Welcome to the TreeHouse Foods Third Quarter 2019 Conference Call. This call is being recorded. At this time, I will turn the call over to TreeHouse Foods for the reading of the safe harbor statement..

Good morning, and thanks for joining us today. Before we get started, I'd like to point out that we've posted the accompanying slides for our call, today, on our website at treehousefoods.com. 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 achievements 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 changes in events, conditions or circumstances on which any statement is based.

For purposes of our discussion today, beginning this third quarter, both for Snacks and ready-to-eat cereal businesses qualified for discontinued operations treatment. As such, our results and outlook today and going forward will be discussed on a continuing operations basis.

We filed an 8-K on October 22 to provide quarterly historical information for 2018 and 2019 on that same basis. I'd 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 to discuss our third quarter results, our year-to-date progress on a continuing operations basis and our guidance for the remainder of the year. Hopefully, you've all seen our two press releases this morning. First, our third quarter earnings and second, the CFO transition.

Let me start with Matthew's departure. I'd like to first thank him for his support of me and the company over the past 3 years. Matthew has been a valued business partner since I joined the company 18 months ago. He deserves a great deal of credit for helping drive the organization forward.

He has served us well and we thank him for his many contributions to TreeHouse, including the great finance and accounting team we have built over the last 3 years. As I look at the TreeHouse organization, that we are building today, and our strategic direction, we are at an inflection point. Today, we are more focused and more growth-oriented.

I believe that we will be best served by a leadership team that reflects that new profile. Two great examples of this pivot are our new Chief Strategy Officer and our newly created position of Chief Commercial Officer. To put it another way, having a growth orientation is key to our future.

I'm pleased that Matthew will be engaged as a consultant over the next three months, as we work through the transition and that he's available as needed. Bill Kelley, our Senior Vice President of Corporate and Operations Finance will become our interim Chief Financial Officer.

Bill has been leading the finance transformation work here at TreeHouse, and has been responsible for the company's financial plans. Bill is a highly regarded finance and food industry veteran, having spent most of his 30-year career with a number of branded, food and beverage industry peer companies, like Pepsi, Hillshire Brands and Kraft Heinz.

We have a deep and talented bench here at TreeHouse, and I'm confident in Bill's abilities and the team's commitment to a smooth transition. We are initiating a search for a permanent CFO, and we will be considering both external and internal candidates, including Bill.

We're committed to finding the right leader with a growth-oriented CPG background to help drive the business and position ourselves for the future. Before we get into the detail of the third quarter, I wanted to make sure we take a step back and frame our year-to-date progress.

At our Investor Day, less than a year ago, we outlined a strategic agenda to become a smaller, leaner, higher-margin and less-levered organization. To become customer centric and to strengthen our capabilities around commercial excellence.

To increase our focus on the growth in the back half of this year and to return TreeHouse to growth in 2020 and over the next 3 years. Our recent 8-K filings gives you a much clearer picture of the progress. On Slide 3, on a 9-month basis, you can see that adjusted EPS from continuing operations is up 32%. On revenue, it declined 7%.

I think that demonstrates that we have, in fact, accomplished a great deal and that we're making excellent progress against our strategic agenda. Now that's not to say that we're content with our performance in the third quarter. Adjusted EPS of $0.55 was $0.02 short of our midpoint of our guidance and the prior year.

Although this was still within the guidance range, it was below all of our expectations on an operating basis. A couple of things worked against us in the quarter. First, although volumes tracked reasonably well in July and August. We had a rather material and unexpected reduction in September orders.

Second, in the quarter we took several significant actions to capture long-term operating efficiencies and to align our manufacturing cost profile. These actions created short-term disruption and resulted in higher-than-anticipated manufacturing variances in our plans. And therefore, lowered gross margins for the quarter.

It's important to recognize that this realignment work around operational excellence puts our plants in a much stronger position than when we started 2019. We believe the issues are transitory, and that these changes to our workforce and shift schedules will translate into sustained future performance.

In fact, in my most recent plant visits, we have examples of plants that are making remarkable progress. The lower-than-anticipated margins in the third quarter were offset in part by continued SG&A discipline and the benefits of tax planning.

Before I hand it over to Bill, to dive into the numbers and the guidance, let me also give you an update on commercial excellence. I'm very pleased that we continue to deliver service levels above the 98% target and remain encouraged, as I see how great customer service has become a way of doing business throughout the TreeHouse organization.

