteria of success is whether we're doing a better job of selling. In that regard, our changes have been a resounding success. Let me take a minute now to describe how well things are going.

When looking at the year-over-year sales, we have to first take into consideration that we exited some very low margin but relatively high volume business in our co-pack and foodservice distribution channels.

Last year, we made a decision to exit a large co-pack arrangement for a snack bar customer and ceased production at our Azusa plant in the first quarter as a result of the lower volumes. In addition, we exited some co-pack, cereal and a low-margin foodservice cookie business.

Combined, these three actions alone caused a decrease of over 16 million pounds in the first quarter, compared to the same period last year. These lost sales were planned by us and were part of our rationale for the 2017 budget.

Excluding these three large items, our overall growth in tonnage would have been 3.8% compared to last year, as you see in slide 7. This growth was primarily in our retail channel and includes most of our product categories.

And even more critical is that excluding those three large items, all of which were exclusively former ConAgra Private Brands business, they showed true tonnage of 5.9% growth in February and March. This makes two straight quarters of year-over-year growth in the Private Brands retail business.

I think this points to the success we're having with our new sales organization structure. They are better trained and better in tune to our customers' needs and strategies, resulting in greater sales success. Our other big focus has been on simplification.

Our division teams have made great strides in identifying SKUs to either eliminate entirely or to consolidate with other very similar formulations. Our goal is to identify 25% reduction in SKUs with only a minor effect on top-line sales. However, any shortfall in sales would be more than offset through higher gross margins.

Our progress has been good, but eliminating and consolidating SKUs takes time, as we need to work both internally on formulation changes, work with our customers on approving the changes, and then running down our existing inventories of materials, containers, and labels that will be affected by the change.

Our goal is to minimize write-downs of discontinued inventory by using up existing stock whenever possible. In terms of the new segments, Matthew will provide more details on the financial results, but I want to cover some of the key developments there.

Our decision to drop the very low volume customers had happened a bit faster than our execution on lowering our plant operating cost. As a result, we saw margin pressure in a variety of our product categories.

This was combined with some input cost changes, particularly in our snack nuts division that were not immediately offset with increased pricing. So even some categories like dressings and sauces that were not affected by the big co-pack business losses, saw some margin erosion.

And finally, we saw margins drop in our single serve coffee category as competitive activity has increased, and we took aggressive actions to win more customers. In fact our retail filtered coffee volumes in the quarter more than doubled compared to the first quarter last year, but our gross margins grew only marginally.

Our margins were pressured by both pricing and temporary but duplicative transportation costs as we struggled a bit in the quarter to meet the increased demand for single serve coffee. We are working on internal plans to focus on efficiency in that critical portion of the business to begin to reverse the margin trends over the last few quarters.

The good news is that our operating teams have identified a variety of areas to focus on over the balance of the year in order to realign the plant operations to reduce costs and take advantage of the efficiencies we are gaining through our simplification programs and increased volumes.

Additionally, our divisional sales teams are working on targeted pricing programs to recover margin lost through increasing input cost. I expect we'll see the same level of success in recovering input costs as we have with driving incremental volume in the first quarter.

The realization of pricing, however, won't occur until the third quarter based on the normal time lag between acceptance and invoicing. As we move into the back half of the year, we will see the benefits of the cost saving programs we've implemented.

Although the benefits will be better than we originally planned, they will be more back half of the year weighted. We expect that the margin profile of the first quarter will continue into the second quarter before we see meaningful growth in the second half.

This improvement will also reflect the benefit we'll see from plants that are in the process of closing now. One last item to comment on is our systems integration work on slide 8. Our IT teams are doing a tremendous job in converting the old systems to our TreeHouse platform.

We're actually running a bit ahead of schedule on the conversions, which should allow us to finish the conversions in 2017 rather than waiting until the transition services agreement expires on February 1, 2018.

We'll use the extra time to start the snack nuts system consolidation project this year with a goal of having the entirety of that segment on SAP early in 2018. This will be an enormous benefit to running that large and diverse product segment.

So in summary, we are finding good sales opportunities within both legacy categories and the former Private Brands business. We believe this is due to more of our retail customers reassessing and refocusing on their own brands.

TreeHouse is definitely in the right place to take advantage of that growth, and we are seeing real evidence of that in our shipments. However, we do need to intensify our focus on cost savings and internal efficiencies to convert the higher sales volumes into higher operating margins. We are confident we'll do that over the back half of the year.

I'll now turn it over to Matthew to give you more color on the first quarter earnings and our outlook for the balance of the year..

private label is a complex business, and simplification of our portfolio is critical. We need to eliminate unprofitable SKUs, and each of our businesses has a complexity reduction target that they are charging towards.

We are also keenly focused on eliminating inefficiencies and waste, and must ensure our plants run better than they did in the first quarter. Third, customer management. You've seen our 2x2 matrix before, and Sam put it up earlier today. You've heard us talk about our top 36 customers, who drive over 80% of the revenue.

That means we have over 1,000 customers where we need to consider fixing those with weak margins, an inefficient level of changeovers, and excessive inventory. And lastly, we're aggressively looking at cost management and ways to further drive SG&A out of the system.

