Unverified Participant Steven Oakland - TreeHouse Foods, Inc. Matthew J. Foulston - TreeHouse Foods, Inc..

Andrew Lazar - Barclays Capital, Inc. Kenneth B. Goldman - JPMorgan Securities LLC Christopher R. Growe - Stifel, Nicolaus & Co., Inc. Amit Sharma - BMO Capital Markets (United States) Robert Moskow - Credit Suisse Securities (USA) LLC John Joseph Baumgartner - Wells Fargo Securities LLC Steven Strycula - UBS Securities LLC William B.

Chappell - SunTrust Robinson Humphrey, Inc. Pablo Zuanic - SIG Akshay Jagdale - Jefferies LLC David Cristopher Driscoll - Citigroup Global Markets, Inc. Jon R. Andersen - William Blair & Co. LLC.

Good day and welcome to the TreeHouse Foods' Third Quarter 2018 Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to TreeHouse Foods for the reading of the Safe Harbor statement. Please go ahead..

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

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

These statements are only predictions.

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

TreeHouse's Form 10-K for the period ending December 31, 2017, 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, 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 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 CEO and President, Mr. Steve Oakland..

Good morning, everyone, and thank you for joining us. I'm happy to be with you today reporting our third quarter in a row of delivering on our financial commitments. This quarter's results top both our internal expectations and external guidance.

Adjusted EPS of $0.62 was above the top end of our guidance range, as pricing has substantially caught up with our cost and we managed through unanticipated issues related to two hurricanes. I'm also proud of our sequential improvement in direct operating income margin in our Baked Goods, Condiments and Meals segments.

Before Matthew gets into the details of the quarter let me cover two topics. First with regard to the hurricanes, Hurricane Florence hit in the month of September. Most importantly, we are grateful that our employees and their families are safe.

And although our Carolina plants did not sustain serious damage as you can see in slide five, our Robersonville snacks plant and Faison pickles plant were both hit by the storm and both were shut down for eight days due to Florence, its aftermath and the resulting flooding.

Lost production time at these plants along with several days of downtime at our three affected warehouses resulted in a drag of a few cents per share in the third quarter. Despite this literal headwind, our organization proved resilient.

Hurricane Michael in October although somewhat less severe in terms of its impact on our operations resulted in several days of downtime at our Dothan, Alabama snacks plant and we expect a negative impact of that storm to show up in our fourth quarter results.

The less obvious, but important issue around the adverse weather is the damage sustained to the cucumber crop. About a third of our country's cucumbers are grown and processed in the Carolinas, Florida and Alabama. We are now facing supply shortages as well as increased shipping distances which will likely drive costs higher in the months to come.

As you know, our pickle business represents just under a third of our Condiments segment. Given the prospective nature of these issues we've done our best to factor that into our fourth quarter guidance. There are further constraints in the supply chain that are still being evaluated.

For example, one of our large packaging suppliers with operations in the Florida Panhandle has been down and does not expect to be back at full production at that site for another six months. So while less direct, these are issues that are still being assessed and at a minimum will likely affect us down the road.

The second topic I'd like to cover is a continuation of our discussion in August around how critical customer service is to our retailer relationship. I'm pleased to say that, we're making good progress and that three months later I feel much better about our service levels. In fact for some customers service is no longer an issue.

And the lingering service challenges are largely contained to those categories where we are capacity constrained such as aseptic broth, frozen griddle and our bars business.

As we seek to be the preferred supplier of custom brands and capitalize on the growth of the private label industry, we must do more than manufacture and distribute high-quality custom food and beverage products.

It's about thought leadership, innovation and a relentless focus on execution that will enable us to provide great service and to be that supplier of choice. We're running a marathon here not a sprint, but it's important to recognize the progress that we've made. The short 15 months ago, we announced TreeHouse 2020.

And nine months ago we embarked on the Structure to Win initiative. We are improving our organization and building capabilities as a result of both of these programs. I'm pleased to report that we remain on track and in some cases like Structure to Win, we're well ahead and the benefits are flowing through to our bottom line.

We are also well down the path to redefining our strategic planning process and shaping our organization's cultural journey. I'm excited to share more details on what all of this means for 2019 and beyond when we host our Investor Day in New York on December 11.

With that, let me turn it over to Matthew to provide you with more details on the quarter and the balance of the year..

Baked Goods, Condiments, and Meals. On slide 14, you've seen the chart on the left before. All signs point to continued tightness in the freight market and everybody in the industry is working to address the challenges here.

Earlier this year, our spot market usage was unusually high and as you've heard from Steve before, we seek to recover inflation, but we cannot price for our own inefficiencies. So, what you see on the right-hand side of this slide is the progress we've made to-date on reducing our spot usage.

Recall earlier this year I described the action steps we were taking to functionalize manufacturing, stabilize our production and shipping schedules, become the customer of choice, and complete a comprehensive RFP to establish multiple carriers in each lane. I'm really impressed by what we've accomplished here.

Over the last three quarters, we have achieved a reduction of more than 50% in our spot premium expense and our lowest spot utilization rate since last summer. Slide 15 is our current outlook on freight, packaging, and commodity costs. The inflationary trend continues with significant cost increases for freight and packaging.

