TreeHouse Foods, Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Welcome to the TreeHouse Foods Second Quarter 2018 Conference Call. This call is being recorded. At this time, you will turn the call over to TreeHouse Foods for the reading of the Safe Harbor statement.

[Unverified Participant:]

Good morning. Before we get started, I would like to point out that we've posted the accompanying slides for our call today on our website at treehousefoods.com/investor-relations. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words such as guidance, may, should, could, expects, seeks to, anticipates, plans, believes, estimates, approximately, nearly, intends, predicts, projects, potential, promises, or continue, or the negative of such terms and other comparable terminology. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause the company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievement expressed or implied by these forward-looking statements. TreeHouse's Form 10-K for the period ending December 31, 2017, and other filings with the SEC discuss some of the risk factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements which speak only as of the date made when evaluating the information presented during this conference call. The company expressly disclaims any obligation or undertaking to disseminate any updates, revisions to any forward-looking statement contained herein, to reflect any change in expectations with regard thereto, or any other change in events, conditions or circumstances on which any statement is based. For purpose of our discussion today, statements such as Private Brands or the former Private Brands business refer to the TreeHouse Private Brands business. Private label on the other hand, refers to the customer and corporate brand industry. I'd now like to turn the call over to the CEO and President, Steve Oakland.

[Steven Oakland:]

Good morning, everyone and thank you for joining us. I am pleased to be with you today sharing a quarter of good results as we posted another period delivering upon our internal objectives and external commitments. Since our first quarter call, I've had the pleasure of meeting many of you face-to-face in New York, and since then I've spent a great deal of time on the road, listening to our customers and getting to know our people throughout our organization through townhalls, plant visits and divisional reviews with the leadership teams and the general managers. I've taken time to do a deep dive and I've come away even more enthusiastic about the opportunities that lie ahead. As I think about how we frame the opportunities, we all know that the consumer packaged goods industry is changing and consolidating quickly. On a macro level, retailers today are facing competitive pressures and disruptions on many fronts. Growth from limited assortment and hard discounters, a shift to cleaner labels, growth within natural and organic, and the rise of e-commerce and click and collect. The good news in all of this is that private available has an important role to play for our customers in all of these disruptions. Amid this evolution, I'm confident that TreeHouse has a long runway for growth. It's clear that the retailers are seeking to build their own brands to drive traffic and improve profitability. We recognize that outstanding customer service has to be the foundation of the relationship with our customers. In fact customer service is as critical to the retailer partnership as cost and quality. To be frank, we haven't consistently delivered on our service commitments over the last two years, so that's an area where we have great focus, and we are seeing improvement, in some cases, significant improvement. This work on service is key to our ability to take full advantage of the growth opportunity that private label presents. Delivering the highest levels of customer service is essential to taking our relationship with the retailer to a more strategic level. Accordingly, it's absolutely critical to understand that private label will play a different role with each retailer based on how they reach their consumers. In the most fundamental of terms, they offer value, or they offer experience. As we partner with our customers and better understand their strategies, we