What all this translates into is a better business that has greater ability to grow, runs more efficiently, generates less waste, has fewer changeovers, and all in all, is a better operation than where we sit today, in turn generating greater shareholder value.

With that, let me turn it back over to Sam for his closing comments, and then we'll take your questions..

Thank you, Matthew. Fifteen months ago, a decade of acquisitive expansion culminated in the emergence of a private label industry leader like none before. Tracing our roots back to the founding of Ralcorp, our TreeHouse is now the home of 46 customer brand antecedents.

Like the mighty oak, we arose from an acorn, spreading our branches in a canopy over all that we could reach. Fueled by M&A, growth beget growth as we extended our commanding presence over center of store.

Now, with the acquisition of Private Brands, we have attained the scale and complexity that mandates that we shift our exclusive focus on growth to a more balanced perspective of value creation.

Thus began our strategic transformation from tactically-driven serial acquirer to strategically-driven operating company whose vision melds organic growth through innovation, with margin expansion through productivity. Accordingly, we have embarked upon a campaign to deliver that promise over this and the succeeding year.

As I delineated earlier this morning, we have already made great strides in advancing our strategic agenda of reaping the full rewards of industry leadership. That we are doing so in the uncertainty of our current marketplace and in the midst of a wholesale organizational realignment heartens my hopes for our future.

These strategic initiatives, coupled with expansion opportunities in on-trend beverages, better-for-you snacks and e-commerce instill me with a confidence that our financial performance over the remainder of 2017 and beyond will fully meet market expectations of the benefits of the Private Brands acquisition.

Meeting that standard will also fulfill our vision of TreeHouse as an enterprise dedicated to superior strategic progress, customer growth and shareholder value even as the digital age dawns on the food and beverage marketplace.

Now let's move to Q&A where we ask that you please limit your questions today to one at a time so that we can try to get to everyone. If you have a follow-up, please feel free to get back into the queue. Leanne, please open the phone lines for Q&A..

Thank you. And we'll take our first question from Chris Growe with Stifel..

Hi, good morning..

Good morning, Chris..

Hi, Sam, and everyone. I just wanted to ask a quick question, if I could, in relation to the second quarter, and as I just think about that in relation to the prior year, and a number of the tailwinds that are coming through, I guess I want to understand what's working against us.

So you have a lot of like plant closings and integration savings coming through, what is it that's offsetting that? You mentioned like the operations being a bit of a headwind this quarter. Does that continue into 2Q? I just want to get a little bit of a sense of why that quarter was expected to be weaker..

Q2 has two things going, as I mentioned in my remarks. The pricing will be a little delayed. We've had some big run-ups recently in snack nuts, so we'll have a little bit of a challenge there. The plant closings we really don't get the full benefit of that until as we get into the second quarter for some, and some are later.

I think the big issue is, mix is something that we have to take into account. We exit the winter selling season with the highest margin – our highest margin profile is Q4. Q1 gets carryover from our in-store bakery business, which is a very nice business as we end the holidays.

And frankly, Q2 we lose the higher margin winter products and now we shift into summer, and now we've got pickles, sauces, barbecue sauces, a variety of the summer categories which are on average lower than the corporate average margin.

So our natural mix is now shifting a little more dramatically than it did in the old days prior to these acquisitions, Chris. So some headwinds, yes, but I think mix is the other issue you have to take into account..

Mix would have been negative in the second quarter a year ago sequentially, right? So I mean, the second quarter a year ago you transitioned to summer related products as well, right?.

We had. But we also had – the Q1 didn't get the full three months last year of the extra, so I think it's a little more noticeable now. But I can't hide the fact that we do have pricing that we have to get, and frankly some of the manufacturing efficiencies aren't rolling in yet.

I mentioned the lost business that we had planned, so we weren't quite efficient as we had hoped, but we're not quite going to get that to roll into Q2 in our opinion, and we'll see that stronger in Q3 and Q4..

Okay, and just a quick question for you as we think about a rising input cost environment, to the degree you can, are you hedging those inputs such that during the life of a contract, if you will, with the retailer that you can blunt some of that incremental inflation? Or is it more the inputs you can't hedge that are causing the issue in this run-up of input costs?.

Yeah, this is Matthew. We have a weekly commodity meeting here every week with the whole team, the businesses and the purchasing team, and really watch this like a hawk, watching all the signals around every commodity.

And to the extent the market is there and liquid enough, we enter that market when we think the signals are going against us to protect us as much as we can. So, we're very active, and I think fairly sophisticated in that regard in our approach..

Chris, are a couple of categories like, a lot of the nuts in particular where there isn't a liquid market to go forward. In other categories where we have relatively liquid markets, wheat, corn, oats, we go forward and we do try to match up our sales contracts, if you will, sales programs with direct hedging so we can take that risk off.

But we've inherited a lot more categories between obviously snack nuts, durum wheat and some other categories where we just don't have a liquid market to be able to do that..

Okay. Thank you for the time this morning..

And our next question comes from David Driscoll with Citi..

Thank you and good morning..

Hey, David..

I had a couple of just little detail pieces here. You didn't say anything about your revenue guidance. It was, I believe, 6.4% to 6.6%. You've got this divestiture.