And in commodities, more inputs rising than falling. On the packaging side, it's plastics, cartons, and corrugate. Based on the number of boxes that show up on my doorstep and I'm sure yours too, that shouldn't be a surprise. As a result, we are back in market to talk with customers about the need to recover input cost inflation.

Next, let's turn to the balance sheet. On slide 16, we finished the quarter with net debt of just under $2.3 billion. Since the Private Brands acquisition, we've reduced net debt by over $600 million. As we've been reducing our debt this year, we have made strategic open market repurchases of about $200 million, primarily to buy back our 6% notes.

With regard to working capital, we continue to manage this closely and are pleased with the $126 million improvement since year-end 2017. As you saw in the press release, we are tightening our guidance today and lowering the top end of our range by $0.10 to $2.05 to $2.25.

Given that third quarter top line was a bit weaker than we had forecasted we believe it's prudent to trim a bit off the top. On Slide 17, we've laid out where our outlook has changed, even if modestly, for the remainder of the year.

You'll notice that the impact of the hurricane has been called out in a couple of places, both from a top line perspective, as well as to take into account what we know today about the operations and crop sourcing challenges.

In addition to any hurricane-related volume softness, our expectation is that the third quarter volume trends continue into the fourth quarter and similarly, declines will be primarily in Meals and Snacks. Our expectation is that our full year sales will close out the year near the bottom end of our previous $5.8 billion to $6 billion range.

We saw good success with pricing to offset the Canadian tariffs and that will flow through in the fourth quarter results. So pricing will substantially cover commodities, packaging and freight inflation and now the impact of Canadian tariffs.

While normalizing our non-dairy creamer business has cost our Beverages segment more than originally anticipated this year, it has also been a slower path to recovery than we expected. We can see some improvements and our assumption is that we will reach full production by the end of the fourth quarter.

Lastly, as I mentioned earlier the cost-reduction initiatives are well on track. Structure to Win is exceeding our original expectations. We have achieved the $30 million in savings through the third quarter and now expect the savings in this calendar year could exceed our original exit run rate goal of $55 million.

Slide 18 provides you with a line item detail for the fourth quarter guidance of $0.88 to $1.08. You'll note that our range for the fourth quarter is $0.20 in comparison to the $0.10 quarterly ranges we provided to date this year reflecting the calendarization of our earnings. On slide 19, we've updated our full year cash flow guidance.

We've taken our CapEx guidance down by $10 million to $190 million and tightened our expectations for the contribution from liquidity initiatives which reflect improvements in working capital.

We have lowered our estimate for cash restructuring charges for the year by about $25 million to a range of $140 million to $150 million as we rebalance our Treehouse 2020 focus to projects such as expanding the TMOS rollout and consolidating our warehouse footprint instead of further plant closures.

As a result, we are extremely close to fully funding our 2018 restructuring costs with improved liquidity. The bottom line is that we are now calling for underlying cash generation of $150 million to $180 million this year which is up $30 million from our prior estimate.

Factoring in the $30 million in proceeds from the McCann's Irish Oatmeal sale, in total, we expect to generate $180 million to $210 million. And our priority for cash usage is to delever and stay comfortably under our debt covenant limits as they step down through 2019.

Before I close, I'd direct you to slide 20 which shows our quarterly adjusted EPS progression in 2018 compared to 2017. Our organization has achieved a great deal this year, despite the difficult start to the year and the initial disconnect in pricing for inflation.

Once we got over that you'll remember I told you on our second quarter call that the back half of this year would look very similar to the back half of last year.

You can see on this chart that the sequential improvement is largely driven by normal seasonality, a measurable improvement in our creamer operations in Q4, and then to a lesser degree the pricing recovery for the Canadian tariffs.

I'll close by saying, we are pleased to report the third quarter in a row of delivering on our financial commitments including offsetting the operational challenges of the hurricane. Let me turn it back to Steve to wrap up with his closing thoughts, before we open it up to Q&A..

Thanks, Matthew. In closing, I'd like to fully frame for you what I see as the current challenges and the long-term opportunity. You've heard Matthew talk about our balance of the year forecast, guiding to softer volume trends. It's important to understand that these are specific to TreeHouse. Our volume losses are a result of historic performance.

If you think back to last year and even over the past two years, we were dealing with integration, spotty execution and declining service levels. So at a time when we had frustrated our customers, we then were one of the first in market to aggressively price for inflation. This forced some of our customers to evaluate their options and bid out volume.

Given the long sell-in cycle in private label, we are now feeling the burden of those decisions in the top line. It's going to take some time to lap those losses, as well as feel the benefits of our recent wins. I reinforce this point so you understand why you keep hearing me emphasize the importance of customer service.

As I said earlier I believe we are solving those issues and as a result we stand on a much stronger base today than we did a year ago. The important distinction to draw out here is that our near-term volume challenges are not systemic in nature. They are not the same issues that big food (22:47) is addressing.

Private label is growing and our capabilities line up perfectly with the growth of e-commerce and the movement to natural clean label and organic. We are not trying to solve structural declines. We are solving operational issues and therefore we can win.

I also believe that we are now running better as a leaner organization than when I arrived in late March. The work around TreeHouse 2020 consolidating operations, rolling out TMOS, getting the entire business on SAP order to cash by the end of the year is ongoing.

I want to commend our employees here at TreeHouse for their commitment and the effort that everyone is putting forth. The hard work and dedication has not gone unnoticed. And finally, as we look forward much of what we need to accomplish relates to strategy in returning TreeHouse to growth.

