PI Aquino - AES Partners Matthew Foulston - EVP and CFO Sam Reed - President, Chairman and CEO.

Andrew Lazar - Barclays Capital John Baumgartner - Wells Fargo David Driscoll - Citi Investment Reassert Ken Goldman - J.P.

Morgan Robert Moskow - Credit Suisse First Boston Amit Sharma - BMO Capital Markets Farha Aslam - Stephens Karru Martinson - Jefferies Brett Hundley - The Vertical Group Christopher Growe - Stifel Nicolaus William Chappell - SunTrust Robinson Humphrey Pablo Zuanic - Susquehanna International Group Akshay Jagdale - Jefferies Steven Strycula - UBS Scott Mushkin - Wolfe Research.

Good day, ladies and gentlemen. Welcome to the TreeHouse Foods Fourth 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 achievement expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31st, 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, President and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed..

Thank you, PI. Good morning all and welcome back to our TreeHouse. After a year like none other, Matthew and I will provide you with a new year's outlook on our recent performance, strategic progress, and long-term prospects.

While we have been challenged financially of late, we foresee exceptional opportunity on the horizon for both our general industry and specific enterprise.

Considered in their entirety, these marketplace conditions and corporate initiatives form a solid foundation upon which to rebuild our TreeHouse through strategic focus on organic growth and margin expansion for many years to come.

As we construct the TreeHouse for the future, it is worth noting that 2018 will be a year of transition, subject to economic headwinds affecting the whole of the beverage and food sector. Accordingly, we've coupled an aggressive agenda of internal initiatives with a realistic assessment of external market forces.

Internally, as can be seen on slide three, we have undertaken a trio of related programs to return our TreeHousehold to good working order. Our CEO search, now in its advanced stages, has generated great interest from an exceptional field. I'll return to this matter with color commentary later this morning.

Next, TreeHouse 2020, launched only six short months ago, is proving to have a salutary effect across the whole of our company. As I will demonstrate in a few minutes, it is also the hub of a wheel of comprehensive and interrelated operational improvements.

Thirdly, as mentioned on our third quarter analyst call, we have engaged a leading consultant to assist us in developing a more efficient SG&A structure aligned with our strategic goals and marketplace opportunities. As a result, we will soon emerge as both a more efficient operator and a more effective marketer.

Turning externally, grocery market trends continue to validate our fundamental investment premise. The private label represents the greatest opportunity for organic growth, margin expansion, and sustainable cash flow in the food and beverage sector.

Next, even in the throes of portfolio simplification, supply chain rationalization and customer consolidation, we continue to benefit from growing consumer demand for customer brands vis-à-vis the offerings of global CPG leaders.

Much of this competitive advantage stems from our extensive shelf-stable portfolio and its evolution to meet millennial preferences for greater product authenticity and lifestyle relevance.

The effects of this shift in consumption patterns are most evident throughout TreeHouse in our single-serve beverage, carton broth, filled pretzel, and specialty tea categories, along with our regional, specialty, value and Internet channels.

Before Matthew addresses our financial performance and outlook, I would like to remind all, not only our shareholders but also our customers and employees, that a new TreeHouse will begin to emerge over the course of this coming year.

As seen on slide eight, with TreeHouse 2020 at its center, we have initiated a comprehensive agenda of internal reforms designed to regain our leadership in the external marketplaces, private label products, customer trust, employee loyalty, and investor confidence.

In its essence, this program demands a return to private label fundamentals, which will return TreeHouse to progress, productivity and prosperity as we transition from the past to the future.

Matthew?.

Thank you, Sam. Good morning everyone and thank you for joining us today. We've got a lot to cover, so let me kick off with our key takeaways on slide 10. Q4 adjusted EPS of $1.02 was just slightly above the top end of our November guidance range of $0.91 to $1.01.

Our operations faced headwinds, while lower SG&A expense, interest and taxes provided the offset. During the quarter, higher freight expense across the industry and severe weather, coupled with supplier issues and erratic customer order patterns, drove division DOI weakness. Our TreeHouse 2020 initiatives continue to track according to plan.

We completed the closure of Brooklyn Park and Plymouth by the end of the year. At the end of January, we announced that we would complete the closure of the Battle Creek facility by the end of 2018. And today, we are also announcing the closure of Visalia, California.

We have talked to you back in November about undertaking a sizable SG&A reduction this year. Today, we are announcing a meaningful reduction in our salaried headcount to be complete by midyear, resulting in 2018 calendar year savings of about $30 million.

We expect this run rate associated with these actions will be approximately $55 million as we exit the year. Finally, we're issuing 2018 guidance in the range of $2 to $2.40, with Q1 expected in the range of $0.10 to $0.20.

We're making progress across the company, but 2018 will be a transition year and the benefit of our actions will take some time to materialize. Let me now move quickly through our fourth quarter results, so we can spend most of our time covering 2018 guidance and the initiatives that Sam highlighted in greater detail.

Starting with slides 11 and 12 and our fourth quarter consolidated results. Sales for the fourth quarter declined 4.3% to $1.7 billion, largely driven by the sale of the Soup and Infant Feeding business last May. Excluding the Soup results and an extra week of Private Brands in 2016, out of the comparison, sales were up 2.4% year-over-year.

Volume and mix contributed 1.7% in the quarter, while pricing added another 50 basis points. As Sam noted in his comments earlier, private label continues to outpace brands, and our volumes were strong. Below the topline, however, our operations continue to face headwinds.

Division DOI was $57 million below last year and total division DOI margin was 10.8%, about 270 basis points below Q4 of 2016. Our operating margin or adjusted EBIT was 5.5%, 170 basis points below the prior year.

As noted earlier, adjusted EPS per fully diluted share in the fourth quarter was $1.02, slightly ahead of our November guidance, but $0.12 below the $1.14 we posted last year. Turning to slide 13, we were again disappointed with our earnings quality.

As you can see, division DOI was $0.72 worse than last year, partially offset by favorable SG&A, including the bonus reduction and benefits from our tax planning actions. Slide 14 details the drivers of the $0.72 division DOI decline year-over-year but in terms of dollar millions.

Volume and mix, including absorption, was roughly $20 million due to about $7 million from an extra week of sales in 2016 from Private Brands, a continued shift in the Snacks division sales mix from higher-margin nut mixes towards lower-margin commodity nut products and weaker product mix in Beverages and Meals.

Pricing net of commodities drove about $26 million of the shortfall as commodity prices increased faster than we could implement price increases and the impact of continued bid activity.

Operational performance accounted for another $21 million due to higher industry-wide freight and delivery costs that we called out last quarter, the impact of severe weather in late December, coupled with several supplier-related issues and erratic order patterns from several of our large customers, which made it difficult to operate our plants at optimal efficiency.

And finally, other and SG&A was a benefit of $10 million, primarily due to lower label development, open positions and tighter spending controls. To further help you understand how the five divisions performed versus prior year, we provided some color commentary on each of the segments on slide 15.

I'm not going to read through all of these, but what we've done here is try to give you some more flavor for the drivers by division. Turning next to slide 16. As noted in today's release, we reported an impairment of $550 million related to the Snacks division, of which $276 million is goodwill and $273 million relates to other intangibles.

The write-down comes on the heels of the 2016 write-down of approximately $333 million for the Snacks division. At this point, we've written-off all of the Snacks division's goodwill and customer lists.

In light of the disappointing Snacks performance, we are engaging industry consultants to provide third-party perspectives on operations, supply chain, and margin improvement opportunities. Moving on, our tax rate was 8.3% in the quarter.

