Good morning, and welcome to the TreeHouse Foods’ First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to PI Aquino. Please go ahead..

Good morning, and thanks for joining us today. Before we get started, I’d like to point out that we have posted the accompanying slides for our call today on our website at treehousefoods.com. 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, 2018, 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 statements 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..

Thank you, PI, and good morning, everyone, and thank you for joining us today to discuss our first quarter 2019 results. This quarter, we continue to make progress on our strategic plan.

Our first quarter adjusted EPS of $0.13 was towards the upper end of our guidance range, and revenue of $1.3 billion in the quarter was right in line with our commitments. These results were driven by underlying strength within three of our divisions, Baked Goods, Beverages and Meal Solutions.

Our Snacks division continues to weigh on our financial results. In addition to our earnings release this morning, we issued a couple of additional press releases. First, I’m pleased to announce that we have signed an agreement with Post Holdings to sell our ready-to-eat cereal business.

The Cereal business was approximately $260 million in revenue in 2018, and was part of the $300 million in revenue defined in our Investor Day as areas where we needed to change course. We think it makes a lot of strategic sense for the business to be part of Post’s portfolio, and expect the transaction to close in the third quarter.

The second press release today was regarding the closure of the Minneapolis snack nuts and trail mix plant. Our strategic review of Snacks is ongoing, and positioning this business for future success is critical. Streamlining the operational footprint is a key step to that end.

Closing plants is always difficult, but we believe that Minneapolis closure is a necessary step to position the business for future success. As we work through the strategic review of Snacks, we expect it to continue to drag on our results. And Matthew will detail that further in his comments around guidance.

On a positive note for Snacks, those of you who’ve been following us closely and heard me reiterate how important service is to the customer relationship. Snacks is no different. Outstanding service is critical to returning this business to both growth and profitability and is also a very important leading indicator.

So while the financial performance of Snacks is disappointing, I’m encouraged by the fact that service levels have improved dramatically, and have been consistently above our targets since December. In fact, we’re doing a great job across the entire organization improving service levels.

And I’d like to take a moment to recognize the hard work our teams have put in. We’re also doing an excellent job implementing the TreeHouse Management Operating structure or TMOS, and rolling out lean manufacturing principles, and it’s beginning to show up in our results. Matthew will share more details with you.

But I’m really proud of the way our organization has come together to drive operational excellence across TreeHouse. Now let me turn it over to Matthew to give you more color and walk you through the numbers and share our outlook for the second quarter.

Matthew?.

Thanks, Steve, and good morning, everyone. Thanks for joining us today. Before I get into the first quarter results, let me build on Steve’s comments around operational excellence.

On Slide 4, and you’ve seen a number of these charts before, we continue to push our service levels higher, up 2 points in the last two months, and our use of the spot freight market lower. In fact, our spot market usage has reached lows that we haven’t seen in the last two years. Network optimization, TMOS and lean continue to make great progress.

In the first quarter, we completed the closure of the Visalia pretzel plant, we announced the closure of the Minneapolis Snacks plant today, we’ve rolled out TMOS now at 15 sites and have launched lean manufacturing at 12 locations.

As Steve noted, and I hope will become obvious as we walk through the first quarter results, our hard work is translated into improved performance. On Slide 5, is our first quarter results scorecard.

You’ll remember we used a similar chart back in February to show you how we faired last year versus our guidance, and it’s something I plan to use going forward. In the first quarter, although results were below prior year, we delivered on all of our guidance metrics. Turning to Slide 6 and 7 on the P&L and revenue drivers.

Sales declined 12.2% or down 10.2% excluding SKU rationalization and divestitures. The decline was largely driven by Snacks along with some lost business in Meal Solutions. If you were to take it one step further and look at the results excluding Snacks, revenue for the remainder of our business was down 6.1%.

As you can see, total pricing was up only 0.2% as Baked Goods and Meal Solutions recovered pricing to offset commodity costs, while Beverages had some pricing giveback and Snacks reflects the pass through of lower input costs. Division DOI dollars declined $9 million. And first quarter adjusted EBIT margin of 2.6% was down 20 basis.

Turning to Slide 8 and the key drivers. This is where you start to see more clearly the drag of Snacks on our overall results. Year-over-year, our EPS is down $0.05. However, you can see that division DOI for Baked Goods, Beverages and Meal Solutions is actually up $0.13 versus last year, while snacks is down $0.25.

Lower corporate SG&A contributed $0.09 year-over-year. So excluding Snacks, our first quarter results would have been up meaningfully over last year. Slide 9 shows our DOI walk from 2018 to 2019, down about $9 million.

As expected, the volume of mix decline we discussed earlier was offset partially by improvements in our operations and pricing to cover inflation. Turning next to Slide 10 and the segments. We’ve been running the business as 4 divisions since January.

And as a reminder, the changes include that the combination of meals and Condiments to become Meal Solutions, and the transfer of the bars and ready-to-eat cereal categories to Baked Goods. In today’s earnings release, we provided a table recasting 2018 on a quarterly basis, so you have the year-over-year comps for modeling purposes.

The biggest issue that jumps out on this slide is the challenge we continue to face in the Snacks division, and I’ll get into that in a bit more detail as we discuss the outlook. You’ll also notice we continue to lap volume declines in Meal Solutions from some lost business, which resulted in some stranded fixed overhead.

On the bright side, we’re seeing some solid results in Baked Goods and Beverages, which is really encouraging. Turning quickly to the balance sheet on Slide 11. We closed the quarter with net debt of $2.2 billion, up slightly since year-end, and showed continued improvement in working capital on a year-over-year basis.