I'm excited to share our thoughts around how we plan to do that and to give you a much better sense for our strategy and our vision for delivering shareholder value in 2019 and beyond at our Investor Day. I look forward to seeing you then. And with that we will now open the call up to your questions..

Our first question comes from Andrew Lazar with Barclays. Please go ahead..

Good morning, everybody..

Good morning, Andrew..

Hi. Two questions if I could. First, you mentioned you're back in the market talking with customers about the need to cover some incremental input cost inflation.

I guess, when do you anticipate some of those pricing actions would flow through? And I guess having just gone through this, do you feel confident that you've got a good sense of volume elasticity and maybe with better service levels perhaps the volume elasticity is a little less extreme this time around. That would be the first question..

Service is first; second, I would argue that the absolute need for pricing from a dollar standpoint is significantly less than last time, right? So the pressure on us to push through the kind of pricing that we did last time is less.

And third, I think and most importantly, there has been an awful lot written about who all are out there with pricing for freight primarily for certain commodities. Some commodities quite frankly are going down. So the dialogue with the customer is much more broad-based. It's much more holistic as TreeHouse.

And I think we're swimming with the stream right now versus I think we were at the beginning of the stream last time. So those things altogether I feel much better about it. And I would suggest we'll see it in the first quarter, the impact of it in the first quarter..

That's helpful..

And we understand that so we have our cost covered understanding that, right?.

Got you. And then you've been able to grow as you've talked about operating profit this year with Structure to Win and some of the work you've done around the plants and some acquisitions. Sales and gross margins are still likely down for the year.

As we think about 2019 albeit it's preliminary, I guess, what becomes the key driver of growth? And does volume need to grow next year to generate the type of growth in the bottom line that you would look for?.

Hey, Andrew, this is Matthew. I think the biggest difference we're looking for next year in terms of the full year profitability and the margin profile is to avoid that significant gap that we incurred in the first half of this year. If you look at the back half, we're pretty much in line year-over-year.

The gap was all in the front half and it related to that delay in getting that pricing implemented. I think, as Steve said a number of different ways, the environment is different. The cost pressure is much better understood and we're coming off a much better service level. And frankly we're on it earlier than we were a year ago.

So key to us next year is going to be avoiding that lag. And then secondarily, obviously, next year is a big year for TreeHouse 2020. And we'll be lapping some in the early quarters some SG&A advantage. So they're probably the key drivers as we think about next year's improvements..

Great. Thanks very much..

Our next question comes from Ken Goldman with JPMorgan. Please go ahead..

Hi. Thank you so much..

Hi, Ken..

Just to follow-up on the 2019 and I know you're not going to give too much guidance on it. But just to refer to something you have said. I think you said regarding TreeHouse 2020, you expect a significant step-up in the plants' margin impact next year versus this year.

You may have reiterated this today, if so, I missed it, but I'm just trying to get a better sense of some of next year's tailwinds. And TreeHouse 2020 has the potential to be a fairly meaningful one. So, I'm just curious if you're still seeing it that way..

Yeah, we are. We've talked about the calendarization of this being about 80 bps this year, a 130 bps next and then 90 bps as we tail off in calendar year 2020. We still view the profile that way.

And frankly, I've been really impressed with some of the momentum we're getting out of this TMOS activity where we're driving continuous improvement on standardized practices. The beauty of that is, the investment is relatively low and it doesn't take productive capacity out in an industry that continues to grow.

So in the prepared comments, you would have heard that we're pivoting our focus in 2020 a little. It's the faster payback less investment intensive better return use of resource..

Okay. Thank you for that. And then, my follow-up is, I realize you have an Investor Day coming up. I know you're not going to get too far ahead of yourself, but you've talked about sort of being in this process of refining your priorities.

Can you let us know, sort of, where you are in that process? Are there any learnings you can share so far about any kind of focus you might have on the business looking ahead?.

Ken, what maybe I can do, I'd like to frame what we plan to share in December in New York. I think what we plan to share is a more clear look at our portfolio going forward. I mean, we've talked a lot about that we're looking at everything we do.

So I think we feel like we'll be able to give some more definition on that, give you some definition on the organization that we think can take advantage of that and support that portfolio.

We think we can share what we think that the – our current portfolio and capabilities, what can we deliver near term and what I mean by near term will be 2019, and then what we can deliver from that. What kind of expectations you should have for TreeHouse long term, so some metrics around it; and then importantly how we pivot this to growth.

We've got some tailwind and Matthew talked about that on our cost structure. We've got some tailwind on some other items that will carry us for a while. But how we pivot this to growth? And importantly, the role of organic growth in a business that's – where the fundamental categories are growing.

So we see all those as the key tenets of the presentation in December..

Great. Thanks so much, Steve..

Our next question comes from Chris Growe with Stifel. Please go ahead..

Hi. Good morning..

Hi, Chris..

Hi. I just wanted to – just to follow-up a bit on the pricing. Your pricing net of cost, even if you include freight, was positive this quarter. I think you mentioned you had some pricing coming through for the Canadian tariffs.

I guess I wanted to understand, as you continue to push for more pricing as you indicated earlier, just how to think about the volume factor there.