We recorded a $16 million benefit due to the restructuring of our Canadian legal entities, which drove the unusually low tax rate. Our full year adjusted tax rate was 19.1%, lower than our normalized pretax reform rate in the 32% to 33% range. You'll notice in today's press release that we've added a balance sheet and abbreviated cash flow statement.

As indicated on slide 17, I'm very pleased with the continued strong cash generating capability of our business. Last year, we reduced our net debt by $316 million.

We also executed upon the share repurchase program that we announced last quarter and repurchased shares totaling $29 million during the months of November and December, broadly in line with our $150 million annual limit.

Our leverage ratio as defined by our bank agreement, which was amended at the beginning of December, finished the year at 3.05 times net debt to EBITDA. Applying those amended definitions, this compares to a 3.45 ratio at the end of 2016. Slide 18 takes you through the changes to our credit agreement.

The team, along with our bankers, did a great job executing the amend and extend under terms that we view as extremely favorable.

Without going through the details, you can see that we meaningfully extended maturities, achieved lower rates and a higher leverage ratio limit, and materially lowered amortization to provide more flexibility going forward. Turning now to slide 19, I'm also pleased with the headway we've made on working capital metrics.

Inventory levels finished the year down $219 million in comparison to our Q3 peak as well as down $60 million from prior year. Overall, working capital was $152 million lower year-over-year and this is expected to continue to be a source of cash into 2018 as we reduce inventory levels and improve turns.

Let me now start framing for you our outlook for 2018. Turning first to slide 20, we're all aware of the rising input cost environment as everyone is facing inflation headwinds this year. Furthermore, this is the first meaningful period of inflation that we've seen after a three to four-year decline overall.

You've seen slide 21 before when I shared it with you on Investor Day. As you can see, nearly everything in our commodity basket is moving north. Freight continues to present a big headwind in 2018.

On slide 22 is the Cass Freight Index, which shows considerable and consistent freight inflation, which as you all know is a result of tight capacity and strong demand primarily in the trucking market. Slide 23 takes you through the impact of tax reform on our effective tax rate for the year.

The bottom-line is that our estimated effective tax rate goes from a normalized 32% to 33% down to 25% to 26%. The statutory rate change results in a 16% reduction, while the foreign rate differential, Section 199 deduction and other changes are a partial offset.

Let's now move to slide 24 and talk about our 2017 base on a more normalized basis, which looks closer to about $2.26 in EPS. Starting with adjusted EPS of $2.81, we need to reload the incentive compensation, which was largely eliminated last year. And the impact of that along with normalized stock comp expense is about $0.60.

We also need to adjust from the unusually low 2017 tax rate to our expected post-tax reform rate of 25% to 26%. An offsetting item is the benefit of lower amortization expense related to the Snacks intangibles write-down, totaling about $0.30, which gets us to a more normalized 2017 EPS base of $2.26.

Slide 25 then takes you through our guidance for 2018. This will be a transition year for us. We believe we have the right initiatives in place, and I'll cover those in a moment, but it's going to take some time for these improvements to manifest themselves in the results. This year, we are anticipating sales of $5.9 billion to $6.1 billion.

We expect adjusted operating income or EBIT in the range of $265 million to $305 million and an EBIT margin of 4.5% to 5%. Depreciation and amortization is expected to be between $255 million and $260 million, and interest expense is expected to be between $118 million and $120 million.

We're anticipating weighted average share count of 56 million to 57 million for the year, taking into account our continued share repurchase program. As a result, our EPS guidance for 2018 is in a range of $2 to $2.40. And finally, CapEx is expected to be about $215 million, which is about 3.5% of sales.

Slide 26 shows the puts and takes from a normalized 2017, which we mentioned is adjusted for bonus and stock compensation, tax reform, and the amortization impairment and walks down to our 2018 EPS guidance range of $2 to $2.40.

Volume and mix will be a headwind due to both our SKU reduction and plant closure actions, as well price realization lagging the commodity inflation. The TreeHouse 2020 initiatives, including plant closures and our SG&A reductions, provide significant benefit. Turning now to slide 27 and our first quarter guidance.

Q1 will be weak, in the range of $0.10 to $0.20 in adjusted EPS as we lap the adverse effects of pricing concessions last year, cycle-through business that has been lost, and are impacted by the operating headwinds from Q4.

Additionally, while we have taken pricing to offset rising commodity costs and freight cost increases due to the tight transportation market, we are faced with a timing issue, and pricing won't be complete until the second quarter.

A number of these negotiations have been protracted as we wrestle with the impact of material levels of inflation after a long deflationary period. To the extent we continue to have commodity and freight inflation, we will suffer the financial impact of the pricing implementation lag.

Let me also cover interest expense as we think about the first quarter. We're expecting between $26 million and $28 million in net interest expense in Q1, which you'll see is lighter than our full year guidance on an annualized basis.

Q1 interest expense will contain patronage proceeds from the Term Loan A and we have built into our forecast the rising rate environment. So, as you think about Q1 and then the cadence of the quarters to follow, you can see on slide 28, we have two things working against us in the first quarter.

Volume and mix is lower, primarily as a result of SKU rationalization and plant closures and pricing implementation will lag commodity and freight inflation. On slide 29, we try to give you some flavor for how 2018 will unfold.

I'd like to point out that this is by no means an attempt to issue quarterly EPS guidance, but rather to help you understand the timing of the benefit of our actions. For example, we have taken pricing to offset commodities, but won't realize that more fully until we head into the second quarter.

Similarly, the savings from our SG&A initiatives will kick-in in the second quarter and grow in the second half. As you get into the fourth quarter, we get our normal seasonal pickup in volume, not unlike what we saw in 2017. The benefits from plant closures, TMOS rollout and SKU rationalization will build through the year.

Let me now step back and give you an update on our TreeHouse 2020 restructuring efforts as well as a look forward on what to expect in 2018.

Slide 30 summarizes the key elements of TreeHouse 2020 and our restructuring efforts to simplify both the customer base and product portfolio, optimize our manufacturing and warehouse footprint, transform our operations, and drive improved performance.

On slide 31, we're showing you our continuum of actions taken last year as well as those that we've announced for 2018. Both Plymouth and Brooklyn Park have been closed. We permanently shut down 19 lines, and we achieved a 27% net reduction in active SKUs.

Baked Goods, Condiments, and Meals have led the charge, reducing about 30% of their active SKU count. We also reduced our warehouse locations by 13 and exited the ConAgra mixing centers last year. This year, the partial closure of Dothan, Alabama is on target for the end of Q2.

Additional plant closures in 2018 will include the final phase of Battle Creek, Michigan and Visalia, California. We will announce further plant closures as those determinations are finalized. We plan to further decommission at least another 15 lines this year on top of the 19 we shut down last year.

And we continue to roll out TMOS, TreeHouse Management Operating Structure, across our network, with full implementation in 12 plants expected to be complete by the end of the year and TMOS essentials in the remaining plants.

On slide 32, we are functionalizing manufacturing and supply chain across the company, and I'd like to take a moment to share the rationale behind our efforts. We clearly must do a better job with operating performance.

As such, we are in the process of standardizing our operating procedures and deploying TMOS throughout our network, as I mentioned earlier. We will implement and lock into weekly production schedules so we limit our exceptions and changeovers and increase our operational efficiency.

What it will give us is better order fulfillment and improved manufacturing performance, allowing plant managers a chance to win and giving our general managers the opportunity to focus their efforts on our go-to-market strategy. In turn, we'll drive better revenue and cost outcomes. Turning to slides 33 and 34.

Let me spend a few moments on the SG&A initiatives that we announced today. We completed a comprehensive review of our organizational structure in partnership with a leading global consulting firm. This graphic gives you a sense for the principles governing this initiative.