Q1 inventory was down nearly $90 million year-over-year. Although, higher than we originally planned as we built inventories in anticipation of the potential impact of the Midwest flooding. We are very focused on making these lower inventory levels the new norm. Turning to Slide 12 and our Q2 guidance.

Taking down the P&L, we expect revenue of $1.27 billion to $1.31 billion, net interest expense of between $29 million and $31 million, tax in the 23% to 24% range and adjusted diluted EPS of $0.25 to $0.35.

I would point out that while our second quarter guidance takes into account the various puts and takes shown on the left-hand side of this chart, we have not baked in any potential impact on transportation from potential spring flooding in the Midwest. Many of the drivers in the second quarter will be the same.

As you’ll see on Slide 13, it will look like a very similar story to the first quarter. Although, we will still be lapping some volume loss like you saw this quarter, we’re expecting solid year-over-year operational performance. Again, excluding Snacks, our results would be up year-over-year. Turning now to Slide 14.

I want to build on Steve’s earlier discussion of Snacks and give you a framework for our current thinking. As Steve said, and as we noted in the releases this morning, our strategic review is ongoing, and we expect to be in a better position to share our conclusions with you in early August.

The left-hand side of this slide is the historical DOI trend for the Snacks division as we now manage it today, so nuts and trail mix excluding the bars business. Snacks has lost meaningful volume beyond simply the large customer that we called out last year. Clearly, profitability of the business is deteriorating.

As you know, the combination of snacking on-the-go and plant-based protein makes this a good category with growth potential, and we need to position the business for success regardless of its future ownership. The decision to close the Minneapolis plant makes financial sense and will better align the plant network with the lower volume levels.

From a cash on cash perspective, we are measuring the payback in months, not years. As we continue to position the business for long-term success, I’d like to also point you towards the right-hand side of the chart where we’ve shown you our service level track record. As you’ve heard before, outstanding customer service is table stakes today.

Yet when you look back on the latter part of 2017 and the beginning of 2018, service was very poor and bottomed in the 80s, clearly unacceptable. The team has done an outstanding job focusing on service and fulfilling customer orders on time and in full. And in December, the Snacks division returned to target service levels.

Since January, our service level has consistently been above 99%. What does all this mean? Into the financial results is a lagging indicator and service levels is a leading indicator. The chart on the right would suggest that we’ve taken a big step forward moving the business in the right direction.

But, as you know, in private label, we have long bid cycles and winning back volume takes time. Our most recent forecast would suggest that the Snacks business presents risk to our full year of about $100 million in revenue and $0.15 to $0.25 in adjusted EPS, assuming TreeHouse ownership through year-end and absent any further restructuring actions.

We are still in the process of reviewing our strategic alternatives, and this scenario is only one of the potential outcomes. We’re committed to doing what makes the most strategic and financial sense in order to provide the best returns and deliver long-term shareholder value.

As you can imagine, the range of outcomes for Snacks have different implications. So while we thought it important to update and quantify what the risks could be if the Snacks business is with us through year-end, until any decisions around Snacks are finalized, we believe it is prudent to wait to update all elements of our full year guidance.

We will come back to you with those conclusions and updated full year guidance on our August earnings call. Let me close by saying that although the challenges in our Snacks business continue to weigh on the overall results, I’m really pleased with the solid start and excellent operational progress in the first quarter.

Let me now turn it back to Steve..

Thank you, Matthew. I’m sure you can tell from both of our comments that the importance of outstanding customer service has been ingrained in our organization. Before closing, what I’d like to do is to give you an update on the four tenants of our strategy, commercial excellence, operational excellence, portfolio optimization and people and talent.

First, around commercial excellence. Dean General, our new Chief Commercial Officer h been spending a lot of time on the road listening to our customers, a lot like I did when I first arrived. Dean is building upon his prior relationships and thinking through how best to align our organization.

We’re focusing the organization on being customer-centric and we’re identifying the right growth opportunities, privatizing them, planning and aligning our teams to execute accordingly.

It sounds simple but we are building capabilities and driving accountability so that we can become a best-in-class commercial organization and the solutions provider of choice. With regards to operational excellence. We’re a bit further along in this journey.

The amount of effort and the progress the teams are putting into accomplishing our TreeHouse 2020 goals is unbelievable. As Matthew noted, this quarter, we completed the closure of the Visalia plant. We announced the closure of the Minneapolis Snacks plant today.

We’ve added another 15 plants to our TMOS rollout this year, and by year-end, we expect to have a total of 29 plants on full TMOS. On top of that TMOS platform, we’ve also launched the lean manufacturing process with the expectation of having 12 plants completed by year-end.

All of this has been achieved while dramatically improving our customer service levels. We continue to have a lot of work to do, but I am pleased with what we’re accomplishing and with the quality of the results. Portfolio optimization will be central to how we position our business for success going forward.

We’re committed to driving shareholder value and being financial disciplined. We’re pleased to be able to announce the ready-to-eat cereal today. And as we said earlier, we look forward to being far enough along in our Snacks strategic review process to share more with you in August.

Finally, people and – the people and talent competent of our enterprise strategy is the most important of the 4 tenants. Commercial and operational excellence as well as portfolio optimization position our business for success. But it’s the people and talent running the organization that will make the biggest difference.

As we align our culture and strategy, our people will drive achievement of our mission, vision and purpose. To that end, we have redefined our corporate values that we’ll launch in a few days.