can apply the right resources and align ourselves to help each of them achieve their goals. As we improve service levels and deepen our relationships with our key customers, we can fully leverage our leadership position in private label and then unleash the power of our scale. It's very exciting to me personally to think about how we capture that opportunity at TreeHouse. The execution of the TreeHouse 2020 plan is key to our long-term competitiveness, having sat with our teams and our division leadership I know there is a lot of heavy lifting taking place. We're asking a lot of our people. But it's quarters like these where we get to see the fruits of our efforts hitting the numbers, and see the progress flow through the P&L. This energizes our teams and they are on board and totally committed to doing the hard work to get the job done. We have also reinvigorated our strategic planning process across the whole company with a fresh and deeper look at the businesses by category. Recently we announced the sale of the McCann's Irish Oatmeal business to B&G foods, which is a small step toward getting our organization focused and pointed in the right direction. So as I mentioned on the last call, we are evaluating everything we do, and changes will be required. I'm not yet ready to share those details today, but I am looking forward to bringing you more detail on our strategy before the end of this year. Before I turn it over to Matthew for the financial review, let me give you a quick update on our previously announced cost reduction initiatives. TreeHouse 2020, our company-wide restructuring effort to lower our cost structure through programs such as simplification, plant consolidation, and the rollout of our TreeHouse Management Operating Structure or TMOS remains on track as noted in slide 6. We recently announced the closure of our Omaha office which is slated for the first quarter of 2019. In June we completed smaller office consolidations in Pittsburg and St. Paul. These shouldn't be much of a surprise given how our company has evolved. Addressing the fragmentation of our operations presents opportunities for consolidation which will better enable us to operate as one TreeHouse. Consolidation facilitates greater alignment around our mission and our culture. It provides better career development opportunities for our people and will certainly improve operating efficiency and cost structure. Turning to Structure to Win on slide 7, which is our specific program to focus and align our SG&A expenses and our division structures in order to better serve the customer. Much of the SG&A progress you'll see in the numbers this quarter is a direct result of this effort. We are largely complete with this program. Although we expect to make this a foundational part of a continuous improvement culture. What we've tried to do on this slide is to give you a visual sense of how our organization has changed. We're streamlining the decision making process and improving our cross functional strategic customer teams. On the general manager front, we've broaden their roles and gone from 22 GMs to 14. This is where the rubber meets the road. We are building capabilities and professional entrepreneurs, leaders for our future. Now on the numbers which is really why we're here today. I'm pleased to discuss another quarter of delivering on our guidance. Both revenue and EPS were above our guidance range in the second quarter, and we saw sequential improvement from our divisions. I'm encouraged by the progress around TreeHouse 2020 to become operationally excellent and align our capacity with the marketplace opportunities. I want to thank our teams for embracing the Structure to Win changes. We ran faster and delivered our strategic savings goals ahead of the original timing. These programs are allowing us to harness our capabilities across the operations and across our employee base. And I personally believe that we are in the early stages of unleashing the opportunities that the growth inherent in the private label space affords us. I'm confident that we can continue to improve our execution as we move forward and deliver our commitments for the balance of this year. With that, let me turn it over to Matthew to provide you with the details.