We will build upon our two-by-two matrices that you've seen time and time again, with our objective being to build an organization that remains committed to meeting our customers' private label aspirations, but better positions TreeHouse to win through improved service levels and achieving the lowest total delivered costs, while leveraging our scale with outstanding food quality and safety.

We will reduce our personnel and related costs by midyear and expect savings of $30 million in this calendar year. We expect the run rate savings to be approximately $55 million as we exit 2018.

Our revised organizational structure will be better aligned with our priorities and will consist of lean, customer focused go-to-market teams, a centralized supply chain, and a more streamlined back office. While our targeted savings are actually higher, our goal is to maintain flexibility to invest in the business and fund growth.

Before I wrap-up, I also would like to touch on our ongoing revenue and margin management initiatives on slide 35.

You'll recall we've talked the last couple of quarters about enlisting a major consulting firm to help us improve our capabilities, implementing tiered pricing structures, gaining a better understanding of our cost to serve, and the ongoing bid review committee.

That work continues, but I'm pleased today to add that we are hiring an industry veteran to head up our margin management efforts. He'll report to me and brings to TreeHouse more than 25 years of experience in sales and was formerly the VP of Revenue Management for a large player in the food industry. In closing, we have a lot of work to do here.

We believe we're taking the right actions to take costs out of the operations and optimize our business and our manufacturing footprint, but it will take time. With that, let me turn it back over to Sam for his closing remarks and then we'll take your questions..

Thank you, Matthew. The juxtaposition of our ambitious strategic agenda and cautious financial outlook is a result of balancing internal probabilities with external possibilities.

Thanks to a renewed focus on strategic customers and profitable categories, we have embarked upon an agenda of systemic simplification and renewed purpose, bound to reap solid returns.

In parallel, we have projected a financial transition to those returns that allows for the vagaries of our marketplace and the lags in -- and the lags of timing in pricing and execution. Thus, in a departure from past practice, we have derisked the next year to ensure those that lie beyond.

As summarized on slide 36, Matthew has articulated our plans for the new year in considerable depth and with great precision. We are undertaking this agenda with the greatest of care, urgency, and confidence. I'll conclude with a few notes on Executive succession.

This is the highest priority of our board, and the search committee is making excellent progress. We have interviewed a number of outstanding candidates from a variety of relevant areas and there has been high interest in the promise of TreeHouse.

We are all personally committed to making sure that the next CEO has the latitude and mandate to continue the hard work ahead to realize the full potential of our company. We are pleased with the progress of the search, have narrowed the field of candidates to a select few, and can assure you that the Board is moving forward expeditiously.

Throughout this progress -- throughout this process, we have been reminded of the steadfast loyalty and ironclad resolve of our support -- our TreeHouse employees in supporting our common cause, particularly through hard times. Catherine, we'll now open the lines for Q&A..

Thank you. [Operator Instructions] We'll go to Andrew Lazar with Barclays first..

Good morning everybody..

Good morning Andrew..

Two questions if I could, Sam. One is want to follow-up on the CEO search and then a broader one.

I guess from the CEO perspective, as you and the Board think about the characteristics and sort of skill set specifically that you're looking for in the next CEO, can you go into a little more detail on those aspects? What are you really looking for? What's the key sort of skill set this next CEO needs to embody based on where TreeHouse is going over the next few years? And then I've just got a follow-up..

First, we've engaged a very fine Executive search firm and have done a great deal of preparatory work with them and internally to address the particulars of that -- the brief and the description for that position.

And we're very pleased that as we've gone out to find candidates that there are plenty of opportunities where we've got a very fine match or several fully capable individuals. I think the -- that individual, most importantly, has to come in, see the possibilities of the long-term growth that are here.

We've indicated that the marketplace is still highly favorable to Private Brands and we're poised with new leadership and management to take full advantage of those market trends..

Okay. And then the 300 basis point margin target on TreeHouse 2020, I think, has always been based on sort of flat volume and pricing outlook because it's hard to obviously forecast those things prospectively.

With your current update and view around 2018, does the outlook around your updated volume and pricing outlook change? Or how does, if at all, those -- how do those things change the 300 basis point target? And then Matthew, just a quick one to follow on that.

Just trying to get a sense of what impact both the SKU rationalization and the remaining Soup and Infant Feeding impact will have on 2018 sales in trying to get an underlying sales growth estimate for the year..

On the first, Matt -- Andrew, three points. The -- clearly, as we've indicated, the results for the last year are different than what we had laid out for the baseline of TreeHouse 2020.

Secondly, having said that, as I discussed and we demonstrated on, I think it was slide eight, TreeHouse 2020 has had really an extraordinary effect on the rest of the business as we've all seen what can be done with careful analysis and excellent execution. So, there's been a halo effect going forward.

And thirdly, the -- adding the SG&A initiatives to bring down the ongoing costs of our infrastructure by $55 million would only be possible if we were absolutely confident that we were going to get all of the benefits outlined in TreeHouse 2020.

Matthew?.

I think that the specific of the Soup and Infant Feeding question, I think we had about $70 million of revenue that was back in the early part of 2017 before we sold it. So, that's the -- that will obviously go to zero going -- has gone to zero going forward. So, that's the sort of delta you should think about.

As we look at our volumes in Q1, we're clearly down some. It's about a third SKU rationalization, a third plant closures and then about a third of just business that's either lost or just running at lower rates this year..

Okay, great. all right, I'll pass it on. Thanks everybody..

Thank you. We'll now hear from John Baumgartner with Wells Fargo..

Good morning. Thanks for the question. I wanted to ask about the complexion of your business. I mean, 80% of the portfolio is either opening price point or NBE, and the volumes there are down about mid-single-digit. And then for the 20% that's the better-for-you and natural, the volume growth was, what, 5% in 2017.

That's been a pretty consistent double-digit grower in recent years. So, I mean, it's hard to think the law of large numbers is setting in for the better-for-you at this point. So, can you just walk through what's driving the slowdown in that better-for-you business? That's my first question..

Well, let me address more broadly the totality of the marketplace and the key factors affecting us. The first is, as we demonstrated in syndicated channels, private label continues to grow strongly. The growth were it quantified in alternative channels is even better.

And approximately half of our business now remains in syndicated while we pursue the -- what used to be called alternative channels. Clearly, growth agents now. In addition to the shift in the outlets, there is a changing consumer perspective that we have benefited with regard to the better-for-you products, and that continues.

It actually, as I've indicated, has grown in -- I named, I think, four or five categories and several channels where that is the case. And then lastly, what we have to do is tailor these possibilities and opportunities to that combination of categories and customers where there is the greatest opportunity.

And as Matthew indicated to you, that is really the driving force behind this SG&A consolidation. And I think he pointed out that we are shifting resources to those high growth, highly profitable opportunities. So, I don't think we would say the end of this is in sight.

And I'd think you'd say that we're putting more bets on the continuation of that growth in -- with select channels and select customers. Thank you..

So, if the 5% is just for the syndicated channels, do you have a sense what the all outlet growth would be for that natural better segment?.

We don't have that data broken out separately, but if you look on slide 12, the thing I'd come back to is the robust growth really across the whole of our business. Once you take out the Soup and Infant Feeding, the story here is up 2.4% year-over-year.

We need to adjust for the extra week back in the prior year, but there's really strong underlying growth here when you look at it in its totality..

Okay. And then Matthew just as a follow-up.

In terms of the 2018 guide, are you assuming incremental bid price compression from your competitors this year? And then in terms of this first implementation of the pass-through commodity pricing, will that cover your full expectations for 2018 or you still need incremental pricing as the year progresses?.