Our shared values represent another step on our journey to moving our organization forward toward achieving our vision of becoming the undisputed solutions leader for our customers.

Our values define how we work with our customers, suppliers and each other to support our performance-based culture, making TreeHouse a great place to work and ultimately driving superior results. In closing, let me say that I believe we’re on the right path to building a world-class organization. We have a lot of information to get through today.

So while you didn’t hear me talk about the importance of private label and our ability to be the supply chain for our customers brands, the opportunity remains real.

The exciting thing is that the market for our products is growing every day as retailers seek to differentiate themselves, build loyalty and traffic and offer consumers value, choice and access to high-quality affordable food and beverages. Finally, I invite you all to visit our new website launched earlier this week.

The new website has a more modern look and feel and features greater information about our products and capabilities. We think it gives you a better feel for who we are and what we’re doing as an organization to achieve our purpose, vision and mission. With that, let’s open up the call up to Q&A..

[Operator Instructions] The first question will come from Chris Growe of Stifel..

Hi, good morning..

Good morning, Chris..

I had two questions for you. The first one is, I’ve thought about the year and approaching the year – with input costs were likely to be up, and really that you’re force – facing the need for pricing early in the year. There was very limited pricing coming through this quarter and you had a very positive TNOC.

So I wanted just to make sure I understand that and kind of what to expect for the year around cost inflations? And broadly how the pricing environment is working for you?.

Good morning, Chris, it’s Matthew. The – I think we talked on the last call about the need to get pricing in. And the fact that we got after it earlier this year and went about it in a different manner. We went it at the top of the organization and then at the bottom of the organization, and the message met in the middle.

And we also, in many cases, were able to offer sort of value-add alternatives or tradables instead of just straight price. So we think we went about it in a much better manner this year and it’s gone into effect much more smoothly and with far less anxiety and volume repercussion. So that’s good.

Most of the pricing that we need, I would say, over 90% is actually behind us. There’s a sliver that’s sort of crop cycle related that we still need to go get, but it’s a very small amount. So we feel good about that. The other thing is in Snacks, we’re actually in a deflationary environment there. So we’ve been chasing that one down.

So the net number you see is not large as the composite. But we feel real good about how we did it and where we sit..

Okay. And Steve, I had a quick follow-up question for you if I could. And – I just wondered at a higher level, if you could offer an assessment of the business. And obviously, with the update coming in August would suggest a little bit of uncertainty until then as we get a better feel for the Snacks business in particular.

But there is, obviously, so many areas of progress throughout the business as well and things have gotten better in many regards.

So – perhaps from a high level you could – if you could offer some thoughts there?.

Yes. Well, I mean, it’s been an amazing year. If you think about the day before this call, this was my first call a year ago, I think our stock closed at about $36.50. I’ve been on the road with a bunch of frustrated customers. We had service issues.

And you know really when you dug into it, we had a great opportunity, but we didn’t have a strategy to go take advantage of that opportunity.

And if you think about it, if you would’ve asked me to commit to the number of things that we’ve accomplished in the year on this call, there is no way I could have committed to the kind of change that we’ve actually accomplished. I would say it’s a classic strategy process. We came together as a group.

We looked at what the opportunity was and how we had to reorganize the business and make a strategic focus on it. Building the ideas of operational excellence, commercial excellence, people and talent in our portfolio. And then the place immediately pivoted to each one of those activities.

I’ve never seen an organization with the capability or embrace change the way that they have. We talk a lot about, for example – I can’t talk about all of these but operational excellence and how much work was going on. When I came in, it was about plant closures and rationalizations. In less than 12 months, we will have a dozen plants through lean.

This is an organization that didn’t define OEE the same way a year ago. We’ve got metrics. We’ve got just a real – a movement there towards capability and efficiency versus rationalization and closure. So you think about the pivot that, that organization has made.

We now on the commercial side, we talk a lot about Dean and working on the go-to-market organization. But that team has built a plan. We have 32 categories. They now have a three-year plan by category, understand where the white space, what’s going to be required from innovation, from capital from selling.

So the sophistication level I think in a year is amazing. Those of you who have been to our website before, if you go to our – if you remember about that looked like and you go to the one that we launched on Monday, I think you see the kind of transformation that the company has made.

I’d be remiss if I didn’t say there’s one area that I wish we’d made more progress on. You always wish you went faster. We understand our portfolio. The sale of ready-to-eat cereal already, I think you all will agree makes a lot of sense. And our limited capabilities there will be complementary to Post. I wish we were further along on Snacks.

I wish we’d recognized the condition of that business a little bit earlier. But I think we do that now and I think – you also hinted at the idea of the guidance issue and what we’re waiting till August.

I would tell you that with the exception of Snacks – I mean, there might be a $0.01 or $0.02 in the ready-to-eat cereal depending on when it closes type of thing, but there is nothing in our forecast that suggests we would change guidance from our Meal Solutions, our Baked Goods and our Beverage business.

From our operations team, from all of those things that they’ve committed, there is nothing in our forecast that isn’t at our above where we were at the beginning of the year. The question is, what’s going to happen with Snacks? And we didn’t think it prudent to update guidance on things we just didn’t know the timing of..

That makes sense. Thank you for the color..

The next question will come from Ken Goldman of JPMorgan..

Hi good morning. Thank you. .

Good morning, Ken..

My first question is a clarification. And if you clarified this in your prepared remarks, forgive me. But in the press release, 2Q sales are supposed to be at the bottom-end $1.25 billion? In the slide, I think it says $1.27 billion for the second quarter.

