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

John Joseph Baumgartner - Wells Fargo Securities LLC Andrew Lazar - Barclays Capital, Inc. Steven Strycula - UBS Securities LLC Joshua A. Levine - JPMorgan Securities LLC David Cristopher Driscoll - Citigroup Global Markets, Inc. Jonathan Feeney - Consumer Edge Research LLC Amit Sharma - BMO Capital Markets (United States) Farha Aslam - Stephens, Inc.

Brett Hundley - The Vertical Group Akshay Jagdale - Jefferies LLC Jon R. Andersen - William Blair & Co. LLC Robert Moskow - Credit Suisse Securities (USA) LLC Pablo Zuanic - Susquehanna Financial Group LLLP.

Welcome to the TreeHouse Foods third quarter 2017 conference call. This call is being recorded. At this time, I'd 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 achievements 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 Chairman and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed..

Thank you, PI. Good morning, all and welcome back to our TreeHouse. Matthew and I have much to share with you regarding market conditions, our strategic progress, recent financial performance and our operational agenda to restore TreeHouse to good working order.

But first, we must address Bob Aiken's personal decision, a surprise to all of us, to resign after approximately 100 days of residence in our TreeHouse. We are disappointed by his departure and wish him well in his future endeavors, wherever they may lead him.

Although shaken by this turn of events, TreeHouse is a resilient structure, built upon a solid foundation, designed to withstand seismic tremors and built to weather storms from any quarter.

Accordingly, our board met, following Bob's decision, and confirm their full support of our strategic vision, tactical agenda and organizational structure, all with undaunted resolve to endure any temporary setback.

While our fundamental business plans are structurally sound and remain intact, we must undertake certain organizational changes to ensure that our board's confidence is fully warranted. Therefore, the following measures have been taken with immediate effect.

First, I will assume the role of President and return to directing the company's operational units. Second, Matthew will assume executive oversight of our initiatives related to customer RFPs and bid negotiation, margin management, and also SG&A, infrastructure and costs.

And third, we will commission an executive research to identify and recruit a Chief Executive Officer to succeed me in that capacity. We commence this shift in executive authority with great confidence in our senior management teams across the branches of our TreeHouse.

They continue to pledge their stewardship in executing the strategic plans and tactical operations of our enterprise. They also represent a new standard of capability and confidence in the realm of private label.

Before turning to Matthew, I'd like to offer a few insights on marketplace conditions and their effects on the grocery industry, its branded suppliers, private label and our TreeHouse as seen on slides 4 and 5.

Well before the advent of Amazon and the emergence of doing deep discounters, our industry entered an era of declining retail store foot traffic and minimal food inflation.

These factors acting in tandem have transformed some merchants into auctioneers demanding discounts from suppliers as the means of buffeting the winds of change sweeping our industry. The effects of this scenario on branded CPG giants in the North American marketplace have been nothing short of a remarkable collapse of topline growth.

In sharp contrast, private label, in general, and TreeHouse, in particular, have enjoyed modest but steady volume growth, despite strong headwinds elsewhere. Broadly, this differentiation emanates from the value and convenience of private label to our customers and their consumers alike.

More specifically, at TreeHouse, our growth sprouts from a product portfolio replete with offerings that satisfy millennial demands for health and wellness, social relevance and a sustainable lifestyle. We have enjoyed fine progress to-date in this arena and foresee even more opportunity ahead. Please refer to slides 6, 7 and 8.

Turning to the capital markets, we are planning to undertake a broader approach to capital allocation than our historical M&A driven cycles of lever up, de-lever and repeat.

In this context, our above-the-norm cash generating capacity and consistency now enable us to initiate and share buyback program based on the strength of this fundamental measure of long-term financial being.

This concise macro view of general market conditions demonstrates that while we are enduring hardship, neither private label nor TreeHouse presents the prospect of long-term stagnation or contraction as do others bound by traditional habits and conventional wisdom.

While we continue to struggle financially in the near-term, Matthew will now address the broad array of strategic initiatives we have launched to remedy that circumstance and to return our TreeHouse to good working order.

Matthew?.

Thank you, Sam. Good morning, everyone, and thank you for joining our call today. Sam shared with you in broad brush strokes the disappointment and the operational challenges we're facing. I would echo his sentiment.

We are facing headwinds here that are not only driven by the external; channel proliferation, retailers under top line pressure, rising input costs, and transportation of freight shortages, but also headwinds that are under our control in terms of manufacturing complexity, bid price discipline and sales growth implementation.

There is absolutely no doubt in my mind that we are in the right place with private label, but we're an organization that must streamline our cost structure and improve our operational performance in order to capture this opportunity.

With that being said, let me go through our third quarter results, the performance of our five divisions and take you through our updated guidance. I'll then close by giving you an update on TreeHouse 2020, along with how we're going to get back to basics and do more around costs, revenue and margin management.

Starting on slide 11, on our consolidated results. Sales for the third quarter declined 2.4% to $1.5 billion. This decline was more than explained by the sale of the soup and infant feeding business, which closed at the end of May. Excluding this business from our prior-year results, sales were up slightly year-over-year.

Volume, mix, and pricing each contributed about a tenth of a percent improvement in the quarter. Below the topline, our operating performance fell well short. Our adjusted EPS per fully diluted share in the third quarter was $0.67, down from the $0.70 we posted last year and short of our third quarter guidance range of $0.75 to $0.83.

Our earnings quality was poor, which we have detailed for you on slide 12, and we are very disappointed with our operating performance. Let me walk you through the drivers of change versus last year. Division operating income drove $0.25 of the decline in the quarter, or approximately $20 million.

This was partially offset by improved cost control and the elimination of the TreeHouse bonus totaling about $0.15.

And we had another $0.12 contribution from the lower tax rate, which was driven by the release of reserves as certain tax statutes expired and the benefit related to the utilization of foreign tax credits in our 2016 federal tax return, which was filed in the third quarter of 2017. Under U.S.

tax law, the company was not able to utilize foreign tax credits prior to the 2016 filing, but the acquisition of TreeHouse Private Brands and certain internal restructurings has resolved this unfavorable position.

As a result, we had a third quarter benefit allowing us to much more efficiently manage the repatriation of earnings from our foreign operations in the future. The $0.05 of other relates primarily to currency. Turning next to slides 13 and 14. We've broken out the results by division.

As you can see here, the underperformance on a year-over-year basis was more than explained by Beverages and Snacks with Baked Goods performing very well. Turning to slide 14, Baked Goods sales and profits were both up compared to 2016 with increased distribution and lower commodity costs more than offsetting increased freight costs.

Meals division sales were down $63 million, primarily reflecting the sale of the soup business, but DOI was down only $1 million. In Condiments, sales rose $11 million compared to last year's third quarter. However, DOI is down $4 million. This is due in part to some challenges we've been addressing around customer service.