[Matthew J. Foulston:]

Thank you, Steve. Good morning, everyone, and thank you for joining our call today. I'll begin on slide 10 with the consolidated Q2 results. On the top line, sales of $1.46 billion were slightly ahead of our guidance range of $1.3 billion to $1.4 billion for the quarter. Second quarter adjusted EBIT margin of 3.8% was one point below the prior year, but represents a sequential improvement of one point from the first quarter. The sequential improvement was a result of pricing catching up to commodities and Structure to Win savings kicking in. Second quarter adjusted EPS of $0.37 was $0.07 better than the top end of our Q2 guidance range. This includes a lower than anticipated tax rate which was a $0.04 benefit in the quarter, due to certain state rule changes in the quarter and the impact of a higher stock price on the tax impact of stock-compensation expense. Overall, we're encouraged by our progress. That said, there is plenty of hard work ahead as results are still below our prior year and where we need to be. Turning now to slide 11 and the revenue drivers in the quarter. Consolidated revenue declined $66 million or 4.4% versus last year. Of that decline, about $63 million was driven by the SKU rationalization, and another $17 million was related to the Soup and Infant Feeding divestiture last May. Excluding these two items, our top line grew 0.9% compared to last year. Volume and mix were slightly negative across nearly every division. In Beverages, we are not yet up to full production levels in the non-dairy creamer business, but we did see some pull forward of sales from Q3 into Q2 in single-serve beverages. In addition, as we discussed last quarter, we believe we were one of the first to market with our pricing for higher commodity and freight costs and margin management continues to be a priority for us which has lead to the exit of some less attractive business. Moving on the pricing, we saw pricing flow through as expected in Q2 up 1.3% on a consolidated basis. The exception was in Beverages, where the single-serve market remains very competitive. Turning now to slide 12 and the key EPS drivers in the quarter, adjusted EPS was down $0.14 compared to the prior year. Within this, division DOI declined $0.34, and was partially offset by $0.16 of SG&A and a $0.05 tax benefit. Excluding the net negative impact of resetting the bonus and lower amortization, the SG&A improvement was actually $0.20. Slide 13 gives you a sense for the division DOI drivers on a dollar millions bases. Division DOI of $146 million in the second quarter was down $27 million versus prior year, mostly due to volume, mix and freight. As I noted earlier, pricing net of commodities turned slightly positive in the second quarter. Rising freight costs continue to be a challenge, although largely in line with our expectations. You'll notice on the slide that operations had a negative contribution to the quarter. There's very strong performance here that is being masked by three factors. The biggest near-term operating challenge here has been the prolonged impact of the Pecatonica strike on the Beverages division, which is showing up in both volume and mix and operations. As a reminder, the strike at the Pecatonica non-dairy creamer plant began last November and concluded in April. Our plans to get the plant back up to full production assumed about a $0.06 drag in the second quarter. Unfortunately, that restart has not happened as quickly as we would like. The low unemployment rate and competitive market conditions for talent in this area have made it difficult to hire back some of the skilled labor, so it is taking longer and costing us more than we originally thought. We expect this to be a drag on earnings in Q3 and, to a lesser extent, in Q4. Secondly, within the Snacks business, we've had challenges, particularly in bars where promotional activity and new-business wins have pressured our cost structure in the near term as we scramble to meet the increased demand. Finally, lower volumes across the entire business have resulted in absorption challenges, which take us time to work through. Divisional SG&A improved year-over-year by $12 million as we implemented the Structure to Win initiatives and have seen tighter expense control across the business. On slide 14, we've given you an indication of the divisional DOI performance by key driver. A couple of things I'd mentioned here without going into line item detail. Clearly, you can see the significant negative impact within Beverages, as we work to get our non-dairy creamer business back to full production. On freight, while driver shortages and rising rates don't look to abate any time soon, we're actually pretty pleased with the progress we've made. Yes, freight costs are a headwind, but, as we discussed with you last quarter, we've taken steps to minimize that impact. Specifically, we completed a carrier RFP and have improved and diversified our network of carriers such that we have significantly reduced the need to go into the spot market for our transportation needs. In addition, the steps we took earlier this year to functionalize our manufacturing and lockdown production schedules a week in advance has created greater shipping stability. And then lastly, while I don't want to minimize the fact that our results are still below last year, on a sequential basis, we are moving in the right direction. In fact, the second half EPS this year is expected to be within pennies of last year, as we see pricing fully offset commodities and freight, and SG&A savings continue to flow through. Next, let's turn to the balance sheet. On slide 15, we've provided an update to net debt and our progress around working capital. We ended the quarter with $2.3 billion in net debt, down over $600 million since we closed the Private Brands acquisition. Compared