Can you just update us on the revenue guidance? And also, just related to the quarter, what was organic sales growth? And then just – I'm sure I could figure this out, but specifically what was the acquisition contribution to sales in the first quarter? If we can just start with those detail pieces..

Yeah, this is Matthew. Let me take the revenue guidance first. We haven't updated the revenue guidance for the loss of that Soup and Infant Feeding business yet. Obviously, the timing of the close of that is still yet to be determined, and the impact will vary depending on when that is.

But naturally, we will update that when we close, and I think you have a good understanding of what the full year number is..

In terms of the organic sales, as we mentioned, the grand total was a 0.6%, but that was including the negative effects this quarter of having lost roughly just over 16 million pounds of business, all of which was Private Brands, David. Because of the new segments and our combination, it's not quite so easy to pull out some of those components.

As you know, we've combined our Condiments and snack nuts business, and parts of the old business went into Meals. But I can say that when you strip out those unusual and known decreases in co-pack and foodservice and look at what's primarily retail then for the rest. In February and March, which is our pure comparable, we're up 3.8%.

For that same period, we were up almost 5.9% for what was the Private Brands business. So, I think what we are seeing is a quicker turnaround, frankly, in the sales activity than what we had hoped, a little slower turnaround in the margins than what we had hoped.

But what I think we need to take into account here is it's internally driven to get those savings. We'll get those. The hard part is getting the sales, and that's where I think the excitement is here. The execution is really turning around.

And having that sales growth and giving us a platform for growth is really what I think charges us here in terms of the go forward. Margins were disappointing, no doubt about it. We're working on that. But to see that kind of sales growth and volume, pure tonnage out of the former Private Brands business was a really good thing..

And then just to follow-up on Chris's question about second quarter, because I kind of agree with him that in the year ago $0.54, two years $0.66. Last year has all kinds of integration costs.

Can you just give us the update on where the TSA expenses are in the first quarter, what you see in the second quarter? And just point blank, with a number that's year-on-year basically below kind of a depressed second quarter last year, I just worry that are you really on pace to see all the savings in the back half of the year that's embedded within the guidance? Just give us a little confidence here that the second quarter isn't a strong indicator of maybe some problems that could filter into the second half..

Yeah, this is Matthew. There's a couple of things below the line that are impacting us in Q2.

Obviously we'll have higher interest expense, as rates have gone up, but also the timing of our equity graph, which we moved up from the middle of the year to pretty much come in line with the rest of how the world operates has resulted in Q2 being a stock compensation peak compared to the other quarters and compared to a year ago.

So, you're going to see a little different calendarization here with that element..

Any comments on the TSA?.

On the TSA, as we've said below, we're sort of easing in and easing out of this thing. And as we ramp down a ConAgra head, for want of a better way of putting it, we replace it with a TreeHouse head. So, I think as we're going through the year, that thing is ebbing and flowing with generally cost neutrality.

I think when we get towards the end of the year and we can really see this thing in its entirety, and touch it, and we've got our hands all over it, we've talked about a high single digit year over year efficiency going into 2018..

Okay..

I think in Q4, David, it's when we think we'll be off the systems a little bit early, so we'll really start to see that benefit. I'm hoping in the November, December timeframe that you'll see a little more of a jump-off there.

But, at the moment, even though we're making conversions, we're still relying on the ConAgra datacenter to do a variety of things for us. So until we get that last bit off, which we showed in the charts, there is duplication in there still..

Thank you so much..

And we'll take our next question from John Baumgartner with Wells Fargo..

Hi, good morning. Just in terms of the increased bid activity and the price competition, what's driving that? Because I guess presumably with broader inflation and labor costs and pockets of commodity inflation, it would seem that bid activity would be kept a bit more rational at this point. So I guess what's changing in the environment behind that..

John, it's Sam. Good morning.

I think the underlying factor here is that for the retail grocery business, particularly in traditional channels and particularly among those outlets who are subscribed to syndicated services, the key factor here is the substantial downturn in foot traffic, trips, and it was shown in our I think chart number four that when you looked across the totality of the edibles portfolio, the business was down for the quarter and successively got weaker as the quarter went along.

And the point there is that we're seeing grocers reopen bidding earlier midterm in often cases, and it's all about the profitability of their business.

And I think it's quite interesting to go over and look at the brands, and the global brands had posted quite weak top lines, and that is in spite of continued trade promotion that effectively holds their space even in bad times. So I think that's the key.

We will address things on the cost side, and as we've indicated, we're going to need to take pricing that is market driven that will be at a substantial amount, but I think that as Matthew and Dennis have alluded, we've got substantial open market data there to justify that.

And then the last matter is that we've got to pursue growth where that opportunity is. I was very pleased to see that in the past quarter we added "better for you" snacks to our e-commerce portfolio, and that's an indication of finding where that business is not under stress but where opportunity opens. Thank you..

Thanks, Sam. And just in terms of the restructuring synergies on slide nine, I'm a little surprised that over a year into the acquisition, there haven't been more plant closures slated, just given how much excess capacity in the private brand network. So I know you've changed how you think about the synergy number, at least initially.

