Welcome to the TreeHouse Foods Fourth Quarter 2018 Conference Call. This call is being recorded. At this time, I will 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'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 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 TreeHouse Private Brands business. Private label, on the other hand, refers to the customer and corporate brand industry. I would now like to turn the call over to the CEO and President, Mr. Steve Oakland..

commercial excellence, operational excellence, portfolio optimization, and people and talent. But first, let me turn it over to Matthew to take you through the fourth quarter results and our guidance for 2019. Then I'll come back before Q&A to share our progress in those areas.

Matthew?.

Thanks, Steve, and good morning, everyone. Thanks for joining us today. I'll start on Slides 4 and 5 with the consolidated results for the fourth quarter. Revenue of $1.48 billion was at the midpoint of our guidance range for the quarter, a decline of 13% versus the prior year.

Excluding SKU rationalization and the McCann's sale, revenue declined 10.5%, driven largely by the loss of some low-margin Snacks business as we've discussed over the last couple of quarters. On that same basis, if you then strip out Snacks, revenue for the remainder of our business was down a more modest 3.6%.

Pricing to recover commodity costs and the Canadian tariffs earlier this year was fully reflected, up 1.6% in the fourth quarter. Our fourth quarter adjusted EBIT margin at 6.7% improved 120 basis points compared to last year's fourth quarter, and on a sequential basis, was 170 basis points better.

As Steve mentioned earlier, our Structure to Win initiative was very successful this year and generated over $75 million in cost savings, well in excess of both our original calendar year target of $30 million and our year-end run rate goal of $55 million.

Fourth quarter adjusted EPS of $1.03 topped the midpoint of our guidance and the prior year results. You can see the key drivers on Slide 6, as Structure to Win corporate SG&A savings of $0.31 more than offset $0.12 of softness in division DOI and a $0.15 drag from the normalization of our tax rate. Turning next to Slide 7 and 8.

Let me first frame our segment comments today. You'll note, for the fourth quarter, we're still reporting the business as five divisions. We started running the business as four divisions effective January 1. So when we report our first quarter of 2019, that will be as four divisions, at which time, we will also give you the comparable history.

These next two slides tell the story of the key drivers of the year-over-year division DOI decline on a dollar basis, as well as by division.

The two most meaningful drivers here are first, the significant volume reduction in the Snacks business; and second, a couple of ongoing issues in Beverages, where Protenergy continues to be capacity constrained, and in creamers, where we are working through lingering challenges as a result of the Pecatonica strike.

I'm not going to spend a lot of time on these slides since I know you all want to hear about 2019, but I am very encouraged by the progress we're making on operations and SG&A. Turning next to the balance sheet on Slide 9.

We finished the year with net debt of just over $2.1 billion, down $804 million since the Private Brands acquisition and down $285 million since the end of 2017. In 2018, the teams did a great job reducing our inventory levels. This year, we delivered a $78 million reduction in inventory.

And when you go back and look at it over the last two years, we've improved inventory by $138 million. This is an area where we will continue to focus. Slide 10 shows you how we measured up versus our guidance this year. I'm really pleased with how the year shaped up. We delivered on nearly every metric.

You'll see down at the bottom that capital spending came at in $196 million for the year. If you'll recall, our original CapEx guidance was $215 million for the year, and we bought it down to $190 million in November. So if that's the only red X on the page, we'll take it. With that out of the way, let's turn to 2019 and our outlook.

Slide 11 gives you a look at the four divisions as we will be reporting them starting in Q1. Meals and Condiments will be combined to be Meal Solutions. And beyond that, ready-to-eat cereal and snack bars will now be reported within the Baked Goods division, whereas previously, they were part of Meals and Snacks respectively.

We issued preliminary 2019 guidance back in December with revenue of $5.35 billion to $5.75 billion and adjusted EPS of $2.35 to $2.75. As you saw in the release earlier this morning, we are reaffirming that guidance today and providing additional P&L detail, as seen on Slide 12.

What I want to make sure comes across here is that despite our expectation for 2019 revenue decline of about 5% at the midpoint, we anticipate that we will deliver adjusted earnings-per-share growth of approximately 16% at the $2.55 guidance midpoint. That will be driven by solid execution on operational improvement across the entire organization.

While we haven't guided SG&A as a percent of sales, you should expect that we will continue to maintain tight expense control and further align our resources across the new division structure.

Our Structure to Win efforts to date have succeeded in lowering our cost structure, and we are planning another net reduction in SG&A in 2019 of about $20 million. As such, over the two-year period, we expect a net reduction in SG&A expense of close to $100 million or about 20%.

We've also added a free cash flow metric to this year's guidance of $150 million to $200 million, defined as operating cash flow, less CapEx, which will be used primarily to pay down debt this year. Let me now turn to Slide 13 to give you some sense for the year-over-year revenue growth cadence and the first quarter in particular.

