TreeHouse Foods Inc (THS) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TreeHouse Foods Second Quarter 2017 Conference Call. This call is being recorded.

At this time, I would like to turn the call over to TreeHouse Foods for the reading of the safe harbor statement.

Good morning. Before we get started, I'd like to point out that we 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 achievements expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31, 2016, and other filings with the SEC discuss some of the risk factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented during this conference call. The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking 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 the purpose of our discussion today, statements such as Private Brands or the Former Private Brands business refer to the recently acquired 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 Chairman and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed.

Thank you, P.I. Good morning, everyone, and welcome back to our TreeHouse. Matthew and I are joined today by Bob Aiken, soon to complete his first month as President and Chief Operating Officer of the company. Bob brings vast experience and expertise in the Food and Beverage sector as an accomplished General Manager and Senior Executive. Over the many years of our personal acquaintance, he has constantly demonstrated the personal integrity, strategic thinking, leadership skills and performance drive required of our marketplace. As a result of these observations, I believe that Bob is unequivocally the right person to lead our operations as the integration of Private Brands has completed to more consistent performance, organic growth and margin expansion.

Also, as you can see on Slide 3, his hire completes the build-out of our executive team undertaken at last year's end. Welcome, Bob. Earlier today, we released our mid-year earnings and outlook for the full year. In tandem, we also announced a comprehensive strategic plan, TreeHouse 2020, to restructure and realign the whole of our TreeHouse, beginning with the consolidation of 3 production facilities by mid-2018. In combination, today's pronouncements reflect lower prospects for the current year, coupled with greater expectations for the years immediately following. While the retail grocery industry continues to battle headwinds in the short term, we now have a strategic line of sight for sustained improvement and private label over the longer term.

Regarding the state of the food industry, our mantra for the last decade has been "live in the marketplace." This dictum has steadily guided TreeHouse, its evolutionary change, has transformed state supermarket national brand equivalents into dynamic traffic builders. As you can see on Slides 4 and 5, that evolution era ended several weeks ago with a Big Bang disruption of the established order. In a flash, revolution was upon us as the entry of Amazon and Lidl coupled with well-documented challenges among traditional retailers heralded the coming of a new age [with credo] of disruption, digital and discounter promises or threatens to redefine both the grocery retailing and food distribution.

Throughout this tumult, underlying grocery market conditions have offered little opportunity for branded growth, as you can see on Slides 6 and 7. In marked contrast to the CPG Giants, our core private label portfolio continues to expand, especially in organic and other better-for-you segments. Despite aggregate demand weakness, intensified bid activity and month-to-month volatility [put -- that] play havoc on our operations. As seen on Slide 8, our simplification agenda is directing strategic transformation of both our category and customer portfolios, also noted on Slide 9.

Turning from the industry to our TreeHouse. Now that we have assembled a full executive team, it is imperative that we return TreeHouse to an earlier era of organic growth, margin expansion and cash flow to support sustained progress. In order to do so, we require radical transformation on a macro scale far beyond our original plans to integrate Flagstone and Private Brands into a contemporary model of our original growth engine. Thus, we have launched TreeHouse 2020, a comprehensive strategic plan to restructure and realign our fundamental go-to-market presence and supply chain assets so that we can best compete in the private label marketplace that lies before rather than behind us. This strategy, which involves hundreds of millions in both its investment costs and profitability benefits, encompasses far more than fixed assets, rationalization and SKU consolidation. We must realign the whole of our TreeHouse to serve a rapidly-evolving and newly-emerging market as defined by the 5 C's of our strategy.

First, consumers. Millennials empowered by technology and search for product authenticity, clean labels, on-the-go convenience and intrinsic value. Next, customers. Retailers in pursuit of the loyalty of channel-agnostic omnishoppers differentiated on brands, e-commerce access and sustainable competitive advantage. Thirdly, categories. Products and packaging that retain their consumer relevance in the migration from center of store to the perimeter, from pantry storage to immediate use, from brick-and-mortar to click-and-collect and from mass marketing to social media. Fourthly, competitors. Integrated marketers who practice strategic discipline as they leverage non-replicable products, services and innovation while ceding no cost or service advantage to others. And lastly, capabilities. Own brand customer intimacy, commercialization and e-commerce supported by a global supply chain, food safety protocols and data analytics.