I would say we have most of the pricing out there. There are some commodities where, as you look further out, there is prospective inflation. And it's -- you can't go price in advance for that, so we'll have to deal with that when we get there.

But we factored the impact of that into our guide here and obviously, we know there's a lag between reality in commodities and price realization. So, we have that factored in with our view as to what needs to go on in the back half of the year..

Okay.

And then on the competitive front, has that stabilized at all?.

The competitive environment is similar I think. We saw a similar level of bid activity. We did see -- as we took some of this commodity-related pricing, which in some cases, are the first upward price revisions for a long, long while that people have put us out to bid to validate the integrity of what we're telling them.

And again, we're working through those processes and feel pretty comfortable we've got that covered within the guidance here..

Great. Thanks for your time..

Thank you. Our next question will come from David Driscoll with Citi..

Good morning David..

Hey thank you. good morning everybody. A couple of questions. So, the first is really simple here, but you guys have a lot going on.

The -- when you see this whole business normalize, do you expect with the combination of legacy TreeHouse and ConAgra Private Brands that there's much seasonality by quarter? And I ask because you just have so much going on, on the revenue lines and so forth.

When we go out a little ways and you get those things completed, I'm hoping you'd give us some sensitivity for the seasonality in the quarters. And this will lead into a more important question..

We certainly do see seasonality and we probably see it most in our Baked Goods category, but we also see it come through in single-serve beverage. So, it's really cold weather related and clustered around the holidays. So, as we go into Q4, that's a peak, there's some residual as you go into Q1 and they tend to be the biggest quarters.

So, we would expect that to remain true going forward..

Okay. So, then when I just look at the guidance and I try to think this through a bit, the first half is much weaker than the second half. The fourth quarter, I think, pretty much has to come out at something $1 or more. And I think that operating margin in the fourth quarter has to be something take around 7%.

So, -- and again, it's a lot of back-of-the-envelope math this morning. That 4Q run rate, in my opinion, would have implications for 2019. And it would suggest perhaps that 2019, that is substantially better than what we're talking about on average for 2018, reflecting all the different activities and progress that you intend to make this year.

And perhaps it also goes to this comment of why you guys think you can still get 300 basis points and 9% margin by 2020.

With that comment, do you look at it the same way as I've just described?.

David, this is Sam. Let me talk about it in a general perspective and then ask Matthew for more specific commentary. What's very clear is that there is impetus and internal momentum for internal improvement that is operating at a very steady and high rate.

The -- probably the single greatest joy I've had over the last several months is if you -- we started with 2020.

We've laid into that now an agenda of portfolio simplification, optimizing the supply chain, functionalizing operations, coming up with a way to reduce the redundancy of our infrastructure, and importantly, beginning to segment customers and manage revenue in a different -- highly different way.

And these are all initiatives that tend to have a multiplying effect on to each other. That's the purpose of that wheel that we show on slide eight.

And my view here, there's -- while we've yet to formalize the revenue and margin management, I would say we expect it, like the other components here to produce substantial results that, when you put them together, may have more than an additive effect. And the beat across these things is very steady.

It's not run fast for one quarter, stop for a while, but steadily increase the progress of the momentum.

Matthew?.

Yes, I think you make a good point, David. The second half of 2018 we expect numerically to be pretty similar to the second half of 2017, but the texture is going to be different. We're going to have normalized tax rates applying instead of the benefits we got from our planning, and we'll also have normalized bonus.

What offsets that, though, is the effect of these plant closures that we've just completed here at the tail end of the year that will start to build, the line eliminations that we've completed, 19 done, another 15 committed to. And then we'll have the SG&A savings flowing through a full run rate.

So, we feel very good about the texture of the back half and the controllable items that we need to deliver and have plans in place to go get such that the second half looks good. Again, you look in the first quarter and we're plagued by the lag on the pricing, which is really the biggest issue we're fighting..

But I guess, Matthew -- I appreciate that color. The question really here is that the first half of the year feels like it has no bearing on what this company looks like in 2019 and 2020 and that really is the fourth quarter run rate.

You're changing almost every operational thing inside the company, TMOS implemented across so many different facilities and these things don't start to impact until Q4. So, Q4 is our better read as to what TreeHouse looks like going forward than a ridiculous Q1 at $0.10.

Is that fair?.

Exactly. Q4 will have the benefit of a lot of these initiatives flowing through and I think it's more representative of a steady-state business going forward..

Okay. Last question for me. Sam, conceptually, is private label manufacturing seeing a margin squeeze across the Board, so not just at TreeHouse? We just keep getting this question every time you guys are talking about competitive bids about what's happening in this industry.

You outlined wonderful comments about revenues, but I'm very interested in your thoughts on what you're seeing and what you think this is -- what is happening to margins in the industry.

Do you think that there is a margin squeeze just across private label food as an industry?.

Well, I would make it more broadly than that.

If you look at the entirety of kind of the food and beverage sector in both private label and brands and then all channels, there are -- the real issues emanate from the -- in the conventional grocery business, that declining foot traffic in the brick-and-mortar infrastructure that has been the mainstay of the industry for many generations.

And when you couple that decline and shift in volume to other channels of distribution, what you see is that the fastest-growing channels are those that provide a value that's greater than had been the conventional view. Some of that is articulated in price. Some of that is articulated in convenience.

But for the whole of our industry, both retailers as well as manufacturers, there is a combined effect here of volume declines in the core market, shifts to other and the fact that those growing segments are ones that are proving not only to be more effective with consumers but highly efficient. And we have to adapt to this.

We've done this before coming out of the recession, and I expect that we will see it again. And as I'd indicated somewhere in the remarks, when I look at the categories, the customers and the channels that are growing, all of those present new opportunities to us that require us to realign our supply chain and our infrastructure.

And as we'd indicated, we're doing both of those..

Thank you for the comments. I'll pass it along..

Thank you. Our next question will come from Ken Goldman with J.P. Morgan..

Hi, good morning..

Good morning Ken..

Hey Sam. A couple of quick ones and then a broader one if I may. Did you -- and then maybe I just missed it, did you give an outlook, even generally, for either the gross margin or cash from operations? And if not, just any comments on that would be helpful as we think about modeling..

Yes, we didn't give anything out specifically around that.

I think the cash generating capability of the business is going to be similar next year to this year, although I would comment that you wouldn't expect the same change in net debt or deleveraging because we're on a different strategy here with the share buyback program and some increased commitments to support TreeHouse 2020.

But the underlying cash generation and CapEx profile are largely unchanged..

Okay. Thank you for that. And then I guess for a broader one, you're seeing -- I think, Sam, you used the word derisked to describe your outlook for 2018. But when the company reported 3Q, it said its outlook for 4Q was "extraordinarily conservative," too.

So, forgive my frankness, but I guess I'm curious why investors should have confidence in your outlook for 2018 given the recent history? Sam, what do you think particularly is derisked about this outlook that's different than maybe how you thought about 4Q when you went into it? And I guess the corollary is, isn't it possible, right, that the next CEO comes in, and as many new CEOs do, maybe consider rebasing earnings even further? Is this not a risk that investors, I guess, need to factor in their analysis?.

Well, with the planning that went into this year, it's the first time that the majority of this business were on one IT platform with an integrated approach to reporting across all of these channels, all of these customers. And we had the benefit of the beginnings of functionalizing operations.

I think that as we've gone through this, we've seen that each of the five division Presidents has mastered the -- an understanding of their individual business, the categories, their infrastructure that -- at a level that we have not had before.

And then among the strategic go-to-market group, we've apportioned go-to-market assets and investments to where the opportunity is instead of covering all with the same degree of detail.