to the end of 2017, our net working capital has improved by $150 million, but keep in mind that in anticipation of our Q4 sales peak, driven by normal seasonality, we expect to end Q3 with increased inventory. Many of you saw our announcement in early June around the amendment to our credit agreement leverage ratio, broadly defined as net debt divided by trailing 12 month EBITDA. The amendment allows for an elevated leverage ratio over the next six quarters and then it gradually steps back down to four times by Q4 of 2019. In return, our credit is now secured, and by the terms of the agreement will return to unsecured status at the end of 2019. What you should take away from that amendment is that, one, we now have greater operational flexibility to potentially consider accelerating our efforts around TreeHouse 2020, and two, as Steve works through his efforts around strategy, initiatives and portfolio evaluation, the amendment gives us greater flexibility to move forward, despite being in a period of peak cash restructuring spend for Structure to Win and TreeHouse 2020. We finished the second quarter with a leverage ratio, as calculated per our covenants, of 3.84 times compared to the 5.25 times limit. Let's now turn the discussion to our outlook for the balance of 2018, starting with slides 16 and 17. With the first half of the year behind us, we have reaffirmed and tightened our full-year guidance range to $2.05 to $2.35 in adjusted earnings per share. Our guidance does assume a few puts and takes. First, on the top line, we will continue to feel the impact of SKU rationalization. As I mentioned earlier in my remarks around the second quarter results, we did see some volume softness across most of our divisions compared to the prior year, and we expect that trend to accelerate somewhat as we get into the back half of the year. We were one of the first to market and took a lot of commodity and freight-related pricing earlier on this year. We've also continued to focus on margin management. We do expect our year-over-year volume comps to be negative in the back half of the year, with it being most noticeable in Snacks where we've lost a chunk of low margin business that will have a meaningful top-line impact, as well as in Meals. As a result, we are lowering our full year revenue estimate by about $100 million to $5.8 billion to $6 billion. As I mentioned, we're holding our earnings guidance. Working our way down the income statement, as you saw, the pricing to offset commodities that was put in place earlier this year, is now fully offsetting both commodity and freight inflation. A number of you have asked about the impact of tariffs, not just Canada, but more broadly the global impact on our business. At this point, there are some knowns and some unknowns. With regard to Canadian tariffs, our teams immediately went to work to get the necessary pricing for products on that list, such as pourable and spoonable dressings. While there will be a Q3 lag of a few pennies on getting that pricing reflected, we expect to fully recover the impact in Q4 such that the net impact of the year is negligible. Longer term, however, it remains to be seen the effect Chinese tariffs will have on more than just aluminum and steel. In addition, the impact on global agricultural flows, and the potential impact on commodities here in the U.S. are difficult to predict. For example, the 25% Chinese tariff on soybeans earlier this year has already put down more pressure on domestic soybean prices. I talked at length earlier about Pecatonica. Our assumption for the back half of the year now includes further drag from the startup costs, but we anticipate getting the plant fully back to run rate by the end of the year. And finally, we expect the contribution from Structure to Win in 2018 will finish ahead of our original plans of $30 million in savings. Our exit run rate continues to be approximately $55 million in annual savings. We've provided you with the additional line items for the year on slide 17 to reflect a tighter EPS guidance range of $2.05 to $2.35. This is broadly in line with our original estimates from February, with some progress on interest expense and a slightly lower full year tax rate, given the state tax changes this quarter. On slide 18, we've provided an update to our full year cash flow guidance. We anticipate that cash generation net of restructuring, and after the completion of our $50 million in share repurchase, in accordance with the 10b5 plan, we'll be in the neighborhood of $120 million to $150 million. Importantly, we continue to work toward fully offsetting our investment in restructuring the business with our liquidity initiatives. Looking to the third quarter on slides 19 and 20, we're guiding $1.39 billion to $1.45 billion in sales, and $0.50 to $0.60 in adjusted earnings per share. On the top line, we won't lap the impact of the SKU rationalization until early in 2019, and I talked earlier about the softer volume forecast related to some of the lost business that we've reflected here. Pricing is anticipated to fully offset commodities and freight, and the impact of TreeHouse 2020 and Structure to Win savings will more than offset the operational drag from Pecatonica and the timing delay related to Canadian tariffs. Interest expense for the third quarter is expected to be between $27 million and $29 million. I'm not going to read through slide 21, but to sum it all up, we're pleased to have delivered another quarter meeting our financial commitments, and we continue to work diligently towards improving the overall cost structure of our business. I believe our third quarter and full year guidance ranges reflect a very realistic and pragmatic view of how the balance of the year will play out. With that, let me now turn it back over to Steve for his closing comments.