Could you just let us know which one is correct?.

Well, let’s take a look at that. Why don’t we take your second question, Ken, while we’re just rolling in for the....

Yes, we’ll go through the detail..

Yes..

Yes. And I could be reading it wrong, too. I guess my more substantial question is, I just wanted to dig in a little bit on the risk that you called out from snacking, and a little bit on snacking. So you called out $100 million to revenue, $0.15 to $0.25 to adjusted EPS.

Is there any sense you can give us of what these numbers were previously just so that we can get a more deeper into sort of the weeds on what the – how the business has sort of worsened a little bit I guess? And along that, the closure of the plant.

Steve, you were optimistic a few months ago that nuts and mix, that whole business would be resolved by now.

Why hasn’t the situation been resolved yet? Just trying to get a sense of what’s happening there? Why you decided to close the plant rather than go a different direction?.

Sure. Well, let me grab that while Matt goes through the numbers for you. Okay. That team as you can imagine, there’s been a tremendous amount of work on that team and we showed you the service chart. So we reorganized that a couple of months ago, right. We announced that we were doing strategic alternatives at our December meeting.

We put a new team in there. That team quickly went to work on what are the right items? Where should they be made? All of those of things. They’ve come to the determination that we can serve all of our customer demand from our three other sites.

And that although the Minneapolis plant had some capability, it really isn’t needed for what they need to do. Near term and long term, it will have no customer impact. And so it just makes this business a much more attractive business. As Matthew said, the payback is pretty quick.

And so we felt that regardless of the outcome of our review, we needed to run this business as if we would run it if we owned it and with the discipline and the rigor that we’re running it at. And so we thought it was important, and I think it positions itself regardless of the outcome.

And I think it raises the value of that business regardless of the outcome..

Just to come back to your number question, Ken. $1.27 billion is the right number..

Okay.

So correct in the slide, not correct in the press release?.

Yes. We’ll reissue the press release to tie those two out..

Thank you, guys. Appreciate it..

Thanks..

The next question will come from Andrew Lazar of Barclays..

Good morning, everybody..

Good morning, Andrew..

Steve, one thing you didn’t mention and it might be because it’s tied in with sort of how you think about the full year and such. But given your commentary on that, the bulk of the change would be – to the full year would be Snacks related.

One thing that you had talked about last quarter and at the Analyst Day and then also I think you tagged me with the expectation that you would see an inflection point in the back half of the year with respect to sales growth. And I don’t know if that’s still very much your expectation.

Again, kind of like snacks excluded, where if anything had changed on that front because I think in the prepared remarks, Matthew had mentioned some – maybe some customer losses in Meals maybe? I didn’t know if that was as anticipated. But – so that would be helpful. And then I’ve got a follow-up..

Sure. Sure. The Meal stuff – the Meals changes are right on their plan. So we still see the back half of the year turning to positive. It’ll probably go flat and then show some growth as we see those 2 quarters go. But we would expect improvement, dramatic improvement ex Snacks in the back half.

Now depending on that – on what happens with Snacks, it may be the total business. But we’ll, obviously, have more information as we go forward..

Got it. And that’s helpful. And then....

Yes. We don’t expect that to change..

Got it. Thank you for that. And then one – you mentioned and to Ken’s question just that some of the restructuring work in Snacks sort of raises the value of the business, kind of, regardless of what ultimate outcome is.

At the Analyst Day, I guess you guys provided some admittedly preliminary dilution type of estimates should these businesses be divested and such.

Does, I guess, any of the changes in the Snacks performance right into our restructuring changes that you’re now talking about, do you think dramatically changed that sort of overall dilution estimate much or not?.

I don’t think so. But it’s awfully difficult to answer that because you’ve got 2 dynamics. Clearly, the earnings are a drag on us. But we obviously made some kind of proceed assumption as well, which you would expect to be weighed down. So I think I don’t see that materially changing..

Yes. I wouldn’t think so. And as we look at Snacks, the first quarter was – will probably be its toughest first quarter of the year, right? So we don’t project, I mean, if you do the math on what – we went to great lengths to be able to be transparent here. On a progress that the other three divisions are having and where Snacks is.

And so what we wouldn’t want you to do is multiply the first quarter by four, I mean it’s not nearly that. That’s why we felt we had to give the thoughts on Snacks. If it’s together for the full year, that’s why we felt we needed to give that..

Thanks very much, everybody..

Our next question will come from David Driscoll of Citi Research..

Great. Thank you and good morning..

Good morning, David..

Okay. So just to be super clear on this. I think what you guys are saying is that if we leave Snacks alone, it’s fair to say that the business, ex Snacks, is on track for your 2019 expectations? Steve, I think you said a moment ago that it would be either on plan or better than planned.

So I think what you’re trying to tell us that the takeaway here is, you’ve got a negative hit to the operating performance of Snacks minus $0.15 to minus $0.25 versus your previous guidance. But the other portion of the business, the bigger side of the business, which will keep going forward, is doing in line or better than planned.

Am I stating these things exactly correct? If not, could you course correct me?.

No. David, that is exactly the message here. We have a Snacks issue. The rest of the business, we’re really pleased with how it’s performing..

Yes. And that’s why we’ve been so transparent in how we try to position it..

Okay. My follow-up then would just be – this is a little confrontational. But it doesn’t actually seem that hard to update your guidance. Like for me, you do own the Snacks business. And until you have a sale agreement, you own it, and you should update your guidance with these numbers. All the rest of us are going to do it.