And I add those things up and what we've learned through the cash management process this year, all those things to me add up to a far better understanding of the business.

And then I think Matthew has been quite clear in his -- not guidance by quarter, but this buildup by quarter that we've kind of shown you the components of that and we'll be quick to report against those every quarter. I won't speculate about what the next person will do, but I'd be delighted to work with him or her to drive the business forward..

Okay. Thank you, Sam..

Thank you. We'll go to Robert Moskow with Credit Suisse..

Hi, thank you.

Matthew, I wanted to ask how significant is the decision to centralize manufacturing planning? If it -- how -- what will you need to do in terms of resource allocation? Will you decrease resources at the plants and increase it at headquarters in order to handle that? Do you have enough resources internally at headquarters to do this? And it's hard for me to reconcile that with a major overhead cost reductions.

Can you help me through how this is going to work?.

Yes, I think first of all, we're not going to take resources out of the plants to do this. This is really more an alignment around a competency that exists in the center and really the -- providing the ability to our division presidents to essentially face the market as opposed to worry about running the day-to-day.

I think there's a lot of best practices that we can deploy and consistent approaches. We will centralize sales and order planning and bring some discipline and structure to this. That very focused effort will enable us rather than being fragmented. So, we'll be consistent across the organization, across the divisions, across the plants.

And bringing that best practice to bear everywhere will immediately bear fruit. Some of the practices we talked about like locking the schedule for a week, this sounds very elementary, but traditionally, our plants have taken calls from customers, calls from General Managers and yin yanged that schedule around all week.

I think that also helps us -- when we lock for a week and give that guy a chance to win, we'll be very stable in the four walls, but we can also sync up much better with transportation in this very scarce market. So, the integrated benefit of both of those, we think, is going to yield results real quickly.

I think we've got 44 or 48 plants already operating on this locked schedule weekly as of the new year here. So, I think this is a pretty big unlock and a fundamental change and I think we got the right people to get it done..

Okay. And I guess a follow-up. If you look at the things that kind of just happened on a quarterly basis, it's just -- it's a litany of little things. It's a supplier not getting product to you on time or its customers not picking up when they're supposed to pick-up.

I mean, does this centralization effort help you manage through those things more effectively? Or are we still going to see kind of quarterly, I guess, variances related to those types of issues?.

Rob, this is Sam. We're still going to see those events.

We expect that as a general proposition that we will -- that their effect will diminish on our operations and not only in part because of the functionality of operations and supply chain, but if we go back to the go-to-market proposition, we started -- following the last acquisition, we determined that we had 1,100 customers and over 27,000 SKUs in daily distribution that we've now identified a goal of 25% reduction in SKUs.

With that, take away hundreds of millions on the topline and virtually no change in pro forma profitability. We've identified that 100 customers at most are strategic in nature and that we should shift our go-to-market proposition, our infrastructure, our IT systems to support those.

Of that 100, 34 account for over 80% of the current revenues and a greater proportion of both the current profitability and the future going forward. And then lastly, we're taking out the redundancy that was put in only 14 months ago in terms of the organizational structure that was designed when we put these businesses together.

So, I think here that what will not change is the nature of the private label marketplace, where someone else controls, owns the brand, controls the programs, et cetera. But we'll be able to concentrate our close relationship, communication and management capabilities over a more focused and concentrated business in all respects..

I have a last question on pricing. You mentioned that when you took pricing, several customers put you out to bid.

Is that happening more frequently these days? And what percent of the time do you think you have that happen where a customer -- where you take pricing and you end up being put out to bid?.

I think this is really the first time we've taken across the Board all customer material amounts of pricing in the face of significant input cost inflation for many years. I think before, it's been sporadic.

So, I think as you sit there as a customer -- and we don't have the lever of offsetting bumps in commodities with fluctuations in trade that maybe the branded guys do. So, it may well be that in response to these commodities, we're first in the door.

So, I think if I were sitting on the other side, I'd have a propensity to want to check, and that's what we're seeing. And we've been very straightforward, very transparent with the commodity cost impact on us and shared that. And we're certainly open to alternative strategies in terms of locking that in as a partnership with customers.

And I think we'll come out the back retaining the bulk of that business with our competitive advantage..

Thank you..

Thank you. We'll now hear from Amit Sharma with BMO Capital Markets..

Hi, good morning everyone..

Good morning Amit..

Matthew, you've provided a waterfall chart on page 14 of what happened in the quarter from a EBIT perspective.

Can you just help us understand over the last two years if you see a pretty dramatic margin [Indiscernible]? Is it similar? Or can you provide like, what are the broad buckets for that or a little bit longer period of time than just one quarter? And I have one more follow-up..

I think as you go back through 2014, it was a tough year. We saw the first impacts of commodities beginning to go up. We had some lags earlier in the year and some contractual things that boxed us out of recovering commodities applied some pressure.

And frankly, we've been pretty unsatisfied with how we've had the plants running, which has led us to this change in the organization here to, I think, become a lot more capable in how that part of the machine runs.

We also have had some bid pressure throughout the year, which we've talked about on previous calls and it's been a pretty tough market with pretty aggressive customers..

The relative weight would still be between volume, mix and pricing, those are the two largest buckets with operations?.

Yes, yes..

Okay, got it. And then, Sam, great answer on Ken's question on derisking in 2018. So, I get it that on your end, you are much better prepared, right? But what about risk from your customers? We've seen that again and again, that even if you are well prepared, have a good case for taking pricing, you don't get as much pricing as you need.

And commodities, I hear Matthew's comment about a little bit ahead, but you still have a history of lagging on those, so if there is more inflation.

Could that be additional risk to even this guidance at this point?.

Well, I think there's the risk for all in the business, retailers and manufacturers that in fact, as the year develops, there may be further cost pressures. The one that we're all preoccupied with, and rightfully so, is freight. And I think that the -- showing that broad-based index is really indicative of what lies before us.

For us, the opportunity here is to differentiate ourselves in a more favorable way than our competitors do with the same customers. Our customers are looking for solutions as well, and we can bring those to them, whether it be in the form of product or service, data analytics.

And by concentrating strategically on the top 100, then we're able to provide to that group, especially those three dozen or so that account for the bulk of all of the growth in financial activity. We've got to develop better capabilities and closer relationships with them.

And to the extent that those customers see those in their best interests, it will be a mutually beneficial prospect. So, we can't change the basic nature of the industry, but we can certainly be a far better practitioner..

That makes sense. And just very quickly, one more for me. Matthew, in the past quarter, you talked about single-serve facing pricing pressure.

Are those pressures still continuing or you see some abatement there?.

Single-serve has been an interesting journey for us this year. We were up tremendously in the first quarter, up less in second, up less in third and still up in the fourth quarter on a volume basis. So, this continues to be a strong business for us. We did, as you know, lose some business.

We talked about it on the call previously and that's why that rate of growth has moderated a bit. On the pricing side, we still see it as very competitive, but we're bringing to bear in that segment the learnings from our margin management work with the consultant and think we're in a good position.

But it's a very competitive segment, there's no doubt..

Got it. Thank you so much..

Thank you. Our next question comes from Farha Aslam with Stephens..

Hi, good morning..

Good morning..

Could we talk about freight? Do you go-to-market via contract or spot freight? And overall, how much do you think your freight costs will go up in 2018?.

It's a combination of both. Some of our relationships are governed by longer-term contracts, and other pieces were in the spot market. I think when we look up freight and you look at the external indicators, it's anywhere between 10% and 15% is the rate of freight inflation around trucking that seems to be prevailing.

Some of that we're seeing in these very tight spot markets and it really does vary dramatically regionally and across certain lines. So, in some cases, you can get away pretty lightly and in other, really highly traffic stuff where the competition is high, the inflation's dramatic.

