Good day and welcome to the TreeHouse Foods' Second Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions].

I would now like to turn the conference over to Pi for the reading of the Safe Harbor Statements. 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 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.

I would now like to turn the call over to our CEO and President, Mr. Steve Oakland..

Thank you, Pi. Good morning, everyone, and thank you for joining us today. We have a lot to cover in today's call, as we continue to make progress across our strategic plans. On our first quarter call, we committed to an update on the strategic review for Snacks.

For anyone who missed our news on July 8, we announced an agreement to sell the snack nut and trail mix businesses to Atlas Holdings for $90 million. Coincidentally, we are scheduled to close that transaction today. I would like to quickly make a couple of points here.

First, we believe that the business will be in very good hands with Atlas, a private equity firm with a number of businesses across the industrial and packaging spaces. I'm confident that the combination of their new leadership, and our team, will provide a great opportunity for this business, its customers, and the employees going forward.

Second, we are pleased with the outcome. While it may seem that the strategic review process took longer than many anticipated, undertaking the sale of a challenged business is a complicated process. We engaged a top tier bank and had the business in front of an exhaustive list of both strategic and financial buyers.

Our team was very thorough considering a number of different structures, partners, and buyers. I believe that of all the options in front of us a clean sale to Atlas clearly delivered the highest shareholder value. With regard to the agreement we announced in May, to sell our ready-to-eat cereal business to Post.

We continue to work collaboratively with the FTC as they work through their review process. We anticipate a timely resolution of the matter. Although at this point we won't speculate on the closing date. We continue to believe that this business fits best with Post's portfolio and we are both committed to a smooth transition for all stakeholders.

More broadly, the two divestitures complete the majority of the portfolio optimization work that we shared with you back in December. And most importantly, we are now able to immediately focus our management time and attention on the remaining core businesses and our pivot to grow.

I will quickly touch on the results, and then I'll turn it over to Matt. Second quarter adjusted EPS of $0.36 was a penny above the top end of our guidance. I'm pleased with our results and the quality of our earnings. I believe we've started to see the operational excellence initiatives pay off in the form of improved EBIT margins.

However revenue of $1.25 billion fell short of our expectations and we still have some work to do to improve the top-line for Baked Goods, Beverages and Meal Solutions, where we still are lapping some loss volume and we'll continue to do so until we get to the fourth quarter.

Additionally our more disciplined pricing process pruned some less profitable volume also impacting the second quarter. Importantly, I'm encouraged with what I see for the future as this organization matures. Finally, we issued full-year guidance for an adjusted EPS from continuing operations of $2.33 to $2.63.

Matthew will take you through the details and the math for that. With that let me turn it over to Matthew to cover the quarter and the outlook. And I'll come back at the end and update you on our progress around our customer centric enterprise strategy..

Thank you, Steve, and good morning everyone. Thanks for joining us today. Before I go into the details of the quarter, let me quickly cover a few housekeeping items as noted on Slide 4. We recognized two impairment charges in the second quarter related to the sales of RTE and Snacks. The first is a $67 million asset write-down for Snacks.

We expect to recognize an additional non-cash pre-tax loss on the Snacks transaction of about $97 million upon closing. The combination of the two charges reflects the difference between the net book value of the asset and the anticipated proceeds.

Secondly, we impaired $64 million in assets related to the ready-to-eat cereal business in connection with the reclassification to assets held-for-sale to account for the difference between the net book value of the assets and the anticipated proceeds. We do not expect another charge in Q3.

In the quarter, we booked a litigation reserve of $25 million for a pending legal settlement. This quarter we transition the accounting for our pickle business inventory from LIFO to FIFO. The impact is relatively minor approximately $0.05 for the full-year 2018 and a penny on a 2019 year-to-date basis.

We've included a number of tables both in the earnings release and the 10-Q that will be filed this afternoon, so you can work through the revision for your models. The transition enables us to account for inventory consistently across the entire company. Finally, and I'll get into the specifics as we cover the outlook.

I want to make sure that everyone procedurally understands the accounting for the divestitures of Snacks and RTE as we move into the back half of the year. Both businesses will qualify for discontinued operations treatment beginning in the third quarter.

Accordingly we will present our guidance on a continuing operations basis which excludes both businesses for the full-year. Said another way, our core business or continuing operations will consist of baked goods, excluding ready-to-eat cereal, Beverages and Meal Solutions.

I'm going to try and move quickly through the second quarter results because I know you're all eager to get to the outlook. First turning to Slide 5, and our scorecard. As Steve mentioned, revenue fell short of our expectations in the second quarter as we continue to lap the volume loss as a result of the pricing actions we took more than a year ago.

In addition to the knowns, as we entered the second quarter, we also faced a couple of additional headwinds. First, we lost some baked goods distribution that was well below our average company margins reflecting our improved discipline around the bidding process. In addition, we had a large customer more tightly manage their inventory.

And finally, some of our co-pack business has been lumpy. Lower than anticipated interest expense more than offset a slightly higher tax rate. So while the top-line was soft, we are encouraged by how the operations of our core business performed.

On Slide 6, I will point out that our operational progress continues to translate into improved financial performance. Division DOI margin at 10.6% was 60 basis points better than the second quarter of last year, and our adjusted EBIT margin was 50 basis points higher.

As Steve mentioned earlier, Q2 adjusted EPS of $0.36 came in a penny above the top end of our guidance range. We were pleased with not only the absolute result, but also the quality of the earnings. Slide 7 shows this quarter's revenue drivers. You can see that the impact of SKU rationalization is lessening particularly in Beverages and Meal Solutions.