But can you comment at least on the role that plant closures will play in the synergy numbers? And should we think about plant closures being more like a post 2018 endeavor at this point?.

This is Dennis. It's a good point. I think one of the challenges private brands have and that's us – private label, I should say, more broadly is here we have a lot of plants, many of which are almost exclusive to one product or one type of production.

It's not as if we've got eight soup plants and we can start restructuring those down relatively straightforward. In addition, we have to unwind a relationship with a customer if necessary, and that can take eight to nine months. And finally we have commitments on purchasing for raw materials.

So it's not as easy as identifying the plant and 60 days later you close the plant down. We have to take into account the crop that's coming in, commitments to current customers, seasonality, and getting through a particular season. So I do find that it does take longer for us to move from, say, decision to actual closing.

The plants we've closed so far were all part of the plan in terms of our original thinking on the private brands acquisition. But as we continue to look forward and we're finding efficiencies and we see opportunities, we'll continue to assess the manufacturing footprint just as we assessed the product categories with the soup decision.

So I think everything's on the table to look at here, but it is a bit slower process because of the lack of duplication and multiple facilities that would allow you to more quickly and easily consolidate plants..

Okay..

I think the work that Dennis and the Presidents are doing around simplification is really critical to any further unlock there. As they narrow this portfolio down, we'll be dealing with a very different customer and product landscape, and give us another bite at the apple..

Great. Thank you..

And our next question comes from Farha Aslam with Stephens..

Hi, good morning..

Good morning, Farha..

A question around your single-serve coffee business. You've doubled your volumes and doubled the size but at the expense of gross margins.

Could you share with us the timing of when margins can recover, and to what degree those margins can recover?.

This is Sam. A great deal of the margin compression here has come as private label has turned into be the real growth engine of the industry.

And our view in pursuing that was that we would be better served in the long term to regain our supremacy in that part of the store, and as a result, have garnered the lion's share of the long-term attractive shifts in that sector. We will begin as we fill things out to improve our cost structure.

We had a substantial amount of the compression in margins was related to one-time start-ups costs I believe. Transportation in particular was addressed earlier this morning. The other thing I'll say is that as we're using category management in this, we are account-by-account improving the economics, not only for ourselves but also our customers..

And just a read on timing, Sam, on how we should think of that margin improvement?.

I think that's something that'll be gradual. We should see small, but incremental, improvements kind of quarter-by-quarter that are more related to development at individual accounts and then some groundswell that will kind of come across the entirety of that business..

That's helpful. Thank you..

Thanks, Farha..

And we'll take our next question from Joshua Levine with JPMorgan..

Hey, good morning. Thanks for the question. Dennis, just one quick question, I think it was in reference to David Driscoll's question. You said total organic growth was up 60 basis points in the quarter.

I may have missed it, but I thought earlier in the call, you had said volumes were up 60 basis points, which was then offset by 60 basis points of pricing, which would I guess be flat organic growth.

I know there are some business exits, but can you just confirm those numbers, please?.

Yeah. That's correct. And in the press release, in the back, you'll see that reconciliation on total. And, unfortunately, we're somewhat restricted apparently from providing much non-GAAP color, which is what we can do on the call. But as we look at the non-GAAP color, the reality is our retail business performed quite well.

It's kind of buried in that because of exiting the co-pack and foodservice businesses that, frankly, were not all that interesting to us. So as you look at the underlying numbers and the 3.8% pure volume growth within the company and the 5.9% for the Private Brands, to me, that's the real story here in terms of where we're going.

And, Josh, as you look at every other food company, all the big ones that are continuously talking about negative volumes, I think it just points to the strength we have in private label here..

Got it. Thanks. And then when we think about the guidance for 2Q and touching on top line, I know you talked about seasonality, you talked about the soft consumer trends, then you talked about again the continued drag from co-packing arrangements that you exited.

But I guess at least in Nielsen, we've already started to see trends reverse, and many of your branded peers have said that they expect trends to at least have started to improve coming out of 1Q.

So I guess with that flat organic growth or even, again, the up 380 basis points or nearly 4% ex the business exits, I mean, should we assume that that rate of growth improves in the second quarter?.

Yeah. I think we're going to have some growth in the second quarter. I think just the issue is the margin due to mix. I don't see any reason why our teams and why private label isn't going to continue to have strong numbers. The 3.8% we talked about is a darn strong number.

I'm not sure I'd ever commit to having that long term, but I think the structural difference we're having here is almost every major retail grocer is talking about emphasizing their private label programs. So I don't think this is a one quarter or a two quarter.

I think this is almost starting to get into a structural change again as the retailers figure out they've got to offer something different and unique, and that's where we have the solution for them..

Got it. And then, if I could, just ask around just the cadence of the year. Obviously again, 1Q is at the low end of the guidance. 2Q is at least well below the Street, and again, obviously, maybe we were a little bit too optimistic, but you've obviously pushed more of the weight now to the second half.

So you talked about some of the net cost initiatives coming in the second half.

Do you think that's enough? Or I guess, how do you get confident that that's enough to get you to the full-year EPS guidance?.

