Q4 2019 Earnings Call

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 obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in expectations with regard thereto or any other changes in 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 as such our results in Outlook today and going forward will be discussed on a continuing operations. Basis are 8K on October 22nd provides a quarterly historical information for 2018 and 2019 on that same basis.

I now like to turn the

Call over to our CEO and president Mister Steve Oakland. Thank you and good morning everyone and thank you for joining us today to discuss our fourth quarter and year-end results came along with our outlook for 2020.

Let me start by taking a quick look back a 2019. I think it's important that we recognize the magnitude of the progress that our company has made recall it 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 with in private brands.

The 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 couch and covers for key areas operational excellence commercial Excellence optimized portfolio and people and talent.

those

Who intended our investor breakfast meeting just before the holidays have seen slide three before which outlines that progress and I'm very proud of the work we've done here.

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 end of the year at 98.4% service across the company more than three hundred 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 attraction towards improving or retailer Partnerships month. 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 wash products and we are in the process of remarketing are 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 cost and time that would have been required to contest the ruling coupled with the stress on our serial employees and our business is let our board to determine the best course of action was a terminated that agreement and remarket the business for sale.

I think the leadership would post for their patients 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.

No.

For 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 for in 2019. We grew e bit by nearly 10%

We increased ebit margin by 90 basis points, and we posted twenty 1% adjusted earnings per share growth.

very credible results in the food space

We deliver these results in spite of a revenue decline of more than 6%

For becoming a much healthier and more profitable business. Is there solid results today, but we continue to see opportunities for improvement and it's important to note that we are not satisfied with the results.

As you saw in 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 a 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 wharf

Slide Five provides 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 here today.

And 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 package is 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 business has underperformed versus our projections for the fourth quarter off when you think back to 2018 and recall that we couldn't produce enough broth to service the demand.

2018 customers over compensated for arbroath service challenges by over or during which led our team to build their forecasts based on prior year demand situations that were exaggerated.

As a result of both of these issues are fourth-quarter volumes declined 5% and we're sequentially flat as you can see on slide six.

Add broth and non-dairy creamer performed to our our expectations volumes would have been down closer to 2%

As you can appreciate when you managed 29 categories forecasting pound volume is not always the best measure bra and non-dairy creamer are much heavier products compared items such as cookies single serve coffee pots and T all of which grew in the fourth quarter and are in many cases higher-margin.

So while our volume has measured in pounds shipped fell Shore, 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.

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 ri-ri 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 toss results certainly give us reason to believe that we're on the right track.

Let me know send it over to Bill who as you should have seen in this morning. Second press release has been elected are permanent CFO. I could not be happier about this when we appointed 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.

Last few months I've gained even better appreciation of how well-built understands our business and the cpg industry. He's been instrumental through all the change the company's 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 time works and vote of confidence. I'm really pleased to be transitioning to the permanent as my responsibilities have brought in over the last few months off. The only has my determination to deliver on our commitments grown, but still has my appreciation for the opportunity. We have ahead of treehouse.

Turning out to the fourth quarter results on a continuing operations basis, which just as a reminder accounts for the form of snacks Division and the radio serial business within discontinued operations.

It's even mentioned earlier and you can see on slide seven fourth-quarter sales for 1.14 billion a decline of 4.5% while profitability improved 90 basis points Johnny bit line to 9.1%

fourth-quarter just CPS of a dollar ten who 10% versus the prior-year comparable quarter.

With regard to items affecting comparability in the fourth quarter. We had a non-cash impairment charge of 41.1 million related to the sale to in-store basic facilities that we announced last month.

We anticipate closing this transaction April.

We also have several items totaling approximately twelve million related to transition costs and NLEA the product labeling regulatory reform. You can see those items detail and took us and the appendix of the deck.

Flight eight takes you through the revenue drivers by division three house organic Revenue in the fourth quarter declined 3.8% a sequential improvement from Q3.

Steve mentioned earlier we are seeing progress.

And a quarter declines in baked goods and meal Solutions continue to moderate and have them moving in the right direction.

Savages took a bit of a step back and the quarter do the drop and non-dairy creamer.