Revenue for our core business or continuing operations declined 6.7% as we continue to lap some of the prior business losses and there was a bit of additional loss this quarter as I noted earlier. Snacks was largely in line with our expectations in the quarter.

The year-over-year change in Beverages has broth and non-dairy creamer volumes moving unfavorably offset partially by strong tea growth. In broth, we did exit some low margin logistically challenged business as part of our efforts to be more disciplined around profitability.

However, given the seasonal nature of the business, we do expect to make some of that up in the back half of the year, as we improve our production planning process.

Pricing to recover commodity and freight inflation was up on a year-over-year basis in Baked Goods and Meal Solutions, while single-serve coffee was the main driver for beverage pricing moving down as we have discussed before. Turning to Slide 8 and the key drivers. Division DOI was $0.06 below last year, while Snacks was $0.14 lower.

Snacks again weighed on our results but the business did perform as we anticipated. Excluding the Snacks decline, this quarter's results would have been up materially versus last year. A big driver was corporate SG&A which was $0.18 better than last year. Slide 9 bridges the DOI from 2018 to 2019 and shows the drivers of the $14 million decline.

This is largely in line with the expectations that we shared with you back in May. Volume and mix including absorption for the core business was down $22 million while Snacks was $15 million below prior year.

These declines were partially offset by positive PNOC of $7 million, a $13 million contribution from operations, and a $3 million improvement in SG&A year-over-year. Slide 10 takes you through DOI once again and drills down into the drivers by segment.

Broadly speaking volume and mix declines across all of the divisions were largely being offset by improved operations, PNOC, and lower SG&A. Turning to our balance sheet metrics as shown on Slide 11, net debt finished the quarter at $2.2 billion.

Proceeds from the Snacks and Cereal transactions will be used to further pay down debt and reduce our leverage. We continue to be highly focused on generating strong free cash flow through our working capital initiatives.

The upcoming third quarter does tend to be a period where we build inventory ahead of the holiday season, but we will work that down as we close out the year. Moving onto our outlook and guidance, as I mentioned earlier, both Snacks and RTE will qualify for discontinued operations treatment going forward.

So we are guiding Q3 and the full-year on a continuing operations basis. I'll walk you through that in a few minutes. Let me start on Slide 12 by baselining everyone with the assumptions that we baked in and provide you with some of the data points that will help as you model the company going forward.

We have tried to give you a comprehensive view of how we see the remainder of the year. With regard to Snacks, as you know, the business is forecast to generate about $670 million in revenue this year. RTE revenue in 2019 is estimated at approximately $230 million or about $55 million to $60 million each quarter.

The net impact of moving both the Snacks and RTE businesses into discontinued operations is expected to be accretive by about $0.19. Note that while we've provided you today with the combined impact of the two transactions, when we filed the Snacks 8-K upon closing, we do plan to breakout the two businesses separately.

So you'll have this historical pro forma detail available. We will have some additional adjustments to the tune of about $0.06 negative which accounts for stranded overhead netted against a penny or two of interest savings in 2019.

All in all, we expect the full-year 2019 impact of the Snacks and Cereal divestitures to be accretive by about $0.13 and we are providing a full-year guidance range from continuing operations of $2.33 to $2.63 per share. Slide 13 walks you step-by-step through the math from our original guidance to today's outlook from continuing operations.

At the far left you can see our original EPS guidance for the year which included Snacks and RTE and totaled $2.35 to $2.75.

As you move to the right, recall that in May, we said that the Snacks business performance this year would be weaker than we had anticipated and we estimated the full-year impact of that deterioration to be $0.15 to $0.25 or a $0.20 drag at the mid-point. This hasn't changed.

Keep in mind that in May while we announced the definitive agreement to sell Cereal on the day of the call, we were still in the process of considering options for Snacks which made it very difficult to reaffirm or even modify our guidance given the range of options that we were considering and the variety of possible outcomes.

The next two bars contemplate the $0.19 of accretion from both transactions and the roughly $0.06 of additional adjustments. That math gets you to $2.48 which is now the mid-point of our new guidance from continuing operations.

Now with another two quarters to go this year, and the fourth quarter being our seasonal peak, we believe it's prudent to keep a wide range on this estimate consistent with last year. So we've taken that mid-point and bracketed it by $0.15 on each side to provide you with a new guidance range of EPS from continuing operations of $2.33 to $2.63.

On Slide 14, we've provided each line of our new guidance from continuing operations. You'll notice that we are guiding down 2019 revenue beyond just the divestitures to $4.29 billion to $4.49 billion.

We are carrying the top-line softness from the second quarter through the balance of the year, but you'll notice that the margin impact of the loss volume is not overly meaningful. The rest of the guidance changes shouldn't be much of a surprise in light of the DISCOS treatment of Snacks and RTE.

You'll notice that we've reduced our CapEx to $170 million and tightened the range for free cash flow for the year to $160 million to $190 million. On Slide 15, we have laid out the impact of the divestitures across a number of key financial metrics.

The data on the left shows those metrics at the mid-point of our continuing operations guidance and the right hand column shows the change driven by the divestiture of Snacks and RTE. Although the business is about $900 million smaller, our EBIT margin increases by about 125 basis points, and our EBITDA margin improves by nearly 175 basis points.

These divestitures drive the $0.13 of EPS accretion and provide the ability to further delever. Slide 16 takes you through the third quarter guidance from continuing operations. We are anticipating net sales of $1.04 billion to $1.14 billion and EPS of $0.52 to $0.62.