As we told you back in December, we will face some headwind in the first half of the year as we lap the loss of some low-margin business, particularly in the Snacks division. As we get into the back half of the year, however, we do have some visibility to new business wins and anticipate pivoting to revenue growth.

I should point out that as you model the year, our intention with this wasn't to box ourselves into revenue growth guidance for the out quarters. As you know, we typically guide the quarter one period in advance.

But what we have tried to do here is illustrate directionally how we expect revenue change versus the prior year to unfold as we go through the year. Slide 14 includes some detail around our first quarter guidance. We expect revenue between $1.27 billion and $1.33 billion and adjusted EPS between $0.05 and $0.15.

Some of you on the line are probably scratching your heads as to why our first quarter guidance is below last year, given the sequential improvement we have been delivering on all the initiatives we have in place. As always, we do have some puts and takes.

On the positive side, our Pecatonica non-dairy creamer plant is back and now running at full production, following the challenges we faced last year. We also expect to see some benefit from the ramp of the Structure to Win program, as well as supply chain savings from TreeHouse 2020.

Importantly, pricing execution has gone a lot more smoothly than last year with a minimal disconnect between inflation and pricing. On the negative side, however, we have a number of headwinds early on. As you already know, volume will be down meaningfully year-over-year as we lap the impact of the 2018 losses.

This will be particularly evident in Snacks, as well as in Meal Solutions, though to a lesser degree. Volume loss such as this not only impacts the top line, but there is also an element of fixed cost absorption that creates a material headwind and reinforces why our pivot to growth is so important.

Back in our third quarter call, we noted our outlook for a continued inflationary environment, and while we see some select packed commodities moving-up, freight and packaging are the key drivers in 2019. We initiated pricing discussions with all customers back in November.

For certain, we are in a much better place today than we were last year, both from a magnitude of pricing needed, but also as it relates to the state of our relationships with our customers.

Because we placed such emphasis in 2018 on restoring service levels and rectifying outstanding issues, the customer feedback this time around has been much more positive.

Once again, there will be a bit of a timing disconnect early in the year, but we do anticipate having customer acceptance around our pricing to cover inflation fully reflected in our results early in the second quarter.

The second issue that will impact the first quarter is that we have some manufacturing variances hung up on the balance sheet that will negatively impact DOI in Q1. As was clear in the fourth quarter results, the teams put tremendous effort toward achieving our working capital goals as the year came to a close.

Hitting our Q4 inventory targets and establishing these levels as the new normal required us to lower Q4 production. As such, there will be some headwind from higher manufacturing costs that roll off the balance sheet with Q1 sales.

With these issues in mind, Slide 15 demonstrates that in the first quarter, the bulk of the business is actually performing well. The $0.10 midpoint of our first quarter guidance is about $0.08 lower than last year.

So what we've tried to do on the right hand side of the slide is to isolate the year-over-year improvement in our Baked Goods, Beverages and Meal Solutions businesses. The solid green bar, boxed in on the right of the chart, illustrates that these businesses are projected to be up meaningfully over the prior year.

Taking one step further, the blurred orange bar represents a year-over-year impact of the Snacks division. The Snacks volume decline of more than 35% has a material absorption effect on the business and creates additional operational headwinds for the division.

While the underlying strength in other parts of the business is masked by Snacks, this issue is baked into our assumptions for the year and is consistent with our reaffirmed full-year guidance of $2.35 to $2.75. With that, I'd like to close by saying that I couldn't be more pleased with how our entire organization closed out 2018.

We have more hard work built into our 2019 plans, and I'm confident that we have another solid year ahead. At this time, I will turn it back over to Steve for his closing comments..

operational excellence, commercial excellence, portfolio optimization, and people and talent. Operational excellence involves fostering a high-performance culture of continuous improvement. It includes metrics around quality, service and safety. It engages and educates our people to create value, control cost and eliminate waste.

We are on a continuous improvement journey. We've shared our progress around TMOS and the positive impact it's having on our business. In 2019, we will implement full TMOS in 12 additional plants.

We are adding an initiative around lean manufacturing this year, which builds on our TMOS platform and is the next step in our continuous improvement journey. We have an aggressive roll out schedule planned this year across 16 of our plants, all of which have already implemented TMOS successfully.

Commercial excellence is about being a solutions provider to our customers. It's about understanding our customers and their strategies and their goals around private label. It's more than selling and pricing. It's about execution, providing supply chain solutions, providing innovation to help the customer meet their strategic goals.

And we are in the early innings of building our commercial excellence capabilities. You all saw the press release from February 1st that Dean General rejoining us next week as our Chief Commercial Officer, reporting to me in this newly created role.

Dean will be responsible for our efforts to bring greater centralization and simplification to our go-to-market organization and make it easier for our customers to interface with us and to align our capabilities with their needs. Dean brings to TreeHouse a skill set and experience around transforming the selling model.

