Welcome to the TreeHouse Foods Fourth Quarter 2019 Conference Call. This call is being recorded. At this time, I will turn the conference over to TreeHouse Foods..

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, targets, may, should, could, expects, seeks to, anticipates, plans, believes, estimates, approximately, merely, intends, predicts, projects, potential, promises, or continue, or the negative of such terms and other comparable terminology.

These statements are only predictions.

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

TreeHouse's Form 10-K for the period ending December 31, 2018, and other filings with the SEC discuss some of the risk factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made when evaluating the information presented during this conference call.

The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein, to reflect any change in expectations with regard thereto, or any other change in events, conditions, or circumstances on which any statement is based.

For purposes of our discussion today, both the 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. Our 8-K on October 22 provides the 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. Steven Oakland..

Thank you, PI and good morning, everyone, and thank you for joining us today to discuss our fourth quarter and our year-end results, along with our outlook for 2020. Let me start by taking a quick look back at 2019. I think it's important that we recognize the magnitude of the progress that our company has made.

Recall that back in December of 2018, we introduced our enterprise strategy, one that refocused the organization on the customer, with a goal of better positioning ourselves to take advantage of the opportunity within private brands, a strategy that helps us move from a decentralized organization made up of a collection of acquisitions to a truly integrated operating company.

The strategy centers on the customer, and covers four key areas, operational excellence, commercial excellence, optimized portfolio, and people and talent. Those who attended our investor breakfast meetings just before the holidays have seen Slide 3 before, which outlines that progress. And I'm very proud of the work we've done here.

I continue to believe that we've made the most progress around operational excellence. Soon after I arrived almost two years ago now, we set a goal to improve our service levels, which we have fully achieved. This enabled us to deliver consistent and above target service levels for order fulfillment and customer service in 2019.

We ended the year at 98.4% service across the company, more than 300 basis points higher than we ended 2017. From a commercial standpoint, we stood up our new organization in July, and we're building on our great customer service and gaining real traction towards improving our retailer partnerships.

I expect the benefits of this work to begin to impact us mid-2020. We accomplished the majority of our divestiture work around portfolio optimization.

We sold the snacks division last August, announced just last month the sale of two of our in-store bakery plants to Rich Products, and we are in the process of remarketing our ready-to-eat cereal business. Obviously, we were very disappointed in the FTC's complaint filing in connection with our ready-to-eat cereal transaction.

The government review took more than seven months, and we clearly don't agree with their assessment.

However, the additional costs and time that would have been required to contest a ruling, coupled with the stress on our cereal employees and our business, has led our board to determine the best course of action was to terminate that agreement and remarket the business for sale. I thank the leadership at Post for their patience through this process.

Finally, I'm proud of the work our teams have done around people and talent, outlining our mission, vision, and values and defining the TreeHouse way. And over the long term, it will be our culture that sets us apart and drives our results. This progress is evident in our full-year results, as seen on Slide Four. In 2019, we grew EBIT by nearly 10%.

We increased EBIT margin by 90 basis points, and we posted 21% adjusted earnings per share growth, very credible results in the food space. We delivered these results in spite of a revenue decline of more than 6%. We're becoming a much healthier and more profitable business.

These are solid results to date, but we continue to see opportunities for improvement. And it's important to note that we are not satisfied with these results. As you saw on this morning's press release, our fourth quarter adjusted EPS of $1.10 was in line with consensus estimates, and the revenue of $1.14 billion was within our guidance range.

However, volume fell short of our expectations. Let me give a bit more context on the market conditions and events that affected the fourth quarter. Slide 5 provides IRI data, but although it doesn't reflect the entirety of our business, provides a useful barometer.

Within our categories, the fourth quarter saw a marked deceleration in private label growth in comparison to the prior nine months year to date.

In the fourth quarter, brands invested heavily across the retail landscape in both temporary price reductions and merchandising that clearly had an impact on private label performance versus our expectations for the last few months of the year.

It's important to note, however, that we believe the customer intimacy that we are building through our commercial excellence organization will allow us to be more effective going forward, regardless of the competitive environment.

Secondly, the beverage division, and more specifically, the highly seasonal broth and non-dairy creamer businesses, underperformed versus our projections for the fourth quarter. When you think back to 2018, and recall that we couldn't produce enough broth to service the demand.

In 2018, customers overcompensated for our broth service challenges by over-ordering, which led our team to build their forecasts based on prior year demand signals that were exaggerated. As a result of both of these issues, our fourth quarter volumes declined 5% and were sequentially flat, as you can see on Slide 6.

Had broth and non-dairy creamer performed to our expectations, volumes would have been down closer to 2%. As you can appreciate, when you manage 29 categories, forecasting pound volume is not always the best measure.

Broth and non-dairy creamer are much heavier products compared to items such as cookies, single-serve coffee pods, and tea, all of which grew in the fourth quarter, and are in many cases, higher margin.

So while our volume, as measured in pounds shipped, fell short, we still delivered our earnings of $1.10 within our range, largely because the relationship between pounds and profit dollars isn't a perfect correlation across all of our categories.

Moving to the right-hand side of Slide 6, although we don't typically share monthly data, I would like to share our December top line results because I think they're very encouraging. 13 of our IRI categories posted net sales growth in the month. I don't want to claim victory.

We are probably six months behind the pivot to consistent growth, but December top line results certainly give us reason to believe that we're on the right track. Let me now hand it over to Bill, who, as you should have seen in this morning's second press release, has been elected our permanent CFO. I could not be happier about this.

When we appointed Bill interim back in November, we also began a thorough CFO search process across our industry and others, led by one of the top search firms in the industry. In the past few months, I have met and spoken with a number of quality candidates, all of whom were qualified.