But I think 10% to 15% with the contracts not normally much longer than a year that we're rolling through all the time..

That's helpful.

And then your chart on 21 [ph] is good, but could you just summarize it for us and kind of share with us how much commodity inflation and how much labor inflation you will experience this year versus last year and overall, how much pricing you're hoping to achieve this year?.

We haven't specifically put numbers around either of those, but the -- you can look at this chart and you can look at freight inflation and we talked about the magnitude of that, and it's pretty significant. So, I would tell you, we track 40 commodities closely. There were only seven are lower than 2017, and there's 33 that are effectively up.

So, there's a fair bit of pressure here. I think on slide 28, it gives you a little bit of flavor in Q1 for the magnitude of the commodity headwind and the pricing we've already got in and that bar will fill out as we move into Q2..

Okay.

And do you expect labor inflation? And is that factored into your guidance?.

We absolutely do and expect it in both on the salaried side and on the plant side..

Okay. Thank you very much..

Thanks..

Our next question comes from Karru Martinson with Jefferies..

Good morning.

Given the impairment on the Snacks division, why not explore other alternatives for that, perhaps streamline the business, free up some management time and free up a basket here for future investments in the business?.

This is Sam. Good morning. We did indicate in the text that we are undertaking a strategic analysis of the business. We've decided to do that with the advice of an outside consultant with great experience in the industry.

And at this juncture, what is different than past is that in the course -- over the course of the last year, Snacks operated on five different IT platforms as five different businesses. We were taking it through a series of TreeHouse 2020-related projects to reduce its unutilized capacity, right-size its distribution network.

And along the way, we dramatically reduced the customer count. In fact, it's only half of what it was a year ago. And during that period of time, we developed a greater focus on strategic customers of large scale.

Circumstance now is that we can, in fact, have a look at this knowing that we've set -- level-set the business and now can look at the strategic components of it..

Okay.

And when you guys look at leverage kind of around three times here, for the right acquisitions, where do you see that going? And what's kind of the long-term run rate that you want to run the business at?.

I think on the third quarter call, we talked about leverage around three and a half times. I think really, we've got a lot of work ahead of us here, as we've outlined in terms of SG&A reduction, TreeHouse 2020 and really getting the margin structure of this set of assets that we've got to the appropriate levels we talked about earlier.

And we think coming out of the tail end of 2018 will be a more representative view of the potential of the business. So, I think we're really focused 110% on extracting the value from the assets we've got right now. So, I wouldn't think there's anything in the foreseeable future to add to that..

Thank you very much guys. Appreciate it..

Thank you. We'll go to Brett Hundley with The Vertical Group..

Hey good morning. Thank you.

Matthew, when you look at the potential for fiscal 2018 here, are you really comfortable with your borrowing covenants and where they've been renewed?.

Absolutely, yes. We -- yes, we feel very, very comfortable about that and that's why we went to market. We think we got a tremendous deal with that. We remain unsecured four times leverage cap. And as we said in the prepared remarks, we think there's a ton of opportunity in working capital here.

I think it's a great untapped opportunity and we've got initiatives in all three areas to get after that. So, I sleep very well at night with regards to liquidity..

Okay. And then you've also been engaging a number of consultants here, and you continue to do that. They aren't cheap.

Can you give us a sense, either in dollar or percentage terms, just what kind of those total annualized fees -- what they kind of total up to so that we can get a sense on maybe what may go away in the future with that regard?.

I think the only thing I'd say on this -- and obviously, I got to be pretty careful because you can pick at them, but the -- we engaged a company on the revenue management. It was very time bounded. It was very specific. We got their expertise and we're moving on. So, that one was pretty small, pretty contained.

Sam alluded to some work we're going to do around the Snacks business. Again, that's going to be more of a 60, 90-day, very focused, limited amount of people involved. So, the only one of any materiality is really the work we've been doing around SG&A. And I can tell you, the payback on that is going to be measured in months, not in years.

So, we talk about it a lot. I think it's been invaluable to help frame our thinking and get best practices, but it's not a huge investment..

Okay. And then my last question. I know you've been working hard to integrate the Private Brands business and look at things really from a product perspective. But my question does kind of pertain to the Private Brands business itself.

Initially, as you weren't on shared platforms, you were having some trouble identifying what might be natural, better for you across that portfolio and what might not be. And I know that you're learning more and more as you do integrate that business.

But I guess what I'm curious about is, I'm wondering how much trouble you think that you guys have had with the Private Brands business as it relates to maybe updating a label the way that you want to or tiering a certain product the way that you had with your legacy TreeHouse products.

I know that you've found a lot of success doing that and I'm curious if that's been much more difficult relative to initial expectations and that now that you have some of the integration work done that you have, if that can really start to pick up speed relative to what you wanted to do initially..

Brett, this is Sam. I think I'm the only one around who was there then and still here. The thing about Private Brands is they've brought a rich treasure trove of both talent and process that complements the TreeHouse greatly.

As we've gone through this SG&A exercise, what we're doing is looking back at the organizational structure that was put together in the wake of the ConAgra acquisition by the TreeHouse team.

As we've looked at that, we see that there's a substantial amount of redundancy and then -- and lack of standardization and, in many instances, processes that are tribal knowledge. ConAgra's team as I -- and I will say Ralcorp legacy, has been a great addition to this.

And we found out that while we do things quite differently, that we could settle on a new approach to every one of these things, including product commercialization and innovation that is a far better prospect than when we started..

I think if I could just add one thing, Sam, I think it was back in Q2 that we actually added the Private Brands into that premium better for you, natural, organic analysis. And we've been somewhat nervous that it might dilute the penetration and it actually didn't.

So, I think the portfolio that we joined together was every bit as rich in that regard as the vase we joined it to..

Thanks guys..

Thank you. We'll go on to Chris Growe with the Stifel..

Hi, good morning..

Hey Chris..

Thanks for little extra time here on the call. Just a couple of quick EPS-related questions. You have roughly $0.70 of benefit coming through from lower SG&A this year that'll even progressively improve through the year, lower amortization. You have an equally offsetting factor from resetting incentive comp.

Is incentive comp being reset to historical averages even with EPS being down so much in 2018?.

Incentive comp is being reset to historical levels, yes..

Okay, all right. And then you had this EPS buffer in the fourth quarter. You've referred to that before and talked about it last quarter.

Is there a buffer built into 2018? Can you quantify that? Are you saying it is built in there? Or just -- could you give me more color on that -- around that?.

Yes. Sam talked and we mentioned in the prepared remarks, say, a sort of derisked and -- I want to use the right word, but prudent guidance approach to 2018 here. So, some of that thinking has come to bear in how we developed this. We're very conscious that we have had guidance out there and we've come up short.

And that's not anything we're proud of or want to continue. So, we've got 2018 appropriately assessed, including a view of conservatism around a number of different factors. It's not a particular bar I call out or want to quantify, but we've definitely been very mindful of being prudent with this guidance..

Okay. And then just one quick one, which should be that around the TreeHouse 2020 program, you had another plant closure announced today.

What are the savings in 2018? And then are there like future phases of this program you'll announce at just random times through the year? Or should we expect more developments on TreeHouse 2020 in 2018?.

Yes, let me start with the quantification of it, and then we'll talk a little bit about the phasing. But as we've looked at TreeHouse 2020, we track it because we hold -- we're making big investments, and we hold the team very accountable.

And we think there's about 80 basis points roughly of improvement in this year that's attributable to that initiative. Next year, that will step up significantly.