He has many long-standing key customer relationships, having grown up in several major CPG companies. Dean spent more than 20 years at Kraft and started his career at General Mills. And we are delighted to welcome him. In addition, a couple of weeks ago, we announced that we are closing the St. Louis office at the end of June.

As always, these are tough decisions. We are committed to helping our associates with this transition.

Consolidation of our administrative offices facilitates greater alignment around our mission and culture and provides better career development opportunities for our people, while at the same time, improving our operating efficiency and cost structure. As Matthew mentioned, we anticipate further SG&A savings this year.

Lastly, an update on our portfolio optimization. As we discussed at Investor Day, we have engaged a banker to evaluate strategic alternatives for the snack nuts and trail mix business. That process is ongoing, and we hope to bring you our conclusion in the coming months. Let me close with my thoughts on people and talent.

We are building a performance-based culture. We are disciplined in our approach, communicate clear goals and foster accountability. We will have healthy debate because we value the contributions and ideas of all of our associates. Our goal is to align and incent our people and celebrate successes together.

Our work around building culture is ongoing, but it is essential to driving shareholder value at TreeHouse.

So before we take your questions, I wanted to be sure to take a moment to thank our team for supporting me in my first year at TreeHouse and for embracing our goals and doing the heavy lifting that has enabled us to deliver our commitments in 2018. It is this kind of energy, dedication and fortitude that will take us into 2019 and beyond.

With that, Sean, let's open the call up to Q&A..

Thank you. [Operator Instructions] Our first question today comes from Andrew Lazar with Barclays. Please go ahead..

I guess my first question would be, if I use the midpoint of the expected volume decline for 2019 and also the overall sales decline expected for '19, I get about, call it, a 4.5% decline for both, which -- that alone would suggest no real pricing built into the model for '19.

I don't think that's what you're suggesting, but I wanted to check my math on that..

Yeah, we've got some very low-single digit pricing baked into cover primarily packaging and freight. And commodities, we've got some going both ways, probably nets out to about break-even, I think, in the aggregate. So what you're probably seeing is a little bit of mix..

Yeah. And I'd like to go to maybe one step further. I think if you look at the guidance that we gave, the guidance we gave at our Investor Day in December on EPS is the same as what we gave you today. You'll notice there is about a 1% at the midpoint sales decline in the guidance we gave you.

We have a new team in the Snacks business and we have an awful lot of effort going on there. And we have a real obligation and, quite frankly, an opportunity to position that business to prosper in whatever its new life is. And so, as they've dug deeper even since December, it looks like that business might be a tiny bit smaller.

And given that where we are in that process, we're guiding the entire Company. As you know, that may or may not be the number we post even at the end of the first quarter. So I think, I just want to make sure everybody understood why that number at the bottom end of that range moved just a tiny bit..

No, that's helpful because that was going to be my follow-up, which is, it sounds like that really is, as you said, the cause as opposed to some change in your thinking on your expectation for what the business -- the new business wins can deliver in the second half of the year and things of that nature.

Is that a fair comment?.

Absolutely true. But given where we are with Snacks, it needs to be in the toll..

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

Hi, good morning. Thank you. When you -- my first question is, when you had guided at the Investor Day to the first half, I think you talked about sales being down but maybe earnings not being down.

At that time, did you anticipate the first quarter coming in between $0.05 and $0.15? And I guess, if not, what specifically worsen versus your expectations? And is it still reasonable, is my larger question, to think that the first half EPS won't be down?.

Yeah, I think, as we -- first of all, we build the budget and then we work on the calendarization of it. And I would say the first half is a smidgen weaker than we originally expected. And I think it will be down slightly, but we're talking more like a few pennies than anything material.

And I would say the thing that developed that weighed on the first quarter a little more than we had anticipated is the same phenomenon that Steve just described around Snacks volumes, just a little bit lighter early on in this year than we expected..

Yeah. And there's also some more -- Matthew mentioned in the prepared remarks about the costs that are on the balance sheet. A lot of those, as we showed -- we tried really hard on Slide 15 to share with you the progress in the other three divisions, right, and what this looks like without -- with and without Snacks.

And so, as we progress on that progress, hopefully, we'll continue to show you those things. But the work on Snacks really was done to get the inventory out, to get the working capital to the right number, to get the customer base to the right set of customers, to make this the most valuable business that it can be.

And so, we have an obligation to do that. It reflects in the numbers. And hopefully, as we work through and share with you the results of the work we're doing on that business, it will all be much more clear..

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

I'd like to ask you, when you look at the fourth quarter and you look at sort of the implied margin on the volume decline in the quarter, you gave the kind of $35 million hit to profitability. It's a much higher margin on the sales than what you have overall. And I suspect that relates to the absorption that you're experiencing from the volume.