From an operating perspective, we expect the story to be similar to this quarter, as we continue to lap volume loss and drive operating improvements through TreeHouse 2020 initiatives and SG&A savings.

Third quarter net interest expense is anticipated to be slightly lower sequentially between $25 million and $27 million and the tax rate is expected to be 23% to 24%. Turning to Slide 17, you've heard us talk about the importance of pivoting the company to volume growth and the cadence of the top-line this year.

As we look forward, we're guiding to a third quarter decline that is approaching flat, while our fourth quarter is expected to be up slightly. The fourth quarter year-over-year dollar sales growth is expected to be modest.

However, we believe the most important takeaway here is that we're moving in the right direction and we're delivering sequential improvement in our year-over-year comparisons. And finally, on Slide 18, this is when we first introduced at our December Investor Day.

With the majority of our announced portfolio optimization efforts nearing completion, we continue to believe that beyond 2019 for the next few years we can grow the top-line of our business of 1% to 2% organically, deliver 10% or more EPS growth, and about $300 million in cash generation on an annual basis.

As we look towards 2020, it will be our final year of the TreeHouse 2020 restructuring and so although we will need some contribution from improved working capital to deliver the $300 million, I'm confident that we're putting the tools and capabilities in place to achieve these goals.

Let me just close by saying I'm proud of the work the organization has accomplished to-date. Beyond our day-to-day operational improvements, we've transacted one business and are in the process of completing another.

That at the end of the day will help refocus our portfolio, improve our profit and margin profile, and better position us to drive shareholder value. With that, let me turn it back over to Steve for his closing remarks..

Thank you, Matthew. That's a great segway for me. When I think back to our Investor Day, we rolled out a new vision and a new customer centric enterprise strategy. We detailed the operational excellence work underway. We identified the need to improve our commercial capabilities and we talked about our commitments to invest in our people and talent.

At that time, we also shared our plans to execute against the change course of areas of our portfolio. While we have some work to do, Slide 19 gives you a sense of where we are on that journey. The last two years have largely been about TreeHouse 2020 efforts. In that time, we've done some really heavy lifting.

We've simplified our portfolio through SKU rationalization, we've centralized our supply chain, and the work to optimize the plant and warehouse network is in the final few innings.

The TMOS work to engage and educate our plant employees; and define common metrics to the organization is well underway, while our lean initiatives are aimed at building a continuous improvement mindset. All of these efforts have been with the goal in mind of improving customer service levels.

That hard work is paying off as our customer service levels are now above 98.1%, the highest we've been in over two years. It's been about seven months from our Investor Day and in that short period of time, we've made material progress against that strategy.

The Snacks and Cereal announcements complete the majority of our portfolio optimization initiatives. Upon their closing, these transactions will allow us to focus our efforts, pay down debt, and have a healthier margin structure to drive shareholder value. We launched our Commercial Excellence organization just a few weeks ago.

As you know, we hired a new commercial leader earlier this year. Some of you had a chance to meet Dean in March. And in four months he has engaged our customer base, launched his new leadership team, and together they have designed our new commercial structure.

This team is now staffed with a combination of talent from outside, along with key internal leaders who've been promoted from within. The result is a seasoned team with stronger capabilities. They have a much clearer sense about what it means to be one TreeHouse organization and to partner with our customers.

They're structured and resourced to gain a greater more in-depth understanding of our customers goals and strategies and their consumers needs. And by doing this, we are uniquely positioning ourselves within the industry to provide strategic thought leadership and network scale advantage for our customers.

The steps we've taken to focus on people and talent have been a real boost to our organization. I mentioned last quarter that we'd be rolling out a new expression of our company-wide values.

The effort was sponsored by a cross-functional team from across our organization and you can go to our website in the "About Us" section and learn more about what our values mean to each and every person that works at TreeHouse.

Our work to stabilize and simplify the business has helped us return service levels to their feet and regain customer confidence. As I've said in the past, outstanding customer service is table stakes. Today we're in a much better position to become the preferred supplier for our customers' brands.

That credibility will enable us to drive organic growth over time. Now it's really up to us to execute as we enter the next phase of our journey. Private label continues to be one of the few growth areas in packaged food. Retailers have more than simply to clear their commitment to their own brands.

They're developing strategies to support their private label growth goals. As we become more commercially excellent, get closer to the customer, and better align ourselves, we will naturally be better positioned to drive organic growth next year and beyond.

I'd like to close by thanking those teams for their hard work and dedication throughout this journey. I continue to be impressed by the magnitude of the accomplishments and our employees' dedication and commitment to moving our organization forward. With that, let's open the call up to your questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question today comes from Andrew Lazar with Barclays. Please go ahead..

Hi, I guess probably this first one is for Matthew, I was hoping you could give us a bit more color if you can around sort of the first half, second half EPS from continuing operations. I know we don't have sort of restated financials around that just yet. But for sort of modeling purposes a little help around that would be great..

Yes, that's a good question and frankly one I expected to if I was sitting on your side of the call. As we go through closing this deal, there's a couple of steps we'll go through in terms of furnishing you guys with information.

One would be to furnish some filings within; I think we've got four days of the close of the Snacks business that will give you some halves and some full-year data. And we're going to do that just as quickly as we can. So don't expect us to use the four days, I think we'll be up pretty quickly with that.

And then at the very latest, we'll give you the historical numbers by quarter. The latest day, I think we can do that is the Q3 call. But again the quicker we can get that to you the better.