Having gone through that process, I am more convinced than ever that Bill is the best partner for me and for the company as we continue to execute on our strategy. In the past few months, I gained even better appreciation of how well Bill understands our business and the CPG industry.

He has been instrumental through all the change the company has been through over the past four years. He's accomplished a great deal with our finance transformation and integrated business planning. I'm looking forward to partnering with him further as we drive the organization forward.

So Bill, if you'd like to take us through the numbers and the outlook, I'll come back at the end and wrap things up, and give you my thoughts on why we're optimistic about the future..

Good morning. Thank you, Steve, and thank you for your kind words and vote of confidence. I'm really pleased to be transitioning to the permanent CFO role.

As my responsibilities have broadened over the last few months, not only has my determination to deliver on our commitments grown, but so has my appreciation for the opportunity we have ahead at TreeHouse.

Turning now to the fourth quarter results on a continuing operations basis, which just as a reminder, accounts for the former snack division and the ready-to-eat cereal business within discontinued operations.

As Steve mentioned earlier, and you can see on Slide 7, fourth quarter sales were $1.14 billion, a decline of 4.5%, while profitability improved 90 basis points on the EBIT line to 9.1%. Fourth quarter adjusted EPS of $1.10 grew 10% versus the prior year comparable quarter.

With regards to items affecting our variability in the fourth quarter, we had a non-cash impairment charge of $41.1 million related to the sale of two in-store bakery few facilities that we announced last month. We anticipate closing this transaction in April.

We also have several adjusting items totaling approximately $12 million related to transition costs and NELA, the product labeling regulatory reform. You can see those items detailed in the release and the appendix of the deck. Slide 8 takes you through the revenue drivers by division.

TreeHouse organic revenue in the fourth quarter declined 3.8%, a sequential improvement from Q3. As Steve mentioned earlier, we are seeing progress. In the quarter, declines in baked goods and meal solutions continue to moderate, and have been moving in the right direction.

Beverages took a bit of a step back in the quarter due to broth and non-dairy creamer. What remains encouraging to me is that the service levels across the organization are very strong. The role of private label remains a priority for our customers, and its attractiveness for consumers remains very high.

Slide 9 gives you the Q4 EPS drivers on a year-over-year basis. The $0.10 decline in total company DOI was more than offset by $0.12 of continued SG&A discipline, and $0.08 in interest, taxes, and other. This was more than explained by lower pension interest expense versus the prior year.

Slides 10 and 11 take you through the consolidated deal walk [ph] and the drivers by division. Volume and mix, including absorption, was down $18 million versus last year, as we continue to lap lost business, mainly in meal solutions.

Although we have now lapped the loss of some brands of pasta from the prior year, we're still rolling off some pickles and dressings losses. I'll help you put some parameters on that when we get to our guidance discussion in a few minutes.

Pricing out of commodities was favorable by $4 million in Q4, due to higher pricing in baked goods and meal solutions, along with lower freight expense, offset by the continued impact of lower pricing in beverages. Finally, we're pleased with the progress we've seen year-over-year in our operations, which contributed $7 million versus the prior year.

Our efforts around continuous improvement and war on waste are enabling us to run the plants more effectively and efficiently, and the issues we face in the third quarter are behind us.

Turning to our balance sheet metrics on Slide 12, we ended the year with net debt of $1.9 billion, and our leverage ratio, as defined by our bank covenants, below 4 times. Working capital contributed about $82 million in the year, driven in large part by the focus we put on reducing inventory.

As you can see on Slide 13, free cash flow of $149 million for the year was below the bottom end of our guidance. Despite the strides we made, and reduced the inventory at year end, our overall working capital improvements fell slightly short of our expectations.

This was in part to resolve the negative impact of the snacks division accounts payable in 2019, as we had some AP that was retained by TreeHouse, and settled as part of the sale. In addition, we had several items impacting comparability in our fourth quarter, payments of multi-employer pension plans and transition expenses.

Although we consider all these item one time in nature, they did impact our free cash flow. Turning out to our 2020 guidance on Slide 14. Our revenue guidance at $4.1 to $4.4 billion takes into account the carryover of some business losses from 2019, as well as pricing adjustments, and I'll give you a bit more color on that cadence in a minute.

Our expectation for EBITDA in 2020 is $480 million to $510 million, and we've outlined the components to bring us to that range. Our interest expense guidance takes into account our lower debt levels. Our EPS guidance of $2.40 to $2.65 represents 6% growth at the midpoint, and our free cash flow guidance is $250 million to $300.

As Steve noted earlier, we think we're about six months behind our expectations for a pivoted growth on the top line. Our algorithm of 1% to 2% net sales growth, 10% EPS, and $300 million of free cash flow are reflected in the top end of our guidance range. In comparison to prior years, our 2020 plan is much more robust.

We pulled together not only a category perspective and supply chain financial plan, but our teams also built a bottoms-up customer demand plan, which is a level of granularity that we never had before integrated business planning or IDP.

That improved visibility around our tailwinds and headwinds for the year is incorporated into our guidance, which allows us to give you a greater sense of how the year will unfold. Turning to Slide 15, I think it's important that we help you better understand the progress of the top line this year, first half versus the second half.

The left-hand side of the chart represents the first half of 2020, as we expect revenue to be down 3% to 5%. This takes into account about $175 to $200 million to carry over top line pressure in Q1 and Q2. To be clear, this isn't new news. It's business that we lost mid-year 2019 or stepped away from, or where we made pricing adjustments.