As I shared with you on the last call, we launched the commercial excellence organization in July. In comparison to the past, our commercial teams are much better aligned with the customer instead of aligned by category.

From a geography standpoint, our commercial teams are now closer to the customers, naturally allowing for more frequent engagement and more focused selling efforts.

As we continue to strengthen our commercial organization, we are regaining the confidence of our customers in a large part because we have been able to sustain our service levels, but also because our reorganization is delivering very tangible benefits to the customer.

Clear points of accountability, more face-to-face meetings and a greater understanding of the customer's needs and how TreeHouse can deliver against them. The customer feedback we've been receiving has been overwhelmingly positive. And we now have customers who are asking us to requote business that we have lost within the last 24 months.

As they recognize if -- the inefficiency of dealing with some of our smaller competitors. It's important to remember, however, that the landscape remains highly competitive and that winning back business will take some time. We're well into our budget and planning process for 2020.

I talked a bit at the last Investor Conference about our efforts to create a more integrated business planning process. The commercial organization is now building their planning expertise with a detailed, highly customer-centric operating plan that simply did not exist before.

That plan is being tightly linked to both our category strategy and our revenue management team. I'm optimistic about what TreeHouse can deliver as we get these things in lock-step.

Integrated business planning, a process common in our large food company peers, will give us a clearer line of sight to growth and help us better define specific customer opportunities. Bill has been instrumental as we've kicked off the IBP process. And he, in conjunction with our Chief Operations Officer, will continue to lead the effort.

Importantly, IBP will also help give us an early read on changing demand signals so that we can more smoothly adjust our operating patterns without some of the step-function reaction that negatively impacted our results in the third quarter.

Finally, I'm encouraged by the solid sequential progress this quarter in volumes as the nearly 10% decline in the first half of the year improved to a 5% decline this quarter.

We continue to anticipate that we will deliver sequential improvement in the fourth quarter, where we believe a pivot to slight volume growth is reflected in the midpoint of our guidance.

Let me now turn it over to Bill to give you more detail around the quarter and update you on our outlook for the balance of the year before we open the call up to Q&A.

Bill?.

first, if you remember earlier this year, we built inventory ahead of the potential flooding in the Midwest, which ended up being more precautionary, and we are still working through a bit of that; second, we continue to build inventory in advance of the NLEA labeling deadline; and third, the lower-than-forecasted volumes in Q3 resulted in higher-than-planned inventory.

We still believe that we will meet our year-end working capital goals as we have put clear and targeted inventory drawdown plans in place for the balance of the year. Slide 12 provides you with a summary of our updated 2019 guidance.

We are tightening and lowering the bottom end of our revenue guidance range to $4.26 billion to $4.36 billion, and our adjusted EPS from continuing operations to $2.30 to $2.50 per share. The revised guidance incorporates a slightly lower tax rate and $5 million lower CapEx, but maintains our free cash flow guidance of $160 million to $190 million.

With regard to the top line, a rebound following the decline in September orders did not materialize in October. The later Thanksgiving Day holiday may in part be a reason why customer orders were light, but we think it's prudent to reduce the midpoint of our top line expectations by $80 million.

From an operational perspective, we believe the issues of Q3 are largely behind us, although we have assumed the operational variances of the third quarter do have some impact on Q4 as inventory on hand for sale reflects some of this cost penalty.

On Slide 13, we've given you the guidance elements for Q4, that gets us a 13% EPS growth at the midpoint. Volume growth in the Beverages division, continued SG&A discipline and a favorable tax rate are expected to be partially offset by manufacturing variances and the continued drag of volume loss, primarily in Baked Goods.

We mentioned this earlier, but what you see on Slide 14 is our year-to-date progress posting a very respectable 32% growth in adjusted EPS from continued ops. As you can see, the improvement we need to make in Q4 is, from our point of view, an achievable number. At the midpoint, Q4 is expected to grow 13% and the full year, 22%.

Although the third quarter did not turn out exactly as we anticipated, we think our year-over-year progress is clear. You've seen Slide 15 before, but we continue to expect our sequential improvement to continue in the fourth quarter where a pivot to slight growth is reflected in the midpoint of our guidance.