As I've been reviewing what the guys are pulling together and these are estimates at this point in time, but when you look back at a recast 2018 we think that number is going to come in - this is with the LIFO, FIFO adjustment, and disc-ops at about $1.94 a share for the full-year with $0.40 of that in the first half.

So we had about a 21% 1H, 79% 2H. As I look to the mid-point of the guidance that we've given you for this year at $2.48 under those same continuing ops, principles and with the LIFO, FIFO in, we'll be at $0.69 through the first half which will be about 28% of our full-year earnings.

So if you think of calendarization for this year, we're actually ahead of last year with a slightly flatter back half. And I know it's been a concern last year at the hockey stick. This year is actually going to be a bit flatter..

Got it. Got it. That's really helpful, I appreciate that.

And then, Steve, in thinking about the TreeHouse entity going forward sort of ex-snacks and ready-to-eat cereal, one of the aspects or the benefits here obviously is hopefully less volatility with respect to the top-line moving forward, so you can kind of more consistently hit the 1% to 2% guidance.

In the second quarter, you mentioned a number of things that transpired outside of Snacks that still pressured sales a bit. So maybe a little bit out of your purview there's always some unexpected inventory retailer management that happens from time to time.

But I think there are two other things that you mentioned and I guess what I'm getting at is hopefully maybe get some perspective from you on -- how comfortable you are with this legacy entity going forward being able to deliver the top-line more consistently and are we still -- should we still expect there going to be, it's private label at the end of the day, there's more volatility quarter-to-quarter, there could be more movement.

Or do you think we really are entering a phase where again it's not perfect predictability but a little bit more consistency on the top-line for the legacy going forward. I hope that sort of gives a....

No, I get exactly what you're asking, Andrew. There's no question, the current portfolio will have less volatility than the prior portfolio. I would also argue the operating performance of the business is going to be much more predictable not just on the top-line but the bottom-line.

The work that we're doing from an operational excellence piece the lean, the TMOS work, and I think we're starting to see that bubble through. But we're seeing more consistent operating numbers to our standards, right.

So in the last year, I think we've seen that number, knock on wood, right we're coming into the heaviest periods of our year but we've seen that improve dramatically. So I think more than just top-line, I think top-line will be more stable. We talk a lot about the pivot to service and in my prepared remarks I talked about building customer confidence.

I can't script this. I entered -- obviously you come in early on earnings call days, so I was here very early this morning and one of the things that greeted me was an email from our new commercial leader that one of our largest national customers is committed for a couple of large categories for multiple years.

Those are categories that have pricing in them, they had volatility. So we're starting -- and that was a customer that quite frankly was one of my tougher meetings when I first came on board.

So for me to see that 15 months later makes me feel better about the fact that the customer recognizes where we're doing, what we need to commit to their needs, right. So I think it's fair to say, we will be more predictable. We don't own the brands. We don't make the decision when they promote. We don't make the decision.

So we will have some lumpiness between quarters. We have some of that in the numbers today. But I think you'll love, I think the combination of the operational excellence and quite frankly our service levels will make us much more predictable..

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

Hi, I'd like to just if I could follow on Andrew's question there. And I think it's somewhat related that you do have a wider guidance range for the year but as I consider the cost savings coming through you’re going to start lapping some of the SKU rationalization and lapping the loss distribution.

I guess I want to understand are there any watch-outs worth noting, is it input costs; obviously you talked about single serve beverage pricing, competition, just to name a couple, anything like that you think that causes that have a potential degree of volatility in the guidance in the second half of the year?.

Yes, I think, yes, if you look at the way we've guided in the past this is the same kind of range we had last year. So we do have, as I said, earlier 72% of the earnings in the back half. So there's a lot of action that happens for us.

Some of that is cost reductions kicking in, more TMOS activity but also seasonally we’re still heavily weighted to the holiday season. So there's a lot still to happen. I think from our input cost perspective, the cost side of this business has not provided any major surprises as we've gone through the first half.

So we see that as relatively benign for the balance of the year. And frankly there's some ups and downs as we get our early look into next year but nothing lurking as a time bomb. I think the biggest concern is the top-line and delivering the improvements and that's what we're focused on..

Okay, thank you. And just one final question if I could. And if you look at this quarter if it's possible, I know there's a lot of moving parts here but can you say what your categories grew.

When we took out the businesses that you were divesting and maybe how you think you performed against those categories may be hard to kind of line up perfectly against that.

But just understand like how the business and the categories are performing here will be helpful to understand the future growth potential?.

Sure. I think that is a very difficult question because they're not apples and oranges right there is 30 different categories even without the divestitures, right. So when you take the divestitures out, I think we're in 29 categories.

So I would suggest total category growth is consistent maybe even a little bit better than what we've talked around the 2% area, right. I would suggest that we are improving. We were losing share in those categories. I mean I think there's a pretty simple math there. But we are seeing that improve.

Some of the bigger categories like pasta those kinds of places we're seeing our performance improve a little bit and our forecast for the back half, the growth that we have in the back half and the improvement to flat is us improving our performance. So I don't know if that helps.

If I took you through each one of the detail, I think we'd be on for quite a while. So I think it's fair to say that we feel good that we're improving our performance in those core categories, if you think about the top 10 or so..

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

Hi, I have two clarification questions if I can.

On Slide 13, the orange bar this is the guidance where you're reconciling from $2.55 to $2.48, the orange bar may estimate you're talking about Snacks deterioration of $0.15 to $0.25 that was your original estimate for or your previous estimate for the year but you no longer have Snacks for the whole year.