In one particular case, we won some new business with a large customer and shortly after launch, the customer requested a switch to a different pack size, which resulted in reduced capacity and getting behind with not only that large customer, but it began to affect production for other customers as well.

Our focus on service levels caused unnecessary de-prioritization of cost reductions. Now that service levels are improving, we will be able to return our attention back to cost reduction. Beverage sales were up $10 million in the quarter versus last year, driven by distribution gains in single-serve, creamer, broth, and liquid beverages.

Pricing was unfavorable in the quarter, as we faced bid pressure from large retailers, new business being won at lower margins and increased competition. DOI declined $12.1 million due to lower pricing and higher freight and commodity costs.

And finally, in Snacks, sales declined $19 million versus last year due to weak category trends across key customers and the exit of legacy branded co-pack business. Some improved pricing took effect in July. However, bid pricing pressure muted that benefit, which we are addressing through our sales and margin management program.

DOI declined $17 million driven by commodity costs that can't be contractually passed through until 2018; unfavorable mix, as we saw more commodity nuts versus value added trail mix and bars; as well as incremental costs related to the largest new product launch in the company's history.

Unfortunately, the customer rollout plan was delayed and we unexpectedly ended up with stranded costs in Q3. Turning now to our balance sheet and our leverage ratio on slide 15. We're pleased to have delivered a reduction in net debt of over $375 million since we closed the Private Brands transaction.

Net debt finished the third quarter at $2.6 billion, up slightly from the second quarter, reflecting normal seasonality and inventory build ahead of the winter months. Our leverage ratio remained under 3.5 times and we continue to believe working capital presents meaningful opportunity with Q4 inventory balances expected to be below our Q3 peak.

What I'm really pleased to share with you today, on slide 16, is that our board approved a $400 million share buyback program, which represents about 10% of our outstanding shares, reflecting confidence in our robust cash generating capability.

We will put in place a 10b5 program to systematically buy back shares of approximately $50 million per year, so that, at a very minimum, we will offset the dilutive impact of our internal equity compensation programs. Beyond that, we will repurchase shares opportunistically with a total annual cap of $150 million.

Our repurchase program allows us to return capital to shareholders while maintaining the flexibility to continue paying down debt or to capitalize on potential growth opportunities with limited acquisition activity for the foreseeable future.

One of what I believe to be the under-appreciated qualities of TreeHouse is the consistency with which we generate free cash flow year in and year out. Let me now turn to slides 17 and 18 and go through the guidance revision.

I'm not happy to be taking guidance down for the second time this year, but it's the right thing to do given the state of our business and the headwinds and challenges we face. I'm going to walk you through where we sit today in comparison to where we were back in August as well as help you understand what we baked into our guidance reduction.

We expect sales will still be in the $6.2 billion to $6.3 billion range, but have lowered our gross margin guidance to between 17.8% and 18.3% and trimmed our SG&A as a percent of sales by 20 to 30 basis points. The full-year tax rate is expected to decrease to a range of 21% to 22%.

As discussed with our Q3 results, the company's ability to utilize foreign tax credits allows us to more efficiently repatriate earnings of our foreign operations. Certain planned Q4 repatriations are expected to generate credits in excess of their U.S. tax cost, resulting in a tax benefit to the quarter.

The bottom line is that we are taking down our full-year adjusted EPS guidance by approximately $0.45 to $0.50 to a range of $2.70 to $2.80. And implicit in the guidance is fourth quarter adjusted EPS between $0.91 and $1.01. On slide 19, you can see our bridge from the August forecast to today.

Division DOI is coming down by almost $100 million or $1.22 per share with shortfalls across all of the divisions. We will partially offset that with $0.34 of lower SG&A, largely due to the elimination of the TreeHouse bonus and $0.43 in tax planning.

You'll also notice on slide 19 that we've indicated that a little less than a third of our guidance reduction is related to a risk adjustment. Let me explain.

Given our third quarter results, our near-term operating issues and the increasing volatility in our large customers, what we have done is taken our division forecasts and added a deeper than normal layer of conservatism.

It's a bit extraordinary, but as we found ourselves in this position of missing and revising guidance repeatedly over the last year, we believe this to be the right approach.

Having shown you our revised guidance and the decline in divisional DOI for the year, let me now direct your attention to slide 20, where we've broken out the percentage impact of each division on the total decline along the left-hand side. As you can see, Beverages, Condiments and Snacks were the biggest drivers of the guidance revision.

On the right-hand side, we've given you a sense for the degree to which volume and mix, pricing, freight, and warehousing and operations have played a role. Let's get into a couple of the division-specific issues and I'll follow up with our perspective on the freight and warehousing piece as that's impacting everyone.

We have significantly revised our volume outlook for Beverages for three main reasons. First, we have discovered some of our Q2 volume strength was driven by customer inventory build and we revised our run rate to reflect current metrics. Secondly, we have lost some business of large customer.

And third, we also won some new business to which we applied historical volume lift per SKU, but we're not currently achieving that same level of historical lift. Turning to Condiments, the reduction in the volume of mix outlook is a result of the service challenges that I described earlier.

While that customer specific issue has now been resolved, it has had some carryover impact to our volumes with other customers as well as the efficiency of our operations and ability to implement cost reductions.

Finally, in Snacks, we've reduced our volume, mix and pricing assumptions due to softness across a few large customers that we've assumed continues into the fourth quarter.

On the pricing front, while we've had good success passing along the higher commodity costs from earlier this year, there have been some contractual arrangements that we need to allow to rollover before our pricing can be implemented. We've also assumed Snacks plant performance heading into the fourth quarter continues to be unfavorable.

And while the startup costs related to our largest ever-new product launch have been greater than expected in the back half of this year, we are expecting this issue to be behind us by year-end. As you can see on this chart, one of the issues facing all of our divisions is increased delivery and warehousing expense.

If you'll turn next to slide 21, this issue accounts for roughly $20 million of our total guidance reduction. As you're well aware, there's tight capacity and a lack of drivers, which is fueling freight increases. Compounding the issue is the recent disruption in parts of the rail network increasing short-term demand for trucking.

Hurricane recovery efforts in the quarter have further tightened trucking supply. All of this has an obvious impact on spot rates. While we expect short-term pressures primarily related to the rail slow down and hurricane recovery to alleviate, the long-term trend is for continued outward pressure on transportation costs.

Finally, and more specific to our business, we've seen a number of customers move from customer collect to delivery with little or no notice. It presents further challenges when we see a high percentage, up to 25% of no-shows, during scheduled customer pickup times.

This is creating additional complexity in our warehouses and plants, including double handling, running out of space, and impacting production.

Before I turn to what are we going to do about our performance, I want to say that we as a management team are very cognizant that we've under-delivered for the past few quarters as well as our outlook for the year. It's a difficult environment for all of food and beverage today and it's also a marketplace that is rapidly evolving.