The blue bar represents our commercial organizations progress, which although encouraging, is being overshadowed by the carryover. As you move to the right in the second half of 2020, we expect to tell a significantly better top line story. We've taken into account known carryover, and we've built it in assumption for possible further losses.

But you can now see that the blue bar, which represents the hard work of our division GMs and our commercial teams, is growing, translating to second half revenue growth of 2% to 3%.

This is not a level of detail we plan to provide every quarter, but I do think it's useful in visualizing how the first half differs, and how we show growth in the back half. Turning next to Slide 16, and our free cash flow projections for 2020.

You can see our expected CapEx spend and our assumption for working capital contribution, assuming the midpoint of our earnings guidance. This is our last year of TreeHouse 2020 restructuring program, so the cash charges will step down meaningfully to a range of $55 million to $65 million. Finally, you'll see the $25 million legal settlement.

We talked about this on our Q2 call, at which time we looked to reserve for the settlement. That one-time item will impact free cash flow this year, but as you can see, our underlying cash flow is strong and right on target.

On Slide 17, you'll see our Q1 revenue guidance of $0.98 billion to $1.02 billion, which contemplates a first quarter impact of about $100 million to $115 million, and carryover loss revenue and privacy adjustments. Our adjusted EBITDA guidance is $90 million to $105 million, and we're guiding EPS of $0.20 to $0.30.

Although this represents a year-over-year decline from 2019 to 2020, I will point out that last year's first quarter, including a meaningful level of pricing to recover commodity costs, they carried over from 2018. In closing, let me say that the importance of delivering on our guidance is not lost on me and the rest of the organization.

We recognize we must hit our numbers quarter end, quarter out, even in the face of industry challenges. I believe our 2020 guidance is realistic about what we think the business can deliver this year.

And given our intense focus on the customer and continued commitment to solid operational execution, big items within our control may even have opportunity to be. So with that, let me turn it back over to Steve for his closing comments, and then we'll open the call to Q&A..

Thank you, Bill. Bill covered a lot of ground here. And I would echo his sentiments. We recognize the importance of delivering our 2020 guidance, and positioning our company on our strategic growth algorithm.

We continue to believe that our algorithm targets are appropriate over the next few years, meaning 2020 to2022 although our pivot to growth this year is coming slightly later than originally projected.

As I mentioned earlier, volume, although important for improving plant efficiency can't necessarily be used as an equivalent metric across all of our categories. So we've guided 2020 net sales as the best measure of our progress. Do I wish we were moving faster? Absolutely, in some ways, that's the nature of private label and the sale cycle.

But it's also understanding that we must balance our growth and margin profile. We must remain disciplined in order to maintain and grow shareholder returns over time. I think we saw solid evidence of that in the 2019 results, which is where I started my earlier comments today.

Let me close today by sharing my thoughts and why I continue to believe in the TreeHouse story, and also give you a bit of a preview on what we'll share with you at the Cagni conference next week. Today, our customers are asking for two fundamentally different things from TreeHouse. First, think about the center of the store.

They're asking us to help them show the consumer value, helping them compete and drive margin that they can invest to drive traffic. Second, in other parts of the store, they want us to bring them uniqueness and innovation.

They're asking us to help differentiate themselves to help them be more be more relevant to their unique customer base, which brings me back to our strategy and in particular portfolio optimization. Last year, portfolio optimization meant that we focused on the divestiture of underperforming businesses.

Portfolio optimization also means that we need to address the rest of our categories, position them in the best way to flourish and make them even more relevant to the consumer. If you take a look at Slide 18 this is the one, we put up in December and our investor breakfast updated for year end.

Across our 29 categories, the ones that fall into the instant consumable, ready to eat and ready to drink has the potential to grow significantly faster than the center of the store categories.

Think about how differently the same retailer may look at a 16 ounce box of spaghetti versus our ready to drink cold brew coffee in a cooler at the front end of the store.

We've also been doing deep dives into our categories and found segments of the categories we participate in today that provide new avenues for growth if we position them differently, or invest in them strategically. Take crackers for example, on the left hand side of Slide 19, which represents just a few of the cracks sub segments.

We're greatest saltines, entertainers but we do very little in snackers, the portion control packs that are portable and go into lunch boxes, or sandwich crackers for that matter. And private label has been growing there by 8% and 5% respectively. We must build our offerings to better align with the growth segments of our existing categories.

On the right hand side of the slide, let's think about a category like pasta, a very mature category and from a manufacturing perspective, few ingredients and simple to make. Can we convert more of that business to make to a made to order model, such that we reduce waste, improve our cost profile and provide better value to the retailer.

In doing so, we can drive down our inventory, generate more cash and invest in our growth opportunities. Finally a couple of thoughts around service. Customer Service continues to be critical to our success. It drives not only our relationship with the customer, but also their confidence to promote our products.

We're starting to see the benefits of reliability. We're building credibility with our customers. And as a competitive landscape evolves, we're becoming part of their solution. So as we look to 2020 and beyond, we have a lot of work ahead of us, and a lot of exciting opportunities. And it makes TreeHouse an exciting place to be.

I truly believe that those opportunities coupled with operational and commercial successes, and the strong dedicated leadership team will allow us to deliver significant shareholder value while achieving our vision of making high quality food and beverage affordable to all. I'll close by saying that I'm proud of all that we have accomplished in 2019.

And I want to thank our employees across TreeHouse for their dedication and committed to ongoing excellence. With that, let's open the call up to take your questions..

[Operator Instructions] The next question comes from Bill Chappell of SunTrust. Robertson Humphrey. Please go ahead..

Thanks. Good morning.