So I was wondering why that number is -- what that range is still the same range. It's a wide range so maybe if you're still within the same range, you just don't want to change it but you no longer have Snacks dragging you down in the back half, so why isn't that range a little bit less of an impact. That's my first question..

Yes, the way to think about that chart, Ken, is to the left of the dotted line there is what we told you previously. So we started the year with that $2.55 mid-point and we called out a drag of $0.20 on the last call. So think of that as history.

Now we get the chance to remove Snacks and RTE for the full-year as an absolute and that's what drives the $0.19 of goodness. And then there's about $0.06 of stranded overhead net of interest that brings us to this $2.48. So what you've got here in $2.48 is a clean full-year with no Snacks in and no ready-to-eat in..

Okay, thank you for that..

But we do have stranded overhead..

Yes..

Right. And then thank you for that. And my other point of clarification is I just want to make sure I 100% understand the base that you're working off for the first half of your guidance. So you reported roughly $0.50 in the first half. Matthew you talked about $0.69 being the number.

If we're just looking at a pro forma continuing operations in that first half, I think those are right numbers roughly..

$0.69 is correct, yes..

Okay. Thank you. And then I just want to make sure when you're guiding to that $2.33 to $2.63 range does that assume a $0.50 first half or $0.69 first half. I just want to make a 100% sure because obviously it makes a difference in how we're thinking about the fourth quarter..

Yes, no, great question. The mid-point of that range the $2.48 assumes the $0.69 first half..

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

Steve, could you just help us a bit, I think certainly happy to hear you reiterate that return to growth in the fourth quarter but with the kind of setbacks on revenue this quarter just trying to understand how we bridge that if that really changed your outlook maybe you were thinking you could do 2%, 3%, 4%, 5% organic growth in the fourth quarter and now it's come back down with some of the category and customer issues in the quarter just maybe help us bridge how we walk over the next two quarters up to that that positive number?.

Sure. Here's what I would say, we forecast our numbers at the beginning of the fiscal year that we guided to suggests that we'd be flattish. I think that's the terminology we're using for the third quarter and growing slightly in the fourth quarter.

One of the first things quite frankly that the new commercialization and Dean's team has put together is a much more robust forecasting process. So we went through those numbers in much more detail by customer with promotional plans, things we didn't know at the beginning of the year in place. And that's what we've guided to today.

So the difference in flattish and maybe down just a tad is some of the things that we did. It's not surprising with as many categories and customers, if you take hundreds of customers across 30 categories. As we've gone through this thing with a fine tooth comb, we've got a much more robust pricing process.

There's a few things that aren't so profitable in that mix. And I think Matthew touched on that I touched on it in our comments today. We've pruned a little bit of that out.

That may have taken a little bit of cushion out for us but we still think that we've also had some gains and we've had some small singles and doubles in there that we picked up in the interim.

So I think we feel pretty comfortable we're going to be flattish probably down just a tiny bit in the third quarter and we'll be up just a tiny bit in the fourth. We actually think that the momentum and the change in momentum is what's important. There will not be a lot of new commercialization in the fourth quarter.

That's another reason we feel good about this. We know what the numbers are. Given the NOI changes all the labeling changes that are going on in the industry, I think even that the customer base, most of the customers aren't trying to commercialize new items in the fourth quarter. They're trying to get that behind them.

So I think we have a pretty good look at it. I think it'll be modest but it's really not the absolute number whether it's $10 million or whatever the number is $5 million or whatever it is. It's more the fact that we pivoted.

So Matthew if you want to?.

I think I just add one thing, if you take a quick look at Slide 17, you can see the bar for Q3 on count shift is significantly closer to break-even year-over-year. I look to the sales report last night for 21 of the 22 shipping days and we're on track for the first month of that.

So I can't tell you what month two and three looks like but so far so good in terms of what is actually one of the bigger step improvements that we've committed during the year..

Got it. And then just a follow-up as we look at some of the scanner data especially in June, it seemed like private label overall weakened a little bit and I didn't know if that showed up in your results.

It's kind of obviously tough to figure out when it doesn't track your specific categories and share or if you're seeing any real change in kind of the private label momentum?.

I think one thing we struggle with is how to use that data because only about half of our business goes through it. So it's a best to sort of crude, a crude indicator. June wasn't a great month for us when I look back on the quarter to be honest..

Yes, I think that's difficult. But I would suggest some of the untracked channels, some of the discount retailers and things that are doing very well. So I think it's a tough. I think it's a tough measure to extrapolate. We think it's directionally important but it's a tough measure to look at an individual month..

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

Question for Matthew.

So on the free cash flow to hit the $300 million just wanted to get a little bit of an update as to when we think given all the puts and takes of these divestitures when is like a reasonable time period to kind of meet that goal and help us understand at least just directionally where cash restructuring, working capital, and CapEx each might do next -- in the next year versus kind of like how we're tracking 2019, just to understand how we can bridge that forward and then I have a follow-up..

Yes, great question. I think I said in my prepared remarks next year is the year that we said we can deliver the $300 million but it would be dependent on some contribution from working capital improvements. We've got still TreeHouse 2020 going on next year.

So I think our cash restructuring drops from that $140 million, $150 million range to more like the $70 million range. So that gives us some nice pick up year-over-year. CapEx next year we haven't looked at the plan yet but you saw we reduced this year from $190 million to $170 million.

I would think that's the top end of our consideration as we go into next year. So I think how we get there next year will be a combination of reduced restructuring spend, continued improvement in working capital. And then once we get into 2021, I think the business will be generating that kind of free and clear with flat working capital..