Our ability to access this marketplace of the future has been greatly advanced, thanks to a recent and extraordinary technical achievement in consolidating the disparate databases supporting our 13 IT platforms. We now have new IT applications that amalgamate all information sources into a single database that can be viewed from the perspective of a specific customer or an individual production line. This is the key to unlocking the elusive transformation of our various legacies into one unified TreeHouse private label portfolio. These IT applications can now give us a more complete picture today than ever before. Our 23,000 SKUs and our 1,100 customers can now be linked by more than simply their categories and their brands. More specifically, we have the ability to track the margin structure, production, logistics and procurement trail for each of these SKUs, as well as the specific supply chain assets and operations serving each of our customers. We now have performance and profitability measures that we did not prior to the integration. Each of our 50-plus plants and approximately 600 production lines can now be treated as our profit as well as a cost center, attaching each line to a unique customer book of business with its own product portfolio.

Based on these insights, we now know that the physical presence and mechanical ability of our supply chain and its fixed assets today operate at utilization levels that are entirely too low. Plant closures, line retirements, network optimization and productivity investments should eliminate that redundancy without major disruption as they can be closely tracked for the rationalization of corresponding unprofitable SKUs and nonstrategic customers.

Simplification of our category and product portfolios should also foster further benefits beyond operational rationalization, including e-commerce capability, procurement and freight economies, working capital efficiency and shared administrative services. Taken in its aggregate, we expect TreeHouse 2020 to generate 300 basis points of pro-forma annual operating margin improvement by the end of 2020. We fully expect that the result when all facets are complete 3.5 years hence, should once again establish TreeHouse as the preeminent industry leader in customer brands, custom products and shareholder value.

Matthew?

Thank you, Sam, and good morning, everyone. Thank you for joining our call today. Sam gave you some good color and a sense for the dynamics of today's retail environment. With that as a backdrop, let me walk you through our second quarter results, update you on our full year guidance and give you an idea of how we're thinking about the back half of the year. I'll close with an overview of TreeHouse 2020, the restructuring program we announced today, and then turn it over to Bob, who will give you his operational perspective on TreeHouse 2020.

Starting on Slide 10, on our consolidated results. Sales for the second quarter were below last year, down 1.2% to $1.52 billion, largely attributable to the sale of the canned soup business, which we closed at the end of May. We saw declines in volume and mix, down 0.3%, while pricing still lacks the increases in our commodity inputs and currency was a slight negative as well. I'll touch later on our pricing actions in response to commodity increases.

Gross margin of 18.2% was 100 basis point improvement over last year. We're making good progress here, although our improvement has been at a slower rate than we originally anticipated. GAAP net income was a loss of $34 million compared to a profit of $19 million last year and GAAP EPS was a loss of $0.60 per fully diluted share this quarter compared to a profit of $0.33 last year.

In the second quarter, our results were significantly impacted by the loss on the sale of the canned soup and infant feeding business. On a pretax basis, we recorded an $85 million loss on the sale. And as previously stated, the impact on our ongoing operating profit is negligible.

We have struggled with the category dynamics and profitability of this business for a number of years, and believe it is in our best interest to focus our resources, both capital and management time, in areas where both the value and the likelihood of winning are greater. The divestiture is part of our ongoing efforts to actively manage our portfolio and ensure strategic alignment.

Adjusting for the items detailed in our press release, our EPS per fully diluted share in the second quarter was $0.51, down from the $0.60 we posted last year. While this was within our second quarter guidance range, we benefited from taxes by about $0.04 versus consensus, meaning our operating results were a bit below expectations, the primary drivers being lower volume and the impact of that on our plants. This was exacerbated by the month-to-month volatility Sam mentioned earlier.

Let's now turn to Slide 11 and cover the segments. You can thank our accountants later, but as you'll notice in the press release, in addition to sales and DOI for the 5 divisions, we've had a greater disclosure around the volume mix, pricing and currency impacts on revenue for each business. We've summarized the year-over-year change in revenue and direct operating income for the divisions. In total, across the 5 divisions, our sales declined about $31 million last year, including the impact of the canned soup divestiture. Direct operating income declined $6.5 million in the quarter compared to last year, again driven largely by lower volumes.