And I just want to understand, number one, I guess, is that true? And then -- or are you really getting rid of that much higher margin volume? And then, just how the programs TMOS and TreeHouse 2020 work to counter that in 2019?.

Why don't I kick-off with that and then hand over to Steve? Obviously, most of what we sell in Q4 we make in Q3. And so, the Q4 results benefited from higher production in Q3, especially when we're running flat out to meet that annual sort of sales bulge between Thanksgiving and Christmas.

And then, our production in Q4 total tails off naturally to support Q1. And also with the inventory drawdown to what we consider to be the new sort of normal levels, there was an additional weight on production. So that's the key driver there.

I think from a macro level around TreeHouse 2020, we're still very comfortable with the calendarization of savings that we've given you, the 80 basis points we achieved in '18, the 130 basis points we've got a very clear line of sight of in '19.

And I think as we talked about at Investor Day, we have pivoted this program from a focus on plant closures to really more of a TMOS-based, continuous improvement-based initiative that gets us much quicker paybacks..

I would just suggest that the plants that are running -- and I've actually -- I know it doesn't sound like it, but within 10 or 11 months, I've had a chance to go to plants that hadn't started TMOS, see the kickoff, see the final report out and then go back -- literally go back a month or two later and see the momentum that we're building.

And so, I think we're on great shape there. We're ready, quite frankly, in a lot of our places to put lean in. And as you know, lean is a well-honed set of skills. We've got a group of folks helping our team that have done this at a number of different facilities across the country and across similar plants to ours.

So the idea that we can add lean to 16 of the plants this year should continue that momentum. We need to be really solid in the middle of our P&L, right? We have to take the variability and the variances out of the center of the P&L, and you do that with manufacturing discipline.

And so, TMOS is the platform to start it and lean is the way we build on it, and that journey is under way. We should be well under way with what we've guided to..

I had a quick follow-up, if I could, on revenue growth. And in terms of the second half of the year, there was a comment that you made about some business wins.

I guess my question is, do you need business wins to achieve growth in the second half of the year? Or are you saying you have some business wins that you believe will lead to second half growth in 2019? And I'll leave it there..

I think we always -- there will always be some ebb and flow and some things that come in and come out, so you need that normal cycle of renewal with wins. We actually got some at the end of last year and early this year. I think I spoke to some of that at the Investor Day, my confidence that -- what I was starting to see turn.

And I've also talked a lot about the commercialization cycle. A sale for us today turns into business six or nine months from now because of the label, the packaging development, the plant approvals, all of those things that happen. So I started to feel good about that at the end of last year. I still do.

I'd also say, when we talk about commercial excellence, I saw some glimpses of it in this pricing discussion. Obviously, it's a very competitive retail environment. The retailers are taking price down. So the last thing they want to see is inflation. Our teams were able to go with this pricing.

And everybody knows that freight inflation is real, right? So this is not a debate with the customer. It's just how do we manage it.

We were able to take -- especially to our largest customers, we were able to take options for them to either offset -- partially or, in some cases, completely offset any inflation by working with us on different logistics lanes on pickup versus delivery on, quite frankly in some cases, new business, new distribution, different promotional, different pack sizes.

So I started to see the beginning of what I will call commercial excellence, where we work together with the customer. In some cases, we mitigated the inflation and in other places, we weren't able to do that and that's going through.

But I think that's the next step in our customer relationship as we start to work together with them to leverage our infrastructure, their infrastructure and use all the levers, not just price, to cover cost..

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

So I wanted to ask -- just a little bit of clarification on Slide 15, your 1Q 2019 margin guidance, or just the EPS guidance bridge, but I want to ask about the margins.

Matthew, I think, what this slide was supposed to tell us about the other divisions excluding Snacks is that margins will be up year-over-year in aggregate for all these businesses excluding Snacks, demonstrating kind of the continued improvement that we've seen in the second half of 2018.

Is that a correct conclusion?.

Yeah. I think that's the right way to think about those divisions in -- as a composite. If you look at that chart, we've obviously got lower volume, but some -- pricing net of commodities is a nice favorable this year because you remember, we went through the first -- well, really the first half of last year with this gap.

And as Steve said, we're making much better progress this year in matching those to up and executing them, we think, in a much more collaborative manner with the customer. And then there's some pretty healthy savings from operations.

And then on the SG&A side, we're lapping a reasonably high Q1 last year as we were just kicking off that Structure to Win initiative. So we get a nice lap, plus some incremental modest savings that we're putting into place. So it's a pretty strong margin story in that quarter..

And we are seeing the -- in the operations bar, you're seeing the benefit of all the restructuring and the TMOS work that we're doing..

Steve, this follow-up then is related to all this. So if these businesses are going in the right direction and the plans have been working, you knew that snack had lost a big chunk of volume.