Yes, that's helpful.

And then, Steve, just wanted to get a sense of we've heard from a lot of the branded competitors in packaged foods that they've been able to get isolated cases or price increases through the channel in some cases they call it out that their volume alias elasticities have not been very favorable because private label or retail store brands haven't followed in certain instances.

And so my question to you is that -- is that impacting TreeHouse's ability to pull-through net pricing in this current environment or is that just the retail trade basically electing to fund that discount or keep that price gap wide at their expense rather than your expense? Thank you..

I would just suggest on that, we've talked a lot about pricing in our pricing timing was some time ago. And what we did. I would suggest that private label has changed, right.

Private label is now a strategic tool when the retailers do pricing, do competitive pricing models, When they want to set a pricing image to the consumer, I think there was -- it wasn't very long ago where private label was not part of that toolbox. Private label was clearly part of that toolbox. So I think the retailers are pulling those levers.

We see those things moving around all the time. So I think it's more the latter than the former..

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

Hey guys thanks for taking my questions. Had a couple of clarifications and a question. So the $0.05 that you referenced on the change in accounting, that's a benefit right. I don't think you said that but I'm assuming that's a benefit to the year..

That's in the back of the press release. We've laid out every quarter's impact of that change going back through 2017. So I think in this quarter it was a penny..

And you said for the year $0.05, is that correct?.

That was last year $0.05 drag..

Okay.

So what's the impact for this year?.

About a penny..

About a penny --.

Yes..

So far..

Yes, and that's what we expect --.

Go forward..

And that's what you expect to go forward. I was wondering..

Yes..

Okay. Then I didn't see anything around the TSA contribution to earnings. I was wondering what that number is..

Yes. We -- we've got two TSAs and we've got timeframes that are indeterminant right now in terms of how long they're going to carry on. So we're probably not going to be able to break that out until we get further into it. I do think as we go into next year, there'll be a couple of phenomenon, right.

You will have the benefit of the proceeds that will help us from an interest expense for the full-year but we'll also have some additional stranded overhead we need to work through related to that TSA revenue rolling off. So I expect the net of those two to probably be close to a wash.

But we've got to get a little bit further into the process here, we have -- we're not a day one into TSA yet..

Okay perfect. And then my question had to do with the sales underperformance in 2Q, I guess as you looked at it three months ago, what surprised you in 2Q and what drove the underperformance as far as the surprise.

I mean obviously you have a lot of visibility on some of these contracts but sales continue to lag a little bit what your expectations are. So I was wondering what surprised you in the quarter..

Sure. I think it's really what Matthew detailed earlier. We had some contract when you have a contract on co-pack; those things there aren't timelines, specific timelines where they take the product. So we had a little lumpiness in co-pack. We had one retailer take some inventory down.

I think I've seen that in a couple other releases so far this year, so. And then some of that could be self-inflicted, right. Our improved service may allow some of our retailers to have a little less inventory, right. I'm sure they were buffering inventory based on our poor service levels.

So we could take that actually as a good thing, assuming it's a one-time thing. And then, we did pair some volume, we did as we dug into some things, I would expect that to dissipate. I think we've been going through this disciplined pricing project for almost a year now. And so we're about a year now.

So I think we've been through much of our volume, I wouldn't say it'll never be a category, we don't cover the needs to be pruned but I think most of that should be behind us..

So Steve you think the chances of a surprise in the third and fourth -- third quarter to fourth quarter is much less than what we've seen so far this year; is that fair to say?.

Yes, I think so. And so much of us remember we're in categories like Refrigerated Dough and we're in big promoted categories during the -- baked goods during the holiday season, most of those programs are pretty well set now. I mean there always could be something changed. I'd hate to say never.

But I think we feel pretty good about the promotional plans are in place. This is the one time of year where that is really relevant for us the fall time of the year. So I think we feel good about that. I would say there's less chance for -- there's less -- should be less volatility without snacks than we've had in the past..

The next question comes from Robert Moskow with Credit Suisse. Please go ahead..

Hi, thanks. I guess two questions. One is we've certainly heard many times about volume declines related to business that just wasn't profitable to chase after. It makes total sense. But at some point, Steve, does that create a capacity utilization problem for the fixed assets that you have.

It seems a bit accumulative enough that it would heading into 2020. And I guess the second question is I just want to make sure I understand the fourth quarter guidance pretty well. I think it comes out to be about -- well I think I have it about a $10 million to $15 million increase in operating income.

Is that a fair assessment for what fourth quarter has to do? Thanks..

Sure. Let me take the first one and Matthew can grab the other one. There is no question. We are very cognizant about the overhead structure of TreeHouse. We understand the volume that needs to happen. The opportunity for us with our TMOS and our lean efforts actually volume rated savings, right the improved operating performance.

The only way you generate that is if you run boxes through the factory, right. So in order for us to print something it's got to be, it is got to be pretty low quite frankly. So I think there was a pretty conscious effort on that. There was also a targeted effort on where we need either a contract pack volume or additional volume going forward.

So I think we'll be aggressive in those places where we need the volume to cover overhead and we'll be prudent in the others. So I think we have a pretty good look across the network at the impact of volume and where we need it. We're quite frankly, we can be prudent..

And I think to answer the second question. I'll talk about the mid-point of guidance just to make it simple. We guided to $2.48 at the mid-point for the year, we had $0.69 in the first half. We've got $0.57 at the mid-point for Q3 and that leaves a $1.22 in Q4.