We believe our revised guidance has appropriately accounted for the state of our business on both the challenges and opportunities that may or may not be realized as we head into the fourth quarter.

Let me now turn to a quick update on the integration and then give you a better sense for the action steps we're taking in addition to TreeHouse 2020 to address the issues we're facing. Very quickly on slides 22 and 23, we're nearly through all of the systems carve-out, cutover, and integration of the Private Brands business.

The IT piece of this will be complete at the end of this month. We will exit the TSA by year-end, ahead of schedule. On slide 24, we have given you an update on our Phase I actions for TreeHouse 2020.

Our commitment to our goal of 300 basis points operating margin expansion, assuming constant volume price and mix remains unchanged, and I'm pleased to report that we're largely on track. We're slightly ahead of where we thought we'd be framing production of Plymouth, Indiana, and that will be complete by the end of this month.

Dothan, Alabama is on track to end production by mid-2018 as originally planned. And Brooklyn Park will have two or three lines moved by the end of December. The one remaining line will move in the first quarter. We have also permanently shuttered 13 of the approximately 20 lines slated for decommissioning as part of Phase I. Turning now to slide 25.

A bit earlier I spoke about the issues facing the divisions from changeover complexity to new product launches to customer bid pressure and our cost structure. Within the past two years, we've come together as two large organizations made up of over 40 acquisitions over time, which has led to disparate operating practices across all our facilities.

As we roll out TreeHouse 2020, one of the key elements of the program is TreeHouse manufacturing operating structure, which focuses on bringing consistency and best practice to all operations.

While the business units focused on sales growth, we have yet to achieve the benefits associated with integrated operations, particularly with supply chain management. This has resulted in weakened service levels, growing inventories, and higher damaged than distressed.

Simply put, we need a much more consistent level of manufacturing and process expertise in order to ensure our success. Not just in one or two divisions, but across the entire organization. As I mentioned, we have established a TreeHouse manufacturing operating structure that focuses on overall plant performance.

We have deployed teams of dedicated, experienced resources in three plants already. And they'll spend five months to six months there to incorporate proven principles and tools to drive safety, quality, customer service, line efficiency, and other key elements of supply chain excellence.

Importantly, the initiative will change the culture within our facilities and train our employees to be part of a high-performing team dedicated to improving our competitive position. All indications are that we will have great success in each of these three plants.

As you'll see on slide 26, we're taking a back-to-basics approach that reflects the current environment. And in a nutshell, we expect to improve service, costs, and commercialization. In addition to supply chain, we must enhance our revenue and margin management capability and conduct a comprehensive review of our SG&A.

On slide 27, as we pursue profitable growth, we need to go beyond our 2/2 matrix of customers and categories. We've engaged an outside firm to help us gain a clearer understanding of our market position by category so that we may set more rational pricing, incorporating cost-to-serve metrics.

We'll employ margin management analytics and pricing guardrails, and we'll better tie our sales team's compensation to margin targets. What it will give us is the tools to optimize our margins in the face of customer pressures and competitive intensity.

And I think in the end, we'll have a smaller but more profitable portfolio of customers and categories. Another critical element will be the effective and consistent integration of commodity-driven pricing in customer contracts, where we are unable to lock in input costs.

In the interim, I'm personally leading a cross-functional bid review committee involved in all major bids and smaller bids where we believe margins are at risk. Moving on to slide 28, on SG&A. We're undertaking a comprehensive review of our combined organization.

We've involved an independent perspective and are using industry benchmark data to evaluate where and how we can improve the potential across all functions, divisions, and geographies. Today, our divisions are staffed uniformly, despite different margin profiles.

So as we review our cost structure, we will seek to provide greater balance in resource allocation and to consider other ways to meaningfully reduce our SG&A in total. Our plan is to come back to you in February on our year-end call to quantify in detail those action steps to you. In closing, let me turn to slide 29.

While the interim is difficult and the near-term outlook lowered, we remain encouraged about our positioning as the private label leader with unparalleled scale in the food and beverage industry. Unlike many other food companies, we're making progress in delivering volume growth across most of our divisions.

In order to improve our profitability, we're taking firm and decisive actions to simplify the customer base and product portfolio, optimize our network, and improve our business. Both TreeHouse 2020, as well as our incremental plans are focused on building operational capabilities, revenue and margin management and rightsizing our SG&A.

Finally, I would like to remind investors of our strong cash generating capability, capability that supports our $400 million share repurchase program as we began returning cash to shareholders. Let me now hand it back over to Sam before we go to Q&A..

Thank you, Matthew. On Monday the 13, only 11 days hence, we will webcast our Annual Investor Day as a private label Manufacturers Association opens its yearly trade show.

Our central theme will focus on the strategic capabilities required to net legacy TreeHouse, Flagstone, and Private Brands into one cohesive operating unit dedicated to profitable growth and industry leadership.

Although our immediate returns continue to disappoint, the new year will bear witness to exceptional go-to-market, supply chain, and systems advances that are now obscured by the fog of current results.

Even as marketplace conditions remain challenged, and commodity inflation returns, we will demonstrate steady progress as we revert to the foundational basics of quality, service, cost, and commercialization.

In turn, these fundamentals will enhance performance as our product portfolio and customer base are simplified, our operations streamlined, our organizations integrated, and our systems standardized. Whether you intend in person or log on to our website, we are sure that you will view insights to a TreeHouse on the rebound.

Audra, please open the phone lines for Q&A..

Thank you. We'll go first to John Baumgartner at Wells Fargo..

Thanks. Good morning. Thanks for the question. Sam, it sounds as though you're sticking with the 2020 margin target, so I wanted to come back to the industry profit pool and specifically what can be drawn from the soup divestiture.

When you acquired that business it had a pretty attractive margin profile and you were the dominant supplier within private label and we saw store brands gained share over the past decade. So, if there ever was a category in which profitability could be preserved, it would seem that soup would be it.

So given the erosion to essentially breakeven in that type of a business, when you sold it, I'm curious as to why other categories aren't maybe as vulnerable to structural profit resets as well?.

Well, good morning, John. With regard to TreeHouse 2020, the specific objective here is to be more effective and more efficient in our go-to-market across a broad portfolio.

We know that 25% reduction in SKUs and a 20% reduction in idle capacity will result in that 300-basis point improvement and we're pleased to make that the main thrust of our strategic plan..

But, I guess, in terms of, if the underlying basis is still kind of shifting and profits are compressing, is there a way to get comfortable, that is, if you couldn't preserve profitability in a category like soup, why should we not see just further erosion in the business underlying aside from the 2020 program? I guess is my question..

I think you look at the changing marketplace and the development and the growth of the millennial consumer, and as we've demonstrated here we have the product programs and the strategies to drive products in the better-for-you sectors that are higher profitability and in fact create a greater affinity with both customers and consumers and that indicates that there's a continuing review of the portfolio always to drive toward growth and greater profitability..

Okay.