What were you means encouraging to me? Is that the service levels across the organization were very strong the role of private label remains that priority for our customers and its attractiveness for consumers remains very high off.

like nine gives you the Q4 EPS drivers on a year-over-year basis the 10% decline in total company deal was more than offset by twelve cents a continued sg&a disappears and eight cents an interest taxes and other this was more than explained by lower pincer interest expense versus the prior-year

Why is 10:11 to take you through the Consolidated deal walk and the driver's by division?

Volume and mix and clean herbs option without eighteen million versus last year as we continue to LaPlace business mainly a meal Solutions.

So we have now left and lots of some brand of pasta from the prior-year. We're still rolling off some pickles and dressings Colossus help you put some parameters on that when we get to our guidance discussion in a few minutes.

Pricing that is Commodities was favorable by four million in Q4 due to higher pricing and baked goods and meal Solutions along with lower Freight expense offset by the continued impact or lower pricing and beverages.

Finally, we're pleased with the progress. We've seen year-over-year in our operations was contributed seven million versus the prior-year.

All right, Albert, Sera continuous Improvement and Warren waste our enabling us to run the plants more effectively and efficiently and the issues we face in the third quarter are behind us.

Trying to our balance sheet metrics on flight 12. We ended the year with net debt of 1.9 billion and our leverage ratio is defined by our bank covenants below four times.

working

Capital contributed about eighty two million a 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 reduce the inventory of your end up working Capital Improvements fell slightly shorter expectations.

This was in part the result of the negative impact of the snacks division accounts payable 2019 as we had some AP that was retained by tree house and settled as part of the cell in addition. We have several impacting comparability in our fourth quarter payment the multi and put your parent multi-employer pension plans and transition expenses.

Although we consider all these items one-time in nature. They didn't have tagged our free cash flow.

Turning out to our 2020 guidance on 5/14. Our Revenue guidance are 4.1 to 4.4 billion takes into account the carryover some business losses from 2019 as well pricing adjustments and I'll give you a bit more color on that Cadence in a minute our expectation for a Dodge 2020 is 480 the fiber and ten million and we outline the components took us to that range.

are interested

Guidance takes it takes into account our Lord debt levels.

Our ups guidance of 240 or 265 represents 6% growth as a midpoint and our free cash flow guidance is 250 to 300 million if Steve Miller earlier, we think we're about five months behind our expectations for a paper to grow on the top line logarithm of 1 or 2% Net sales growth 10% EPs and three hundred million free cash flow are reflected in the top left of our guidance range.

In comparison to Prior years. Our twenty-twenty plan is much more robust.

We pulled together. Only a category perspective and supply-chain financial plan for our teams also built a bottoms-up customer demand plan, which is a level of granularity that we never had before in a business planning or IDP.

That improve visibility around our tail winds and headwinds for the year is incorporate into our guidance, which allows us to give you a greater sense of how the year will unfold.

Trying to five fifteen. I think it's important that we help you better understand the progression of the Top Line this year first half versus the second half.

The left hand side of the chart represents the first half of twenty-twenty as we expect Revenue to be down three to 5%

just takes into account about $175 to two hundred million to carry over top line pressure in q1 and Q2 to be clear. This is a new news. It's business that we lost mid year 2019 took away from or where we made pricing adjustments the blue bar represents our commercial organizations progress, which also encouraging is being overshadowed by the carryover.

Did you move to the right and the second half of 2020 we expect to tell a significantly better top-line story we've taken into account known carry over and we built in an assumption for possible further losses. You can now see that the blue bar which represents the hard work of our division GM and our commercial teams is growing translating the second half of 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.

Turn Nexus light 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 off. This is the last year of Treehouse twenty-twenty restructuring program. So the cash charges will step down meaningfully meaningfully to a range of 55 to 65 million.

Finally, you'll see the $25 million legal settlement. We talked about this on our queue to call at which time we book to reserve for the settlement that one-time item will impact free cash flow this year. But if he can see underlying cash flow is strong and right on target.

It's 9:17. You'll see our q1 Revenue guidance of 9/8 to 1.02 billion which contemplates a first-quarter impact of about one hundred two hundred fifty million in Cary over lost phone need pricing adjustments.