Yeah. This is Matthew. Our plan was always more back half biased than front as the efficiency actions come in through the year. I think we saw last year as we brought private brands in more of a trend to a heavy Q4 calendarization, especially in the baked goods area, which exacerbated that imbalance.

We did get on this early when we started seeing this softness, so the plans are pretty advanced. We didn't close the books last week and figure out we needed to do something.

So I think there's a level of maturity around the thinking and the planning that Dennis and the team have got in place that gives us confidence in the execution of that increment to get back..

Got it. Thanks very much..

And our next question comes from Evan Morris with Bank of America..

Good morning, everyone..

Hey, Evan..

Hey. Just on the pricing, I know it was down in I guess, what, four of the five segments in the quarter. You've talked about the need to take more aggressive pricing going forward. I guess just thinking about that within the context that you are going to be faced with higher commodities. The environment is still pretty challenged.

A lot of your branded competitors, while they might have seen a slight improvement kind of coming out of the first quarter, trends for them aren't particularly good.

So I guess the question is how confident and why are you confident that you'll be able to take the level of pricing that you need in this environment? And I guess just thinking about that from a margin perspective, if one of your goals was to sort of avert margin pressure, should we expect that more of that net cost savings that you thought possibly would flow through to the bottom line this year is going to need to be reinvested back again to protect margins in light of that sort of difficult operating environment and rising commodity costs?.

Evan, Dennis here. Good questions. Two things that we have going for us right now is despite the challenging aspects of the business, what's been interesting is the price gaps have generally stayed very consistent. And I know a lot of you have seen that as you've looked at the measured channel data.

So in terms of the price gaps, the nice thing is they haven't been closing, so the opportunity for pricing exists.

The other thing is in private label, we've got a little bit of a different relationship with our customers in terms of what we call fact-based selling, where it tends to be a little more open book in terms of what the input cost structure of the product is.

And we actually can sit down and will sit down and compare the year-over-year change in the particular ingredients that go into the product and work out generally a mutually agreeable relationship in terms of how to price or modify the product to get the margin covered. So I think we're in a good place to do that.

I'd be much more concerned if we saw price gaps dropping, which wouldn't leave the room to get those penny or two, and that's really what you're talking about, pennies on the unit. So I think we're in good shape. I'll turn it over to Sam for comments..

I would concur with Dennis and second that.

When we look at kind of the industry dynamics over all of the syndicated channels and then the 102 food and beverage product categories, what we see is that pricing with regard to net – the aggregate price changes of brands have been roughly 2.2% over the last 52 weeks, and that's what private label has been as well.

You do have to separate the mix out there, and I think we're in a better position than some of the very large private label categories, like water and carbonated beverages that really get whipsawed by branded promotions, et cetera.

The other matter here is that the most successful pricing we've had has been in circumstances where the cash prices in openly and often quoted input markets are moving up, and we have that instance.

I think, Matthew, of the top 25 components, aren't 19 of them either positive or flat and just a handful are coming down?.

Exactly, yeah..

So we will do our selling here where we'll take the item and the bill of materials and sit down and show what's justified here as a pass-through on the components, and we would expect that the brands will be doing the same type of thing. So we'll use the industry dynamics to work in our favor..

Okay. And then just as you think about the full year, you reaffirmed your EPS outlook. It sounded like to David Driscoll's question earlier, you were reaffirming the sales outlook, again, ex the divestiture.

Just wondering just the level of confidence or visibility that you have now in light of that you said that these retailers are now opening bids early, which just tends to be not common practice and it seems like the bids that are being reopened are now getting done at a more competitive price as these retailers are focused more on their profitability.

So I mean, I guess that's a pretty big change, it would sound like. So just again understanding the level of visibility you now have behind reaffirming your full year..

Well, I've got a spreadsheet in front of me that is kind of the most detailed I've had in years, and this came up through the five operating divisions, and I think month by month we're seeing each of those five develop a better sense of their marketplace and their customers.

The other matter here is that both the retail and the food service industries now are suffering from a small decline in volume, which given their cost structure has great import. And what we have to do, as Dennis eloquently talked about earlier, is we now have a go-to-market proposition where people have specialized not product knowledge.

They're focused on a smaller set of items. We know that 36 of our customers generate 80% of all the private label revenue in our business and every one of those 36 has got detailed attention with regard to what those opportunities are.

So as each month, each quarter goes by, I think our confidence in our capability in this regard is getting even more finely tuned.

Last component, we just put SAP into one of our largest snacks units, and as that system progressively marches across the totality of the business, we get more transparency, better information, shorter lead times, and the business will take advantage of that. Over..

Thank you. I'll pass it along..

And we'll take our next question from Robert Moskow with Credit Suisse..

Hi, thanks. I thought maybe I could just delve into the beverage segment just for a second. I think you said that competition has been intense and you've had to take some price rollbacks in order to get business, but now coffee prices are rising.

Is this different from what your plan was for the year? Like, I imagine your plan all along was to price so that you could get more volume, and then the volume is up.

So are you essentially saying that like profitability in beverage is going to be weaker than you thought or are you saying that you now have to try to take some pricing higher in order to offset higher coffee (01:00:07)?.

first, the pure Green Mountain effect that had been overwhelming the industry a couple of years ago has moderated, and we understand, it was clear to us that under new ownership and new leadership they will continue and private label, but make it a complementary part of their business rather than their primary driver.