You know, I guess the real focus is just the pivot to growth in trying to understand how over the past, I guess, two, three months, we went from or given the past six months, we were kind of confident that it was going to show up in the third and fourth quarter to now it's being pushed out six months and what transpired over the past two, three months that push that out? What happened to - I thought there were pretty sizable kind of distribution gains that were supposed to come in both in the fourth quarter and in the first quarter.

You didn't touch upon that.

Did they get pushed out as well? Just some more clarity of how, in the past two, three months, everything's been pushed out?.

Sure. Well, a couple of things. I think we have much better visibility today. And we talked a little bit about that the last couple times we've been together about the IBP process.

So I think we have much better visibility across our businesses, to where the [laps] [ph] are to where the new business comes, we're in when it is either comes or comes out of our business. And secondly, hopefully, we've always been consistent that we thought the growth would accelerate in the back half of 2020.

So we did lap, and I think Bill talked about it in his prepared remarks today, we did lap some pasta, and some other things that were negative in our numbers. The sale of the ISP business quite frankly doesn't qualify for discontinued operations it’s got some negative lap in it.

So there are a few things in there that are maybe a little worse than we thought they were. But we thought it was just prudent to give better line of sight, a little more transparency to what we see for 2020. And a more realistic look at where we think next year will fall volume wise. And we also thought maybe I'll comment on the volume versus dollars.

You know, we had significant deflation in 2019 in some large categories for us, like Single Serve beverage. And I think with that in mind, we thought volume was a better way to guide.

In fact, you know, we think we would have pivoted to dollars in 2020 regardless, so I think 2020 given the variety of our mix, and the variety of weights of things we do we think that's going to be a better measure going forward..

Okay. And then in terms of the distribution gains, what I was saying, did they show up or they postponed or are they coming in as expected..

Hi, Bill. This is Bill Kelly, thanks for your question. You know, we did get distribution gains in the quarter, particularly in our in our baked goods and meal solutions divisions. What you saw on Steve’s Slide 5 is that the market did come back at us a bit here and demand softened. And that really hit beverages pretty hard.

So unfortunately our distribution losses did not offset the gains, but the gains that we expected to see, we did see except for our broth and creamer categories..

And I would say that's the biggest difference from when we were together in December, if you look at it, and that's why we thought it was important to show the IRI data.

If you look at the IRI data for the first nine months of last year, and what our projections and frankly our work with the customer was built on and then you look at what happened in the fourth quarter and the aggressive spending against us from brands. We just saw the category softened substantially in the fourth quarter.

So I think the fourth quarter is really two things. It's about two thirds our performance in both creamer and our beverage business, right, and broth. And then it's about, another quarter the performance in the categories. So that would be the difference in the fourth quarter. The first quarter really is just the timing of new of new business.

And quite frankly, the magnitude of the [rap] [ph] that's coming in..

I'll turn it over. Thank you..

Thank you, Bill..

Your next question comes from Robert Moskow of Credit Suisse..

Hi, thank you. This is actually a Jake Nivasch on for Rob.

Just a quick question on the long term algorithm and I guess for this year two is, are you guys still projecting that the EPS growth that like two thirds of it is going to be coming from top line?.

Yes, hi, Jake. This is Bill Kelly. Yes, our algorithm is still our long term view and we think that the two thirds top line growth will drive the EPS plus 10%.

I will just remind you a bit though that in the higher end of our range for next year where we're aiming at that, and this year we finished over in that double digit percent growth as well in EPS..

Got it, thank you and then just a follow up, I guess what gives you - how confident are you guys that in the back half, you know, we're not going to see, you know, any unpredictable nature of consumer behavior, not consumer customer behavior, just given you know, it's just a hot volatile business.

So I guess, how confident are you in that sales rebound?.

Well, I think the sales rebound is based on new business won, it's not based on any kind of herculean performance from the customer. So hopefully that numbers conservative enough that it absorbs that potential..

Got it. Thank you..

Next question comes from Jonathan Feeney of Consumer Edge. Please go ahead..

Hi, good morning. Thanks so much. I'm particularly interested in the free cash flow for 2020 and beyond.

Could you - what is the bridge between adjusted EPS and free cash flows? Are you rationalizing capital expenditure? And I'm interested going forward is this a company that's going to derive free cash flow consistently well ahead of adjusted EPS do you think? And how do you balance that with what I hear on the innovation side, like you've called out in your comments that transition from pasta to that ready to drink cold beverage? Well, you've got all kinds of – you’re swimming in capacity for pasta, and you've got potentially new capacity [indiscernible] for any innovation you might need to do.

So, if you could kind of walk me through that I think it's a really key part of the story, and I'd really love to understand it. Thank you..

Good morning. This is Bill and thanks for your question. I'll start and maybe Steve will add a couple of points here. The first part of your question in terms of the bridge, you know, as we walk into 2020, we want to see a significant step down in our restructuring spend, as our TreeHouse 2020 program wraps up.

So I think our earnings that we project and the step down in cash restructuring, and a bit of a modest declining CapEx drives us to where we're aiming. The second part of your question related to some of the comments on, [mix and] [ph] order. We have made significant strides in managing our working capital.

And we are after some structural working capital reductions and things like [indiscernible] our inventory and managing our terms both on ARAP and other initiatives led by our Treasury function, we think we have a great opportunity here to deliver this cash flow..

Well, and I'll build a little bit about the thoughts we have and we'll have more detail on this at Cagney. But if you think about how much more stable our base is, our customer services levels and our performance operationally.

And now that we're building that on top of that we're building a commercial team, it's time for us to help the retailer meet their strategy and I talked very simply about it in my opening comments. We'll talk more about it at Cagney.