Our adjusted ebitda guidance is $9,200 million and regarding EPS of twenty to Thirty cents.

Although this represents a you over at a client from 2019 to 2020. I will point out that last year's first-quarter include a meaningful level of pricing to recover commodity costs They carried over from 2018.

In closing let me say that importance of delivering on our guidance is not lost on me. And the rest of the organization. We recognize hit our numbers quarter in quarter out even the face of Industry challenge. 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 continued commitment to solid operational execution items within our control. They even have opportunity to be so with that. Let me turn it back over to Steve for his closing comments and they'll open the call to Q&A.

Thank you, Bill. Bill covered a lot of ground here. And I would Echo his sentiment we recognize the importance of delivering our 2020 guidance and positioning our come back on our strategic growth algorithm.

Continue to believe that our algorithm targets are appropriate over the next few years meaning 2020 to 2022 Although our pivot to growth this year is coming a little 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 wage guided 2022 net sales as the best measure of our progress.

Do I wish we were we were moving faster? Absolutely in some ways that's the nature of private label and the sales cycle, but it's also understanding that we must balance our gross 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. I sharing my thoughts on why I continue to believe in the treehouse story and also give you a bit of a price on what we'll share with you at the Cagney 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 money 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 then particular portfolio optimization?

Last year portfolio optimization met 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 could take a look at slide eighteen, this is the one we put up in December at our investor breakfast updated for your end across r29 categories. The ones that fall into the instant consumable ready to eat and ready-to-drink have 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 a ready to drink cold brew coffee in a cooler at the front end of his store.

We've also been doing deep dives into our categories and a found segments of the categories. We participate in today that provide new avenues for growth. If we position them differently or investing strategically take crackers. For example on the left hand side of slide 19, which represents just a few of the cracker subset segments.

Saltines entertainers, but we do very little and 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 eight 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 money and we convert more of that business to made 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 long 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 a 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 the competitive landscape of all's or becoming part of their solution. So as we look to twenty thousand and Beyond we have we have a lot of work ahead of us and a lot of exciting opportunities and it makes treehouse and 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 damage 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 commitment to ongoing excellence.

with that

Let's open the call up to take your questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you were using a speaker phone, please pick up your handset before pressing the keys off your question, please press star then to the first question today comes from David Driscoll of d d research, please go ahead.

Morning, David.

Mr. Just call your line is live.

The next question comes from Rob Dickerson of Geoffrey's please go ahead.

Morning, Rob.

They will ask our provider to recheck their their line.

Mister Dickerson your line is live and open.

The next question comes from Bill Chappell of SunTrust Robinson Humphrey, please go ahead.

Thanks. Good morning. Can you hear me? Yes, Bill. Thank you. Good morning, Bill. Third time's a charm. You know, I guess the real focus is just the pivot to growth and trying to understand how over the past I guess two or three months, you know, we went from or over the past six months. We were kind of confident that it was going to show up in the third and fourth quarter. Now, it's being pushed out six months and you know, what transpired over the past two or three months that pushed that out what happened to I thought they were pretty sizable kind of distribution gains are supposed to come in both in the fourth quarter. And then the first quarter you didn't touch upon that did they did they get pushed out as well? Just some more clarity of you know, how in the past two or 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 the last couple of times. We've been together about the ivp process. So I think we have much better visibility across our businesses to to where the latches are to where the new business comes when we're we're in when it it either comes there 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 2012. So we did lap and I think 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 edge of the is B 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 to what we see for 2020 and a more realistic look at where we think next year will fall off.

volume-wise and

And we also thought maybe I'll comment on the Volume vs dollars, you know, we had significant deflation in 2019 and some 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 the dollars in 2020 regardless. So I think 2020 given the the variety of our banks and the variety of of Weights of things we do. We think that's going to be a better measure going forward.

Okay, and then and then in terms of the distribution games what I was saying, did they show up where 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, you know in the quarter particularly in our in our bed goods and meal Solutions divisions. What you saw on Steve's slide off by was that the market did come back at us a bit here and demand softened and that really hit ravages, you know pretty hard. So unfortunately additional losses did not offset the games but the games that we expected to see we did see except for our block and creamer categories and I would say that's the biggest difference from when we were together in December if you look at and that's why we thought it was important to show the I mean if you look at the 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 in the aggressive spending against wage.