So just – is that just opening up to more risk? Or are you seeing competitors also price that's – and you're sort of going up in line with where the competitive environment is allowing you to hold share or gain share?.

Chris, I'll – I can take a stab at this and Matthew can comment. But I would suggest there's been so much written about what's going on in price. Obviously, you hear it from the big branded folks. You don't really hear it from the private label industry.

But the private label industry is impacted as much or more by freight, as much or more by commodities. The commodities are hit and miss, right? There some are up and some are down. So we'll work with each customer on each category appropriately. But I think that it is an industry-wide event and I think the nice thing is now we're ahead of it.

But yet, our – the rest of our universe is well ahead of us. So we're not the first ones out there at the tip of the spear I say on this one..

Okay..

Yeah. I think just to add a couple of points, if I can. We've said publicly a number of times that we can't price for our own inefficiency and we're not intending to here. It becomes a very fact-based dialogue. The customers drive us through these detailed cost sheets. I think our guys have done a very good job with that.

In some of these areas as well take freight for example we don't need to debate freight too much. If the customer thinks they can transport it more efficiently and add more leverage they can pick it up. And we're totally profit-neutral and agnostic to that.

So I think there's a degree of – this is actually leading us to lean out the supply chain and find some opportunities between the two of us. So it's leading the supply chain system to actually some more efficiency..

And in most cases, a year ago we were asking them to pay more for bad service, right? And in my prepared comments, when I talked about the volume losses you see today the customer was looking at our performance at that point. And they had to make some bets.

So we were losing the ties, right? The fact that we've improved our service, that we've improved our relationship, I know I've had a chance to be with our largest customers, our midsized customers and our small customers. And I've seen that relationship pivot dramatically in the seven months, or so that I've been here.

So I think the customer feels a little better about us as an entity about what we're capable of. And so when it comes to something like this that's an industry-wide thing, I feel much differently I think than we did a year ago..

Okay. Thank you for that. And just a quick follow-up. In the quarter, there was a comment about a LIFO liquidation benefit that would primarily accrue to the Condiments business. And obviously you had some hurricane expense on the other side that offset that. I think you defined that in the release at almost $5 million.

How much was that LIFO liquidation benefit? If I look at all the puts and takes of the quarter, some of those unique items, were those a net benefit or a net kind of detriment to the quarter in EPS?.

You know, I think, when you look in the Q, when we file it you'll see the LIFO liquidation was about a $4 million item. We haven't talked about LIFO in the past, but it's almost an ongoing joke here as to what the accountants are going to come up with in terms of a negative LIFO thing. It has been far more of a headwind than a tailwind.

It's just that the accounting rules require you to call out a liquidation. So we've done that and been very transparent about it. What we haven't done in the past is call out the headwinds..

Okay. Thanks so much..

Our next question comes from Amit Sharma with BMO Capital Markets. Please go ahead..

Hi. Good morning, everyone..

Hi, Amit..

Matthew, a quick one for you and then one for Steve. Matthew, in the press release the stock-based compensation was around $5 million I think.

Is it lower – is it trending lower than what you have outlined? And then do you expect to catch up with that in the fourth quarter?.

We've had a bit of a reduction in stock-based compensation as we've adjusted the head count here. As we mentioned in the prepared remarks, we're running well ahead of our Structure to Win goals and now expect to be closer to the $55 million that we committed run rate actually within the calendar year.

So with that as people go out, we're truing up the stock-based compensation, so we've gotten a nice little pick-up there..

Got it, but below the initial $55 million for the full year, right?.

Yeah..

Okay, got it. And then Steve, completely agree that you will come to New York next month and lay out a lot of these things. I was a bit surprised by – or not surprised, but it was interesting to hear you say that.

Most of the issues that you're facing on the volume side are operational versus structural, right? Does that – that doesn't mean that you're not looking for structural improvements or structural remedies for the operating performance that we saw earlier this year or even in the last few years?.

Well maybe I can bring some more definition to my definition of structure, okay? What I would suggest is – and I want to make a comment on long sell-in cycle as well, so that will hopefully bring it to life. What I meant by structural is they're not category specific. It's not consumer driven. We're not facing fundamental demand issues.

We're facing our ability to be that best supplier, right? In cases like creamer and broth and bars, we're frankly not delivering the orders that we're given to by the customer, or we have that customer on allocation. So we've got categories, where we're fundamentally not delivering what we've either committed to or what the fundamental demand is.

So that's what I mean by structural. These are not structural through our industry or our category. Private label industry is growing. If we simply hold share, we will have organic growth, right? So obviously we would hope to do better than that over time and we'll talk about that in December. I did make a comment on long sell-in cycle.

So, if you think about a year ago they're out – the TreeHouse organization is out with price. They're very aggressive with it because quite frankly we had to be, right? I mean, we were not in a position for that not to happen. It was on top of these bad service levels.

And maybe it wasn't as functionally organized as I would argue we are today and as streamlined as the process is today. So as that worked its way through the cycle, the customer decided well you know what? Given that, I'm going to – this volume I'm going to take even if it's an equal price from another vendor.

Well that other vendor takes – I mean, six months is a herculean effort; more like 9 to 12 months to transition that volume. Because if you think about it, there's the bid, then there's the formulation process. You have to have the formula proved. You have to have the packaging approved. Typically there's a plant trial. There's a QA audit.