But we see really two different sets of businesses within TreeHouse, we see one that can provide higher growth categories, more innovation, and more uniqueness and help that retailer differentiate. And then we see some center of the store stuff, if you think about much of what we got from Conagra private brands, those are value categories.

And maybe we don't have to allocate the same expenses to them. Maybe we don't have to allocate the same R&D dollars, etcetera. So we think there's a way to run different parts of our portfolio differently.

We think the cash from running those businesses on the cash side more aggressively will actually fund the innovation and the relationship with a retailer. So I wouldn't say that it's going to necessarily be incremental. I think we see it as a way fund the future growth and better connect with the customer..

Thank you very much..

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

Hi, couple of questions.

One, could you just talk about trends in trade spend; and if you're seeing anything any changes there, is it various categories?.

You know, Bill can speak to it but trade in our business is not what it is in traditional CPG. So most of our work is net price. We have a small branded pasta business; we have a little bit of trade and in some of our retailer relationships just because they like to find a way to approve funds so that they can promote.

But trade in our business is a much smaller piece. That doesn't mean we don't see trade spent against us, like we did in the fourth quarter that we don't see the traditional mechanics of what happens in the branded business that in the same categories we participate in. So I don't think it's right for us to comment on that.

And you know, we see it go up and down a quarter. I don't think we track it beyond that. But trade for us, thankfully, is not the big headache that it can be in other CPG..

Okay. And then one follow-up on the single serve beverage comment, you called out the competitive pressures.

What do you think kind of come, it opening price point brand, new entrants, retailers kind of changing their strategy in terms of how many brands or how many items to carry on shelf? Any more color you can give will be great?.

Sure. I hope I didn't misrepresent that. That was the - we saw that as single serve coffee pods came out. We saw the margins very, very high. We saw the dollar price points very high. We've seen that consolidate over the last couple of years. I think we shared on previous calls that we've seen that flat now.

We're seeing that sort of find its new equilibrium. But unfortunately as our contracts roll off, and those new pricings rolled in, we had deflation in 2019. I think in one of the slides of Bill showed where he shows carry over part of that carry over, yes, there's volume loss, but I think he made a comment to some pricing.

There's the last bits of that pricing compression and single sauropods [ph] is in that number. It'll be significant in the first quarter, for example. So that's in our guidance for the first quarter. So, it's really just the reset of pricing across the entire industry. The good news is as we've seen contracts go through.

Since then, with it seems to have stabilized. So that's why we also feel good about guiding the dollars. We don't see the same deflationary pressures, once we get through the first quarter to next year or this year, excuse me..

Okay. So you don't see that as a category where you need to do more skew reduction or consolidation because it's not hitting margin targets. It's still a category you think that's good and viable..

Yes, no question. I think we will see some volatility in our mix occasionally because of contracts wanting contracts, loss, etcetera. But in general, we view that as a growth business and will continue to invest in it..

Okay, did you break out how much is a loss volumes and each of the category were planned versus unplanned space losses?.

No, I don't think we did that. And you know we've talked in the past that we did have some businesses where the margin profiles weren't so attractive. We did price our way out of some things that made sense for us, but that's the balance, trying to balance your overhead absorption, your volume, your cost in the mix.

That's where the magic in this whole thing..

Okay, thank you..

Next question comes from Jon Andersen of William Blair..

Good morning everybody..

Hi, Jon..

At the investor breakfast I think it was in November, you talked a lot about how really customers were acknowledging the improvements you've made, particularly on the service level front, and that that was translating into more and maybe more fruitful new business discussions.

Could you just provide an update with respect to that the kind of the nature and the conversations you're having, and to what extent has that now influenced kind of your outlook for the second half of the year where you expect to grow kind of 2% to 3%? Thanks..

Well, and I think I can't express enough the frustration with the length of the sale cycle. And, you know, the sale cycle works on both ways. I think the losses that Bill detailed in his charts, really are the reflection of things that have happened to us, you know, more than a year ago, many cases.

So I would suggest that the conversations today are a number of folds. They are about longer term commitments, they are about innovation, they are about innovation and they're about value. I mean, there's no question that the same store categories in the retail needs help, right.

They're investing and click and collect they're investing in a lot of things. So that that's really what we'll talk about a Cagney's is how do we operate differently in those places where the customer needs value. And how do we operate differently in those places where the customer needs innovation.

So the good news is we're having those meetings, we're having them a layer up, I guess, than what we would have a year or two ago. We're having them with more strategic folks in the organization as well as with the traditional procurement people. So I think it's just a maturization of our commercial group.

Remember, that group just was launched in July, so we expect that to continue to gain momentum over the next year or so..

Okay. You talked a lot about creamers and broth in the fourth quarter. And I'm just wondering, you know, where do you sit now with respect to those businesses? It sounds like maybe there was over ordering a year ago, perhaps under ordering this year.

But can you talk about I mean, their excess inventory levels? Are you going to shift to demand in those businesses going forward? Is there anything that we should be aware of?.

You know, I don't think there's anything that'll be material and we've shown us in our guidance. We did carry broth inventory into the first quarter. The good news on broth is it is a winter seasonal business. Yes, the holidays are most important, but it is a total winter seasonal business. So that businesses burning off.

We talked about the demand signals there. When you're on allocation with a customer, unfortunately, often the customer will order more than they actually need.

So we had historic demand signals in that businesses that were inflated, we build a plan on that and shame on us, right? We guided to it, we actually felt even when we were together in December but that business was going to perform dramatically better than it did in December. So that that was a big miss on our part.