[Steven Oakland:]

Thanks, Matthew. Let me leave you with a couple of thoughts about the balance of the year and the guidance that Matthew just took you through before opening the call up to your questions. We have a lot going on as an organization. The nature, the amount, and the pace of change are critical factors we are balancing as we make long-term investments in our capabilities and our platform from which we will grow. Let me give you a few examples. First, margin management. Matthew first talked about this last year in conjunction with TreeHouse 2020. While we're still honing our pricing expertise throughout the organization, it is already allowing us to be more proactive on the front end. You saw us as one of the first food companies in market with pricing for commodity and freight inflation late last year, and we saw good success. As Matthew mentioned, we are also very much on top of the Canadian tariff impact for the back half of this year, and we're pleased with the results in both of these areas. Secondly, you are going to see some changes to the top line of the business, as we re-craft our portfolio. Some of the second half sales softness that Matthew discussed are driven by market forces, and some of the changes are designed to position our platform for future, more profitable growth. We've factored this into our guidance for the back half of this year, and we'll incorporate when we provide our 2019 guidance next February. As we move forward, we will be purposeful and profitable about the growth that we take on. Finally, in closing, let me just say that I feel very good about reaffirming the midpoint and tightening the guidance range for 2018. I'm confident in those statements because our organization is much more mature than it was a year ago. Our five division structure has now been in place for the last 19 months. Our forecasting abilities and capabilities have improved significantly. And our business visibility continues to improve, as our IT integration and consolidation projects are moving ahead quickly. 100% of our plants are targeted to be on SAP order to cash, and six ERP platforms are scheduled to be eliminated by the end of 2018. The result is tighter communications across a streamlined organization, and better forecasting skills and processes to support our TreeHouse of the future. I continue to be excited about being part of the next phase of growth of this wonderful organization. We spent a lot of time over the last year talking to you about cost structure and the necessity of getting that right. And while that work continues, the challenges I look forward is to shift the balance of our discussion and share more with you around our opportunities for organic growth and how we're investing in our future. I look forward to coming back to you later this year to bring you more detail around our strategy for delivering long-term shareholder value. With that, let me open the call up to your Q&A.

[Operator:]

Thank you. We'll take our first question from David Driscoll with Citi.

[David Cristopher Driscoll:]

Thank you and good morning.

[Steven Oakland:]

Good morning, David.

[David Cristopher Driscoll:]

I have two questions, one on pricing and then one on the fourth quarter. On pricing, the third quarter on slide 20, pricing seems to be a material acceleration over the first half. Can you guys just give us a bit more color? Second quarter pricing, I think, came in at 1.3%. Is the third quarter pricing locked in with your customers, or is there still pricing that you need to secure? And basically, I'm just trying to get a sense of how much risk do we have on this pricing recovery to cover these commodities and freight inflation? And then if I can follow up on the fourth quarter in a moment, I would appreciate it.

[Matthew J. Foulston:]

Yeah, let me – morning, David, it's Matthew. Let me take the first stab at the pricing question. We have literally all of this pricing locked in, and almost all of it flowing through the P&L, so we're very, very confident with the Q3 guide around pricing, and we're very pleased that it's going to flip from just covering commodities to effectively covering commodities and freight. I would draw your attention to the comparable period back in 2017 which is where we really first started getting upside-down on commodities. You'll remember, I think it was in Snacks where we had some inflation in nut pricing that we just didn't have the ability to cover. So we're also lapping a comparable period that's an easy beat.

[David Cristopher Driscoll:]

I really appreciate that. On the fourth quarter, I think the implied guidance because you gave third quarter guidance, the implied EPS guidance is about $1.0 to $1.20, and I'd just like to understand the implications of the fourth quarter run rate on a 2019, and just going forward. In my opinion we would seem to be a quite material number and very different from any of the other quarters in 2018 and the fourth quarter, I believe, it should really inform investors' views as to what the earnings power of the company is in 2019 at least. I know there is more to go with the program 2020, but I'd just like to get your thoughts on the fourth quarter, and then what it means for the future.