The other big factor is that as private label has grown, all of the growth has come in a handful of accounts whose position with the consumer and their margin structure is that they are highly price competitive.

And these are businesses that we have learned to, regardless of what the stated gross margin is, we've learned to operate those businesses in a way that we get the full benefit of volume even if it is more from a base of looking at an activity based accounting than the conventional margin calculation.

And having said that, I think we'll – let me go to Dennis. I think we'll pass along those coffee increases as they come to us..

Yeah. We've been able to do that, Rob. I think the fundamental change that's happened in the single-serve coffee business has frankly just been shelf price and the pressure that has been put on both by retailers to hit that shelf price. The average shelf price per unit is down about $0.50 ending Q1 compared to where it was last year in Q1.

And frankly there is some capacity, and a combination of excess capacity for some of our competitors and a push for the brands to expand and reduce price on their own private label brands has caused this issue. It's not really related to green coffee price. I think that we'll be able to offset with green coffee.

I think this is just a fundamental shift in the demand and capacity within the private label, single-serve coffee right now..

I guess my question is the year panning out like weaker than you thought and you and have to try to catch up to make it, or are you basically saying that you had planned for this all along?.

It's just a little bit weaker I would say. We won quite a bit more new business than we thought we were going to win, but it came at a lower price than what we had originally expected. I think you can see it in the measured channel data.

The brand volumes are challenged and private brand continues to grow to winning, but the mix has been a little lower on the margin than what we had originally planned..

Okay..

Yeah. Rob, a handful of retailers have redefined this market..

Got it..

And the positive effect for us is that while brands were zero, completely flat for the year – for the quarter, we've garnered 50% growth. The other matter here is that what will not show up in the syndicated channels is the growth in e-commerce.

And while that is a small part of our business, we expect this year to have a third consecutive year of double-digit increases in that channel and broaden that as it goes along..

Great. Thank you..

And our next question comes from Bill Chappell with SunTrust..

Thanks. Good morning. Just two kind of follow-up questions.

One on the pricing commodity issue, I mean, how much of it is snack nuts? Is that 50% of what you're looking at or is it really more broad based?.

The majority of it is snack nut based. It's I would say more than 50%. That's the biggest input challenge at the moment. There's other pieces that are up a bit; frankly, there's a couple that are down, but basically it's a nut issue both in pricing and in availability with some of the tree nuts from overseas..

Okay. And then second, back on the beverage side, we've heard that I guess some of the retailers are taking a hard look at the shelf space allocated, maybe taking out some of the underperforming brands and shrinking the overall space that they allocate towards the space.

Is that happening, and would you be kind of -- I assume that's a net positive for private label as they get rid of some of the other value or other lower priced brands that aren't turning..

It's a great factor in favor of private label, and it is happening but it is at an account by an account basis. But I think what all those who follow the syndicated data and broader measures will see that the shift is moving towards those who have begun to practice category management.

And I believe, Bill, that more than a year ago I'd indicated that our database was tracking 209 brands and over 1,900 SKUs, and it's simply a process that the grocers in their own self-interest will regulate more closely. And it will benefit private label..

Great. Thank you..

And we'll take our next question from Brett Hundley with the Vertical Group..

Hey, thank you. Good morning, guys..

Good morning..

as I look at the long term volume opportunity for you guys, and if I try and hold kind of the macro flat, every year you have a mix of new store build that occurs at the retail level.

And what I'm kind of expecting this year and beyond is that that mix may be able to change in your benefit as you have hard discounters coming into the market and building stores.

And so what I'm trying to understand and would appreciate your view on is, do you see kind of the mix of new store build changing in years ahead to the point where it could actually benefit you and add volume relative to previous years holding everything else equal?.

I do, and there is a direct – there are three effects here. The first is that there are announced by two world leaders plans to expand their footprint by thousands of stores, and that shift will expose more consumers to the pricing programs that have worked so well for those chains in other markets.

I think the second matter is that, and this is a case, I cannot name the customer, but particularly with one very fine national supermarket chain, actually, two of them. And you see them now kind of creating stores within the store.

And the biggest effect that that has had has been in the better for you premium private label area, and where it used to be that there was a limited choice with regard to better for you items and grocers that focused entirely on that sector.

Now in response to that consumer move as well as more discounters, the store within a store has become a very attractive proposition for customer brands where people are willing to invest and create a brand that's a strategic element.

And then lastly, you've got Millennial consumers who have learned to shop for immediate convenience as well as complete transparency about price, and that I think will benefit us in a smaller way, but significant over the long term with regard to the attractiveness of an e-commerce of private label..

I appreciate that. And then just secondly, your recent soup announcement shows that divestiture is both possible and maybe top of mind for you guys.

Can you talk about the strategic sense, as you sit today, of further monetizing other non-core assets, deleveraging and then building scale through M&A in categories deemed growth here or more attractive? You've put that 2x2 up for us a number of times in recent years and explained maybe the benefits in being in various parts there.

But can we think about that matrix changing a little bit?.