I guess just a follow-up, on the national brand equivalent part of your portfolio, are seeing the sales declines moderate to some extent there? Given the trade up and trade down?.

As we indicated the big growth in private label right now is coming from the better-for-you health and wellness related products and channels that are outside of the syndicated traditional supermarkets and as you dig into that you'll find that we can modify the product category and the customer portfolio to find those avenues of growth and that's our primary pursuit.

It's reflected in contrast between our topline and that of the big CPG giants that operate in North America..

Great. Thanks, Sam..

Next, we'll move to Andrew Lazar at Barclays..

Good morning, everybody..

Morning, Andrew..

I guess, Matthew, I was hoping maybe at a minimum you'd be able to provide a little bit more of a range maybe for the year around free cash flow delivery? That's something that perhaps can help folks think about at least maybe some of the downside protection. You've given a little bit of granular guidance.

I think free cash flow was about $142 million through nine months, but I know you've got, I guess, seasonally stronger cash flow in 4Q. So, I guess anything you can give us around free cash flow for the year would be helpful..

Yeah, I think I'd – there's a couple of data points out there. One is how much we've paid down net debt since we closed the deal, which is, I think it was $375 million. Obviously, third quarter tends to be a bit of a lumpy quarter with inventory build ahead of what is seasonally very important for us going into Q4.

But, if you look back, trailing 12 months, we're closer to $300 million of free cash flow and I think that's a good way to think about the year and the cash generating capability of the company..

Okay. All right. Thanks very much..

Will go next to Steve Strycula at UBS..

Hi, guys. I guess a quick question on Beverages to start and then I'll have an EBITDA question. Does your guidance imply that the Beverage business decelerates further in the fourth quarter? Meaning that basically in Q3 you only had the slowdown incur for about half the quarter? That would be my first part of my question. Thanks..

in Q1, I think it was up close to 20%; Q2, it was up about 16%; Q3, it's up about 4%. So, we're thinking of Q4 being very similar to Q3. Maybe a bit lower, a little bit more deceleration..

Okay.

Is that attributable, can you speak a little bit more about the customer loss or at least the bidding process for preserving some of the volume but maybe just at not favorable margins? Give us a little bit more texture there?.

Yeah, I think there's a couple of things going on here. We continue to win business, but structurally, as we've talked about earlier on this year on the calls, the margin structure it's taking to win that business, the price structure, is lower than it has been.

We don't win every bid we get and we've lost a couple of SKU positionings here with some pretty big customers. So you see this slightly different volume profile as we go into the back half of the year. And then thirdly, from a volume perspective, we did find out just recently that there was a pretty big inventory build at one of our customers in Q2.

So what we thought was a really good demand input signal turned out to be a sort of tempering with some payback. So I tend to think of Q2 and Q3 as smooth those out a little and you get to a more realistic rate..

Okay. That's very helpful. One last question for me and then I'll pass it along. I know it's early but as we think about 2018, you have a lot of initiatives underway. I mean you still have revenue pressure from the soup divestiture, SKU rationalization, and then you have to reinstitute, hopefully, bonuses next year, as well.

So given those type of headwinds, is it feasible that EBITDA should recover in 2018? I know it's early but just want to understand, those are pretty large moving pieces. I want to see how they kind of mesh together. Thank you..

Yeah, there are some pretty big headwinds as we start and we're in the very embryonic stages of planning for 2018. I give you two puts and takes here. One of the headwinds we're definitely going to face is higher commodity costs next year and also higher freight costs. That's a phenomenon that we do not think it's going to go away.

And similarly, packaging within the broader commodities, but one we generally – you generally probably don't think of. You go to the agricultural inputs, it's seeing some really stiff increases.

So we are going to have to be out there next year with some pretty aggressive pricing to recover that, but by the same token, we're going to get the tailwind of these plant closures that were already planned and executed, plus the incremental ones that we're in the process of doing here through TreeHouse 2020, and we need to become and are becoming much more scientific and technical in how we respond to these bids.

We're placing much more scrutiny on them. We've got a cross-functional team in front of them. So we're taking a little bit of that decision, right, and moving it up the tree to get more scrutiny and our best thinking around it. So we're seeing ourselves, I think, become much more effective in how we counter that, and much more tactical..

We'll take our next question from Joshua Levine at JPMorgan..

Hey, good morning. You've talked about a lot of the changes that need to happen, a lot of supply chain improvements, improving flexibility, et cetera. Yet, at the same time, correct me if I'm wrong, but I think you've now cut CapEx for the second straight quarter.

I guess can you just talk about whether or not that's maybe a matter of pushing out some of the timing to next year? Or if there's something else just sort of going on with that? Thanks..

Yeah, this is Matthew. Our engineering guys that really manage CapEx and the interface between the finance team and what we need and the divisions are just doing a phenomenal job prioritizing capital, making sure we get the return stuff in, and really challenging the stuff that's not deemed critical.

So I can't think of a return project that we have pushed out to next year, de-prioritized, or shut down totally. Very focused on making that capital work for us with short paybacks, and to be accretive very quickly..

Got it. Thanks. And then on the cost side, I think you had said for a long time, right, that the second half of 2017, the initial wave of kind of plant closings that were initially announced back last year would start to benefit COGS.

And maybe I missed this, but I guess can you speak to whether or not these savings actually came through in the quarter? Or if you continue to expect them to? And I guess the reason I'm asking is just one of the questions we get from investors is whether or not you'll be able to keep the bulk of the 300 basis points related to the TreeHouse 2020 plan? And so, if the margin right now is getting kind of competed away, maybe why should investors think that you could keep that over the next few years? Thanks..

This is Sam. As Matthew had indicated, TreeHouse 2020 is on plan. We will have accomplished at year-end virtually all that we had set out to do. And the benefits begin to flow in as those activities are completed. We here are talking about 20 production lines in addition to the plants. We regard this as entirely incremental and completely on plan..

Thanks very much..

We'll move next to David Driscoll at Citi..

Great. Thank you and good morning..

Good morning, David..

Sam, can you start off here, and I got really two questions for you, Sam. The first one is a business question. Second question is on your role going forward.

But the first question here, can you put some perspective on the bid pressure? How much excess capacity is there in private label? And then just big picture, how does the private label industry expect to grow, invest in PP&E, but yet have returns that are below the weighted average cost of capital? It just feels like right now that the algorithm doesn't match up with expectations for really significant private label growth.

As your margins right now, they wouldn't make sense to do a lot of new investments. Can you start there? And then I have a question about your role going forward in the CEO title..

Matthew and I will tag-team the first question. I will indicate that the historical bid pressure came up in a very fast wave. It quickly peaked and has continued to move down and diminish quarter by quarter after that.

With regard to our go-to-market proposition here, what is difficult to see is that outside of syndicated channels, and outside of the conventional center of store, there are extraordinary growth opportunities.