And where I’m going with this, the value-added point here, is that I think that these reductions that you’re talking about $0.15 to $0.25 should be focused on the top end of the previous range, not the bottom. And there’s a lot of places people could go today in the absence of direction from you guys.

So if the rest of the business is really performing quite well then I would say that this would suggest that we’re taking the top end drop off this number related to Snacks if you own it forever. Maybe you don’t but that’s something we won’t learn for some period of time.

Would you agree with that thought process?.

The way I think about, David, is when we give you a range, we’re looking at the range of possible outcomes. But when you think about the midpoint, that’s really where nominal is and we’ll have puts and takes around that. So when we guided three months ago, and we put that range out there, we were really thinking around driving to that midpoint.

And we’d be slightly above or lower at the time. But drag is really from that midpoint, and that’s the risk we’re calling out here of $0.15 to $0.25..

Midpoint to midpoint, right, is the thought, I think the midpoint to midpoint still keeps us at the very bottom end of our original guidance. There is just so many variables in this. We thought we should let this play out. This is a, as you know, seasonally our smallest quarter.

It would be very difficult for us to change guidance much after this quarter regardless, right? Just because we have so much of our business that’s seasonal in the back half. So I don’t know that we – even if the Snacks was on plan with the changed guidance in the first quarter. So we just want to be totally transparent with it.

Here is what’s going on. Here is what the full year risk is. The number of outcomes for this thing, I mean, trust me – this team is working really had to – since December to sign a definitive agreement on our ready-to-eat cereal business at the same time that all these things are happening. I couldn’t be more pleased with them.

I’m disappointed we can’t answer your question exactly today. But we’ve put a stake in the ground. And you know what that does, we’ve got a stake in the ground for next quarter. So we recognize that, we owe you something by then..

Okay. I appreciate the color and commentary. Thank you..

The next question will come from Robert Moskow of Crédit Suisse..

Just a couple of questions. I’m – the back half of this year people are, I think, excited about it because I think you mentioned one customer in particular that’s taking on a lot of incremental volume.

Can you give us an update on your visibility into that volume? And tell us was any of it Snacks or cereal? Was any of that in that commitment? And just maybe an update there? And then I had a follow-up..

Sure. No we – when we talked in December about the change course parts of our business, we know where they were. So we didn’t guide to increase this from there. So I think you can feel pretty good about that. And I think it’s interesting. We have a number of wins in this business. There is tiny ones and there is big ones and there is puts and takes.

But I feel good about where we’re going in total, right? The total numbers are great and there is no change from there. I don’t think we can comment on any – we don’t ever comment on any individual customer, right? The interesting thing is, there is going to be some commercialization. We really didn’t talk about this.

The NLEA labeling is going to cause every label in the grocery store to change. As you know, we have tens of thousands of those. We’re on track to get that done. It will be interesting at the very end of the year if some of that has to be solved with inventory.

The only thing we didn’t really talk about is there is a potential for the fourth quarter to have some inventory fluctuations to meet that NLEA timing. But that’s the only thing I think would change from our thinking on the growth rates that we put out in December..

And we think that’s a pretty modest impact because it will be the tale of the distribution that it really concerns, not the big customers....

NLEA is – you can’t produce after December 31 on the old label. So there maybe some of the small customers that don’t get to it where we have to build a little inventory at the year-end..

And whether we hold it or they do, we get this all clear..

It’s all clear. Sounds clear right now..

I guess I’ll have to study up on NLEA labeling, more homework..

Yes. Don’t do it. Trust me, we’re working on it..

Don’t do it?.

We got it. We got you, Rob..

Okay. I’ll watch Netflix instead. One follow-up. I think you say you offered tradables and value added instead of just price and that helped the elasticity.

Can you give me a little more specifics as to what that means? I thought – are you offering tradables and value added? Or is the customer giving something back to you instead of raising price? What does this mean?.

Let me give you a couple of – just real discrete without talking about who it is. We have one customer that went to all 6 pack, right? And that was causing us – that slows your line speed down, does a whole bunch of things. We switched that customer back to a 12. We were able to take a 2% to 3% out of the cost of that product. And it was cost neutral.

So the customer went from 6 pack to a 12 pack, and that absorbed the inflation in that particular commodity item. We had one large customer in a piece of that new business that we talk about in the back half, that chose to give us that splits their distribution.

They chose to give us a much larger piece of that distribution, which increases the run size made of full trucks, they have the logistics and operating savings and that offset any commodity inflation. So we went to customers and we talked about other ways to drive other costs out of the supply chain.

We are a complex machine and there are ways for us to do that and those were win-wins. It’s interesting, not all of the customers or not all of the tradables were able to work for both parties. But the fact that we brought them solutions and not just price was an enormous step forward in our commercial, I would say, relationships.

So I think the fact that we did it was as important as the places where it actually happened..

The better blocking and tackling. All right. Thank you very much..

Your next question will come from Scott Mushkin of Wolfe Research..

Good morning, Scott..

Hey, sorry. Good morning, everybody. So I had a couple of housekeeping issues and then a question.

So on the ready-to-eat cereal, is – how much EBITDA was that? Did you guys give us that?.

No. We haven’t quantified the details of that. But I’d point you to how we arrived at the items that we talked about at Investor Day being change course. And they were really on that 2-by-2 metrics with growth and profitability. So items that were sort of below company average on the margin put them in that that bottom quarter.

So you can think about it, and certainly not helping the average..