[Matthew J. Foulston:]

Yeah, I think – why don't I take a stab at that as well, and Steve can jump in. I think we've always said that this year is a year of two halves. The first half was going to be spent catching up on this pricing, and that's been a tough fight for our guys out in the field, but we're already thrilled with what they've done. The second piece was that we said SG&A was going to grow as we went through the first half, and we'd have (31

[Steven Oakland:]

Yeah, the only thing that I would add David is that the 2020 project, we will be in 13 plants by the end of this year. We have 50. And so that should be a gift that keeps giving. It's a lot of work. And we'll start to roll out phase 2 and phase 3, those processes, as you know, from other major food companies. Those processes take time but deliver results over time. So I would expect 2020 to continue to pay dividends each year (33

[David Cristopher Driscoll:]

Thank you.

[Operator:]

And our next question comes from Jonathan Feeney with Consumer Edge.

[Jonathan Feeney:]

Good morning. Thank you very much.

[Steven Oakland:]

Hi, Jon.

[Jonathan Feeney:]

Just one question. Thanks for taking my question. Just one question I had. So when I look at the total addressable market here, I mean, private label is on fire. You looked at scanners – I mean I may be cutting some of your categories wrong, but looks like it's pretty close to double-digit growth of sell-through in private label and I don't get your channels in there. But clearly, there is some as you rationalize customers and SKUs, there's some share loss. Could you comment on who is doing business broadly speaking - industry capacity utilization, and maybe when we reach a point where – I mean, that TreeHouse can keep up with this rapid growth? Thank you.

[Steven Oakland:]

Sure, Jonathan (34

[Matthew J. Foulston:]

Just to add a couple of things there. We really don't see material capacity coming online in any categories that I'm aware of, with the exception of single-serve beverage, and we talked about that a fair bit. And I would say that the dialog with some of our customers who have very aggressive growth plans is definitely pivoting to a concern about available profitable capacity, which we think is a huge positive.

[Jonathan Feeney:]

Thank you very much.

[Operator:]

And next from JPMorgan we'll hear from Ken Goldman.

[Kenneth B. Goldman:]

Hi, thanks for taking the question. I have two questions (37

[Steven Oakland:]

Sure. Let me get the first one in, with regard to (38

[Matthew J. Foulston:]

Well, I was up in front of our sales team just yesterday giving them a big thank you for a lot of hard work. I do think we got out ahead of this, and anecdotally we're sort of at the front of the line, which made it pretty uncomfortable in some parts, but as you've seen, sequentially, there has been a lot more dialog around price. I think the other thing (41

[Kenneth B. Goldman:]

Thank you.

[Operator:]

Thank you. And our next question comes from Chris Growe with Stifel. Please go ahead.

[Christopher R. Growe:]

Hi, good morning.

[Steven Oakland:]

Good morning, Chris.

[Christopher R. Growe:]

Hi. Just had two questions for you, if I could. I wanted to be sure I'm clear on the – like the timing of the SKU rationalization activity in relation to the plant closures, I'm just curious. Does the plant closures (43

[Steven Oakland:]

(43

[Matthew J. Foulston:]

On the sales decline, I think you should think about SKU (44

[Christopher R. Growe:]

Okay. That's helpful. Yeah.

[Steven Oakland:]

You'll see a few of those as we go (45

[Christopher R. Growe:]

Okay. And just one quick one on the inflation overall, is this a good run rate for inflation on, like, freight costs and input costs for the (45

[Matthew J. Foulston:]

I would definitely break those two into two pieces. We do see some commodity inflation (45

[Christopher R. Growe:]

Okay. Thank you for your time.

[Operator:]

Next from Wolfe Research, we'll hear from Scott Mushkin.

[Scott A. Mushkin:]

Hi, guys. Thanks for taking my questions. So I guess I wanted to poke at the volume losses that you're seeing and it's hard for me not to look at some of the slides, 11 through 14, and not say, hey, you've taken price, but you really kind of taken it on the chin, losing some accounts and some volumes. And I'm just trying to understand will that (46

[Matthew J. Foulston:]

Yeah, let me start off and then Steve can leap in. As I said, I'm fairly convinced we were the (47

[Steven Oakland:]

And I would also say. I made this (48

[Scott A. Mushkin:]

As a quick follow-up, I would like to talk about the Condiments area. What we've been seeing out of retail is some pretty aggressive pricing in the barbecue season for a lot of condiments, I know you guys are playing in those markets. Can you just give us some insight into who is footing that bill? Or is that business traded away from you guys, and people are letting the retailers price it so much lower? And thanks. I'll yield.