Slide 16, reaffirms our free cash flow target for the year of $160 million to $190 million, and our priority for cash continues to be debt repayment. We continue to wait for the green light from the FTC to close the ready-to-eat cereal transaction.

So assuming that closes before the end of the year, we expect to pay down about $400 million in debt and finish 2019 with our bank covenant-defined leverage ratio between 3.6x to 3.8x, well below our covenant requirements. Slide 17, reaffirms our expectations for growth for 2019. That's 1% or 2% growth on the top line.

Equal to or greater than 10% EPS growth and approximately $300 million in free cash flow. With that, let me turn it back over to Steve to wrap up and open the call to Q&A..

Thank you, Bill. In closing, I'd like to leave you with a couple of key thoughts. It's important to recognize that we've made incredible progress this year. It's been a year of significant structural improvement around our strategic pillars of operational excellence, commercial excellence, portfolio optimization and people and talent.

As I've said before, we are on a journey here. As we prepare to finish 2019, we are in a dramatically better position to grow the company in 2020 and beyond.

Growth in private label takes time, but the combination of our improved service levels and the launch of our commercial team give me confidence that we will unlock the -- our potential for growth and deliver increased shareholder value. I continue to be very proud of what we've accomplished in such a short period of time and where we are headed.

I want to thank the entire organization for their ongoing commitment to our customers and to our values. At this time, Bill and I are available to take your questions. Given the recency of the management transition I've also asked PI to join us for Q&A today. Operator, please open the call for questions..

[Operator Instructions]. And the first question today comes from Chris Growe of Stifel..

I wanted to ask you, if I could, first. So just to be clear, you did not get any recovery in shipments in October. And I guess I'm just trying to get your sense around your confidence around the fourth quarter outlook and given that delay in shipments.

Did you build in some shipments later in the quarter? And just trying to get a sense of how you expect that to kind of flow through the volume in the fourth quarter given your expectations for it to be better in Q4 versus Q3..

Sure. Chris, I think we just planned October to be a normal October, and that's how it's flushing out to be. So we didn't see that bounce back from the things that fell out of September. But our October shipments are pacing right where we have them planned.

And we don't need a spectacular recovery anytime in the quarter to meet the numbers we've guided to. We need a good solid 2 months after this..

Okay. Got you. And just one other question in that -- one of the bar charts that showed that negative $21 million drag on profit from the operations. I guess I'm just trying to -- you made a comment that with some of the, I guess, inefficiencies that occurred in the quarter.

How much of that continues into the fourth quarter? Are these things all now wrapped up? Is it just the residual higher cost of inventory that you have to work through? I just want to get a better sense of what to expect there from that angle?.

Well, let me do part of that, and I'll ask Bill to do part of that. So the operating variances in the quarter were significant. But they were really a result of an acceleration. I would call it a step change in our labor and our scheduling practices. And those were facilitated.

It's really a convergence of us better understanding our demand forecast, us being much more disciplined on inventory. And then quite frankly, Lean and TMOS creating capacity. So we took an opportunity to take significant cost out of our system for the long term.

When you do that you have a lot of variances because people move around and you have bumping and you have training and all of these things. Quite frankly, the volume in the quarter early when we made this decision, the volume looked pretty good. We thought it would cover it.

But I think regardless of that fact, I think we've positioned the plants much better. And it's hard to have negative numbers and talk positively about TMOS. I know that sounds a little odd. TMOS unlocked capacity that allowed us to do this. So maybe I'll let Bill speak to what's carrying into the fourth quarter..

Chris, so in terms of the impact, the plants have run reasonably well all year. I think in Q3, we saw a bit of a hiccup there. Obviously, as you know, as we capitalize variances, we'll have some of that roll into Q4. The midpoint of our guidance does account for that. So we think we'll be fine in terms of our ability to deliver Q4..

And I guess to be clear then, this lower cost base, if I can it call that, because of the capacity you created and what you've taken out, does that kick in, in the fourth quarter, therefore, so you'll get some residual cost? But when do we start to see those savings that you've created as part of this step change, if you will?.

I think that will help us in next year. It helps us get our 10% earnings growth next year. And it also helps us pour volume on the plants, right? That incremental capacity is really going to pay off as we start to grow..

The next question comes from Andrew Lazar of Barclays..

I guess my first question is a bit more general to start. It does seem that TreeHouse is making, as you mentioned, quite a bit of sequential progress, right, on both sales and profitability. And then you've talked about, though, some items that came up in the quarter that led results to be a bit below your expectations.