From Brands. We just saw the category soften.

In the fourth quarter, so I think the fourth quarter is is really two things. It's about two-thirds our performance in both creamer and and in our beverage business right in bras, and then it's about you know about another quarter the the performance in the categories. So that would be the difference in the fourth quarter. The first quarter really is just that the timing of June of new business and quite frankly that the magnitude of the rap that's coming in.

Got it. I'll turn it over. Thank you. Thank you, Bill.

the next question comes from Robert Moscow of Credit Suisse

I thank you. This is actually Jake Me by Shawn for Rob just a quick question on the the long-term algorithm. And I and I guess for this year too is are you guys still projecting that you know off 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 and we think that the two thirds top-line growth will drive the the EPS plus 10% off. I would just remind you a bit though that in, you know in the in in of our arranged for next year. We're we're aiming at that and this year we finished, you know over in that double-digit percent growth as well. Yes.

Got it. Thank you.

Just a follow-up. I guess what gives you you know, 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. I'm not consumer customer Behavior, you know, just given, you know, it's just a volatile business. So I guess how confident are you in that sales rebound? Well, I I think the sales rebound is based on a new business one. It's not based on any kind of Herculean performance from the customer. So hopefully that number is conservative enough that it absorbs that that potential.

Got it. Thank you. Next question comes from Jonathan Feeney of consumer Edge, please. Go ahead. Hi. Good morning. Thanks so much for calling interested in the cash flow for the free cash flow for 2020 and and Beyond could you what is the bridge between adjusted EPs and free cash flow rationalizing Capital wage? 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 called out in your comments, you know that transition from pasta to that ready to drink cold beverage. Well, you've got all kinds of your choice and capacity for pasta and you've got, you know, potentially new capacity or Coleman for you know, 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 birth.

And I'd really love to understand it. Thank you. Good morning. This is Bill. Thanks for your question. I'll I'll

Start and maybe see if I add a couple of points here the first part of your question in terms of the bridge, you know, as we walk into twenty-twenty. We want to see a significant step down and our restructuring spend as long as 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 decline in cat backs drives us to Thursday. We're we're aiming the second part of your question related to some of the comments on you know, it makes the order, you know, we have made significant strides and manager are working capital and we are after some structural working capital reductions and things like after our inventory and managing our terms both on and other initiatives led by our treasury function. We think we have a great opportunity here to deliver Thursday.

Well, I'll be a little bit about about the thoughts will happen will have more detail on this at cagny. But if you think about how much more stable our base is our customer service levels suck in the the our performance operationally, and now that we're building that on top of that. We're building the commercial team. It's time for us to help the retailer meet their strategy and and I talked very much about it in my opening comments. We'll talk more about it at cagny. But but we see really two different sets of businesses within Treehouse. We see we see one that can provide higher growth categories more Innovation off and and more uniqueness and and help that retail or 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 valued categories and maybe I don't have to allocate the same expenses too. Or maybe we don't have to allocate the same are indeed R&D dollars et cetera. So we think there's a way to run different parts of our portfolio differently. We think the cache from birth

those businesses

On the cash side more aggressively will actually fund the innovation in the the relationship with retailers. So I wouldn't I would I wouldn't say that it's going to necessarily be incremental. I think we see it as a way to fight The Future growth and and and better connect with the customer.

Thank you very much.

The next question comes from Carla Casella of JP Morgan Securities. Hi couple of questions one. Can you talk about 10,000 trade spend and if you're seeing anything any changes there is a 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 most of our work is is net price. We have a you know, a small branded pasta business would have a little bit of trade and and some of our retailer relationships just because they like to find a way to accrue funds so that they can promote but but trade in our business is a much smaller piece off. That doesn't mean we don't see trade spend against us like we did in the fourth quarter that we don't see the traditional mechanics of what happens in in the brain of business that you know in the same category as we participate in so long. I don't think it's right for us to comment on that and you know, we see it go up and down on a quarter. I don't think we track it beyond that but trade for us thankfully is not the it's not the big headache can be in in other cpg.

okay, and then at 1

Follow up on the single-serve beverage, you called out the competitive pressures or is it coming from is it opening price point bands 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 gather would be great. Sure. No, I hope I didn't misrepresent that that was the you know, we saw we saw that off 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 we shared on previous calls that we've seen them out for seating that sort of find its new equilibrium, but unfortunately as our contracts rolled off and those new pricings rolled in we had deflation in 2019, I think in one of those situations where he shows carryover part of that carryover, 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-serve packaging.