Well, yes, we can, and if you go back to I think slide five, while we did not put numbers there. In both customers and categories, if I look at the gain in the green quadrants and then the loss in the red, when you annualize the gains in green customers, it's been over $100 million rate in the first quarter. The same for green categories.

When I look at the red, red as we call it, we are diminishing our business in the most marginal categories and customers at a rate in the first quarter that, again, exceeded $100 million in both instances. And so the shift is on here.

I think that we also will get the benefit from this organization of now we've got not only five divisional presidents each with a P&L, but we have 32 general managers, each with a P&L, and their entire focus is on only one business, and that leverages both the top side for the better, and it exposes those parts of the business that operate less well.

The third factor I would say coming into this and it's a big, big thing is, I'd indicated that we've already identified 3,100 SKUs to eliminate, and 260 customers either to consolidate or discontinue.

And that type of focus will allow us to get below kind of the fog of the aggregate and determine to a far finer degree which of these businesses, should we put more capital into, and in that regard, Matthew and Dennis are running a capital allocation program that's really focused on growth and margins. And then we'll deal with the converse of that.

I do think that with regard to building these businesses through M&A, that as our leverage comes down and we extend our SAP systems across the totality of the business, we will continue to be in that M&A market with the primary focus on better for you snacks, on trend beverages, and e-commerce capabilities..

Thank you..

And we'll take our next question from Amit Sharma with BMO..

Hi, good morning, everyone..

Good morning..

Dennis, you gave that Feb and March volume number.

Do you have the comparable dollar number as well from organic growth perspective?.

I don't actually have that. I've got the volume because I can track that with the old systems, but the dollars, I don't have that handy..

Okay.

And then the pricing pressures or price competitiveness that you talked about, is it across all product segments, or did you see it more on the NBE or the value side and less on the premium side?.

It's not so much at the product price point or the style. The majority of it is in the snack nut category. We've got some businesses that are relatively moderate and are up slightly on the plus side. I think we're all getting hit a little bit by linerboard pricing, which has gone up, which is making all the packaging material more expensive.

But rather than a premium value, it's really much more in anything that has to do with nuts..

Got it.

And given that, historically snack nuts, the pass through works well and volumes are probably more at risk than the actual margin, do you expect or as you talked about it covering the back half from a margin perspective, how much of that is just this pricing that you're probably putting in place now and catch up in the back half?.

Yeah, there's a fair amount that'll be – the realization of pricing that'll help the margin. I think the more important piece, though, is the structural adjustments we're making with the plant closings and other plant operating efficiencies that'll be taking place. But the pricing will certainly be a positive in the back half..

Any way of quantifying that in terms of even the buckets? Hey, half of that comes from pricing and half of that comes from efficiency, and the rest are that?.

It's hard to do that because as I mentioned, sometimes when you go in with a pricing, what happens is the price doesn't shift but the product shifts, and that happens in light of working with our retailer to mitigate a price change by changing, say, packaging or labeling or the counts in the box that can help to mitigate a cost.

So at the end of the day, the margin comes back, but it may or may not be a pure price adjustment as opposed to a product adjustment..

Got it. Thank you..

And we'll take our next question from Jon Andersen with William Blair..

Thank you.

Just to start, the planned business exits that impacted the first quarter, could you talk about whether that kind of exit activity will have carryover effects, and at what kind of level, as we look to the balance of the year?.

The bar business, which was the biggest of that, will impact the whole year but decreasing in Q4. It's gone now, but it was in full place for the full half of last – at least half of last year and then started winding down. The other foodservice business is – we probably – I think, we've lapped that towards the end of the year as well.

So it'll still kind of be a bit of a year-over-year comparison headwind, Jon, for the quarters 2 and 3 for sure..

Okay.

With respect to the TSA, is there any color you can provide there? If we just kind of fast forward to 2018, assuming you come off the TSA in total as planned early in the year, what kind of a net benefit are we talking about there once you're fully off of that agreement with ConAgra? Is that something you can quantify at this point?.

It's hard to get that exactly, but my thought was it was going to be somewhere in the maybe $10 million range from a $50 million to a $40 million. We talked about that last year, but I don't see that changing. Part of the reason we still have this cost running through is we're still using their mixing centers, we still have the datacenter we're using.

Those things are coming off later this year. We hope to have all of our own warehousing activities in place and off their mix. And so there's some real opportunities for cost, but they come along where they're tied into the last of the systems conversion.

So that benefit I'm referring to, frankly, is mostly going to be when we're off fully, which is at the very beginning of next year..

Okay.

One more for me, which is a little bit bigger picture question, when you talk about your customers relooking at their corporate brand programs – and I'm assuming that means both relooking at it from a bidding perspective and looking to negotiate better pricing, but also from a growth perspective – and also there's some commentary in the press release around – or in the prepared comments around specialization or customization, given kind of the changing retail landscape.

It would just seem to me that those two dynamics, kind of reopening bidding and customization or tailorization demanded by your customers, would kind of work against you in terms of some of your pricing initiatives and some of your simplification initiatives.

Why is that not the case, I guess, is the question?.

It's Sam. First, there's a swirling atmosphere in the marketplace where there are currents in several different directions. We've indicated that there are tailwinds and headwinds.