So, you'll see the biggest year-over-year improvement in 2019 and then we'll finish off in 2020 with the residual, which will be a similar improvement to that, which we've recorded this year. So, we feel really good about our tracking of that. In terms of cadence on it, obviously, we're doing analysis. We're living in a fairly dynamic marketplace.

We're constantly looking at line utilization. And as and when we make these decisions, our goal is to give our customers as much notice and our employees as much notice as possible. And we'll roll these out as and when we get them teed up, analyzed and through the Board. So, I would expect to a continuum as we progress through the next 18 months..

Okay. Thanks for that information..

We'll go on to Bill Chappell with SunTrust..

Thanks for squeezing me in. Quickly, on a pricing standpoint, I understand that you have, for a variety of reasons, the delay in pushing on pricing. But I would think your branded players -- branded competitors have gone forward with that, phasing freight and other things.

So, at the store level, are there greater than normal price gaps where volume should actually benefit? Or are the retailers taking it up kind of ahead of you actually being able to pass on those price increases?.

Bill, this is Sam. The retailers are taking a wide array of responses to this. I will note that what used to be 90% of our retail business is now less than half through syndicated channels. And secondly that there are enormous pressures on all of us, and not just manufacturers but retailers with regard to prices.

And the -- it really depends on the strategy of the store. The ones where we are concentrating now our strategic approaches are those customers that see their individual brands as being strategic in nature, a whole part of the store experience and make sure they reflect the appropriate value.

And we work hand in glove with them with regard to that about the product, the packaging, the formulation, its positioning, its merchandising. So, there are an array of responses here that you have to look at in the context of broader market long-term trends..

But I guess, overall, the price gaps are fairly normal with historical trends?.

They have not changed materially on a broad scale basis. When you get into individual customers, that behavior can be quite different..

Got it. And then also, Sam, on the competitive bidding, I would think, with inflation, especially freight, hitting everyone and probably even more so for the smaller competitors, that aggressive bidding should ease.

Is that a fair assessment?.

I think that here, with margin management capability internally and the use of this review committee in its -- the interim before the margin management, that we are, internally at TreeHouse going to be in a better position than we have been in the past.

And importantly, an internally consistent condition with those, that the short list of quite large and strategic customers present a TreeHouse approach to this and we'll benefit from that..

Okay. Thanks..

Thank you. We'll go to Pablo Zuanic with SIG..

Hey Pablo..

Thank you. Good morning to all of you. Look, I want to ask you a question in a way in the context of disagreeing with this thesis about this horrible market, about these horrible conditions for private label manufacturers. So, what I want to ask you is two questions.

One, when we think about this margin target of 300 bps, can you give some color at the product divisional level where we should expect more upside and where maybe less? That would help just to -- in terms of credibility just to think about how this can play out over -- through 2020.

And the second question, which is related to that and to support what I said at the beginning, when I look at your profit margins in 2017, they fell about 30 basis points, right? But Baked Goods were relatively flat, about 10 basis points down for the year, Meals were up 130 bps, corporate expenses were lower.

So, the problem was chiefly -- Condiments were down, but the problem was chiefly on the Coffee business, Beverages, which worsened in the second half in particular; and Snacks, which continue pretty bad.

So, I could make the argument -- and I can understand why all the questions are from a macro perspective, but I find that this issue at the profit margin level is mostly in the Coffee side and the Snack side.

So, if you can tell us, just some -- am I right about that interpretation? It sounds to me that the macro challenges are being exaggerated and that your issues are mostly product specific. I have a follow-up, but if you can answer that. Thank you..

Pablo, I'll take the general.

And Matthew, could you cover the specifics?.

Sure..

With regard to the market condition, I think you misread this. We're not saying that market conditions are terrible. They are a combination, one, of continued growth opportunities for store brands that quite exceed that of the branded global CPG companies and we're very pleased to have that market condition.

The second matter is that within the market, there are extraordinary shifts largely driven by consumer preferences. You've seen, as Matthew pointed out, that we benefit greatly from that and not only in legacy TreeHouse, but our -- with our acquisitions.

With regard to the better for you and premium products, there are also shifts to different retail outlets. They -- we're challenged there to reform our supply chain to adapt to those markets and I'm quite pleased with the progress that we're making when you look at the retailers that we see are the vanguard of the future.

You're right about the differentiating margins in the different businesses.

And Matthew, could you comment on those please?.

Yes, I'll just start a little bit with the 300 basis points and just draw our attention to a couple of things. One is that a lot of TreeHouse 2020 goes well beyond just closing plants.

And a lot of it's really about this TreeHouse management operating structure we're going to put in place to get savings, to embed continuous improvement thinking, centralization initiatives. And that will yield benefits across all divisions and all categories.

I think there are some areas when you look at the concentration of our manufacturing where we probably won't be taking plants out and some of the older, more traditional categories where there's more rationalization opportunity. To maybe touch on what is absolutely true, we clearly have two divisions that have struggled this year.

I think Beverages has gone through an increase in single-serve beverage competition and a price reset. But it is what it is. We've talked about it on the call. We've talked about some of the wins and losses. That will not have the returns as a piece of the Beverage category that it has in the past.

But as I've mentioned before, we have some tremendous businesses in that category with good margin structures that are very stable that we love. The other item, I think, is on the Snack side.

And as we've seen snack nut price inflation, and that's fed its way through to the customer, we're seeing the elasticity of demand kick-in and there's naturally less demand for those products once they reach certain price points. That, together with the some of the operational things we've talked about, have made for a tough year.

I do think the operational aspects there are certainly fixable, but at a certain price, people are probably only going to buy so many nuts. So, I think there's a little bit of two sides to the snack story here..

Thank you. That color is very helpful. Okay, just one follow-up on the Coffee side. If I go back in time when Keurig launched the 2.0, they became very aggressive with supermarkets and went there and took private label business away from you. Supposedly, over the last year or two, you were able to recover some of that.

So, what's happening now? Is JAB back out there logging with retailers? Are retailers going to go back to the Keurig platform production? Or as a matter of fact, these are people on the license side that are the ones taking business there? Just some color there would be helpful.

And the reason I think it's relevant is given the very high margins you make in beverages. Thank you..

Pablo, I think what we've seen out of Keurig and its new management and ownership is they're really focused on global growth across Coffee and related businesses. And Keurig has announced initiatives to focus on the branded end of that with both their products and their machines.

And we believe that will, kind of, benefit private label in an indirect way as household penetration expands. The other matter is that with regard to private label that sector continues to be the fastest growing and it's being segmented in part by price but also by service.

And we've opted here to focus on the quality of that portfolio given the segmentation in the marketplace. And you'll see us in the value-added aspects of the business continue to be the private label leader..

Just one last follow-up for Matthew.

So, going back to that question about the 300 bps broken down by products, is it fair to assume -- maybe it's an obvious question, but is it fair to assume that Snacks should see the greatest margin expansion? I mean, margins were 2% for the year anyway, so is that logical to assume that?.

I think when you look at the underlying initiatives, you're going to see them affect everyone. We've had some onetime stumbles in margin pressure here that we hope not to repeat.

We even reached the point where it was so cold before Christmas that it was too cold to roast nuts, which was a first and we had weather that prevented people getting in the plants. So, there's been a lot of micro things. We really need to get that business stabilized and operating really efficiently.

But I -- so the upside in margin there has to be among the bigger, but this TreeHouse 2020 is every plant, every category, every division..

Understood. Thank you..

Our next question will come from Akshay Jagdale with Jefferies..

Thanks. Thanks for squeezing me in. I just have two questions. Both are industry-related, just wanted to get a little more color, Sam, if you can. First one is on the mix, the customer mix. Obviously, you're making a big push, and it makes sense to align with the 100 strategic customers.