Susan that number

Um, it'll 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 me go through since then with it seems to have stabilized. So we that's why we also feel good about guiding $2. We don't see the same deflationary pressures. Once we get through the first quarter next year or this year. Excuse me. Okay, and so you don't see that as a category where you need to do more skew reduction or consolidation because there's just not hitting margin targets. It's still kind of I think that's good and viable. Yeah. No question. I think we will we will see some volatility in our mix occasionally because of contracts one and contracts loss Etc. But in general we view that as a great business and will continue to invest in it.

Okay. Did you break out how much of the Lost volumes in each category were planned versus a planned space office? No, I don't. I don't think we did that and you know, we've we've talked to in law passed that that there there we did have some businesses where the margin profiles weren't so attractive we did price our way out of some things that that made sense for us, but that's the balance right trying to to balance your your overhead absorption your volume your cost in the mix that sort of magic in this whole thing. Okay. Thank you.

the next question

comes from John Anderson of William Blair

Good morning everybody. Hi John, John.

Hey, I want to do at the investor breakfast. I think it was in November. You talked a lot about how retail customers were, you know, acknowledging the the improvements you may particularly service-level front and that that was translating into you know more and maybe more fruitful, you know new business discussions. Could you just provide an update? I you know with respect to that the kind of the nature and the of the conversations you're having and and to what extent has that, you know now influenced kind of your outlook for a second half of the Year. Where were you expect to grow kind of two or three percent? Thanks.

Yeah, well and and I think I can't express enough the frustration with the length of the sales cycle. And and you know, the sales Cycle Works on both ways. I think the losses that bill detailed with his charts really are the other reflection of things that have happened to us, you know more than a year ago in many cases. So I would suggest that the conversations today are are a number of fold. They are about longer-term commitments. They are about Innovation. They are about and they're about value. I mean there there's no question that the center store categories and the retailer needs help right, they're investing and click and collect are investing in a lot of things. So that that's really what we'll talk about a Cagney is is how do we operate differently in those choices 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 those those meetings were having them a layer up. I guess then what we would have a game.

or two ago

We're having them with with more strategic folks in the organization as well as with the traditional procurement people. So I think it's just a matter ization of our commercial group. Remember that group just was back 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 that it sounds like maybe there was over ordering a year ago, perhaps under ordering the share but can you talk about it? I mean their excess inventory levels. Are you going 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 that'll be material in in anything. We've shown as in our guidance. We did carry broth inventory in to walk 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 so that business is burning off. I you know, we talked about man 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 business that we're we're inflated wage.

We build a plan on that and shame on us.

Right, we got it to it. We we actually fell 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've got the 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 is a combination of things as you know, we had a we had a large strike in our system where we we were disrupted dramatically though. We also had some legislation on 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 business is on its way back, but it's it's a little further behind than we had hoped.

Okay last went for me. So the ivp the integrated business planning in the level of visibility into the plan for 2020. It seems like it's dead. It's better than it has been in the past. And and then there was also I think some commentary around, you know, there's an opportunity given that for us to you know, perhaps be you know, expectations or the guidance that you've set if there were one two or three areas where you see, you know, he kind of Leverage points off. We're we're 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 out of the operations. So we saw that rebound in the fourth quarter Thursday, 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 20/20 There's an opportunity for that to deliver as we go forward, also these commercial relationships and and the focused organization. I can't tell you how different that is I think that team is is having small wins and we just need those we have we have literally every month, you know, it's it's fun when we celebrate it we get a win but you go back and US1. Will that ship? Well, it's going to ship it October, right? So it's really a 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 wage

Can't we 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 the heavy-lift at. This place has been through over the last couple of years. At least that I've seen. Yeah. Thanks so much and good luck going forward. Thank you.