And I guess what I'm doing is, if I go back to sort of your comments on the 2Q call and sort of throughout the quarter in various sort of venues. It sort of felt like TreeHouse had a good read on how you sort of expected the back half to play out, I guess, more specifically on the sales side.

I think you made mention of retailers don't shift around volume that often in the holiday season, and that gave you some better visibility, things like that. So I guess I'm just trying to get a sense of if it's not having the systems in place yet or forecasting accuracy? Or maybe it's just the nature of, to some extent, private label.

Inherently going to be more volatile from time to time. And we just have to kind of accept that. I guess what I'm doing is I'm asking how all this plays into your level of confidence, and how investors can think about that as really going to your 2020 outlook more than anything else? And then I've just got a quick follow-up..

Yes. Sure, Andrew. I would tell you that we've been running the IBP process for a few short months. The commercial organization is now bringing us a bottoms-up forecast. If you think about it, it isn't that long ago when I stood up here and talked about 13 different ERP systems and 5 different sales forces and all of those different things.

So the work we've made over the last year has started to consolidate all of that stuff. And I would tell you, I think the volume forecasts are better than we've ever had. I think they'll get better each month. So I have more confidence in them today than I did 3 months ago. And I'll have more confidence in them a month from now and 2 months from now.

So I think it's fundamentally getting better. I would tell you, we had soft shipments in October. And I think it was consumer demand. Not October, excuse me, September. I can't -- October's tracking fine. The September numbers caught us off guard, quite frankly, and they were customer pull numbers. October bounced back to a normal October.

So I wouldn't suggest we won't get caught by surprise occasionally. But I think in my prior history, we had a couple of those months as well. So I'm not sure that in this business, we control all the levers and we can forecast it down to every possible month. But I feel good about next year.

What we can talk about is as we start to see customers bringing us in for bids that we weren't in before. As we start to see contracts layering on, quite frankly, as we lap losses, right? As our denominator becomes more clear to us, which is happening. So we're fortunate not to have a lot of pricing that we face in this next year.

So the team is really working hard on new business. We're not working with a customer to get pricing through. So we're in a very different place than we were the last 2 years at this moment. So I would suggest our visibility to 2020 is -- I can't speak to it past my last 18 months, but certainly the best since I've been here..

Great. And then just one quick one is, I think the comment was, assuming the ready-to-eat cereal business closed by the end of the year. And I realize it doesn't pay for anybody to sort of try and handicap what the government will do around timing and such.

But should I take from that your thought that, that's kind of broadly where your expectations are right now for that business?.

I think so. Again, we just don't want to -- I -- we don't want to handicap what they're going to do with the holidays and their staffing situation, all of those things, when they'll get through the work. So it's hard for us to believe it's taken this long as it has. We've tried to be as supportive as possible.

I am on record saying, I think that this transaction creates a real competitive force of private label. Combining our business with Post's business will create a scale private label competitor. I think in the end that will show through. I just don't know when the end will be, so..

The next question comes from Rob Moskow of Crédit Suisse..

I was hoping to get a little more color around 2020. You're reinforcing your confidence on 10% EPS growth. But given the weak sales here and the lack of visibility, I think, and how sales tend to roll through.

I'd like to know, do you need to have sales positive in order to get 10% EPS growth next year? Or is it really the overhead cost reductions that give you the confidence that you can get there? And then secondly, I know there's no discussions about price increases, but some of these costs have come down, transportation looks like it's coming down.

Is there any risk that your customers might want credits for that and ask you to lower prices in 2020?.

Let me touch on, and Bill can cover the part of this as well. I think we do plan on some growth in next year to meet that 10% number. And I think we have visibility to the lapse and the losses and to when the new business comes on, that makes us feel good about that.

I mean could we have a little bit of volatility? Does it hit in September or October, does it hit in July or August type of thing. I think we have a pretty clear line of sight to some new business that will get us there from a top line standpoint.

Quite frankly, things like what we did in our manufacturing plants in the third quarter make me feel better. I didn't think we'd be able to make that kind of a step change in cost as early as we did. So the cost side continues to track on or above or on or better than what I would have thought. And the top line that we feel good about.

So I don't know, Bill, if you'd like to?.