Maybe if I could just ask, why hasn't there been more work done to reduce the cost structure in the snack operation to prevent what appears to be a very sizable loss in snack profits in Q1? You said there's a new team there, but is there an appropriate sense of urgency? I mean, when I see a big loss like that, I start to wonder if the cost structure is being right sized fast enough.

And if not, why?.

I think -- Dave, that's a great question. Clearly, the team that's in there has the right sense of urgency. The cost structure in that business is very asset-intense. Depending on the outcome of the strategic review, those assets have different values to different options in that. And so, I think it's really hard for me to answer.

I have an answer for this, and I look forward to begin able answer it more candidly. But I think some of the levers that you would pull if you knew you were going to own this business long term, we would have pulled. If you're not sure you're going on this business long term, you wouldn't pull them. Maybe that's the best way to say it..

Okay.

And then that issue will get cleared up in the next one or two quarters, so this is not going to be with us for an exceedingly long period of time, is that fair?.

That's very fair, and I would be disappointed if it took that long..

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

So one question for Steve and Matthew. That blurred lines on Slide 15, I wanted to ask a little bit more about. Q1 has a snacking drag, perhaps maybe as much as $0.20. How do we think about that for the balance of the year? Because your guidance includes that business as part of your operations for the full year. And then, I have follow-up. Thanks..

No, that's a good question. As we look at this business on a year-over-year basis by basis by quarter, through the first half, it's a drag, and as you get into the back half, it pivot's to being up modestly in Q3 and Q4. So this will cease to become a drag once we get to the middle of the year..

I would suggest that that team has a plan regardless of the outcome of this, for it to be a much better business by the end of next year -- or this year, so by the end of this year. So a lot of the heavy lifting and we took a lot of those changes in the end of last year, and they're reflected on the balance sheet that will hit us this quarter..

I think one thing they haven't touched on around Snacks is the tremendous job the team have done with service levels. They've really -- and the first thing you absolutely have to do when you get in trouble is fix the service, and when you've got that good platform, everything else can come.

And this service is probably the highest I've seen since I've been in the Company. It's really quite astonishing..

And then Matthew, on the free cash flow bridge for this year, if we're coming in at $150 million to $200 million, how much cash restructuring related to, call it, plants is involved in that assumption? And how do we kind of bridge from this year's levels to the out-year number of closer to $300 million? How much comes from P&L margin expansion versus working capital efficiencies versus decreased cash restructuring charges? Thank you..

We had cash restructuring spend of around a $102 million in '18 related to TreeHouse 2020. I think in '19, that's going to drop to around $90 million. And obviously, as you go into 2020, we've said all along that that is going to drop materially.

As we think about moving out into 2020, we'll be looking for at least that 10% EPS growth that we talked about at Investor Day feeding through, and we continue to think there's really good opportunity in the working capital space for further improvements. We're particularly encouraged by the progress we made on inventory.

And to do that with improved service levels is really commendable for the team. So, I think you're going to see that spending drop off pretty significantly, you're going to see earnings in that 10% range we've committed to, and then we're going to continue to work working capital hard..

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

That's a pretty creative pronunciation. But yeah, this is Akshay. Thanks for the question. I wanted to -- good morning. I wanted to ask about your long-term plan relative to sort of what we see in the private label industry.

Just -- I think it's -- to me at least, is an important revelation here that you're basically telling us that you're aligning yourself right with the winning customers and the right sort of product mix, the more profitable product and customer mix.

And I think what it tells us that -- is not well known is that there is a big tail that sort of hemorrhages money and there's probably a big tail that is an unprofitable endeavor.

So can you just help me understand if I'm thinking about it correctly in that regard? Because there this view out there that private label penetration is going to increase significantly, but -- it might happen, but your guidance is basically calling for you aligning better with the winning customers and the winning product mix.

Is that a good way to think about the plan here with the sales declining as much as they are?.

are there -- is there capacity in the category, is there underlying growth in the category, etc. Those things uniquely change the margins from category to category. So we're trying to align ourselves strategically with the right customers in the right parts of the private label business.

And we think there's a great opportunity to be profitable and grow..

I think also when you look at that trail of customers, the team did a great job with that SKU rationalization program where we took out over 25% of the SKUs. I think the tail you're left with can still be costly.

And the next opportunity is really to figure out how to improve the margins on that tail, and it probably hinges around formula and container harmonization and keeping the uniqueness to the label, so you can really very effectively service a fairly complex tail and make good money..

Yeah. Complexity has to be a core competency for us..

Got it. And just one follow-up, just in the context of private label share overall increasing over time -- you are the largest, probably the more sophisticated private label manufacturer in food, and you're telling us you need to get much better at what I would call the basics.

And so you're on this journey to get better the basics and then eventually start producing more strategic relationships and create a point of difference at the product level.