Obviously as you guys now realize since the Private Brands acquisition, we do have heaviest seasonality in this business. In Q4, when I look at Q4 as a percentage of the total year, it's actually about three points lower than it was last year. So I don't think there's anything here that's particularly abnormal for our business.

We do have continuing rollout of TMOS continuing rollout of lean and cost reductions plan to ramp-up as we go through the year. So we feel pretty good about the trajectory between 1H and the end of the year..

And Matt, you have just another question, the EBIT guidance for continuing ops is now $2.75 to $3.00 at the start of 2018 it was $2.90 to $3.25.

Is the delta between these two really the breakfast cereal business because snacks might have been maybe a zero for the year like how -- can you help us bridge those two numbers?.

Yes. I think as you go through there, clearly a chunk of that is the stranded overhead that we're left with. That's about $10 million in round numbers of stranded overhead we are sitting on..

And breakfast cereal was passed..

For sure..

Okay, those two things. All right, I got it. Thank you..

Thank you..

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

Steve, going back to your response to Rob's question and I think that's a wider discussion for us to right. So you talked about its willingness to walk away from lower margin volumes, right? I think this a new muscle for TreeHouse, right. So can you just talk about like how widespread is it, you did say that in some categories you do need the volume.

Can you talk about broadly speaking like how wide is this muscled through the organization; right and how willing are you to use it.

And then just correlating to that, should we start to focus a little bit more on your profitability rather than just talking on the top-line?.

Sure. Maybe I'll ask Matthew to go backwards and I'll go forwards, right..

Yes, let me go back and I lose track at time here but probably at least 18 months. And I think the first manifestation of our focus on profitability was really the SKU rationalization program that did a couple of things. It eliminated what I will call no and low profit business which gave us immediately a positive contribution.

But more importantly when you take 25-plus-percent of the SKUs out, it allows the plants to run so much better. So that was the first manifestation of hey we got to get after the stuff that's dragging us down.

I think the second piece goes back about the same amount of time maybe a bit longer was really giving more scrutiny to these bids as they came in and any bids over a certain threshold. And it means most of them frankly coming from Steve and myself and the executive team and they get scrutiny.

And as Steve said, over the last year we've cycled through a lot of this business had a really good understanding of the market clearing price. And hence what we should be in and what doesn't make sense to be in. And I think we've been very prudent stewards of the margin..

Yes, and I don't want us to think that going forward that we're going to cut our way to prosperity. I think we're through most of that. I'm sure there's something we will uncover as you think about hundreds of customers across 30 categories. But I think we understand most of the material items in that.

I think it's really a mindset of growth from now on that. I think our commercial organization. I think our operations everyone is focused on where are those opportunities for us to serve the customer better. How do we grow? So I think it'll be the exception not the rule that doesn't mean there won't ever be any.

But I think it'll be the exception not the rule. I think we're through most of it..

And just to follow-up on that Steve, so we are seeing a pretty significant margin improvement even though at least for now, right. The volume losses are coming in and they were mostly from last year right..

Right..

But going forward, should we expect that as this track goes away you could see a pretty substantial operating benefit from a margin perspective as volumes shift..

I will let Matthew comment on that. But I think I would suggest, so if we are when we talk about discipline you could argue that's maybe an oversimplification. I mean if we're walking away from stuff and our margins are improving, I think you can guess where those things were priced, right. So maybe Matt if you want to talk about going forward..

Yes, I think the other thing that's important is volume provides great leverage in this business. When we were at Investor Day and we talked about the 1% to 2% growth at that mid-point. That delivers close to two-thirds of the 10% improvement we've committed to in EPS each year.

So as Steve said the focus is on growth, the leverage from is great and we're actually in a position or a part of the market that is growing. So we think we're in a good spot and it's certainly the primary focus in here..

The next question today comes from Bryan Spillane with Bank of America. Please go ahead..

Hey good morning everyone. Just one question from me, Matthew. I guess in terms of use of proceeds from the two divestitures to pay down debt. Can you just help us, is there anything from the timing perspective that would sort of effect when you actually do that.

Are you waiting for maturities or something else in order to be able to put that money to work and pay down debt.

And then any sort of color, you could give on how that might affect interest expense, so kind of although the operating line leverage related to paying down debt next year?.

Yes, good question. We've got a really incredibly flexible debt structure here. So there's no penalty, no maturities we can pay down as and when and have been. So we would anticipate stepping into that fairly aggressively.

I think when you think about how much leverage do you get from getting on from $200 million of proceeds, if you think of a -- sort of 4% interest rate as a way to count that going forward. I think that's the way to think about it. I would caution you a little bit before you float too much interest good news through next year.

Just to think back to the earlier comments about the TSA and when we roll off their we've got some costs that will need to deal with. I'm confident we will but it won't be like a light switch. So those two could be a wide --.

To prior guidance, once we have more --.

Visibility..

Visibility. The other thing I would suggest is we expect to be close today on the Snacks transaction. The other one is going to happen shortly but that may flex a month or two or some period of time before we get that debt down before we see it in the interest. So given that there maybe -- we'll guide that when we have more visibility..

Okay and just to be clear the TSA payments will flow through the net interest line?.

No, they won't come through interest. I was just netting those two --.

[Indiscernible]. And those are usually designed, those aren't big money makers, those are designed to cover the cost.

And quite honestly it gives us, as Matthew talked about, it gives us some time to manage through the stranded overhead but that overhead will be -- will be fulfilling those services through the period of time and gives us time to build a plan to adjust this..