The next question comes from John Baumgardner of Wells Fargo.

Good morning. Thanks for the question. Hey, Jonathan Q Steve wage, which is a it's a pretty unusual string for this business. How much is that? Would you attribute to just you know, the benign commodity environment which is limited and need for pricing. I mean 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 wage. Okay, so, you know, 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 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 it that the benign could muddy environment.

Doesn't make that effort a little easier right and and we'll test all those skills.

Whenever we have commodity inflation, but maybe bill can comment also, but I believe free it's also helped us and and we've shown a lot about I'm not suggesting that we priced Freight wrong. We just didn't operate well in Freight in the pack, right we had so much on the spot Market that team is really got our ourselves much closer to our court carrier group, and we're we're actually operating on our on our contracts now, so is that a month? Let me let me just build on that point. You know Freight is was favorable for us, you know, in in the quarter the four million dollars you saw you over here and P not mostly was driven by favorable Freight off Steve's point, you know operate 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 rate. So all the work we've done around managing through an RFP process and a more efficient is showing up in the p&l and the only thing I would add also to just our procurement team, you know, they have a dog

Series of initiatives and programs that they're using the fight inflation into a pretty good job of making sure that that we're that they help their helpful in this in this in this number. Okay, and then the follow-up would be

Just going back to the comments about the heavier promotional environment from Brands and Q4 because looking at the Nielsen data, at least, you know, that's been showing brands that generally more rational over the past year or two, you know less volume so low 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 he's talking about that, you know in in 2020, you know, I I think twenty-twenty if anything we've been we've been appropriately conservative just on the volumes based on our we have a choice 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 plants per customer are and like Bill said we built this up from the ground up versus top-down. And and so I think those things are pretty realistic regardless of the environment we expect it might have been flow with a particular customer a particular time, you know one quarter to another number.

I don't think we're assuming a a change in the behavior of of Brandon cpg. It just happened to hit the quarter. Right and and that's I RI data on our part and yep.

My comments that were made based on the measures both quality and and tpr. So that's where we got that data. Thanks for your time.

The next question comes from Rob Dickerson of Jeffries, please go ahead super. Thank you apologies for missing my my first chance. Yeah, you gave us a knock that our our phone wasn't working. No. No, it's my fault. I was my fault. I really I really I I'm sorry. Okay. So just the first question kind of follow up on the last question. We just heard kind of but more top-down sounds like there was a little bit of incremental brand of pressure in Q4, you know, I guess, you know the facts supported that to an extent but we stuff like way back and we just say, you know, we just ask what's the state, you know of private label. How does Private lable play in addition to the Retail Landscape today, you know even relative to 3 years ago as we look forward 3 years is the feel as you speak to all of your customers you improve the service level.

are you try to innovate more be more agile cetera is that

Like we as retailers have you know increased demand, you know in a yearning to really improve, you know, our overall exposure to private label if the products right right if the innovating right if you can create the demand or if you can increase the demand curve, you know for those products and we absolutely want that and given you a little bit bigger if you can do it then we yes, we we wash partner with you cuz I I just asked because The Upfront slide you forward says this brand do this brands are trying to become more efficient, but it does seem like you know, there's a there's a still a large opportunity wage label. Yeah, please don't read anything into the fourth quarter that would suggest that the the retailer strategy has changed right? I mean you think about the pressure on the retailer to differentiate themselves Drive traffic could find the dollars to do that will 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, yep.

That conversation is is is is still happening and I wouldn't I wouldn't I've not seen anything in my conversation with a retailer or in we just came back from the FMI annual event where we were off all the retailer CEOs. And so I I would I haven't seen anything but changed 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 some times when both ends are effective. We are seeing like I said as bifurcation in in request from us, we are seeing the need for Value in certain categories where they see little differentiation wage. Then we're seeing the where they want real differentiation. We're seeing that that demand as well. So I think we're we're uniquely structured do both but that would be the only strategic change I've said