So what I'm really asking is, isn't it true that for private label penetration to improve materially as an industry, it's going to be a while if you are on this journey as a leader? I just wonder what the tail -- your competitors, where they are in this journey as well.

But am I thinking about it correctly that you're going to deliver on your plan even if private label penetration is kind of flattish?.

I wouldn't suggest it's going to be flattish. I do think there are some -- most of our competitors are single or very limited category manufacturers. So they -- they are single category manufacturer, and to say they're not good at one category isn't fair. There's some very good competition out there that's very focused on what they do.

I think the growth of private label will really be determined by the number of retailers and the sophistication of retailers to put their effort on it. I think the supply base exists.

The difference for us is, for us to take this to another level financially, quite frankly, is for us to leverage our scale for us to bring all of the structure to it where we can bring more to bear for the customer, we can take inventory out of their system, we can leverage our national distribution base, those kinds of things.

So I think for us to be good across all of our businesses, we have to do the things we're doing, be on the journey we're on. I would suggest private label can continue to grow. So I think the pond we fish in will continue to grow. There's the opportunity for us to fish effectively, and it requires us to do the things we've talked about..

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

I've been hearing more from the big branded companies about list price increases that they're taking. A lot of that is in like biscuits and other snack items.

I want to know if you've seen that flow through in terms of your categories and has that helped you to some degree with your pricing power in those categories?.

I would tell you that we talk a lot about freight and packaging because it affects every one of our businesses, but wheat is one of those other commodities that's up. And so baked goods and snacks and things that are heavily wheat-influenced are seeing more inflation, significantly more than freight inflation. So we are seeing that.

Obviously, that helps us. Private label, one of the things it does is it functions with that brand umbrella, so when the brands go up, that price gap is good for private label traditionally. But I think that you're just seeing a -- the one commodity complex that is up is wheat, so....

And Steve, can I ask a follow-up? You mentioned that with some customers, you were able to take options to offset sometimes all of your cost increases. It had to do with some maybe logistics changes or supply chain changes. Can you give us an example of how that works? I was little unclear what you have meant..

As you can imagine, if you're dealing with a large national retailer and you're shipping goods out of a dozen of our different warehouses to theirs and the inefficiency of that, if we can have them pick up -- and they run large distribution plates, right? So there's nobody runs bigger distribution plates than some of them.

So if we've been able to switch some of that to pick up and pick up from a single location, so to take a lot of inter-company logistics out of it, so we've been able offset cost by doing those kinds of things. We have some businesses where we were able to pick up significantly more business.

A lot of our customers split the -- split a particular category something 60/40 or something like that between two manufacturers just to protect their supply base. They've been able to move some supply around. That has helped us. We've had some where they've changed packaging.

We've been able to really understand the actual cost of what we deliver to them and bring them alternatives that were actually lower cost to offset that. I would suggest that's early. I would suggest it's early for both us and the customer. We both need to build that muscle, right? It's not just a straight procurement exercise.

But it was encouraging to see it begin..

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

Steve, the release cited positive pressures in 12 categories. And I guess my impression was that as of maybe the middle of last year, some of the bid price competition was beginning to stabilize.

So could you just walk through in a little bit more detail what you're, I guess, seeing on the competitive front at this point? Is it more retailer driven? Is it more competitor driven? Just your thoughts on that..

Well, I think it's pretty widely publicized that there's some pretty aggressive pricing going on, specifically in Eastern Seaboard of the United States, with some of the hard discount competition going on. And so I think the retailers are trying to figure out how to manage against that.

And so, if you're a retailer in one of those markets, you're trying to get -- you're trying to drive as much cost out as you can. That has provided both opportunity and challenge for us. There are places where that's new business for us and places we have to protect it. So those things are going on.

But I wouldn't suggest 12 out of 30 is anything unique. I think you'll always see some -- we're in a competitive industry, and 12 out of 30, I wouldn't consider alarming category..

Okay. And then just a follow-up for Matthew in terms of the restructuring work that you're doing. I think you shooting for about like a 20 percentage point increase in capacity utilization. So I'm just wondering where that number stands exiting 2018.

And then second, in terms of your focus on, I guess, the top 100 core customers out of, I guess -- what, about 1,000? Have you come down on the percentage of those customers that you plan to completely exit at this point? Just any more clarity there would be helpful..

Yes, I think from a capacity utilization point of view, one of the first things we did was decommission a lot of surplus lines. So we effectively just took that capacity out within the existing footprint, consolidated onto other lines.

From a plant perspective, what we've actually done since the Private Brands acquisition, a lot of plant closure activity. We've got two more that we're in the process of right now that will happen this year. So I'd say we're midway through that journey, is the right way to look at it.

And the bulk of the efficiency going forward is really going to come out of this continuous improvement lean deployment and just increasing throughput out of the assets we've got. And then, can you just recap the second question? I apologize..