[Steven Oakland:]

I would suggest Condiments might be one that's visible (49

[Scott A. Mushkin:]

Thanks, guys.

[Steven Oakland:]

Yeah.

[Operator:]

We'll now hear from Robert Moskow with Credit Suisse. Robert Moskow - Credit Suisse Securities (USA) LLC Hi, thank you. I guess getting back to the freight question. When you say you have good visibility that your pricing that you've put in place can cover your freight costs in the back half, well, why isn't it covering it in the first half, I guess? It's not like you are introducing new pricing in the back half. And then, if we can kind of fast forward into 2019, do you expect to have to do this again? Do you expect to have to raise prices again in order to try to offset freight? Thanks.

[Matthew J. Foulston:]

That's good question, Rob. One of the things that we've talked about before is the timing with which we approached our customers. And that started, I would say, middle of Q4. And depending on the division and the category (51

[Steven Oakland:]

I would also say our business is a series of variable length contracts. Some of the retailers are on an automatic annual bid. Some of them are on other time cycles. So the good news in ours is the (53

[Matthew J. Foulston:]

I think we've some good examples just recently where that started working where because of the network the retailer is running versus the network we're in, they've naturally got empty back-hauls, and we've gone from some delivered to customer pickup, taken cost out of the supply chain. So I think that kind of activity is where we're going to have to take the dialog and optimize the whole supply chain not a (54

[Steven Oakland:]

Yeah. Robert Moskow - Credit Suisse Securities (USA) LLC Okay. Thank you.

[Operator:]

And now we'll hear from Farha Aslam with Stephens.

[Farha Aslam:]

Hi, good morning.

[Steven Oakland:]

Good morning, Farha.

[Farha Aslam:]

I have a question about Pecatonica. Could you share with us who has been producing the product for you? Do you have to (55

[Matthew J. Foulston:]

Yeah, that's been a brood-based impact, not just a cost impact. So we've struggled on the cost side, as we mentioned in the remarks. It's been tough in this tight labor market, especially around certain skilled trades where there's just a shortage of good people that we can get to come join us. So we've struggled with getting that full (55

[Steven Oakland:]

Yeah. So, Farha, what we did, we loaded the other two plants and we moved volume around. We had temporary workers in the facility which performed at a fraction of the normal operating performance at Pecatonica. We (56

[Farha Aslam:]

That's helpful. Thank you.

[Operator:]

And next, we'll hear from Steve Strycula with UBS.

[Steven Strycula:]

Hi, good morning. Two parts, the first would be, if you could walk us through, Steve, a little bit of rationalization. Should we expect – it sounds like it should be a little bit more acute in the back half relative to the front half, and when should we expect that to fully, kind of, wrap into the baseline of the business. It feels like that might be Q2 of next year. But any guidance there would be super helpful. And then a higher level question for you on customer feedback. I know you have been traveling the country meeting with a lot of your largest retailers. What has been the most candid conversation that you've had with them in terms of how can TreeHouse really improve and gain share of wallet, relative to what they've done the last two or three years? And what are one or two things that are needle moving that you can do to kind of interchange (58

[Unknown Speaker:]

Sure. I will interchange (58

[Steven Strycula:]

Thank you.

[Operator:]

And Amit Sharma from BMO Capital Markets is next.

[Amit Sharma:]

Hi, good morning, everyone.

[Steven Oakland:]

Amit, (01

[Amit Sharma:]

Steve, a question to you, when we look at measured channel pricing data for private label, there is a large variance in what you are reporting and what data we're seeing. Is that just a function of your customer base or are your private label competitors haven't really fully caught up with the pricing yet?