and then

And then would you say as you have these conversations with retailers that you know, they feel you know, not just you but they feel that you know your scale right your ability to maybe reduce inventory risk relative to some you know, smaller players is obviously attractive or is it hey, you know, we're still in a fragmented industry. So, you know, hey Treehouse you're you're great. But you still going to have to compete, you know, took a heavily on on pricing relative to some of the smaller players and then I just have a quick follow-up. Sure. Well, I I think we have to provide value regardless, right? I mean, I think that's pretty clear. That is the office around 20 20 20 20. That is the effort in our operations. We're convinced we can do that. That's why we only guide to one to 2% growth when maybe our categories are grown at 2. There's some places where we know you know, the brake frankly the margins will be below what what we need to return to share it to our shareholders. So I think value is is always there. I do think they're concerned about

gets bigger the larger private label

Gets in a you know, 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. We we cannot take our eye off the cost blood right? We can't okay super and then quickly just only a commodity complex going forward. Like is there there any areas where you foresee potential incremental pricing needs or you feel pretty good where you are, you know, there's a couple of little tiny things, but but, you know knock on wood, you know, we we think we're hedged where appropriate and we're dead. We don't see big commodity headwind at this moment, right? Thank you so much. Thanks a lot.

The next question comes from Chris group of people, please. Go ahead.

Hi, good morning, Chris. Hi Chris. Hi. I just had a question and it's a bit of a following of the past couple of questions. But have you given the rate of inflation you expect for this year? And then how you are offsetting loan not in the form of pricing or are there is there more like positive peanut coming through based on things like frayed or whatever? How are you discussed that because I think it's going to be a bit flattish and twenty twenty-five to Steve's point. 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 or kind of improvement initiatives. So we don't we don't have much coming this way of of pricing or cost inflation. Yeah, and the one place we do have inflation is Wages across our factories, as you know, that that that has been tight labor has been tight. We're almost to the point where Arlene initiatives are are mature enough that we can count on them to deliver to deliver that cost. I think I think historically in in large cpg dead.

You looked your Opera?

To cover to cover inflation plus a penny or two and we're getting close. So we're counting on the on lean to help us with labor inflation and interest just as a bit add before you leave the topic. Well, we did have a bit of pricing in 2019 that offset some of that information as well.

Okay. Got it. Thank you. And I just said one other question and you had talked about the stronger branded performance in the fourth quarter, for example, and I guess I just want to get I think you also discussed, you know some more bread competitive activity just to be clear on that. Does that continue into twenty-twenty? You think I get to the focus still at retail is on private label, but do you foresee that or is there any indication of that activity continuing in 2028, you know, we don't see anything. We don't see anything that's going to change. I I I'm I made a statement a little bit earlier about we don't see anything changing in strategically. But but we would expect from time to time. We'll have quarters Thursday. You know, we're we're 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 that those keys those key. So, you know those will happen time to time, but we don't think structurally different.

Okay. Thank you.

The next question comes from Steve's Piccola of UBS, please go ahead. Hi. Good morning and congratulations to Bill. Thank you Steve. I appreciate it. So just make sure I heard you clear on the last question question that of inflation of commodity inflation that's supposed to be flat this year. Just want to confirm then Steve in Prior Quarters off when you recently joined the company. I think one of the comments you made about the changes you are making was it would be the company would be better positioned in the future to manage Commodities because the way you would strike contract be less of going to the table and negotiating to get pricing would be more pass through. So I just want to understand why the need to lean on productivity savings while a really realize this part of the page if you're actually be protected with that in the contracts just want to make sure I understand that piece. Hopefully, I was clear there that was for labor inflation, right the plants need to cover their own labor inflation not commodity inflation month.

Okay, and and so, you know labor, you know, if there's local taxes, there's utilities. There's all the things that you have in your in your non ingredient cost spent so we can pass ingredients through we can't pass through and so we want to count on our plans to to have a continuous Improvement effort that covers its own cost structure not commodities.

And then 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 restriction costs were in 2019.

For the actual 2020 program. I'm sorry that that's one of the multi-year program. What were the cash costs and 2019 because I realized that steps down 20 20. I just want to understand kind of the Delta if you will. I think it was $144 and twenty $1,944 million and they'll step down dramatically 255 in 2012's. Okay, and then my last question I'll pass it along just understand the distribution losses they talked about and I realized a lot of that's in the rear-view mirror, but just to make sure we understand that appropriately is that shelf space loss to maybe smaller subscale private label manufacturers that are maybe willing to do business with the retailer at a lower margin rate box or is this a little bit of also just maybe branded holistically taking back a little bit of thank you. You know, I I think it's I don't think it's printed. I think it's a case of our performance in, Georgia.