We delineated those in the introduction and you should note that the profit opportunities there are substantially more than NBE products and that those customers are the ones that are leading not only the growth in the industry, but also the development of their own private labels.

Matthew, would you like to comment on the bid proposition?.

Yeah. Just a couple of things. If I draw you back to slide 5 in the deck, we're actually very pleased with how our volume has been holding up and, in fact, on a shipped volume basis is actually up when the rest of food seems to be down, (45:11) towards the high-single digits.

So we do think private label is the place to be and we think the market is definitely coming towards us. I think what we need to do a much better job of is really recovering and being totally on top of these commodity cost increases.

Going forward, from a tactical point of view, I don't think commodities should be something we win from or something we lose from. I think it should be a completely transparent proposition with the customer and I think we've not been on top of that to the level that we should.

From a bid activity perspective as I mentioned earlier, we've employed a third party to really help us think through this and rationalize our pricing structures.

I think we're going into these discussions already better armed than we were in the past, and frankly, we're giving our salespeople in some cases the backing to walk away from business that's not adequately margined up for us and I think that's something they lived in fear of in the past.

So we're really entering into this in a very different way with a lot more engagement. We're leveraging the people with diverse backgrounds, senior-level we've got here to be very tactical about that. I think as we went through Q3, we actually saw a modest decline in bid activity.

It was a pretty reasonable quarter from that perspective, and we just think, going forward, we will strengthen our capability. I think when you move through the margins in the business, and are we at the right margin level, there's a couple of things. Clearly, we've got a big program here to address the cost in the manufacturing footprint.

We've talked about Phase I and given you details. There will obviously be more coming, and we talked about the next phase of that being rolled out when we're on the Q4 call early next year. And I think the other thing is getting to work on SG&A.

When we look at our SG&A as a percent of revenue, as this company has grown, the percent of revenue that SG&A represents hasn't materially come down. So, we're on that. It's going to be a very comprehensive review, and I think I'm optimistic that that's going to lead us to a fair bit of opportunity..

Thanks for those comments. Sam, this has been, basically, I've always viewed TreeHouse as almost your baby. You started it. The change in CEO role for you is a big one.

Can you talk about that a little bit? And what will your role be – after you find this new CEO, what will your role be going forward with the company?.

Let me comment on the state of the management cadre to begin with. We have the finest group with the greatest depth and breadth that has been at this company since its inception.

I went back through the ranks of our senior management team and found that we have 20 new people with new skills, new energy, great outlook, who are completely integrated themselves into the business. With regard to my particular role, the immediate priority is to put this business back into good working order.

I'll focus on the foundational matters that got us here and work with that team to, in fact, put these strategic initiatives that Matthew has delineated into place in a highly effective and efficient way. We will pursue now and find the next Chief Executive Officer.

We're going to do that with all deliberate speed, and after that person is identified, the board and I will confer with regard to my role in the future. I'm looking forward to, one, working with a new strategic leader of the company; and secondly, continuing in some role to be determined only after we've completed that search..

Thank you..

And next we'll go to Jonathan Feeney at Consumer Edge Research..

Thanks very much. Good morning. A question for Matthew and a question for Sam. For Matthew, how quickly can we expect you to enact this $400 million share repurchase? At what rough cost of debt, do you think – and how high can you get in terms of debt to make that happen? Just some detail and color around that.

And then after that for Sam, obviously, it's not an easy industry. There's some tough trends out there. There are others who have made acquisitions in this space and no private label very well.

Has it crossed your mind to run some kind of strategic process and decide whether divestitures or a combination with other company is the right answer here as you look for a new CEO after such a quick transition? Thank you very much..

You want me to take the first? Okay. With respect to the share buyback, one of the things we don't plan to do here is lever up to accomplish the buyback. So this thing will be governed in two ways. First of all, we're going to put 10b5 program into immediately offset dilution. The second thing is, we're really going to base this on free cash flow.

I think it will vary by quarter, given the seasonality of our business. But, we're very cognizant that we put this out there not to put it out there, but to put it out there and execute on it. So, we'll be stepping into it as and when cash flow allows on top of that 10b5 program..

Thank you..

With regard to your second question, Jonathan, I think if you're able to come to the Investor Day in a week or so hence, what you'll see is the development of extraordinary capability that is just coming into visibility at this business.

And going through these matters, I think that not only will we be able to stay on our strategic plan, improve our foundational basics, but also bring new capability to the fore that will benefit us and manifest in ways including putting the house in order, improved financial results, and importantly, an improved connection to our customers as well..

Look forward to seeing you there, Sam. Thank you..

And next, we'll go to Amit Sharma at BMO Capital Markets..

Hi. Good morning, everyone..

Good morning..

Matthew, you talked about bid activity may have peaked in the third quarter or second quarter and you saw some sequential improvement.

Do we have any visibility, any confidence that, that bid activity will not reaccelerate again either in the fourth quarter or initially in early 2018?.

You know, there's a certain cadence to bidding that each customer has their own way of going about this and what we're actually looking to do internally is figure out what that cadences like so we can plan our activities over the year. Obviously, we don't control that so that just gives us an indication.

What's key to me is us being better prepared, bringing more data to the table, and having a much better understanding of our strategic leverage. At the end of the day, we're the leader in the bulk of the categories we compete in.

We probably have incomparable food safety capability and an ability to service these customers nationwide that no one else has and I think we need to make sure we get paid a fair price and deliver a fair margin to our shareholders in that transaction..

I mean, your performance in the stock price tells you that it hasn't happened, right, that the market hasn't paid you or your customer hasn't paid you for that capability. And then what you said today about maybe eventually empowering your salespeople to walk away from some of these transactions, I mean, it sounds good.

But given how high your fixed costs are, is it really realistic for us to assume that if bid activity stays high, that there will be a meaningful ability to walk away from sales? And what would it look like from your sales perspective?.

This is Sam. Let us put it in the context of TreeHouse 2020. We initiated this program to make ourselves more effective in the go-to-market proposition and through that effectiveness become more efficient. We determined some time ago that there was roughly 25% of the SKUs in this company that were not contributing to the overall profitability.

And in doing that, we also determined that there were hundreds of non-strategic customers of that whose current business and future prospects were such that we needed to concentrate elsewhere.

As a result of this initiative, the full 20% of the production capacity of this company will be taken out of service, and the fixed costs related to these facilities will over a period of time drop in the magnitude of 300 basis points of our current business. In addition to that, we're shifting to customers.

We know that there are 34 or 35 of them that account for 80% of our business in the marketplace. And we're concentrating on those customers and the categories that we described as being ones that are better for you and give greater growth opportunity.

And so there'll be a shift away in our business that will benefit us in that we will be – our capabilities will shine most brightly where those future opportunities are for growth..

Great. Just one more for me, Matthew. If you go back to slide 19, you talked about adding a risk adjustment to the guidance for this year somewhat conservatively.