Can you -- I think in the past, you've given -- at least periodically, you've shown how if you broke the entire private label food space out between, like, strategic customers and non-strategic, there's a huge difference in growth.

I forget when you did that last, but can you give us some color, like if you just look at those customers, how are they doing? Like if the private label category is -- for food is flattish, I believe there's a set of strategic customers that are growing rapidly while the tail is declining pretty rapidly as well.

So, that's the first question, if you can give some color. And then the second one is you've in the past mentioned the number of bids that you look at.

Can you give us a sense of what percentage of your total business roughly gets bid every year? And if that's -- if you can compare that to any historical periods or give us some context that would be helpful. Thank you..

I'll take the discussion about the industry trends and Matthew will touch on bids. We've employed a single strategic construct with regard to customers since the very beginning. We learned more about that as we developed similar insights to consumers. In broad strokes, the two-by-two still stands.

The largest and most strategic customers tend to be several handfuls of ones that are -- have the broadest distribution and market penetration. Those businesses are growing at a steady pace.

There was a group of -- a more numerous group that are at -- kind of the pioneers here for kind of retail and distribution that are showing substantially greater growth as a percentage. And a big part of that is their increasing dependence on their own house brands. Those are the two big growth segments.

And then we're -- the remainder of this divides effectively into the -- those aspects of the brick-and-mortar industry that are not moving with the marketplace and over a period of time, their share will -- if nothing else is done, decline.

Across all of these, what we try to identify is the specific nexus of the customer and the category and develop individual programs that, in fact, will in the context of their strategies, maximize the value for them and their suppliers of private label.

Matthew?.

I think from a quantifying bid activity, I would say when you look at it on a revenue basis, there's probably about 20% of our business that was out for bid in 2017, and I'd bifurcate it into two pieces.

Probably three quarters of that is business that we actually have and get bid out, and then the other piece is stuff that we're obviously bidding on that we don't have now. So, think of 15% of existing roughly goes out and then we're in play with another 5% of our revenue opportunistically..

That's helpful.

And just -- so regarding that, can you give some context as to where that number has been over the years, that 15% particularly?.

I can't. I don't know if Sam's got a perspective from days gone by. I know we certainly started tracking this and seen much better data analytics in the last year or so..

I would think that it's been the last several years substantially grown. And it -- we should look at it as a changing condition of the marketplace and adapt to that. And as Matthew had indicated, we're setting up that capability now..

Perfect, I'll pass it on. Thank you..

Operator, in the spirit of time, if we could just take two more calls please..

Absolutely. We'll go to Steve Strycula with UBS..

Hi, good morning. Two quick questions for you.

One, on the Snacking business, what percent is -- of the Snacking segment is now considered, call it, better for you or a growth asset, if you will?.

Steve, this is Sam. On the tracking that we do that is reported in particular detail, at this juncture, that excludes Snacks largely because of operating on five different IT platforms. As we consolidate that this year, we can -- we'll report that.

I will say, having said that, by its nature, the -- tree nuts in particular are regarded as beneficial from a health perspective. And bar -- health and wellness bars are certainly showing dramatic growth on the branded side. More later on that, but I hope that at least puts it in context..

Okay, great. And I have a question for Matthew on cash flow. Just to follow-up on Ken Goldman's question, how should we think about the free cash flow? It seemed like you said comparable to last year.

Should we take that to mean -- can we get the $300 million free cash flow this year? You've already given us a CapEx number, so I guess we're just trying to back in to see if operating cash flow can get to about $500 million. And if so, is that heavily dependent on working capital to kind of get to a $500 million number? Thank you..

Yes, I don't think you're wildly off there. We've got some modest improvements in working capital baked in this year. And obviously, as I said earlier, this will be a peak year for TreeHouse 2020 expenditures, so we're managing those, too. But I think you're in the ballpark..

And how much does that include for cash restructuring?.

The SG&A piece of this is probably going to be in the $25 million to $30 million range of severance-related. On the cash side, around restructuring on the other side, it's pretty modest..

Okay. All right. Thank you..

Thank you. And our final question will come from Scott Mushkin with Wolfe Research..

Hey guys. Thanks for letting the call go long. So, just had a quick clarification on the guidance. You guys laid out a number of initiatives in 2018, plant closures and other things.

And I was just wondering, is that included in the guidance? Or is that as -- we'll take that as it comes?.

No, that's absolutely included in the guidance..

So, do we have any idea what the expenses -- I know you said, I think, 80 basis points of improvement this year based on 2020. What are the expenses associated with some of the stuff? I didn't know if I saw that. And if I did, if I missed it, I apologize..

I don't think we've called that out specifically, although there are details in each of the press releases that we've presently made public. So, you can find the Battle Creek impacts and you can find the Visalia impacts out there, plus the two that we closed in the tail end of last year. So, that's all out in the public domain..

Okay.

So, there are substantial costs in the guidance that you gave us for the 2018 outlook, but will be more onetime in nature, correct?.

Yes, and they will generally be treated as a callout on the walk from GAAP to adjusted EPS..

But the $265 million to $305 million has those costs in it?.

No. Point me to which page you're looking at here, if you could..

You said the EBIT is expected to be between $265 million to $305 million.

And I'm just trying to understand if what's in there and what's not in there?.

Yes, that's adjusted EBIT that does not include those typical callout items. We've had a very, very consistent process over the years of what we adjust out and what we don't..

Okay. My second question and -- really goes to the environment and what's going on with the customers. Clearly, someone like a Walmart is rejiggering their portfolio and bringing their pricing down.

And I guess just as we think about the long-term nature of margins and the efforts to streamline the business, what's your thought process at having to give some of this back to your customers, especially like a Walmart or a Kroger, Albertsons, as they need to compete more effectively with the ALDIs and Lidls of the world?.

This is Sam. I think we've indicated today, as we have for a long, long time, that it's absolutely critical that we live in the marketplace here and that there is a never-ending evolution with regard to how retailers approach the market.

And you only have to go to the slide early in the deck -- and I think slide five and look at the volume or the revenue trends of the kind of the global powers in CPG to see that there is a real change underway that will -- could [Indiscernible] to the benefit of house brands among those retailers that regard those as strategic components of their go-to-market proposition.

I think that cost has never been lower in anybody's consideration other than the number two item and that will continue to be the case. But what is really going to drive the private label opportunity is the disruption that has already come about from the changes that were wrought in -- I think, in the second quarter industry-wide.

And we're well-positioned to take advantage of that. And there'll be a little bit of a counterintuitive proposition that if costs continue to escalate in a way differently than the last several years, that'll put an even greater premium on product quality, food safety, customer service, innovation, speed to market, and data analytics.

And nobody can compare with us in this industry in that regard -- in those regards..

So, to follow-up and then probably end the call, the -- so when I see Walmart bringing down their salad dressing to $0.92 to compete with Lidl and ALDI, down from $1.28, probably a pretty big reduction at shelf, are they asking you for help on that? Or is that something that they're just doing on their own?.

No. Each of these leading retailers, and we serve all of them, have their own competitive strategies. And it's our function to understand that, to in all cases complement it and where are -- and where we can, in fact, improve on that. And the unchanging nature of retail grocery is that results of these things can be read instantaneously.

And those matters that work well get expanded and get extended. Those that don't get cut off immediately. And then we have to be able to respond to both sets of circumstances..

Okay, guys. Good luck and thanks for taking my questions..

Hey, thanks everybody. I know -- we very much appreciate that you've joined us today. If you would go back to our first slide and our last and regard those as bookends for news of our progress quarter-by-quarter over the coming year. We'll see you soon. Thank you..

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. You may now disconnect..