Yes..

Okay. But it was positive EBITDA though? That’s....

Yes..

Yes..

Oh, absolutely. And on cereal, we had just a couple of core capabilities, it was really difficult for us to go to market with that. With not having the full line of portfolio. This will be complementary to the Post portfolio, and I think it will flourish there. So this is the absolute right outcome for this and the folks involved. So....

Okay. Perfect.

And then if we’re looking at the stranded cost you guys talked about in the fourth quarter, those have all been on unwound in the first quarter? Or where do we stand on that?.

Yes. I think we were talking about the manufacturing costs from running our plants a little low with regard to hitting the right inventory levels at year-end. That’s all been flushed through in the first quarter as those – that inventory has worked its way into sales..

Yes..

So that’s really behind us..

All right. Perfect. Then my final one. And again, I guess maybe these are mostly housekeeping. Condiments, and I know Condiments and ready-to-eat meals were put together. But the Condiment category has remained very aggressive at retail.

And I was wondering if you guys have any comments about how much you’re having to support that? And – or have you seen any differences there? We’ve seen some really aggressive things at retail labeling.

And I just wondered if you have any comments on that category?.

That’s a good pickup by you. There have been a number of what I would call private label price wars in some of the items in that category. We’ve had to align ourselves with the customer. Make sure we got forecast right. We have seen some volume stuff swing pretty aggressively there.

I would suggest – we’ve worked with the customer as that volume – proportionally with that volume to help them. But I think we don’t control what the customer price it at, and they make sure they are very careful to keep us out of that. So I would suggest that in some cases have been benefit for us, but we do our best to make sure we respond to it.

We don’t typically get much notice when that happens. So we try to respond as quickly as we can. But I think it’s been beneficial for us but not – and we’re trying to work with the customer to help them where we can..

All right. Perfect guys. Thanks for taking the questions..

And the next question will come from Amit Sharma of BMO Capital Markets..

Hi, good morning, everyone..

Good morning..

Good morning..

Matt, a couple of housekeeping questions. One, can you talk about how much was pricing – or price mix excluding Snack? And then second one was the spring flooding issue.

How much of a impact could that be in second quarter? Or second quarter and third quarter?.

Yes. I’d draw your attention to Slide 7 in the deck we posted this morning. And you can see where price is excluding Snacks. It was up in Baked Goods, up in Meal Solutions, down a little bit in Beverages. And that’s primarily the competition we saw in single-serve beverage last year.

I think we talked about the amount of business that we had just coming to the end of its contract life. I think it was close to 70% of our business went through a bid cycle last year. So we think we’ve got pretty good fresh competitive pricing in there and a good handle on the market..

Spring flooding?.

Yes. The second piece, spring flooding. For those of you that look at the journal and look at the news, this has been devastating for some people.

And we took a look at the level of snowpack compared to historical levels, and depending on how fast that melted off, certain areas we’re looking at catastrophes in – also in terms of stuff coming up the river, would the river be closed? Knock on wood, we’ve been okay so far. A lot of people haven’t but we have..

But we have. And our large agro vendors came to us and give us this risk. We ran a little bit of inventory. We brought some raw materials in. We – that’s why the inventory number, although down from a year ago, wasn’t as – quite frankly, as efficient as we’ll target it to be long term.

But we took advantage of bringing some raw materials and maybe running a little bit of inventory on those places where we require either rail, rail where we were most concerned about us. I guess there was a rail sighting or two that we’re in tough shape. So we were just defensive there.

And I think we’re fine unless it was – unless we saw a total disaster coming forward. I think we’re going to be fine. But we did build a little inventory just to protect ourselves..

And last one for Matthew. You did touch on the beverage pricing side of it.

Is that to the end of it from a price deflation perspective? Or do you think, given the competitive dynamic in the category, we could continue to see negative pricing on the beverage side?.

Yes. It’s a tricky question. The thing that we’re really, really pleased about is just the underlying volume growth in the category. And I think what we’re going to find is capacity comes and maybe the market gets a little long and then it gets tight again because this thing just keeps growing.

So I think in our first quarter, when I dove into the details, I think we’re up about 6% on net revenue on single serve. So it’s a really nice category. And I think there’ll be minor short-term imbalances, but generally, we still like it..

Got it. Thank you so much..

The next question will come from Steve Strycula of UBS..

Hi, good morning and congratulations on the new website. It was – it looks pretty fresh when I went to the URL this morning..

Thank you. That’s PI’s work. So we – in PI’s spare time, we gave her that project. So she is more than just the IR....

Guru..

Guru. Right..

Nice. So logistics question for you guys. Contracts are getting renegotiated right now and spot rates are lower for freight.

So how does this impact your outlook for the full year particularly in the back half as some of these contract rates get negotiated? And for context, what percentage of your cost structure is logistical expense? And then I have a follow-up..

Yes. We’ve never called out the total freight cost. So I’d be careful about doing that. I think the biggest thing for us has been this reduction in stock usage. We had a chart in the presentation today, and we talked about this in some detail when it was killing us a year ago that the team have done a phenomenal job.

We’re down into very low single digit use of the spot market. So that premium that we were paying has just been wiped, almost illuminated through efficiency. The other thing we’re seeing is in the contracted freight market, it is still inflationary. So we do face that inflationary pressure.

Probably less so than we did a year ago but it’s still out there..

And the carriers have done a nice job. I mean I think we all thought that the carriers were going to struggle. Our carriers are shown up on time, and they’ve obviously added equipment. They’ve – now they’re getting a better rate for this, so they’re – they must be getting returns.