Why shouldn't we think of that as structural going forward in light of what has happened in terms of your margin structure?.

Well I think what we were trying to do here was look at all the inputs, look at the environment. We stress tested the assumptions like we've never done before to a depth and made some very purposeful overlays for that forecast to feel extremely comfortable with it.

We recognize that putting guidance out and missing is not a good method, so we've been, I would say, extraordinarily conservative here going into the fourth quarter and very purposefully. We would hope not to use all that risk adjustment. And if people deliver on the commitments they've made, we should be in good shape.

But this is the best view we've got of the fourth quarter and we're beginning to develop our view of 2018 and what the margin structure looks like for that, as we speak..

Got it. Thank you..

We'll go next to Farha Aslam at Stephens, Inc..

Hi. Good morning..

Good morning, Farha..

A question on the Snacks category. That's been probably the toughest ever since you bought Flagstone. And you've changed management there.

Could you share with us kind of what you've learned so far? The actions you need to take? And what you think recovery looks like in that Snacks business, because it has been so volatile over the last four years?.

Farha, this is Sam. The lessons that we will apply in 2018 are the following. First, in the context of 2020, we will eliminate excess capacity and organize our facilities so that each becomes a specialist in one particular part of Snacks.

Secondly, we have initiated a global supply chain that incorporates going all the way back to the sources of supply in Asia and operating through our customers whereby we provide transparency in costs, and as a result of that, we'll be able to pass through costs in a program that has been highly successful with nondairy creamer.

I think, thirdly, we see that there is value added opportunity in both trail mix and bars and we will have initiated marketing programs to build those particular groups. And then lastly, today, we are on the four IT platforms in that business and as of February 5, we will be on one. Those are the key advances..

And I think one more, if I could add to that, Sam, is it's absolutely critical in this business where you've got very volatile commodities that we price for commodities and embed back in every relationship we have going forward and that's going to be a little different in certain areas but it's absolutely imperative in this kind of business..

That's helpful.

And I know you're not ready to give 2018 guidance right now, but as you go through 2020, could you give us some cadence on earnings growth? Kind of can we expect earnings growth next year? Or do we have to wait till 2019? Or do we just kind of get it in a bullet in 2020? How should we think about that?.

I think the margin improvement and the cost take-out related to TreeHouse 2020 will come in here in a phased approach. So you're going to see this coming in as we step through the three years. It's not totally backend loaded.

Once we get these three plants, or two plants fully and the one partial closure done and these lines stripped out, that's going to start flowing to the bottom line quickly. And then when we get with you in February, we'll talk about Phase II which will carry us out through 2018 and give you more visibility into what we are doing.

So that is going to start contributing next year and flow through the year after. So you won't have to wait to see the benefits of that..

That's helpful. And this is the last question.

On your tax rate, is this sort of a one-time lower tax rate or is this a new tax rate level we can take going forward?.

You know on the last call we talked about a long-term tax rate of 32% to 33% going forward, which is different from where we typically guided, which has been up in the 35% range. There is an element of this that is one-time but we do expect some favorability going forward.

No, nor ready to put a number to that yet but we feel very good about the 32% to 33% and there might be opportunity below that..

That's helpful. Thank you..

We'll go next to Brett Hundley at The Vertical Group..

Hey, thank you. Sam, I wanted to go back to a question that Jonathan Feeney asked on the business structure.

I don't want to belabor it too much but I guess, simply, do you still believe that scale – to the point that you're building it in the industry, do you still believe that scale works in private label? It seems to be a much different discussion in your business relative to the national brands that are out there.

And so just curious kind of what you've learned and how your beliefs have trended as you've merged these two entities and maybe even perhaps some of these assortments being simplified in store now, maybe that actually comes to you and helps scale and private label.

But I'd just be curious on maybe getting a more definitive answer from you there?.

Brett, two points. One, scale is absolutely vital in this industry. It has to be applied selectively when it comes to categories and customers.

The second matter is that one has to remember that this business used to be entirely supermarket-based national brand equivalents, old standby products, and as the market shifts in part due to millennials going to other categories, in part due to new outlets and then, thirdly, the digitization, digital capabilities of this industry.

One has to shift those resources and build scale where in fact the market is going, not where it was. And in that regard, it becomes something that is more surgically delivered than broad-brush effect for everybody equally..

I appreciate that. And then just two very quick ones for me.

Matthew, I want to say that in your 300-basis-point goal that you guys have, did you say that your pricing assumption within that target was basically flat over time? Did I hear you correctly last time you spoke about that?.

Yeah, we said that margin improvement was at constant volume mix and price..

Okay.

Do you feel the need to become more conservative on that in any way?.

Well, we feel very good about the elements we included in that increase.

Now clearly, we've just sat here and taken you through a business where the margins were different than where we thought they would be and that's really why we are putting in these two additional programs around managing our revenue more effectively and also taking a really comprehensive look at SG&A.

And they are the two things we're looking to harvest to manage this pressure as it comes towards us but we're very, very comfortable with where 2020 is and the plans we've got in place and the progress we're making day-by-day, stripping those lines out, and getting these plants closed up..

And so just to be clear, you still very much believe in your 2020 target and further communications on the plans that you've talked about today should be incremental?.

Exactly..

And then just lastly, within Snacks, I'm just curious on the snack nut side, is there one competitor that seems to be giving you guys most of the trouble? Whether it comes to bid and mix changes that you're experiencing or would you characterize the competitive backdrop as pretty broad there?.

This is Sam. There are certainly industry leaders but none is comparable to us now in size or capability. Some of what you're seeing, though, is that as we're putting these businesses together, we've got to create simplicity out of complexity.

I listed the points that we're doing there and the nature of the business is such that you really have to win with a handful of big customers and we're well along the way to building those business relationships. Those are our primary concerns..

Thank you..

We'll take our next question from Akshay Jagdale at Jefferies..

Hi, good morning. Thanks for taking the questions. First question is for you, Sam.

It relates to the 2020 plan; how should analysts and investors be thinking about Bob's departure and what that might mean for the 2020 plan? And then also you're going to have a new CEO coming in ideally when you hire him, the view, typically, is when somebody comes in they're going to take their own look at the plan and if need be, sort of, lower the bar.

So can you just help us think through that like how should we think about those two issues as it relates to the 2020 plan?.

The 2020 is a construct that has been developed long before in not only months but quarters past. And it is – we've met with the team. It is one of extraordinary talent and depth and they're taking the principles that we've laid out and are applying those fully.

I was very pleased to find out, to-date, that they've identified an additional 292 items that can be eliminated and that that affects the number of lines that we can take out. So that project, above all things, is independent of other operating matters..

Okay. And then just I wanted to address the issue of structural versus transitory, at least in terms of what I think the market's sort of pricing in and or viewing as structural.