You know several years ago.

Was so unpredictable that you know, our retailers decided to to either split the business that they had with us or quite frankly to try other vendors and we gave him quite frankly reasonable to do that. We we feel like that's changed now and that's why we see the momentum going the other way and the bar the blue bar on bills charts is going the other direction, but I think it was really just business lost because of our performance in some cases. Our pricing wasn't competitive. We we we had a little. And pasta where where we think our cost structure was a little out of line we fixed that but I think it was really really reflective of our performance. And if you think about our performance on all metrics, you know, two three four years ago. That's what's reflected in there.

Thank you.

The next question is a follow-up from Robert Moscow of Credit Suisse.

It's your lucky day to from credit price. Yeah, hi there. I just wanted to know if co-packing volume is part of your plan for for 20 28. You said six months ago that you would be more aggressive about going after that kind of volume. They're certainly risks associated with that because it tends to be very volatile. Can you talk a little bit about that. Yeah sure. Actually, we have a couple of of very nice pieces of of contract business. We we obviously don't out of respect for that contract can't tell you the the partner with some of the largest global cpg with some of the largest global other retailers. We have we have a couple of nice pieces of contract business. We have been careful there, It's it's typically multi-year agreements those agreements typically have passed through and so there we risk those quite a bit and I think as the new what I would call the new foo dog

Me write 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 in in we're partnering quite frankly with both of those. We've got some new age stuff. It'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 dead without. Okay. So is that part of the the plan for two to three percent growth in the back half that there will be more of this type of volume or is it just kind of steady-state? Yes, ma'am. Yeah. No. No, that's part of our plan for growth. Yes, and I 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 a choice of some of the product for you. So, you know, we we usually we wouldn't do that without their permission, but we'll have some of that Cagney to give you a look at it.

Sounds good. Thank you. Thank you.

And our last question today comes from David Driscoll of d d research.

Great.

Thanks. Good morning, everybody.

Hi and congratulations. Thank you. I really appreciate it. Wanted to follow up on the 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 thing seemed 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 a play heavily into 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 Steven you expressed a lot of confidence last quarter that even despite kind of the quarter not showing the the founder of these improvements that these manufacturing operations are made that we would see it and coming quarters. What are your thoughts? Well, I'll have built to get through the numbers but I think you saw it in the fourth quarter. I mean, I think those wage

First were positive in the fourth quarter, even though we were a little behind our plan and volume. So when 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 to fall through and you know, I got the question earlier. Is there any upside in this and I think if I think one of the upsides is our operations the operations if they continue to operate as we know they're capable of that could be a little bit of of Tailwind to us this year. Hi Dave. So you saw the number and the quarterback about seven million dollars better than than a year ago, you know and that that was helpful to us as we actually carry in some negative variances with the issues. We had in Q3 why you know, our operations teams really have done a good job and their programs around and leaned and War on Waze is really giving them an opportunity to put their arms around around the class. You know, we as we fall into q1 and historically, you know, there's always a ramp up here in the beginning of the year as volumes get a bit stronger and and so far so good the teams have been able to to bring the the operations back to Thursday.

They want to see these point, you know 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

How you doing? A terrific job in 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 the volumes that you've lost in the first app that you've outlined in the presentation. But when you go forward a year or the expectation is that we will see volume leverage run through the p&l and be very clear years following twenty twenty. You know, I would say yes, I think any I'll call you back to our comments on you know, we we have visibility and the line of sight and a planning process 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 be able to a very nice job at home seen the manufacturing profile to deliver that result. So yes, I do think you'll see that benefit. The only time that I would make is that you know, q 4 for us is always a challenging a quarter just because of the sheer. Yep.

size of it and so

I always have to be very careful as you 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 see if 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. We that sort of out of our control, but we appreciate that. We look forward to the follow-up and we look forward to seeing you next week in Florida. Have a great day.

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