But they’ve been able to bring drivers to bear to do the things that we didn’t think anybody was going to be able to do. So costs I would say are where we planned them, right? So the good news is, what we’ve guided to and what we planned we think has less risk from freight then it would’ve in the past.

It is inflationary but the performance of that team and the performance of our carrier partners – and it feels – lets us feel good about our plan..

Okay. And this a clean-up question, Steve, to follow up from an earlier part of the queue.

Did I hear you right in saying that excluding Snacks, you expect the rest of the businesses that you own to kind of comp flat for the third quarter and then to grow in the fourth quarter? Or is that inclusive of Snacks?.

I think Matthew, you made a comment in your prepared remarks about the quarter. But....

Yes. I think we’re talking top line volume and the pivot to growth..

Yes..

And certainly, as we go through the second half of the year excluding Snacks, we still think we’re on track for that pivot to grow..

Yes..

The next question will come from Jonathan Feeney of Consumer Edge..

Good morning. Thanks very much..

Thanks, Jon..

I guess I wanted triangulate some of your earlier comments on the cereal business server business. Just to get this clear, the buyer has claimed the $15 million to $20 million EBITDA range after their synergy.

So is it possible that, that was a mid-single-digit EBITDA margin? Like it was that low?.

It’s been a very competitive category, and it’s been a category that’s been shrinking in size over the last 3 to 4 years. So the dynamics there....

Our dynamics were not good. The cereal category dynamics are pretty well published, right? And if you can imagine, a much smaller scale player in a category with those dynamics, I think you can assume why we added in a change course category. I think it’s going to the absolute right place, and I’m – I think those synergies are real for them.

So I think it’s great. But it was not – we don’t think it was the right place to have it at TreeHouse..

Makes a lot of sense. And I guess just on that same topic, just a detail.

But like – assuming that kind of margin contribution like this would be – I mean, you’re getting pretty close to where this is breakeven? Maybe modestly accretive or modestly dilutive as far as total impact even if you bring proceeds, I assume would be to repay debt, right?.

Yes. Yes. It’s really not material. It’s going to be $0.01..

Yes. It’s going to be the – if it closes later in the year, the back half, it’s not going to be – we’re talking $0.01 or $0.02, either way not material..

That’s beautiful. And just one thing that Matthew mentioned earlier, we’re jumping to coffee business. I guess I’d just love to expand on broadly. You said capacity comes in. You said that business is growing. A lot of things are growing.

And I wonder – I guess, it seems to be a great environment to improve margins just because everybody’s capacity utilization should be getting higher.

I mean are there places where this kind of rapid growth in your addressable – in your addressed markets – as far as private label goes, are there any places that concern where you’re seeing competitors at capacity? Because I don’t see it, but I’d just loved to see your feel for the marketplace..

Yes. This is the area we’ve talked about where it’s most visible and most obvious. But it seems to be over the long term more than supported by underlying category growth. I think the other one is in the bars business. That’s a hugely competitive, hugely fragmented, you only need to go to the store and look at the plethora of activity there.

That’s an area where you see capacity. But I think it’s lots and lots of small pieces rather than big players..

Yes. And I would also say if you think about the – just the macro consumer trends, right? The natural organic businesses that we’re in, the broth business, right? Bone broth and those kinds of things are growing really quickly. So we – the private label mirrors the macro consumer trends.

We tend to be in those categories that are established and growing. We also have some that quite frankly aren’t so. We talked a lot about that in December at our Investor Day, why we think our growth rates comfortably are where they are. So....

Thank you very much..

The next question will come from John Baumgartner of Wells Fargo..

Good morning. Thanks for the question..

Hi, John..

Steve, I wanted to come back to the Snacks guidance for the EPS. So just to be clear, that incremental $0.15 to $0.25. I think you said Q1 will be the toughest for Snacks this year. So I guess what’s kind of incrementally worse for Q2 to Q4? I don’t know if I fully caught that.

Is that just assuming retaining it for the full year?.

Yes. Maybe, Matthew, you can go into detail. But yes, that – we thought it was important to put a look out for Snacks for the whole year for a couple of reasons. I mean we’ve talked about the process we’re in. We’ve – it also – we detailed out a tough first quarter. We really didn’t want people to multiply that by four.

So we thought it was important for us to give you the best look. It’s volume driven, right? And we want to give you the best look at what we had. So Matthew, I don’t....

Yes. I’d go back to when we were in New York in December, Investor Day. And then when we talked on the last call, our guidance and our assumption here had to be that we owned it for the full year although it was under strategic review because guessing the if and the when are just too many variables.

As we haven’t concluded that yet but we’ve committed to in the next 90 days, we thought the best thing to do was under that same assumption to mention both the top line and the bottom line impact assuming we don’t do any fundamental restructuring on it because that would obviously be one of the possible outcomes.

So it assumes we keep it for the balance of the year right now consistent with original guidance..

Yes..

Okay. And the impact of Minneapolis.

I guess that would come through in 2020?.

We expect to see a positive impact yet this year..

Yes..

I think my remarks, we said we were measuring the payback here in months not years. And I really mean it. It’s going to be a tremendously fast payback given where the volumes are..

Right..

Okay. And I guess – I mean, since you haven’t come down on a decision to sell it versus I guess rehabilitate it.

I mean assuming that you did retain the assets, can you talk a little bit about the other leverage you can pull from here following that Minneapolis closure to get the probability back up?.