There's a – this is a long process. So the volume challenges in the third quarter and the fourth quarter that you'll see lap here – that we're lapping here are decisions a customer made 9 to 12 months ago. And so we've had some wonderful wins in the last quarter or so. Those are going to show up in our sales 9 to 12 months from now.

So the long sell-in cycle is what I was trying to articulate there and the fact that the challenges in our topline are not category specific, are not industry specific. They are in fact a result of the performance we had a year or so ago and the pricing we took on top of that performance..

That's great. Really, really helpful, just a really good clarification, so thanks for your definition of structural.

But you do plan on addressing your asset base or your portfolio next month right as part of that wider discussion?.

As clearly as we can, yes..

Thank you..

Our next question is from Rob Moskow with Credit Suisse. Please go ahead..

Hi. Thanks. A couple of questions. Steve, do you have any metrics on your fill rates today and how they have improved or at least stabilized over the past few quarters? You say that your service levels are better. So is there any metric that you can provide on that? And then secondly, the sales guidance range for fourth quarter is so wide.

And if you hit the low end of this range of $1.4 billion, I just don't see how the EPS is achievable unless there's some kind of adjustment on the tax rate below which you've guided to. So maybe Matthew can help us understand the circumstances that would get you to the $1.4 billion in fourth quarter..

Matthew, you want to catch that one and then?.

griddle, Protenergy and bars. And we're working hard in the plants here to meet the demand but we are struggling to meet that level that we had in the forecast. So we've pulled that number down a bit. It's a focus of what we're doing every single day to squeeze out an extra bar, an extra griddle, an extra Protenergy.

So that sort of frames up the thinking on what drove us to pull that midpoint down..

Sure. Rob, the other could be a little headwind in our pickles business too just because the uncertainty on the supply chain there.

What I did and the reason I passed that question off first is I've got the fill rate data in front of me, but the fill rate data is hard for me to roll-up in total because some are cases, some are pounds, some are dollars, right? And we mix 32 different categories of a wide variety of things. So let me try to frame it in this regard.

The customer typically looks for about a 98%, 98.5%, 98.1% to 98.5%. They recognize 100% is very difficult to do and probably would require both of us to have too much inventory. We had categories when I arrived that were below 90% quite frankly. That wasn't the majority of them.

We had a lot of categories in the 95% and 96% range, okay? We now have a lot of categories above 98.1% above what the customer is asking for. And we've had multiple months in a row of meeting the customers' demand at their level.

We have a few categories – the reason that I can't give you a number for the whole company those items that are on what we call allocation so griddle bars, Protenergy and our broth business. We give the customer a forecast. And they may or may not order to that forecast.

Sometimes they order above it, but we only fill – we tell them we'll sell, we have 100,000 cases a month for them. That's what we provide. That's what we agree too.

So some of those numbers are not the easiest to extrapolate, so what I would suggest is we have gone from what I would call below acceptable service mid-90s to high 90s and in most of our categories.

We have a number of places that we need to get better, but we've picked up I would argue at least 2% across the board in customer service in the seven months I've been here..

Okay. Thank you..

Sorry for that. That's a tough one to give you to go on..

Yeah. I mean, look when you come to the Analyst Day maybe you might consider providing some metrics around it, just to how you measure it and how you see the progress..

Sure..

Okay..

Our next question comes from John Baumgartner with Wells Fargo. Please go ahead..

Good morning. Thanks for the question..

Good morning, John..

Matthew, why don't we come back to Beverages, I mean, still some noise there from the Pecatonica plant.

But I mean is it your expectation for this segment to finally be more of a structural margin floor in the high-teens kind of where it is now? I mean, how are you thinking about the balance between the cost savings and logistics improvements coming through set against what still seems like pretty competitive pricing?.

Yeah, we feel pretty reasonable about the margin profile and the earnings in that category this year. It's really a story all about creamer. The rest of the business is performing pretty well. Margins in Q3 in coffee are good. So, we feel pretty good.

The other thing that tends to get a little bit masked here is it is a competitive category, but it's also growing fast. So we think our single-serve filtered coffee is going to be – we're in a couple of percentage points by the time we get to the end of the year of where it was last year.

And you'll remember at the end of last year there was a lot of talk about a big chunk of business we lost. That's really been filled in by category growth. So, we like this category. And we see some stability there.

We do have work to do in the balance of this year to finally put a nail in the creamer operations and get that back to where it needs to be..

And then I guess just going forward your thoughts on the move into liquid coffee.

I mean do you expect that to be accretive to the overall Beverages segment margin as it ramps I guess in 2019 and 2020? I guess what's your take on the competitive environment there? Should we anticipate another Wild West scenario as we had in single-serve with the influx of capacity and pricing pressure? Or is it more of a competitive moat to support the capital investment there?.

Maybe I'll comment on it first, and then Matthew can comment on it. I would suggest that we've seen great demand for the capacity that we're bringing online really, really quickly both from the branded players for co-pack and from private label customers to launch into the category.

So if you think about how great a category this is how much it's grown and how little private label there is we're encouraged quite frankly by the demand for that capacity when we bring it on later this summer, right, early spring, right; late spring early summer..

Yeah. Yeah, I would say it's not an inexpensive proposition to get into and it's not an easy technology. But we think the synergies with our experience in the broth business are going to give us a competitive advantage here.