Yes. I think in terms of the 10% for next year. I think what we've said before and how we think about this is about 2/3 of that 10% EPS growth will be driven by top line of 1% to 2%. Obviously, in our business model, the leverage we get out of our plants when volume pumps through creates some really strong pull in the middle of the P&L.

And to Steve's point, all the great activities that we've seen in Q3 will continue to benefit us. On the other side, you talked about some of the input costs and some of the freight and those kind of things that have driven our pricing. I think we continue to get efficient there. Obviously, who knows what the bid environment will bring to us.

But we wake up every day in this business thinking about how to become more effective and more efficient so that we can offset that inflation..

The next question comes from Amit Sharma of BMO Capital Markets..

Steve, just wanted to go back to a decision on Matthew. Can you talk about that a little bit? How should we think about that? Does that mean that most of the heavy lifting in terms of portfolio optimization, reorganizing a supply chain, kind of, is behind us now.

And that you are really flexing the organization to be a little bit more focused on top line, and that's what's needed..

Well, Amit, I have to tell you, it sounds like you just read my notes, right? So if you think about when Matthew -- and again, I want to thank Matthew for all of his support. If you think about when Matthew was hired. I think -- I would argue this is a very new TreeHouse, right? Compared to when Matthew was hired.

If you think about all of the accomplishments we talked about, the ERP consolidations, the SG&A work we've done, the -- all of the things that have happened so far, the consolidation of organizations. The conversation in our leadership team now is about innovation.

Is about top-to-top customer relationships, is about IBP, is about the investments that we're going to make in growth, not investments in consolidation in 2020. We're talking now -- we're looking beyond 2020 about investments in growth. We're talking about when do acquisitions make sense and which ones.

So if you think about how different the conversation is and how different the skill set is, we showed you numbers. I mean the underlying core business is growing nicely. From an earnings standpoint, we think it will pivot to growth in the fourth quarter, it will certainly be growing in 2020.

So I think it's a natural evolution of skill set and things that we need on the leadership team. Having said that, there are no issues. I mean -- I hope that goes unsaid. There are no issues from an accounting standpoint, from a disagreement standpoint, the guidance that you're looking at with Matthew was integrally part of, and he's available to us.

We wouldn't have him on a consulting agreement going forward if there were any issues. So we intend to help him as much as we can, thank him as much as we can, and focus on a different set of variables going forward..

Very helpful. A very quick one. One more on your customer mix. And look, all of us look at the IRI channels, right, for private label, but more than half of your business is now in the alternate channels.

Are those channels still growing faster than IRI for your business? And are they margin-neutral at least, as you compare them to margins in IRI channels?.

Yes. I think the answer would be yes and would be yes. I mean obviously, places like ALDI and Lidl, those folks are growing very, very quickly. Trader Joe's, places that are very private label-centric are nice businesses that are growing quickly. And with regard to margins, I think it just depends on the categories.

I think the categories perform regardless of IRI or not IRI. They perform margin, sort of, neutral. Our higher-margin categories are the same higher-margin categories regardless of whether the channel is tracked or not.

The ones that have a lot of capacity where we need to be more competitive and give the customer a better price are the same categories, regardless of whether they're tracked or not..

The next question comes from Bill Chappell of SunTrust..

And I'm sorry, maybe you just hit this again, but can you explain to me why the orders were cut so late in the quarter? And then why that carries over into the fourth quarter? Because obviously, you're looking for lower potential growth.

So I mean was -- were there more orders that were cut in October? Was there something that I -- just help me understand the whole situation one more time..

Okay. No, I think we saw the quarter fall off. And you can speculate on the weather. You can -- I mean it was 4 degrees warmer than normal. We have a lot of cold weather categories, you can speculate on some of the largest retailers in the United States. It was the end of one of their fiscal quarters.

I mean you can speculate on a lot of things on why volume at the end of September was soft. We try not to do that. October started off as a normal October. I think we have the best visibility. I think I mentioned that earlier that we've ever had. And we think the number we've guided to in October is the number.

So I don't know, Bill, if you'd like to?.

Yes. And then to the point, Bill, around the mechanics of how it impacts Q4. So some of that performance that you see came through in Q3. But obviously, some of that got capitalized into inventory. And so as that higher cost inventory gets sold off in Q4.

We're going to have a bit of a drag there that we've accounted for in the midpoint of our guidance range..