Just in terms of your focus on, I guess, the top 100 core customers out of your total customer pool, how are you thinking about the percentage of customers that you plan to exit entirely? Have you come down on a hard number for that yet? Or is that still kind of work in progress?.

No, I think we looked at that by customer and SKU, the intersect, going back a couple of years when we went through the first profitability review, and we took action at that intersect because some customers can be great in certain categories and not in others and you can make a lot of money. So it's a very fine needle to thread here.

And certainly in many regards, there is no such thing as a bad customer..

And I would suggest, there will be less customer exit, maybe a few. We have sat down with some customers and maybe exited a line or a category or two, what's in both of our best interest, where we can't serve their needs. Some customers do a lot of volume in a particular category and not in others.

There are some places where we're unable to meet their needs the way we want or there -- or it's not win. But I would suggest there will be less customer exit. And more work on -- and Matthew touched on it a minute ago, we call it, gold standard formula. There are many cases where we'll have multiple formulas for virtually the same item.

We can give the customer actually better value with a more constant formula and give them unique packaging so that they still have a unique presence on their shelf that give them actually better value, better quality at a lower price and make our operation much more effective to run..

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

This is Drew Levine on for Amit. Thanks for taking the questions. I think most of them have been answered by now. But maybe, Matthew, if you could provide any sort of cadence that we should look out for as far as COGS inflation? I think it's probably more a 1H focus than 2H. So maybe you could comment on that.

And then, Steve, just an update -- I know you talked about engaging with the bankers on the Snacks. Just if there's been any other progress on the additional divestitures that you're looking for? Thanks..

I think as we go into this year, we see a fair bit of that inflation early on in the year in the freight packaging. We generally goes through a sort of annual cadence of bidding out a lot of our freight network, so we capture that inflation at a point in time.

I think it's true to say that there was an inflationary phenomenon in freight that's just going to be ongoing, but it will hit us pretty early and we'll factor that in. There are probably a handful of crops where you don't get good visibility until later in the year, and we'll look to see what those crops are and the pricing action we need to take.

But we don't think that will be particularly significant. So I think that most of that is a 1H phenomenon..

And then, if you can comment just on the additional….

The additional stuff. I think at Investor Day, we thought it was really important to put a floor under it. When you have as many businesses and categories as we do, there's probably a few things that don't fit in our network. And so, we're always looking at some of those things and what's the right cadence.

Quite frankly, solving the Snacks issue right now is our most important and where all the focus is. So I wouldn't anticipate anything that material in the rest of this year.

But we did think it was important to put a floor underneath it and just say, yeah, there's probably a few things that are better somewhere else and we'll work through that over time, but it won't be material..

Our next question comes from Scott Mushkin with Wolfe Research. Please go ahead..

Hi, this is Sid Dandekar on for Scott. Thanks for taking my question. So you talked about the improving dialogue and relationship with the customers.

Has that translated as yet to any tangible gain, say, like better pricing or stickier contract terms?.

I would suggest we've had some contracts extended as much as three years. We have a couple of things that we've worked through with customers that -- I think the customer recognizes that there's a cost to constantly changing as well, given the long lead time and all the work that goes on.

If we have trust, if we have transparency in the dialogue, I think we're starting to build some slightly longer-term contracts. We're having some folks talk to us about dedicated assets, about all kinds of things. So yeah, I would say -- but again, I mentioned this in my prepared remarks, we're very early in this journey.

We look forward to Dean joining us and helping us with this. But clearly, operational excellence is much further along. We have a clear path there. I think we have a path to commercial excellence, but we're early in the journey. So that should pay dividends over the next year or two..

Okay, thanks. And then as a follow-up, it looks like pricing in Baked Goods more than offset volume. And I think you also mentioned Meals is something that improved sequentially.

So my question is what are the next one or two categories where you think you can start getting that better price-volume balance as 2019 progresses here?.

We have a couple of categories that we're very, very tight on capacity, and we've got customers on allocation, both in griddle and broth. There have been some competitive dynamics in griddle that have been in our favor. And there's also a lot of promotional activity on broth, and it's certainly on trend in many regards.

So there's a couple of areas there where we just can't keep up fast enough. So obviously, the price dynamic certainly is much more favorable there than some of the other categories..

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

I just wanted to ask quickly about the SKU rationalization. It was a couple hundred basis point headwind in the fourth quarter. How should we be thinking about SKU rat impacting revenue during the course of 2019? And then the second part, so that is, you want to ensure obviously going forward that SKUs do not proliferate in the future.

And so I'm wondering if you could talk a little bit about changes that you may have made to the bidding process, the way you kind of evaluate and bet bids with customers, that would be terrific. Thank you..

Yeah, why don't I take a crack at that and if Steve wants to weigh in a second? We're going to be lapping a little bit of SKU rat, probably going out as far as the second quarter with the tail of stuff that was coming out of inventory.