And I think we we've got the systems in the process in place to try to keep that from happening again. The non-dairy creamer business, quite frankly, I think is a combination of things. As you know we had a large strike in our system where we were disrupted dramatically.

We also had some legislation on partially hydrogenated soybean oil, so we had to change the formula, which changed the taste. I'm not sure any of that was handled at the level that we would all expect it to be handled. So that businesses on its way back, but it's a little further behind than we had hoped..

Okay, last one for me. So the IBT, the integrated business planning and the level of visibility into the plan for 2020 seems like it's better than it has been in the past. And then there was also I think, some commentary around, there's an opportunity given that for us to perhaps beat, expectations or the guidance that you've set.

If there were one, two or three areas where you see key kind of leverage points were if you were to deliver upside, these would be the areas that would be most likely to come from.

What would those be?.

I think the continued positive performance of our operations. You know, we talked about the third quarter that we took some structural cost of the operations. So we saw that rebound in the fourth quarter. We're expecting obviously that to continue. So I think there's an opportunity for that team. They've worked really hard.

We've spent a lot of money on TreeHouse 2020. There's an opportunity for that to deliver as we go forward. Also, these commercial relationships and the focused organization I can't tell you how different that is. I think that team is having small wins and we just need those win literally every day. You know, it's fun when we celebrate it, we get a win.

But you go back to the US when will that ship was going to ship in October, right? So it's really - it's a very different situation but that momentum is continuing to build.

So I think if the operations continue to run well, if a couple of these things hit us a little quicker than we thought, I would suggest the guidance we've given and how transparent we've been on the first two quarters is a significant improvement in the company's operating capability. I'm not sure we could have done that in the past.

So hopefully, that's the transparency that shows you the heavy lift that this place has been through over the last couple of years, at least that I've seen..

Thanks so much, and good luck going forward..

Thank you..

Next question comes from John Baumgartner of Wells Fargo..

Good morning. Thanks for the question. Steve, if we look at pricing net of commodities, Q4 was I think the seventh consecutive quarter of that metric being positive, which is a - it's a pretty unusual string for this business.

How much of that would you attribute to just the benign commodity environment, which has limited the need for pricing and made that bar easier to clear, relative to how much that stems from a change in your go to market and engagement with retailers?.

Well, I think I'm going to let Bill give us some detail on it. I think there's - we've done such a better job on freight, okay. So, I think the freight bar shows up in that in that number as well. So, I would suggest it's all of the above. I think it's our ability to manage mix. I think it's our ability to work with a customer.

And quite frankly, our procurement organization has done a really good job. So, I think it's a whole bunch of things. We're running as a better business. I'd be kidding if I didn't say that the benign commodity environment doesn't make that effort a little easier. Right? And we'll test all those skills whenever we have commodity inflation.

But maybe Bill can comment also. But I believe freight has also helped us, and we've shown a lot about - I'm not suggesting that we priced for it wrong, we just didn't operate well in freight in the past. Right? We had so much on the spot market.

That team has really got ourselves much closer to our core carrier group, and we're actually operating on our contracts now..

Let me just build on that point. Freight is what's favorable for us in the quarter. The $4 million, you saw year-over-year in [indiscernible] mostly was driven by favorable freight.

But to Steve's point, elaborating much better in that space, about half of our benefits came from lower spot market usage, and another half or so came from the lower contracted rates. So, all of the work we've done around managing through an RFP process and getting more efficient is showing up in the P&L.

And the only thing I would add also to just our procurement team, they have a series of initiatives and programs that they're using to fight inflation, and do a pretty good job of making sure that they're helpful in this number..

Okay. And then the follow-up would be just going back to the comments about to have your promotional environment for brands in Q4, because looking at the Nielsen data at least, that's been showing brands as generally more rational over the past year or two. Less volume sold on promo, also more moderate depth on deal.

So, I'm curious, what's embedded in your guide for 2020? Are you assuming that this Q4 elevated promo carries through, or is this more isolated to the holidays? How are you thinking about that in 2020?.

I think 2020, if anything, we've been we've been appropriately conservative just on the volumes based on our - we haven't assumed any particular movement from the brands. We've really built it based on what we think realistic, much more realistic and much more conservative volume plans per customer are.

And like Bill said, we built this up from the ground up versus top down. And so, I think those things are pretty realistic regardless of the environment. We expect it might ebb and flow with a particular customer or a particular time one quarter to another. I don't think we're assuming a change in the behavior of brand and CPG.

It just happened to hit the quarter, right? And that's IRI data on our part. My comments in that were made based on the IRI measures, both quality merch and in TPR. So, that's where we got that data..

Okay. Thanks for your time..

The next question comes from Rob Dickerson of Jeffries. Please go ahead..

Super. Thank you. Apologies for missing my first chance..

Yes, you gave us a panic that our phone wasn't working..

No, no, it's my fault. That was my fault. I'm sorry. Okay, so just the first question, kind of a bit of follow-up on the last question we just heard kind of, but more top down. Sounds like there's a little bit of incremental branded pressure in Q4. I guess the other retailers supported that to an extent.

Bu if we step way back, and we just ask what's the state of private label, right, how does private label play in to the retail landscape today, even relative to three years ago, as we look forward three years? Is the feel as you speak to all of your customers, you improved the service levels, you tried to innovate more, be more agile, et cetera, is that yes, we as retailers have increased demand and a yearning to really improve our overall exposure to private label, if the product's right, if the innovation's right, if you can create the demand, or you can increase the demand curve for those products, and we absolutely want that, and given you a little bit bigger, if you can do it, then yes, we want to partner with you? And I just ask because that the upfront slide, Q4 says this, brands do this, brands are trying to become more efficient.