I really think it – we’ve done the work to start to run that business dramatically better. And I think if you look at the charts we showed on service, that’s a deep dive we probably don’t show on every business on every call. But that business is where it is because of the way – quite frankly, the way it was operated.

And we’ve improved that dramatically. And the team that’s in there now has done a great of that. So I think we’re building customer trust. You rebuild that customer trust, you have opportunity to bid on things and then you have the opportunity to build the volume. It – there is great capability.

Moving Minneapolis, although, a great group of people and an interesting facility. The team has been able to mirror those capabilities in the other 3 plants, a 3-plant environment is much more efficient than a 4-plant environment. So I think all the things they’re doing – we’ve been running this thing with the future in mind regardless of who owns it.

So I think we’ve positioned it for success in the future. We’re just so disappointed that its not more evident, that the effort going on isn’t more evident..

So the view is, it’s more based on volume than incremental cost cuts from here is what gets positive?.

Absolutely. Yes, absolutely. We need to put volume through the system..

Okay. And then just one last follow-up if I can sneak it in. On the – in the press release, there was or less mention of competitive conditions across the business this quarter versus the last year.

Has anything kind of changed there notably on that front across the business?.

I wouldn’t say so. I mean we – I’d say I just think maybe we’re better positioned. We understand each one of the categories much better. We’ve got clearer plans for each one. I wouldn’t suggest that, that’s different. The commodity cycle is not as aggressive as it was a year ago.

And so when you’re facing commodity inflation, the customer is trying to mitigate it any way they can. So that could be the only change I would say..

I’d say this too, little things related to what Steve just said. One was being first out with the pricing before anyone else 15 months ago made it very difficult. And I think we paid for that somewhat.

And then secondly, just to build on those comments I made earlier about the increase sophistication and customer friendly manner in which we went about pricing this year. It’s been much more collaborative and less confrontational. Well, I think, as a result, we haven’t seen as much go out to bid.

We’ve been very transparent and very collaborative around creating win-wins as opposed to just passing cost straight through..

Okay, great. Thank you..

Our last question for today will come from Jon Andersen of William Blair..

Good morning, Steve. Good morning, Matthew..

Good morning. Jon..

Good morning..

I just have two quick ones, they’re actually follow-ups to the prior questions. A couple of years ago, the bid cycle was – it seemed more intense in terms of what was up for bid and some of the negotiations.

Can you just comment on what you’re seeing from a bid perspective at present? And changes that you’ve made to your process to facilitate that? Is the first one..

Yes. Let me take the process piece. And we’ve talked about this a couple of times. But we have a bid review committee that we have on the calendar every on Monday for 90 minutes that Steve and I sit on. And we basically review any material bid that comes in and make sure it’s aligned with our strategy. The thinking is right.

And we’re collaborating and leveraging across the whole of the organization and taking sometimes a customer view on where appropriate – a category view. And I think that has continued to help us a lot as we go through these bids. Overall bid level, certainly, not as high as peaks we’ve seen in the past..

Yes. I would say so, too. And I’d think again, if you think about the inflation that was in the market a year or so ago, I think that causes the customer to make sure that they are in fact priced right. And so that drives a lot of bid activity.

I also think that there was a comment or 2 earlier among some of the categories where capacity is tighter, maybe some of the bids have become 2- and 3-year cycles. So there’s been a few of those out there. So maybe that will mitigate that a little bit. But I mean, the customer who bids annually, and we have some of those.

That’s a routine process continues to do that. Some of the others maybe are looking at a little more longer term. But I would suggest that it is slightly less intense than it’s been..

Great. That’s helpful. Last one is around Snacks. And there have been a lot of questions around this. I’ll ask this a little bit differently. As this has gone through your kind of strategic process, the underlying implication is, you’ve kind of deemed Snacks, at least the portions that you’re – that are under review as kind of noncore.

And I’m just wondering if you can talk broadly about what it is about this business specifically that leads you to believe that another company could better steward it.

And what are the capabilities maybe that you don’t have or the characteristics of the business that make it noncore or would allow it to be better stewarded under another company’s ownership? That’d be helpful..

Sure. I think I made this comment at a – in an earlier call. But I think if we look at the history of that business when it flourished, it was run in a slightly different connection between purchasing, finance and sales.

Some of the opportunities we have in our much different categories, in our Condiments categories, in our Meals categories, really rely on long-run, highly efficient production where we really are running sort of – trying to run a world-class manufacturing operations.

In often cases, it’s a little more artesian than – and a little more art and science.

And so when you’ve got a small piece of your business that requires a fundamentally different go-to-market structure, a fundamentally different connection between finance, purchasing and sales and marketing, it really is hard to do that within a machine where you’re trying to drive cost out and be on much longer run, much more standardized stuff.

So I just think it’s run differently. When it was most effective, it was run differently than we run it today. I think that’s a pretty fair statement, right? And so trying to say, do we really want to have something that we run fundamentally differently in the portfolio is an interesting question to ask..

Okay. Thanks so much..

And this concludes our question-and-answer session. I would now like to turn the conference back over to Steve Oakland for any closing remarks..

Well, I’d just like to thank you all today, and I would like to thank our organization. I did get a question at the beginning about the amount of – if you think about the amount of change and the amount of progress we’ve made in 12 months, I really have to say thank you to everyone here for all of their effort, their commitment.

We look forward to the things that we owe you and we talked about that today, and we look forward to the opportunity to bring those to you as we go forward throughout the year. So I hope you all have a great day..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day..