What your view is, which, it seems like with your 2020 plan, still in place, you're saying the issues you've had, in general, are transitory and you should be able to improve margins, right? So I would like you to, if you can, just talk in three buckets, right? So in my opinion, there's three buckets, right, that we think about when we think structural issues.

You've got the share issues, market share, and sales. Right? There I think the market's thinking, well, if private label penetration is going to double or increase significantly in the U.S., how is TreeHouse having flat to declining sales, right? So the implications are that you're losing share. I don't think the facts align with that.

I think you might be at least maintaining share. But I would love to get your view on that as it relates to, is it structural, and what's the realistic expectation? Then secondly, on price pressure and margin compression, the market's saying it's going to intensify.

And it's played a big role in the guidance reduction this year, and it's going to intensify. If I heard you correctly, I think what you're trying to articulate is the bid activity has, in fact, peaked and is less intense. But I might be wrong, so maybe you can clarify on that.

And then the last piece, which is probably the one that you control the most, is the cost structure. Market's saying the cost structure is not going to offset the first two issues. And your plan implies it not only will it offset, but will be incremental to margins by 300 bps. So at the end of the day you have your view, but you've got to execute.

And I think you're going to have to execute it over time. But at least if you could clarify in those three buckets if I'm sort of characterizing your view correctly, that would be super-helpful. Thank you..

Akshay, Matthew and I will do this together. And you may have to remind us along the way about the exact components. Let me start with a discussion of factors that are underlying our current performance issues and changes in the marketplace.

With regard to our current performance, we, in a period of 19 months, tripled the size of this company with the acquisition of Flagstone and Private Brands. And what you see flowing through our statements now are the aftermath of putting those businesses together.

We've got extraordinary progress in some quarters and in others we're still kind of working through those problems. And that is a general statement that permeates the recent past. The other general statement is that in our go-to-market proposition, the retail grocery industry has been shaken to its foundations.

And they've not only seen the advent of Amazon and the digital age, but what's happened in other retailing sectors. And as a result, they're going through extraordinary change.

That is a wonderful opportunity for us, as the leading scale manufacturer of private label in North America, to develop programs with customers that are going to win and categories are going to grow.

And that shift will be a long term structural shift and a favorable one, while the underlying factors that I described at the beginning are transitional matters. Matthew, I'll hand it to you. Please..

Yeah, a couple of thoughts. I mean just to reiterate, this 300-basis-point improvement is at constant volume/mix and price and we're feeling really good about that. I'd take you back to slide 5 and look at our shipped volume compared to our counterparts in the industry.

And we're holding up tremendously well and have consistently outperformed them over the three quarters of this year. So we think we are in the right place. We're working very constructively with a number of big customers who want to expand their private label offering, and we feel good about that.

I take you to slide 7 as well, and just remind you, we're the private label leader in 20 of these 32 categories. And maybe more importantly, we've got better-for-you premium organic offerings in 26 of those 32. That's a tremendously strong position to be in when that sector of the market continues to grow.

So we're really happy with the portfolio and the offerings we've got here and I think it's the right platform. I think when it comes to competitive intensity, we've talked a lot about the help we're getting to manage bid processes, pricing strategy, guard rails, escalation, and a much greater senior management involvement in that process.

And we feel good about that, and I think that's going to get better as we get further into it. And then on the cost structure side, we're going to very aggressively go after SG&A. It's going to be a comprehensive review, top to bottom. We're going to use benchmark data, look at our organization structure.

We're going to spend money where we think we can make money and grow. And where there's areas that are in harvest mode and we like the cash flow, we're going to have to shrink the amount of support we give to those and rebalance over time. So I think this is a get-lean-for-future growth. It's not a hack and whack and impair the business.

It's going to be very thoughtful and with a very keen eye to continuing the growth in the business..

Thank you. Just one follow-up on that, Matthew.

So in terms of what you can control the most, it's definitely to get lean, right? And so is it a fair characterization that you're very early in those efforts in terms of them flowing through in any meaningful extent in your margins? And has that been delayed as far as the guidance coming down, et cetera? I mean, I know you've talked through all these issues, commodity costs, freight, all the additional details, great.

But in general, the plan for 2020 was to structurally reduce costs and get lean, let's say, by 2020 and a lot of that is sort of closer to 2020.

Right? And so, the biggest impact that you're going to have structurally is on the costs and getting lean and that's a couple years out, right?.

Well, I'd take a slightly different view and I'll just reiterate with 2020, we are absolutely on track.

If you think of the things that we talked about, the two full and one partial plant closure, we've got one ahead, one a little behind with one line lingering and we've already got 13 of those approximately 20 lines pulled out of the other plants and decommissioned. So that's a sizable chunk of cost. It's going to start flowing.

We feel really good about it. We'll tell you about the next year's installment when we're with you in February. So we feel really good about this. This is not a big back-end-loaded wait for something to happen in the tail end of 2019. It's going to be a progressive, a very intense and well thought-through plan that we'll roll out to you.

I think the area where we're in our embryonic stages, to be honest, is SG&A. We're doing the data analytics and comparing ourselves to benchmark, looking at layers and spans, depth of the organization, and really where we need to spend money to win.

And that's the area where I think we're going to harvest incremental savings that we haven't seen at all in the P&L yet..

I'll pass it on. Thank you..

Next we'll go to Jon Andersen at William Blair..

Hey. Good morning, everybody..

Hello, Jon..

I just have one bigger picture question, Sam or Matthew, general thoughts. It revolves around the scope of the business. Sam, you talked a minute ago about how the business has tripled in size over the past 19 or 20 months and you've gone from operating in perhaps 10 or 12 categories to north of 30.

To what extent do you think that scope is a help or a hindrance going forward? And are you just finding that there are, from a competitive standpoint, too many kind of regional or category-specific players that can come in and do a, quote, "good enough" job for retailers within a specific region, within a specific vertical category? It's just making it challenging to kind of maintain business, win incremental business.

Just looking for a little bit of sense there whether this is a help or a hindrance sitting here today with the scope of the business? Thanks..

Jon, it's a help provided that we employ our category and customer strategies with great determination and precision.

There are – when we started 2020, we came to the conclusion that there were roughly 100 customers that we could build this business around, 34 of them accounting for over 80% of the business, and that there was a huge concentration of non-strategic SKUs and non-profitable customers that were legacy elements that had their role in each of the companies that we acquired but that when you put one infrastructure over the totality, that those were businesses that do not fit our model and that's where we will see the smaller scale suppliers and competitors concentrate their resources.

And it is up to us and I think Matthew has demonstrated quite clearly that we are on the move with regard to customers, with regard to categories, and with regard to fixed assets and facilities now going to complement that with the SG&A..

Thank you.

Operator, in the interest of time, can we just take two more callers, please?.

Certainly, we'll go next to Robert Moskow at Credit Suisse..

Yeah, Matthew, if it makes you feel any better, I think there's overcapacity in food analysts as well as food, so..

Do I get to pick which ones we take out?.