But it does seem like there's still a large opportunity for private label. Thanks..

Yes, please don't read anything into the fourth quarter that would suggest that the retailer strategy has changed, right? I mean, you think about the pressure on the retailer to differentiate themselves, drive traffic, find the dollars to do that, well private label penny profit in most categories is significantly better.

And then if you can make unique items that can only be bought in your store, it insulates you from other channels, right? So, that conversation is still happening, and I wouldn't - I've not seen anything in my conversation with a retailer or in - and we just came back from the FMI annual event where we were with all the retailer CEOs, and so I haven't seen anything would change that strategy.

Now, it may move around quarter to quarter. I mean, trade spend still drives their bottom line at times. And so, you may see sometimes when brands are effective. We are seeing, like I say this bifurcation, in requests from us. We are seeing the need for value in certain categories where they see little differentiation.

And then we're seeing the - where they want real differentiation, we're seeing that demand as well. So, I think we're uniquely structured do both. But that would be the only strategic change I've seen..

And then would you say, as you have these conversations with retailers, that they feel - not just you, but they feel that your scale, your ability to maybe reduce the inventory risk relative to some smaller players, is obviously attractive? Or is it, hey, we're still in a fragmented industry, so hey, TreeHouse, you're great, but you're still going to have to compete pretty heavily on pricing relative to some of the smaller players? And then I just have a quick follow up..

Sure. Well, I think we have to provide value regardless. Right? I mean, I think that's pretty clear. That is the effort around 2020, TreeHouse 2020. That is the effort in our operations. We're convinced we can do that. That's why we only guide the 1% to 2% growth when maybe our categories are growing at 2%.

There's some places where we know, quite frankly, the margins will be below what we need to return to our shareholders. So, I think value is always there. I do think they're concerned as it gets bigger, the larger private label gets, and especially in the larger retailers, the more concerned they are about stability of supply.

And so, that's when I think our scale really brings it to bear. So I think all those things are true, but we cannot take our eye off the cost. We can't..

Super.

And then quickly, just on the ag commodity complex going forward, is there - are there any areas where you foresee potential incremental pricing needs, or you feel pretty good where you are?.

There's a couple little, tiny things, but knock on wood. We think we're hedged where appropriate, and we don't see big commodity headwind at this moment..

Super. Thank you so much..

Thanks a lot..

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

Hi, good morning..

Hi, Chris..

Hi, Chris..

Hi. I just had a question, and it's a bit of a follow on to the past couple questions.

But have you given the rate of inflation you expect for this year, and then how you are offsetting that in the form of pricing, or are there more positive [indiscernible] coming through, based on things like freight, or however you discuss that?.

I think it's going to be a bit flattish in 2022. It seems quite - there are some pieces that are there going to be a bit up and we have to offset that with a lot of our CSI or kind of improvement initiatives. So, we don't have much coming in way of pricing or cost inflation..

Yes, and the one place we do have inflation is wages across our factories. As you know, that has been tight, labor's been tight. We're almost to the point where our lean initiatives are mature enough that we can count on them to deliver that cost.

I think historically, in large CPG, you've looked to your operations to cover inflation plus a penny or two, and we're getting close. So, we're counting on lean to help us with the labor inflation..

Just as a bit add before you leave the topic, we did have a bit of pricing in 2019 that offset some of that inflation as well..

Okay, got it. Thank you. And I just had one other question. And you talked about the stronger branded performance in the fourth quarter, for example, and I guess I just want to get it - and I think you also discussed some more branded competitive activity.

Just to be clear on that, does that continue into 2020, you think? I get that the focus still retail is on private label, but do you foresee that, or is there any indication of that activity continuing in 2020?.

We don't see anything that's going to change. I made a statement a little bit earlier about we don't see anything changing strategically, but we would expect from time to time we'll have quarters that are - where were certain key categories for us, the brands are aggressive.

I mean, that's just the way that works, right? And trade is still important to the retailer at those key periods. So, those will happen time to time, but we don't see anything structurally different..

Okay, thank you for the time..

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

Hi, good morning, and congratulations to Bill..

Thank you, Steve. I appreciate it..

So, just to make sure I heard you clear on the last question, pricing that of inflation - of commodity inflation, that's supposed to be flat this year.

Just want to confirm then, Steve, in prior quarters, probably when you recently joined the company, I think one of the comments you made about the changes you were making was, it would be - the company would be better positioned in the future to manage commodities because the way you would strike contracts would be less of going to the table and negotiating to get pricing.

It would be more pass-through. So I just want to understand. Why the need to lean on productivity savings while - I realize this part of the business, it can actually be protected with that in the contracts? Just want to make sure I understand that piece..

Well, hopefully I was clear there. That was for labor inflation, right? The plants need to cover their own labor inflation, not commodity inflation. Labor, there's local taxes, there's utilities, there's all the things that you have in your non-ingredient cost spend. So, we can pass ingredients through; we can't pass labor through.

And so we want to count on our plants to have a continuous improvement effort that covers its own cost structure, not commodities. That's pretty typical across at least where I've been in the past..

Okay. And then a clarification on the cash restructuring charges. I see what it is in the bridge for 2020.

Any kind of wrap up as to what that cash restructuring costs were in 2019?.

For the actual 2020 program? I'm sorry, is that....

Yes, for the multi-year program, what were the cash costs in 2019? Because I realize that steps down in 2020. I just wanted to understand kind of the delta, if you will..

I think was $144 million in 2019, $144 million, and it'll step down dramatically to $55 million in 2020..

Okay. And then my last question, and I'll pass it along.