And I would think like many of these categories, you're going to see a life cycle evolution of the margin structure that over time drifts down. But we're excited about that..

Yeah. That's a natural bolt-on to our Beverage business..

Great. Thanks very much..

Our next question comes from Steve Strycula with UBS. Please go ahead..

Hi. Good morning.

First part of the question would be Matthew will you mind simplifying or unpacking the third quarter volume declines a bit more the down 7, down 7.5 (48:04)? How much of that would you say is really specific to Q3 versus having a little bit of a tail going into 4Q and beyond? I know there's some noise with the plant disruptions and hurricane shifts, so that would be much appreciated.

And then I have a follow-up..

Yeah. I would – we ended up missing Q3 internally versus where we thought we were headed by about $30 million roughly in round numbers. So we think that was awfully coincident with the hurricane. We've been tracking real well by then.

The other pieces we went into that quarter was as I mentioned the creamer thing is not fixed and that weighed on sales in the quarter. We think it will weigh on sales in Q4, but we'll be out of the woods by the end of the fourth quarter.

So we talked a little bit in response to one of the earlier questions about some of these areas where we could undoubtedly sell more than we can currently make. And we thought we had a little bit more capacity frankly in a few of those categories and it's turning out we actually have right now.

But it's all hands to the pumps to try and free as much of that up as we can. So we've been pretty thoughtful when we put that number out there and it's something we're working to beat because those categories are on fire and we'd like to get our service levels across the board back to where they need to be.

And they're the three really that we talked about where we're struggling..

Okay. And then a quick follow-up for Steve. As I think about some of the longer customer win cycles that you're talking about it's evident that your service rates are probably improving right now.

But for some of the attrition that we're seeing from call it fall of last year, does that take time to cycle out through the first half of calendar 2019? And the context of why I'm asking that question is because as I look forward ahead of the Analyst Day, the Street's modeling earnings growth in excess of 20% for the next year or two.

So I just want to see if that properly accounts for some of the customer account loss that might be enduring into the first half of next year. Thank you..

Well, I think it does. And I think I led the dialogue around how long it takes for those things to come in and come out of our top line. I think we will bring clarity to the opportunity in 2019. Our – we would normally not guide 2019 that early, but that is our hope in December.

So, we think we will bring clarity to that when we're together in December..

Thank you..

Our next question comes from Bill Chappell with SunTrust. Please go ahead..

Thanks. Good morning..

Good morning..

Just couple of questions actually about the hurricane impact in the quarter. I just – does that, I mean, I understand with the cucumber crop that's too early to tell.

But on the lost shifts shouldn't that just pop back up to some extent in the fourth quarter and maybe even little bit later, I mean, or are these actually just lost sales?.

I would think of it more in terms of that few cents that we called out as really being overhead absorption in the quarter where we had operating assets that we were paying for. We had people that we were paying, and we just didn't have the ability to produce.

So that when we talk about it being a few cents in the quarter, it was really a function of the cost side. There's a little bit of that cost hung up on the balance sheet that will roll off in Q4. So that's the biggest thing that we factored into that few cent comment in the prepared remarks. But those plants are all back up and running.

In fact, as we look at October, plants have been running well, and volumes looking pretty good. So, we don't think we've got too much residual other than what we just talked about there that's mechanical on the balance sheet..

Got it. And then I guess same – I'm following on Rob's comment on the wide range on the top line. It's also obviously pretty wide range on the bottom line.

So is that really just all the operating leverage from point A to point B? Or are there other factors that we should consider in such a wide range like $0.20 range for one quarter?.

Yes. It's interesting. We talked about this internally quite a bit. And Steve made a really good point. A $0.20 range on $1 is a lot different to the $0.10 range we had on $0.18 in the first quarter.

So actually when you look at the amount the earnings we've got in the fourth quarter here, our range as a percent of the earnings is actually probably the lowest we've had this year. So I think that's the way we think about it internally..

Okay. Thanks so much..

Our next question comes from Pablo Zuanic with SIG. Please go ahead..

Thank you. One question for Matthew, and then one for Steve. The margin expansion in Condiments, even if you take out the LIFO issue, still about 400 bps right? That's quite significant. Can you talk about – that was over one year, so talk about how that translate into margin expansion to the other divisions.

Clearly, significant in the context of giving 300 bps of margin expansion by 2020 for the company as a whole. So I see that as a very positive sign, but more color would help. You had 14% roughly margins there. Is that sustainable? If you can talk about that Matthew? And then a question on coffee for Steve.

In the case of broth, you made the reference that you have a private label business, but you also have a co-packing business for branded players. Do you see that as an opportunity in the case of coffee, not just to be given that your main – you know, that Keurig has entered very aggressively into private label over the last few years, K-Cups.

Is there an opportunity for you to take business away from them on the branded side?.

Do you want me to go first with Condiments. You're spot on. We shouldn't count on that LIFO repeating. So, it's very appropriate to adjust that out. But I think the Condiments division is furthest along on its journey through plant rationalization, and we're starting to see those benefits really come through.

And also they were right at the front of the line in terms of TMOS. And when we see the results that's yielding in those plants it's really, really impressive. So we're looking to replicate that experience as we roll that out across the rest of the business and see similar kind of improvements.

And that's what makes us so confident in the 130 bps next year squeezing that out of cost with TMOS at the front of the line leading the charge there..

Sure..