Both industries have issues. No, you don't. But I guess I do have another question.

Your slide that shows, on 7, that you're the leader in 20 of your 32 categories, do you have better pricing power in some of these and others related to how big your market share is? Have you seen any noticeable differences in the size of your share or your size relative to the nearest competitor? Or is your pricing power, is it kind of a random walk depending on what's going on in the particular category? And then I guess the second question is this risk range that you've introduced, it's pretty wide.

I mean it's like, what is it, $0.40 just in fourth quarter alone.

Does that mean that that's the range of outcomes that might happen in fourth quarter? And what should we think about how you think about the risk range on an annual basis? Should I multiply that or is that just like a fourth quarter phenomenon?.

Hey, Rob. It's Sam. I'll take the first and then ask Matthew to comment on the second. With regard to the categories, the real key matter about profitability, it gets down to segmentation and being able to identify those places where there is value-add and other places you've got to go bare bones.

And then you've got to match that up with two other factors; one, the growth in the business, and the second, the particular distribution of customers. Unlike brands, the customer distribution here are quite uneven.

And when you have the segmentation and you have the growth and you've got strategic customers, then you can build a proposition that, for both our customer and ourselves, over the long term, provides great opportunity for both buyer and seller..

I think just to build on Sam's point there, the other thing we find as we go through these categories is not necessarily how big we are compared to the next guy, but it's really how much surplus capacity is there out there and what optionality does the customer have to move a sizable chunk of business away.

And then thirdly, if he should choose to move business away, how do we behave from a pricing structure? Because the way we go to market is not one price. If you want all my capacity, it's a certain price. If you want to take less, you know. So we're getting very tactical about how we handle that and every situation's unique.

But certainly, we have an eye on how much capacity's out there. Moving to your fourth quarter risk assessment, should you multiply this by four or is it just a Q4 phenomenon? Let me give you an example of one of the elements that's in there that we've risk-adjusted. We've taken out all pending business.

And some of our items have long commercialization periods and some we respond to very quickly. I basically said I can't have a forecast if we don't have a relationship, an order, and effectively, a PO. So that's one example of where we've been super draconian. Could we see some upside there and some business come through? Absolutely.

I think the other things to think about is Q4 is a very big quarter for us. It's a big season and there's a lot of volatility in the industry.

We took you through some of the challenges we're having in the freight market, customer behavior, and how that ripples back and sort of backs up the warehouses and can back up into the plant and bring you to a stop.

So I think this is Q4-specific and it's our attempt to put a best foot forward and get some guidance out there that we're erring on the conservative side and we plan to beat..

So, Matthew, do you think you'll introduce that same methodology on an annual basis, too?.

I think we'll get through Q4 and see where we land. We're only a little over 18 months into running this huge business. We're getting better insights. We're getting better data visibility.

We're on a path now to not just roll out SAP on the order to cash side, but, as Sam said, progressively and selectively put it through some of our businesses to increase our ability to run and manage those. So first one up is Snacks.

So I think we will get better insights, better visibility, better control over some of these businesses progressively and I think our ability to confidently guide will go up over time..

Great, okay. Thank you..

And we'll take our final question from Pablo Zuanic at SIG..

Thank you. Look, maybe I'm missing something but I find that we spent a lot of time talking about the forest and not enough about the tree and by the tree, I mean the coffee tree. Sure, we don't talk about private label trends, what's happening with retailers and so on.

But at the end of the day, sales trends for most of the other units, product groups improved and profit margins, yes, they came down for Snacks but they've been coming down for a while. The big, big, big delta by far in this quarter was in coffee.

And what I want to understand that better – and, to me, it wasn't so much Snacks because we've seen that already. Coffee, it's a good chunk of your earnings, 25% beverages and coffee, I'd say, 20%.

So my question to get a gauge in terms of where we are going, I don't want to oversimplify it but it seems to me that it comes down to coffee and single-serve coffee.

So the question there would be, number one, in terms of what happened in the quarter, in that slide 20, you talk about the volume issue but margins fell 600 bps, right? So was the margin drop just because of operating leverage or was that an issue that you were not able to pass on pricing because of higher cost or that to recoup clients, you're still having to compromise on margins? So if you can comment on that, specifically, in terms of what happened with coffee margins, which was a big difference from what we've seen before.

And then the second question, also related to coffee, is just give us a state of the coffee private label industry. I mean TreeHouse is a very complex company right now. So I find that there are many, many different companies within TreeHouse.

So in coffee what's happening? From my – the data I'm looking at, the category's slowing down, branded and private label. The private label share in K-Cups has flattened since June. I'm not so sure that household penetration is improving.

Are you regaining deals? Or is JAB still being very aggressive and trying to take more private label business? If you can give color on that because the way I analyze the company and look at the numbers, the quarter was all about coffee. If your coffee margins had been flat or up, we won't be having all this conversation. Anyway, thanks..

Let me comment on the state of the general market and then, Matthew, perhaps you could complement that. First of all, Pablo, with regard to the size of the market and also the private label share, the data that you generally see is counts of units and there has been a wholesale shift away from dozens to units up to 100 cups per case.

If you do it on an equivalent cup basis, the private label business is still growing very strong double-digit in units and over a broad scale.

The other matter is that with regard to the totality of the marketplace opportunity, while it's not in syndicated data, we do know from other sources that household penetration has continued to rise and, in fact, our latest report is that for a single-serve cup brewer that the household penetration has passed the 30% level, which is quite a substantial improvement.

The third factor and then I'll ask Matthew to jump in is that there are a handful of retailers who have elected to make this a destination category and, in some instances, they've done that through price and, in other instances, through selection.

That has concentrated the private label elements of the industry and some of what you're seeing there is that the competition is shifting to a smaller group of retailers rather than a broader group..

Just one before Matthew jumps in, in the case of Keurig and JAB, do you find they are being just as aggressive with private label? Are they walking away from that business? There's conflicting commentary out there on that. Thanks..

It's clear to me that private label has become a part of the Keurig strategy. It appears to me that they're quite disciplined and focused on customers that they believe are strategic to their branded business..

Yeah, thanks, Sam. The way I look at single-serve beverages, it is only a piece of that beverage category. We have some very other strong categories within that business unit that performed very well. When it comes down to the year-over-year – the three big drivers were freight and distribution cost increases. Pricing, as we've talked about, was down.

And also commodities, mostly in the oils, were up. And in fact, coffee was, I think, down slightly when you go back to a year ago. So it is a very competitive marketplace.

And as we said in Q2 when we had some margin compression, same theme of pricing pressure and the choice we had here with incremental business was to participate at lower margin or not participate and we think we made the right decision..

Thank you..

Thanks very much, everyone. We look forward to seeing as many of you as can be at our Annual Investor Day again a week from Monday. We are TreeHouse, growing strong, standing tall..

And that does conclude today's conference. Again, thank you for your participation..