Just to understand the distribution losses that you talked about, and I realize a lot of it's in the rearview mirror, but just to make sure we understand that appropriately, is that shelf space loss to maybe smaller sub scale private label manufacturers that are maybe willing to do business with the retailer at a lower margin rate? Or is this a little bit of also just maybe branded holistically taking back a little bit of share? Thank you..

I don't think it's branded. I think it's a case of our performance in the last - several years ago was so unpredictable that our retailers decided to either split the business that they had with us, or quite frankly, to try other vendors. And we gave them, quite frankly, reasonable reason to do that.

We feel like that's changed now, and that's why we see the momentum going the other way in the bar, the blue bar, on Bill's charts, is going the other direction. But I think it was really just business loss because of our performance. In some cases, our pricing wasn't competitive.

We had a little period in pasta where we think our cost structure was a little out of line. We fixed that. But I think it was really reflective of our performance. And if you think about our performance on all metrics, two, three, four years ago, that's what's reflected in there..

Thank you. Next question is a follow-up from Robert Moskow with Credit Suisse..

It's your lucky day. Two from Credit Suisse..

Hey, Rob. Yes..

Hi there. I just wanted to know if co-packing volume is part of your plan for 2020. I think you said six months ago that you would be more aggressive about going after that kind of volume. There's certainly risks associated with that because it tends to be very volatile.

Can you talk a little bit about that?.

Yes, sure. Actually, we have a couple of very nice pieces of contract business. We obviously, out of respect for that contract, can't tell you the partner. But with some of the largest global CPG, with some of the largest global other retailers, we have a couple nice pieces of contract business. We have been careful there.

It's typically multi-year agreements. Those agreements typically have passed through. And so there, we've de-risked those quite a bit.

And I think as the new - what I would call the new food economy, right, the - where some of the larger food companies would like to shed assets, and then where some of the smaller food companies, these new emerging food companies have no assets. We've tried to be very selective. And we're partnering, quite frankly, with both of those.

We've got some new age stuff that's really exciting. And we've got, like I say, two or three of the largest food companies in the world that we're doing product for today. One of those kicked off just here in January. So, we're really pleased with that..

Okay.

So is that part of the plan for 2% to 3% growth in the back half, that there will be more of this type of volume, or is this just kind of steady state?.

Yes. No, no, that's part of our plan for growth, yes. And Pi just gave me a little note that we're actually going to have one of those partners have approved that we can serve the product at CAGNY. So, one of the new age guys will actually have some of the product for you.

So, we usually we wouldn't do that without their permission, but we'll have some of that CAGNY to give you a look at it..

Sounds good. Thank you..

Thank you..

And our last question today comes from David Driscoll of DD Research..

Great, thanks. Good morning, everybody..

Hey, David..

Good morning, David..

Hi. And Bill, congratulations..

Thank you. I really appreciate it..

I wanted to follow up on - so, last quarter, there was a lot of conversation that we had about the manufacturing operations and the investments that you were making into them. You had some negative variances in those operations. This quarter, things seems to go better right there.

But how do we handle or how do you guys think about the manufacturing operations and their efficiency as you go into that first half of the year with those volume losses? I assume that's got to play heavily into how to think about the margins right there.

But I'm really trying to understand the underlying trajectory of the efficiency of these operations. Steve, you express a lot of confidence last quarter that even despite kind of the quarter not showing the power of these improvements that these manufacturing operations have made, that we would see it in coming quarters.

What are your thoughts?.

Well, I'll let Bill tell you through the numbers, but I think you saw it in the fourth quarter. I mean, I think those numbers were positive in the fourth quarter, even though we were a little behind our plan and volume.

So, when they can be positive in manufacturing when you're behind your plan, that suggests that you're operating significantly better. And I think our plan this year is for some of that to fall through.

And I got the question earlier is there any upside in this, and I think one of the upsides is our operations, the operations, that they continue to operate as we know they're capable of. That could be a little bit of a tailwind to us this year..

Hi, Dave. So, you saw the number in the quarter was about $7 million better than then a year ago, and that was helpful to us as we actually carry in some negative variances with the issues we had in Q3.

But our operations teams really have done a terrific job, and their programs around team [indiscernible] and war on waste has really given them an opportunity to put their arms around the costs. As we fall into Q1, and historically, there's always a ramp up here in the beginning of the year as volumes get a bit stronger. And so far, so good.

The teams have been able to bring the operations back to where they want. To Steve's point, volume is so helpful to operations. We get quite a bit of leverage out of point of growth on the top line, and our teams are really doing a perfect job of managing through it..

So then would it be fair to say that when we look forward a year - and this is not a guidance question, but just trying to understand this manufacturing leverage. You got to deal with the volumes that you've lost in the first half that you've outlined in the presentation.

But when you go forward a year, the expectation is that we will see volume leverage run through the P&L and be very clear in years following 2020..

I would say yes. I think - and I'll point back to our comments on IBP. We have visibility, and a line of sight, and a planning process that actually reaches out that far to give the supply guys a really good visibility into the numbers that are coming.

So with that visibility, they'll be able to do a very nice job at flexing the manufacturing profile to deliver that result. So yes, I do think you'll see that benefit. The only comment I would make is that Q4 for us is always a challenging quarter just because of the sheer size of it.

And so, we'll always have to be very careful as we walk through the fourth quarter on these issues..

Thank you for the comments..

Thanks, David..

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

Well, I'd like to thank you all for being with us today. I know that we were bumped up against some other calls today. So, I apologize for that. That's sort of out of our control. But we appreciate that, and we look forward to the follow-up, and we look forward to seeing you next week in Florida. Have a great day..

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