Matthew, can I ask one before Steve answers the question? When Post Holdings took some of private label, they make a big deal about having a very high share of the categories they operate in private label. Can you give us just big picture in terms of where you are? Because obviously you have a very diversified portfolio.

In some parts you don't have as much share of private label. In other categories, you have a very high share, right? I had thought in Condiments your share wasn't that high. So to me it's quite positive and impressive that you're going to get that type of margin expansion, with apparently not having such high share within private label.

So, Matthew, if you can just give some big-picture color in terms of the portfolio in key categories in terms of share of private label? Thanks..

Yeah. I think if you go back to probably our last call and if not it was the one before, we lay out the categories and denote them in two different ways. One is, where we have meaningful premium better-for-you natural organic offerings. And I think the other dimension we used was where we were number one or two in the category.

So, I think that's something I'd go look at. I think, the real story here is the story of operating effectiveness, efficiency and what TreeHouse 2020 can really bring us. And the Condiments division step forward and we're at the front of the line here. And we're really seeing those benefits on the cost side as opposed to the market leverage side..

Yeah. And I think to your point Pablo, that's why we're so encouraged by this as well. The progress we see in the plants we're running it and we've got it occasionally in other divisions. It's not just in Condiments.

But we're very encouraged by that progress as well and that's why you heard us talk in the prepared remarks about a pivot to more of that 2020 spend being on TMOS. We will have a lot of detail on that in our Investor Day in December.

When it comes to the – our mix between contract pack for other branded manufacturers and private label, I would suggest that our single-serve coffee pod business has a lot of private label opportunity. And we see that as a growth business.

And not that we would be against a contract pack for someone else, but there's a lot of opportunity in private label there. The contract pack I spoke to was in this ready-to-drink liquid coffee and that'll be both cold brew and other forms of that.

That business right now as we bring it online has had probably I would say a disproportionate amount of interest from the big brands on contract pack capacity. So that suggests to me that just capacity in that environment is a little tight right now. So we are by definition a private label manufacturer.

Contract pack has an important piece of certain businesses and certain segments for us and I would expect it to be part of our ready-to-drink coffee business quite quickly, especially as we start out. But I think the opportunity in single-serve coffee pods in private label will consume us in the near term..

Understood. Thank you..

Our next question comes from Akshay Jagdale with Jefferies. Please go ahead..

Good morning. Thanks for the question. I have two. First one is for Matthew. You've referenced the back half of this year a number of times, but obviously delivery of that is highly predicated on 4Q.

So, can you just talk through your level of conviction on delivering on the significant sequential improvement that's implied by guidance? Obviously, there's a margin portion of it and then there's also seasonality, which we understand.

But when I look at the sequential margin progression chart that you have put up by division, I mean, it's a mixed bag right? So you need all – in aggregate you need like 150 basis point or so margin improvement sequentially. And I'm just trying to get a sense for why you are very confident with that. And then I have a follow-up for Steve..

Yeah. I'd draw your attention to slide 20. And I think it's a great question. What we've said this year is that the first half was going to be very difficult and it was primarily around this disconnect between input costs and pricing.

And we said once we were over the hump of that, the back half of this year was going to look very much like the back half of last year. And certainly when you're within $0.05, I'd say that's very similar. So Q3 we're very, very close. If you look at the walk to Q4, there are three big things and we feel really good about them.

There's the normal kind of seasonal uplift that we get. And you know the categories that that impacts every year as we go into Halloween, Christmas and the holidays. We do have this creamer recovery. And when we did the forecast here, more of that was a forecast than it is today.

And we're really pleased with the way our production rates are coming up there. I think, we've got good line of sight to delivering on that. And that has been a pretty material drag on our earnings all year. And then the final one was the Canadian tariff pricing.

If you remember, we said we'd incur the costs for that in Q3 with no pricing because of the lag to get it in and that we would fully recover the costs for the year in Q4. So you're seeing that over recovery come through. I think the other thing is if you look at the margin improvement Q2 to Q3, it was also very impressive.

So I think there's a lot we feel good about here. There's a lot we think is very similar to what we've done before and it's all items we've either got in or got our arms tightly around..

Perfect. And just Steve, a longer-term question structural versus non-structural. I would argue that food companies, the structural problem that food companies, branded food companies, have is more related to market share. Yes, the category growth dynamics obviously are slow or worse than they were. I agree with that.

But I think the bigger issue for branded food companies is market share losses. And that's where I would ask for more color from you. Maybe it's an Analyst Day question but over the last 10 years if I look at my model for TreeHouse, the organic growth is less than 1%.

And by my estimates, because TreeHouse has always had dominant market shares and there's a lot of bidding activity, it seems to us that there's share loss that happens there more so than share gain.

So I understand you're going to improve the operational component of this, but I wonder what your view is on market share looking back and if there needs to be a material shift for the company to grow in line with whatever your view on the category is. So it's a long-winded question but perhaps you can answer it at the Analyst Day..

Well, actually I thank you for that. You know, the – and in the answers that I had talked about when I talked about our strategy in our presentation in New York in December, I did make a point to talk about how we return TreeHouse to growth. And maybe a fairer statement is how we pivot TreeHouse to growth.

And there was no – it wasn't by accident that I called out that we'll talk about the role of organic growth. The organic growth 1%, 2%, whatever the percent is, 3%, whatever that number is in this business, is dramatic. And we are in a position where we should be able to do that. And so we'll talk about that.