But we don't think it's going to be a big number we're talking about, and it's obviously factored into the guidance we've given. I think, when it comes to proliferation, whichever industry you are in, complexity is like a disease. And if you're not on it all the time, it's going to come back and get units, no different here.

We've got a couple of sort of gating items on this. One is the big committee we put in places as part of our revenue management initiatives where we look at that in some detail and make sure we're not getting there. And then I think the other one that's a sort of natural gating item is label reform and the year-end deadline.

We and the rest of the industry are in a crunch here to get this label reform completed, and we don't have the capacity for any leakage on the SKU rat. So, I feel pretty good about where we are today..

I touched on the beginnings of our conversations, what I would call, commercial excellence conversations.

We had a couple of instances, one particular, a large bars customer, where we actually were able to isolate what the cost of some of their complexity was and how, by actually eliminating an item or two, we were able to actually offset some inflation, run more effectively and provide them with better value.

So I think having the customer really understand the cost of complexity as well will help. So this is this organizational maturity thing that we're building and commercial maturity we are building..

And just a quick follow-up, internally, are you at a place where you have visibility, the teams have visibility into costs at a SKU kind of account level such that you can make those kinds of evaluations, Steve, on specific items that may not merit continuing in market and more broadly, just having that kind of cost accounting knowledge that allows you to kind of price overall to better margin?.

I would say, we've got pretty good data visibility now. We've come a long way over the last two years with the complexity of our IT infrastructure. We are a 100% SAP Order-to-Cash now, which is great. We're down to, I think, it is 70 OPs[1:02:29] in our manufacturing system.

When we put S/4HANA over this in the middle of the year, it will make us somewhat ERP agnostic. So I think will be -- we are in a much better place. We're certainly in a good place to run the business. It will only get better here in the short term. So I feel good about that.

The one thing that we struggle with and I think everyone does -- and you can probably understand, having 45 or more manufacturing locations -- is to really get good activity-based costing. And I've been at a few places where it's been tried and never worked.

So to pretend that we have it that accurate would be misleading you, but I think we've got pretty good data..

TMOS is helping us understand the cost of a changeover. And we understand that we are in the customs product business and changeover needs to be a core competency for us.

So our journey on lean and on TMOS is slightly different than maybe the other large packaged food businesses I've been involved in because we're building things like changeover capability. We are building a different set of muscles in our plants.

But as we build that capability, we're capturing the cost to do so, and hopefully, our standards and our standard cost system reflect that better than it used to. And I would suggest, as we continue to roll out TMOS, though, that visibility will get better..

Our final question comes from Rob Moskow with a follow-up from Credit Suisse..

Regarding the free cash flow for the year, I think you came in -- well, it's in the press release -- $310 million. It's a big part of your executive comp.

Did you exceed your target with that $310 million? And then secondly, you took some balance sheet actions you said and you slowed down some plants to improve the balance sheet at the end of the year in Snacks.

How much of that helped you get to that free cash flow target? Or would you have been there anyway and it didn't really matter?.

I would -- cash flow is a piece of our compensation. I would call it a sliver, not a dominant piece, but it's important to us. And as you know, over the last couple of years, we've worked very hard at all elements of working capital.

I think what we did in the fourth quarter was really systemically bring our inventories down to a level that we're pretty comfortable with, as opposed to it being a one-time initiative that bounces straight back in the first quarter and then you wait until the end of the year because, frankly to us, if we can't sustain an inherently lower level all year, we can't pay down debt and we can't realize the interest savings.

So we looked at this from a very holistic point of view as an ongoing journey that we're going to need to improve on this year and next year, as opposed to squeezing this for a some kind of compensation..

Yeah. And Rob, I would suggest that we actually took -- you all see our executive comp stuff obviously, but we actually took cash flow into all of the incentive plans this year, and we saw a lot of focus on it. Having said that, we have a corresponding measure in the individual plans on customer service.

And so the fact that customer service is weighed heavily as well doesn't allow you to just swing inventory down to make a comp number because you get dinged the other way if the customer service goes bad. So we think there's an opportunity. We think people are working really hard to do what they should get compensated for.

We think it's an important balance sheet metric for us. But we have a check and balance in there when it comes to service..

I'll follow up on that later.

A last question, your $0.09 dilution estimate for the sale of Snacks, are you reiterating that, or does that have to go a little bit higher for dilution?.

We don't have any reason to provide an update around that at this point in time..

Thank you. Well, I want to thank everybody for being with us today and our team for all the effort that went into this. We will have a chance to see many of you at CAGNY next week, which will be fun for TreeHouse, I know. I don't think TreeHouse has been at CAGNY in a while.

So we look forward to seeing you all in person there and your questions and thoughts as we go forward. Have a great day..

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