Yes. It wasn't really the volume that did it. It was the -- we called down -- we had a pretty good look at the numbers that the -- coming out of second quarter, and we did that on our second quarter call. We took that to Shay and the operations team. They took, as I said earlier, the TMOS and Lean capacity.

They added those things all together and said we have an opportunity to make a step change in our operating system. And they did that. So those are the costs that come through. It's really not a volume thing. We guided to the -- to our best look at the volume for the quarter.

The September orders really aren't -- they affected September, they're not affecting the fourth quarter..

And then to that point, Steve, we are on track in October..

Yes..

Just to be clear, there's no order -- there's no -- from the distribution gains that you were expecting in that third and fourth quarter. Nothing's changed there. This is just timing of seasonal orders is how you're clarifying that..

Yes. Exactly. I think some people with the later Thanksgiving probably brought things like refrigerated dough, right? We make pie crust. We make some very seasonal categories that are tied to Thanksgiving. I think that Thanksgiving being a week later, people naturally or -- retailers are driving the same inventory reductions we are.

They naturally push those shipments back into October versus September..

And then on the Beverages side, anything new? I guess I was trying to understand both -- if there's new competitive dynamic on single-serve, but also I was probably expecting a little bit more from cold brew to -- in this quarter..

Yes. The cold brew, that's interesting. We do have a large anchor customer. That business probably will shift a little bit in December but more in January than we initially thought. We couldn't control that. We are shipping product. We're making salable product. And we've got a couple of small customers that are in market with that product, which is great.

I think we're going to try to do a little sampling event. And we'll probably share that with you at our next investor conference. So you'll get a chance to look at that. Yes, that's probably a little bit of the call down as well. The timing of when the first customer wants to start it in January versus in December..

The next question comes from Steve Strycula of UBS..

I apologize, I was a little late joining the call. So I hope this isn't too redundant of a question, but just to clarify, the weakness we saw in September, it sounds like some pieces may be coming back in October.

I just want to understand why lower the midpoint of the revenue? Is that really tied to Bill Chappell's question that a piece of the Beverage business is coming into January versus December. So quick clarification there. And then a bigger-picture question, just wanted to know.

Steve, now versus, call it, the first 100 days you were at the company, has anything changed in terms of how you think about the longer-term organic sales opportunity for this company. It seems like the volume trajectory has taken a little bit longer to inflect than you initially expected. But that's just my interpretation.

And then is 10% EPS growth realistic on a 1% to 2% top line. Help us understand why it shouldn't be a more moderate rate of profit expansion..

Sure. I would say on the fourth quarter guidance, I just think we have way better numbers now. I would say, yes, but cold brew is a small piece of it. I think we just understand -- remember, we do this across 27 categories or 29 categories, depending on how you look at it. So cold brew is a small piece of that, yes.

But the rest of the categories, we just have a better feel for what the fourth quarter numbers are. What I tell you that 100 days in, if there's one area that frustrates me the most, it's the pace. Then I go back and I prepare the script for this. And I look at -- we just did the Investor Day 11 months ago.

And I think about what we've accomplished in 11 -- 11 months ago, we were fighting fires in Snacks. We were doing a whole bunch of other things. We still had all the sales forces. We had all these different things going on. So -- and then the ERP systems, everything. When I think about the amount of progress we've made in 11 months. I think it's amazing.

The top line has taken a little while to go. The sales cycle in this business, but don't read that as lack of success, read it as us just better understanding of the sales cycle. People make annual 1- and 2-year commitments when they do labels for somebody, all of those things. So that turnover takes a little while.

I think also the lack of our commercial, sort of, visibility. I think some of the product -- things that were in process to leave us weren't as clear to us at the time. I think we've lapped that, and we'll be lapping that here as we get into the first part of next year. So yes, it has taken a little bit more time. But maybe I'll let Bill speak, too..

Yes. So the part of the question around the 10% for next year. Obviously, to Steve's point, we put the tools and strategies in place to go over the 1% or 2%. Clearly, there's some work, as indicated in the Q3 results. But our commercial excellence team that's only a few months old, they've done a great job at really identifying opportunities.

We've been asked to bid on business that we lost 24 months ago. Our service is still pretty high. And we're knee-deep, obviously, right now into our 2020 AOP process and our planning processes. But we think there's just leverage in this business model.