Now it won't happen in every category and it'll be higher in some and lower in others. But there's a real opportunity for this business to deliver if we're able to do that. So your question is spot on why I made sure that was in my comments today..

Thank you..

Our next question comes from David Driscoll with Citi. Please go ahead..

Great, thank you. And I appreciate you squeezing me in here. So a couple of questions. Steve, first one is just a follow-up to you on what your – you answered a couple of things here about what you're going to tell us at the Investor Day.

But I'd just like to ask is are the strategic actions like really significant or is this pruning? Can you just give us a little bit of color here on the magnitude as to what it is you're going to reveal to us on the December Analyst Day?.

Well, I would just – I would pare it down to just say it's hard for me to comment on that. But I think the expectations are that we do the things necessary to bring TreeHouse to where we all think it can be. And so I understand the expectations on the business and on me for that day and I hope I don't disappoint you..

Okay. Matthew, a couple of follow-ups. I mean, I think you've already said a couple of things here, different questions. I'd like to put them together. The first one is that in the third quarter pricing covered inflation. That produced the 5% margin.

I think secondly you said that in – I think to Andrew's question, you said that the big thing in 2019 is to not repeat kind of the big problems of the first half of 2018.

So said differently, right, your third quarter has already shown that you've had pricing to cover the inflation, 5% margin, when you just start to think of what that means for the first half of 2019 I think that's why you're saying you have some confidence that you don't repeat the disaster of the first half of the year.

And then, finally, I think you said on the call that there would be 130 basis points of margin delivery specifically from TreeHouse 2020. And that would be on top of anything related to pricing, covering the inflation that's gone on this year.

Each of those pieces that I've laid out right there, am I correctly restating that the different pieces that you've laid out on the call here? But just trying to consolidate this information and make it clear..

Yeah. I think we talked about by the time we got to Q3 the pricing would have caught up with the input cost challenges. And clearly in Q1 and Q2, it didn't. So we're pleased with that gap being closed.

It's very clear to us also that it is not a sustainable business model to have inflation that's very clear, very in front of you and not have it in price and then go through this six-month lag. If this is the profile of our business going forward that's not going to be acceptable.

So as we alluded to, we're at a market having those discussions right now because there's very clear inflation right in front of our nose as we sit here on freight, on packaging, on some commodities. And as Steve said some are down, so some people are going to get a pleasant windfall.

The other item is the 130 basis points of 2020 we see for next year. As we've said all along that is at constant volume mix and price. And we are going to have a difficult lap in the first half of last year. As you've looked at our volume profile this year you can see the back half is weaker.

As we go through next year, we're going to have a difficult comp in that first half. And that's the pressure that we'll need to work our way through..

Okay. I appreciate that. We'll look forward to the investor day to spend a little bit more time on 2019. Thank you..

Thanks David..

Thank you..

Our next question comes from Jon Andersen from William Blair. Please go ahead..

Hey good morning everybody. Thanks for the question..

Good morning Jon..

Most of mine have been asked, so I just wanted to spend a minute on Protenergy. You mentioned that there's a capacity expansion going on there. Could you talk a little bit more about the profile of that business? I think at the time of the acquisition it was mostly a broth business.

Is that still accurate today? And then with respect to kind of the capacity expansion, what are the objectives around that? Is it pure capacity to do more broth? Are there capability enhancements to maybe do other things in aseptic as well? So just trying to get a better profile of what's going on in that business and what your expectations are? Thank you..

Sure. I would say as we define, Protenergy it is still the broth business. The other aseptic things we're putting around it we'll call different segments, but it is primarily our broth business or it is our broth business. And it's been a fascinating category.

If you think about a category that's been around forever, all of a sudden that business has just taken off from a volume standpoint. And I would suggest, that private label has gained a tremendous amount of share.

There've been a couple of our largest competitors get behind us, promote it, advertise it and change their distribution mix, their merchandising mix, et cetera, their shelf set which has driven a lot of the volume that none of us expected, quite frankly in the industry. So we've got customers that are 230% of what they were a year ago type of thing.

So we talk about capacity constrained, I mean the numbers are that dramatic, right? So that's going on. There also are segments in that of bone broth, of much more upscale broths which are on trend. And I would argue our new protein drinks are part of different diets.

So I think there's two things going on here, I think there's just been this swing by a couple of our largest retailer, but frankly by many of the retailers, not just like our largest ones, that have swung that category more towards private label.

And then on top of that, you have this consumer dynamic of these specialty items these ready-to-drink items, ready-to-use items. So we've got a couple of great dynamics there. We invested in some capacity. We're chasing it a little bit.

We – it's a nice business, but we have some work to do on our manufacturing footprint and on our ability to produce that at world-class rates..

And has the – in broth specifically has the conversion largely happened from out of cans into the aseptic cartons? Or is that still kind of going on? And is your growth opportunity more kind of the private label piece just picking up relative to national brands in that aseptic format?.

I think it is. It's virtually all aseptic format. And that's where the opportunity process..

Great. Thanks so much. Look forward to seeing you in December..

Yeah. Great. Well, with that, I think we're going to – we'll call it a day. And I'd like to thank everybody. And we look forward to seeing you all in December. And we'll sign off for now. Have a great day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..