The next question comes from Carla Casella with JPMorgan. Please go ahead..

Hi, my question was along the same lines.

And so I guess if you can't give us the debt expected or timing of the debt, exact debt pay down can you help us with just what the EBITDA in those businesses? I know you gave revenue for the businesses but I guess the EBITDA, I understanding that you'll have stranded costs as well but the period that does that will travel with those..

Yes, we haven’t disclosed all those details to-date..

Okay.

And I don't think I ever saw, did you ever give a sale price for the ready-to-eat cereal?.

No, that's something is not disclosed. No, obviously the preponderance will come out of that eventually but that has not yet -- that is yet to be disclosed..

Okay great. And that's not part of the FTC kind of further looking into it; it doesn't have to do with -- it's just the overall transaction.

Is that correct?.

That's correct. Yes..

Okay..

I would say they're running a normal process, they're just running a process..

Yes, exactly. Okay, thank you..

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

Steve, I just wanted to come back to the back half revenue bill because there's been an expectation for I guess a fair amount of new volume to come through including some of the business that you lost from the pricing last year. But it sounds as though maybe that development is running a bit behind plan at this point.

Can you just talk a little bit more about that that new business or recovered business, as you kind of see it now in the moving parts there?.

I wouldn't go that far. I think those things that we lost last year the pieces that come back are just beginning to shift. So I think those things are in place. I mean we did -- we proven a couple of things out. We have a little closer look at it. But no I wouldn't. I wouldn't suggest that I think those things are pretty good.

I do think there's some new items and there's some new businesses that are maybe a little delayed because of the commercialization challenges around NODA [ph] and getting all the labeling right. But none of that's material. I think we're very close to where we thought we would be. We have taken out as we said a couple of things we've had.

We're going to carry some of the things that we've done in the second quarter through a little bit. But I think what we guided to at the beginning appears to be what's happening in the fourth quarter..

Okay. And then just to build on the capacity question in light of the volume declines in the first half of the year, TreeHouse 2020 have been targeting I think a 20 percentage point capacity utilization improvement and I think entering 2019 you were about halfway there in terms of the progress. Is that 20% still a good number.

And then in getting there from here, how do we think about the balance of the drivers. Is it more a function of gaining new volumes on a fixed asset base? Is it more from taking down additional capacity? Just the balance there would be helpful..

I would suggest we're starting to see the benefit of that and I think it's going to be, we missed one of the thing. There is some capital expense we won't have to make going forward; I think we're going to see our broth business rebound in the third and second half, really the third and fourth quarters.

Some of that volume shifts in the third quarter for Thanksgiving. But we're going to see our broth business bounce back. And that's really an effective TMOS, right. They will ship significantly more cases off the same assets than they did a year ago. The same thing is going to happen on our waffle business in the back half.

So I think the impact of TMOS is also going to be capital avoidance. We had some long range capital plans for assets that the TMOS impact will cause us to avoid. So I think it's a combination of those things. I don’t know Matthew if you want..

Yes, I think the -- when you look back over time, the easy capacity we realigned was the taking lines out where we could load other facilities. That was easy stuff.

We've gone through a sizable number of plant closures now and done the majority of that structural work and we've also done a lot of work on warehousing sites down dramatically since the Private Brands acquisition.

And as we've seen volumes come through even in this year, we've been making shift adjustments as we speak from three shifts to two shifts and taking those chunks of cost out to align with the latest demand. So it's an ongoing thing that we're working on day in, day out..

And our last question today comes from Jon Andersen with William Blair. Please go ahead..

Most of mine have been asked, just a couple of quick ones. One on if you could comment on pricing in general where you sit. I know that you talked about getting the vast majority of the pricing you were looking forward but there was perhaps a little bit more that you would be looking to implement by mid-year.

So just kind of an update there with respect to your plan? And then a broader question, Steve, with all of the conversations you've had with your retail customers over the past 12 months or so, if you could talk a little bit about how you see the private brand opportunity for you evolving.

I'm thinking about what are retailers focused on right now is it mostly opening price point to create a price -- pricing, low price image. Is it more specialty and premium products and kind of where are you intending to focus your efforts going forward? Thanks..

Sure. Yes let me just take the first one on pricing. I mean we really do have the vast majority of this behind us now. I think we're down to a couple of million but we're still floating around deciding that the best way to tactically approach it and where the broth markets are going to be but it's literally two million or less.

I think we're still wrestling with so nothing that the second half is depending on..

And I think the answer to the question on the dialogue with the retailers really is dependent on their strategy. The hard discount retailer has a focus on even though they want innovation; they want some of those things. It's really focused on value.

The super regional the chain that's doing really well in their market wants innovation that gives them that drives traffic, that makes them unique, that insulates them against e-com. So they're looking for unique items.

So I think what we're starting to do and what the teams that the commercial group have built are designed to do is make sure we put the right resources. On the value team, it's a logistics group it's a bunch of value engineering folks on the experiential team, it's innovation right, it’s R&D.

So I think we're pivoting to putting the right resources on the right team. And I would say that's where we see growth coming next year and the year beyond, right. So I can answer that question easily because it's so different every meeting is so 360 degree different..

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

Yes. I'd just like to say thank you to everybody for being with us today. It's been an amazing journey, if you think about what we've done since we were together in New York in December, we've gone from five divisions to three, we've executed on what we’ve done to really position the company to take advantage of private label growth.

So we'll be working hard as you know for the rest of the year and we look forward to talking to you all after the third quarter if not before. Thanks so much. Have a great day..

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