And that with a little bit of growth on the top and some strong operational efficiencies in the middle of our P&L and our continued relentless focus on costs. I think we can definitely have a line of sight on 10%..

Yes. And I might build on that one way. I mentioned the word a new TreeHouse earlier. And I think it's relevant here. The new process with IBP. The sales organization is now bringing us a bottoms-up plan. If you can think about how fragmented we were, and we were that way on purpose.

The plans were top-down, right? And weren't grounded in the customer commitments and contracts as much as they will be today. So we now have a top-down plan and a bottoms-up plan. We have that natural tension between us pushing them and them understanding what's realistic. So I think the plans going forward will be much more realistic.

I don't think you'll see the volatility that you've seen in us in the past. That doesn't mean there will be none. But I think we'll get better. I think we made a nice step change. And going into 2020, we see our cost structure. We think we have a line of sight to the volume we need. And the math would suggest 10% is very doable..

Steve, just quick clarification on that last point. If I'm hearing you correctly, should we take that to mean that you now have a bottom-up forecasting versus top-down before. And if so, when exactly kind of did you -- did that system go into place where you kind of said, all right, guys, we're no longer top-down, we're going bottom-up. .

Yes. Well, I'm going to look at the guy running the IBP process across the table from me..

Thanks for the question. On the integrated business planning, if you're familiar with it. It's a process that's iterative in nature. So several months ago, we executed what we call cycle zero. In most of our businesses, we're through 2 or 3 cycles and at our corporate level through our second cycle.

So it's building, and we're becoming a lot more smarter to the iterative process and doing a lot of those pieces. So I think it's continuing to evolve, but it's really getting stronger. And it's right when we need it as we head into 2020..

Yes. So I would suggest, as Bill said, it's a couple of months old. But remember, we can do this because we have systems in place, because we have customer teams in place now. It seems like a rudimentary thing that we should have had, but we weren't organized to do that kind of detailed planning process before, and I think we are today.

And I would expect it to get better and better..

The next question today comes from Carla Casella of JPMorgan..

This is Sarah Clark on for Carla. I have 2 quick questions for you. Thanks for the additional color on the RTE cereal sale.

Does this complete your evaluation of businesses for sale?.

I think it does materially. Obviously, we talk about portfolio optimization as one of our strategic pillars. So the -- we'll always be looking at pieces of it. I think if you do the actual math, there's maybe $40 million or $50 million left in what we guided to a year ago. So that would suggest odds and ends, nothing material..

Okay. Got it. And then you started to touch on this a bit.

But can you talk more about the trends and spreads you're seeing between branded and private label pricing?.

It's interesting. I would say that's one of the things being a long-term brand guy. I've never seen private label become the battleground. And I think with the battleground going on between some of the hard discount retailers. People are now using private label as a front page price point item. And so I've never seen it as aggressive as it is.

We see some places where our customer is investing a great deal in their pricing on private label to make sure they're sharp. And then they compete against a hard discounter. So it's all over the board, it's very regional. But now that private label is much more of a strategic tool versus a tactical tool.

The customers, I think, are really looking at pricing by zone. I think, as you know, west coast grocery is very different than east coast grocery. So -- but we see probably those spreads growing in many places. I would suggest they're growing, not contracting..

Next question comes from Jon Andersen of William Blair..

Steve, you mentioned 11 months ago at the Investor Day, there were -- a lot going on, obviously. And I think one of the -- one of my takeaways was that perhaps TreeHouse's net-landed cost in each category were maybe not as low as it should be or as low as some of the smaller, more focused competitors that you're up against.

Has that -- to what extent do you think that has changed your cost competitiveness in each vertical or category during the past 12 months? And are you seeing a better ability to kind of go into bids and not only address retailers' kind of value-added concerns but also more price competitive as well?.

Sure. That's a great question. I would suggest a couple of things. We have gotten more competitive. The investments we've made in TreeHouse 2020 are paying off. Things like we did this quarter. I mean those are expensive investments but they do make us much more competitive.

But I think even more important to that, I think, we now, because we're a more consolidated organization, we better understand 2 things. We better understand the role of private label at the retailer.

So is it a value-added sale or is it a value sale, quite frankly, right? I mean do we need to bring them innovation, do we need to bring them natural organic clean label, or do we need to bring them value. So we better understand what the needs of the retailer are. And so we can bring them the right formulas, the right things.