[Steven Oakland:]

I think retail pricing data is very difficult right now. We talked about – it all depends on where that data is being picked up. How much that retailer does on the East Coast of the United States right now. Because you'll see pricing across the country (01

[Amit Sharma:]

And one quick one for Matthew. Matthew, how much incentive comp headwind is going to come in the second half?

[Matthew J. Foulston:]

Most of the incentive comp headwind is going to come in the back half of the year. As we went through the year last year, our performance (01

[Amit Sharma:]

Got it. Thanks so much.

[Operator:]

And next, we'll hear from John Baumgartner with Wells Fargo.

[John Joseph Baumgartner:]

Good morning. Thanks for the question.

[Steven Oakland:]

Hi, John.

[John Joseph Baumgartner:]

Steve, I wanted to come back to the Snacks business. When we see the pricing net of commodities was positive and that new volume essentially offset the impact of the SKU rationalization, but margins are still down, it feels like the complexion of the business is really changing from a mix perspective. So how do you think about the ability to rebuild profitability in that segment, and I guess what needs to happen to rebuild the mix?

[Steven Oakland:]

I would suggest that the Snacks business is getting tremendous amount of attention and effort from us. And I think we understand that the business (01

[John Joseph Baumgartner:]

I guess this is premature, given your review that's ongoing, but – I mean, think about I guess the ultimate margin structure here (01

[Steven Oakland:]

Again, I think it depends on how we do in each one of those categories. I think bars is a great business. There's a lot of high-value add. These new high protein, high particulate bars are very high value bars, and there is a lot of opportunity in that. And I think if you get the trail mix business right as a mix within Snacks, you can go to historic margins. So I think the historic margins are very doable, but we've learned – we've put two very different businesses together ConAgra Private Brands nut business and the flagship (01

[John Joseph Baumgartner:]

Great. Thank you, Steve.

[Operator:]

And now from SIG Financial (sic) [SIG] (01

[Pablo Zuanic:]

Thank (01

[Steven Oakland:]

Yeah, certainly. Thanks. Well, I'd say two things, and I tried to talk about that in the prepared remarks. The thing that's obvious to me on your first question is, it really varies by retailer. And if you go across the country and you look at the super-regionals, who've learned to compete in the hyper – as the supercenter concept went national and as grocery evolved the last time. The super-regionals did it on experience, right. And so the retailers are asking a very different question for TreeHouse. They are asking us for our innovation organization (01

[Pablo Zuanic:]

Thank you.

[Operator:]

And next from Jefferies, we'll hear from Akshay Jagdale. Please go ahead.

[Akshay Jagdale:]

Hey, thanks for taking the question. I (01

[Matthew J. Foulston:]

No, that's a good question. And when I look at Q4 over Q3 and the improvement we need, it is about 50/50 traditional seasonality, and 50/50 cost improvements. And we will see renewed (01

[Akshay Jagdale:]

Got it. That's helpful. And just one for Steve, I know you're (01

[Steven Oakland:]

Sure, Akshay. I (01

[Akshay Jagdale:]

Sounds good. Thank you.

[Operator:]

And with SunTrust, we'll hear from Bill Chappell.

[William B. Chappell:]

Thanks, good morning. Hey, Steve, sorry, I may have missed this. But in terms of refining the portfolio, I guess I would have thought it would have happened a little bit faster and maybe more than just kind of one relatively small deal so far. As you've spent the past four or five months looking at the portfolio, has there been any change in your view in terms of accelerating or pulling back, or versus kind of the initial take, and would you expect the pace – if it's accelerated of refining to accelerate between now and year end?

[Steven Oakland:]

I would expect – yeah, I hope we can bring (01

[William B. Chappell:]

Got it. Thank you.

[Operator:]

That concludes today's question and answer session. Mr. Oakland, at this time, I will turn the conference back to you for any additional or closing remarks.

[Steven Oakland:]

Yes, I just again would like to say thank you to everybody that was on the call with us today. And I'd like to reach out to our organization, I think we are working really hard, and (01

[Operator:]

This concludes today's conference. Thank you for your participation. You may now disconnect.