I think, for us, as people relook here, what you would hope with your customers is there will be a greater congruity between what their thinking is about their brand and what their actions are as merchants.

And I think while there will be currents both ways, what will benefit us is we have reorganized where we have highly specialized product and category expertise, in not only marketing, product development, but also supply chain.

And the other matter is we have divided the world into there are 36 category – product – customers out there that account for we know 80% of our profits. We believe that it's the great majority of growth in the business. And we can no longer treat all the same way.

We have to spread our resources and make our commitments in the context of what those relative opportunities are. And when you put that together, I think that whatever the environment, we'll be better served than our competitors..

Thank you..

And we'll take our next question from Akshay Jagdale with Jefferies..

Hi, good morning. I just wanted to make sure I'm understanding the picture correctly.

With your segment reporting changing, it's become a little bit harder to decipher how your legacy versus acquired business are doing, but the way I'm looking at it, it looks like a decent chunk of the acquired business margin improvement is actually pretty solid, like Meals, Snacks, I saw some pretty good trends.

Those are segments where acquisitions have played a bigger role. So am I reading that correctly? I mean, Condiments still seem to be in a decelerating trend from a margin perspective, but, overall, it seems like some of the major acquired businesses which were having margin issues are seeing some momentum the other way.

And the big issue that I see this quarter that's a step change from what we had seen previously, and you've talked about a lot, is just your legacy Beverage business, so am I understanding the picture correctly, or maybe misrepresenting something?.

Well, I think, as Dennis said, our visibility into the P&L in that old construct is really gone as we focus on the business. Now, it's only through a couple of ways that we can manage to get some idea of the tonnage that we ship and give that comparability. So it's easier to do on a volume basis.

And I do think we're particularly pleased with the organic growth, given the outside environment. I think just one more thing on the beverages that weighed on us that we didn't touch on too much is really the significant volume ramp-up and these rate inefficiencies, which we are now out of and should see that reverse as we go into Q2 and forward.

So that was a one-time depression there, notwithstanding the other things that Dennis and Sam talked about..

Okay, so Beverages, the margin issue is not all single serve coffee.

Is that correct?.

That's correct..

Okay.

And so when you look forward long-term with your new segment reporting, so if you're successful in turning this business around that you bought, will most of the improvement come through in the segment operating profit margin, or will we see a decent chunk also in unallocated corporate expense?.

The bulk will come through on the margin side, and where you'll see the unallocated will be the timing of the stock compensation that Matthew talked about, which is – with the change in our grant structure moving from a late June date to a first quarter date, it's front ended the operating expense relative to stock compensation expense.

And, Akshay, you've been around. You know that we used to always have a big blip up in the third quarter, and then the third and fourth were the high points for stock compensation, now it's Q1 and 2. That'll be a benefit in the unallocated..

Okay, so just one last one, I mean, in your new segment reporting, which is pretty helpful, I thought, the Snacks business obviously is the lowest margin. I mean, even when it was under the previous ownership, the margins were generally much higher.

Structurally, is that just a lower margin business, and should we not expect it to get to 8%, 9% over time? I mean, can you just talk a little bit broadly about structural impediments, price and cost related in the Snacks segment? Thank you..

There are really two components, Akshay. One is that there is the largest single portion of our current business that is repackaged – buying tree nuts and et cetera in bulk and repacking those for retail distribution.

And there is in that business inherently lower margins in that the commodities themselves are the largest single portion of the total cost and the retail value.

I'll contrast that to other aspects of the business, particularly trail mix and certain measured parts of the bars business where the opportunities there for better margins are really quite substantial. And until the last year, private label had trail mix largely to itself. We now have branded competition that will bring more people into the category.

And I think you'll see that we'll be able to get higher margins there.

The last point is that while we bought a nut business, what we're building is a better for your snacks business and over a period of time, we'll introduce other products, other channels, including e-commerce and while we will not change the fundamental nature of that part of the business, it only is related to repackaging nuts in smaller packages.

We will build out the more attractive components of the better for you snacking..

Thank you. I'll pass it on..

And our last question comes from Pablo Zuanic with SIG..

Hi, good morning. This is actually Aatish Shah on for Pablo. Just going back to the margins, again, in the past I believe you mentioned the K-cup margins have comes down to the company average. But looking at the beverage segment margins, we see that the margins are above the company average.

So I'm just trying to get an idea of what portion of that segment is K-cups. And then just more generally, which segment do you see more of the margin upside? Thanks..

We don't disclose the individual components of any of the segments, so I can't talk about that. I think in the margin upside, I think we are highly focused across the board. One of the nice things about the division structure is we're not trying to pick and choose out of 32 product categories.

We've got five division presidents, and five teams, and five operating groups who are focused on each one. So we're expecting all of them to be pursuing margin opportunities. And I think that's really where we expect to go. I can't say that one of those segments is going to be a bigger contributor than the other.

I think we expect all of them to be contributors to the margin improvement..

Okay. Great, thanks..

Thanks, everyone, for joining us today. We look forward to seeing you, many of you, later in the year while we're on the road. Goodbye..

And that does conclude today's conference. Thank you for your participation. You may now disconnect..