We understand our low-cost formulas. We understand where we bring value and we bring when -- where we bring experience. But we also have a better understanding of what different businesses clear at.

What does the large bid in each category, what should that clear at, right? What's the right price point in each -- for a large, medium or small customer in any one of our 30 categories? So I think our revenue management organization and the work that the sales organization is doing has better aligned us with both the market and the customer strategy.

And I think that's why we're starting to win more than we are losing..

That's helpful. One more on just the changes that you made in the third quarter. The improvements in manufacturing. I just want to make sure I understand. So it was kind of a headwind from a cost perspective in the quarter, but it sounds like a tailwind with respect to maybe capacity and productivity in the future.

Can you talk in a little bit more detail around how that works? So what helps you in the future based on the investments you made in the third quarter? And when should we begin to see some of those improvements flow through?.

Sure. I think it comes down to as simple as we're producing more product with less shifts. And if you're able to do that over the long term. If you can get more product off the same physical assets with less run time, all of the math works really well. And so that's it, probably in a nutshell. And I would expect it to start in next year.

And the reason for that is we expect a little bit of volume pickup the next year. So the more cases you run through, the more of that savings you get. But also, we talked about our year-end focus on inventory and working capital. And so we won't be running as hard.

I mean there are some categories that we run hard every day because they're tight and they're seasonal. But across the entire business, we probably won't be running that hard with the holidays with all of those natural times. It's a great time for us to pull our inventory down. Get our working capital at our targeted levels.

So this business is doing all of that with a very disciplined look at working capital. And so I think all of those things triangulate into the impact coming into next year..

The next question today comes from John Baumgartner of Wells Fargo..

Steve, I wanted to try and reconcile your comments because I think on one hand you're mentioning that the customers are investing a lot more in private label pricing these days. But then I look at pricing net of commodities, which I think was actually positive for the sixth straight quarter.

Which -- I mean it's kind of highly unusual going back over time for this business. So I'm curious when you think about pricing net of commodities, how much of that positive balance is just kind of a Goldilocks environment where the cost inflation hasn't really been a lot. The consumer environment has been improving a bit.

And then that balance kind of gets out of whack again when either of those 2 variables kind of erode? Or to what extent is this positive PNOC being driven by just better internal processes and structural changes you made internally to the business?.

Maybe Bill and I will split this one. But I think you can't discount the amount of money we've invested in TMOS, and how we're getting better yield. We're getting -- so sometimes our PNOC isn't steady-state, right? We're improving the operations so much. We're engineering cost out. We're cutting yield or improving yield, we're cutting waste.

So sometimes our PNOC number when you're in an improvement situation might be a little bit skewed. I don't want us to think we're margining up on the customer. In fact, my conversation with the customer is, we talked about the 300 basis points in TMOS. And in 2020, we can take that out of our cost system without asking the customer for a lot more.

So Bill, if you want to?.

Sure. To build on Steve's comments, I think, obviously, there's an element of PNOC that's efficiency. We have a lot of effort around value engineering, very professional procurement organization that really does a lot to drive out the costs. That percent that's the efficiency-driven is growing.

And that -- we think that's an opportunity for us to leverage as we go forward..

Well, and it should be, given how much money we've spent on 2020. We have very high expectations for that team because we've resourced them..

And the last question today is a follow-up from Rob Moskow of Crédit Suisse..

I'm trying to do a walk from your original guidance for operating income for the year, it was $290 million to $325 million. And I don't think there's any update provided here.

Do you have a range that you're providing for operating income or not? I'm -- based on what you've said is for fourth quarter, it looks like it's going to be around $265 million which is a big step down. And maybe you can help me, how much of the step down would be from just divesting cereal, I guess..

Do you want to?.

We're not updating our EBIT guidance at this time, Rob, just the revenue as well as the EPS..

EPS. Yes. And there was some moving stuff around from the divesture of cereal. But -- well, we can..

Yes. We can work through some of that....

We can work through some of that and pull that out because it's in disc ops, so we can have a pretty good look at what the difference is there..

Okay.

So we can take a peek at the operating income contribution of that business then?.

Correct..

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

Well, I know it's a busy morning for everyone. I know we've put a lot of information in front of you today. We appreciate all of your support and all of your time today and look forward to seeing you all soon. Have a great day..

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