Just a couple of things to cover here. Results in beverages and meals, excluding the impact of the canned soup sale, showed good improvement over last year. We continue to gain distribution in single-serve beverages, but are also seeing competitive pressure and higher commodity cost impact margins. In Meals, excluding the impact of the SIF sale, despite facing negative volume mix and pricing, profitability improved by $4 million versus last year. The 3 other businesses, Baked Goods, Condiments and Snacks, faced headwinds as volumes were hampered by industry weakness, which drove manufacturing inefficiencies, competitive pressures have intensified and pricing has yet to catch up with commodity costs.

Turning now to our balance sheet and our leverage ratio on Slide 12. Despite the challenges in the overall marketplace, I'm extremely pleased with the progress we've made on paying down debt. Our business generates strong predictable cash flow, and if you'll remember, our target was to get back under 3.5x leverage by midyear. Since we closed the Private Brands' acquisition early in February of '16, we've paid down $470 million in debt over the last 5 quarters, with our net debt-to-EBITDA as defined by our bank covenants closing out the quarter at approximately 3.4x.

Our net debt at the end of the second quarter was just under $2.5 billion. Our focus as we head into the back half of the year will be to continue optimizing our working capital. Our strong cash flow and liquidity, coupled with our progress in deleveraging, provide a lot of capital allocation optionality.

Let me spend a minute talking about commodities and pricing. We've continued to see escalation in select commodities like oils, nuts and coffee. Chris Finck and his team have been aggressively going after pricing. Our teams have been laser-focused on how we're taking pricing across the customer base. Recall that we have approximately 1,100 customers, of which the top 100 generate about 90% of our revenue and fall into one of the yellow or green quadrants on the customer 2x2 that Sam showed you on Slide 9. For our strategically focused and highly collaborative customers that are committed to their corporate brands, our strategy has been to price to recover the commodity increases.

Along the left-hand side of the chart, and in particular, the red box tail of 1,000 customers, we've acted swiftly and aggressively to address not only the commodity increases, but also how we do business with them so that we can ensure that we are getting paid more appropriately for the complexity and costs that they are driving. Our pricing actions are largely complete, and while we still have a little more work to do through the back half of the year, we do expect to see pricing flow to the bottom line starting in July. I'll talk in a minute about how we address these issues in the second half.

Turning to Slide 13. The Premium, better-for-you natural and organic continues to be a bright spot for us, posting volume growth of 3.4% year-to-date. Our data now includes Private Brands, but still excludes Flagstone and single-serve beverage. This segment represents roughly 19% of our revenue through the first half of 2017. And importantly, margins are much more stable in this area.

Before I move to our outlook, let me take you through a quick update on the Private Brands integration, as seen on Slides 14 and 15. We're nearly complete on the systems separation and are tracking ahead of schedule. As you can see on Slide 15, the execution work around plant closures is also tracking according to plan, and we expect to wrap up the TSA around the end of the year.

Equally important is the work done to exit the ConAgra mixing centers. This too is key as we can now optimize material flow and freight for TreeHouse, rather than being constrained by the ConAgra footprint.

On Slides 16 and 17, we've summarized our updated guidance, which now reflects the impact of the canned soup and infant feeding sale at the end of May, and takes into account the current sentiment around the challenges we face, both in the retail environment as well as operationally. As you saw in the release, we are lowering our adjusted EPS guidance range downward by about $0.35 to $0.40 to a range of $3.15 to $3.30.

Revenue is now expected to be between $6.2 billion and $6.3 billion. Our gross margin is expected to be in the range of 19% to 19.5%, and we're tightening up our SG&A range to between 12.9% and 13.2%. Interest expense is expected to be between $120 million to $123 million, and we are lowering our tax rate guidance for the year to 29% to 30% due to 3 things: the revised stock compensation accounting rules; the amended agreement with ConAgra that increase the tax basis of the acquired assets; and release of an indemnification reserve.

Having owned Private Brands for over a year now, we believe a more appropriate long-term tax rate for our business is in the range of 32% to 33%, excluding the impact of restructuring. Our share count estimate remains the same between 58 million and 59 million shares. CapEx should be approximately $185 million this year, inclusive of Phase 1 of TreeHouse 2020, and down from the $215 million we anticipated earlier this year.

On the next page, we've detailed both the GAAP and adjusted net income, EPS and EBITDAS calculations. Note that the GAAP numbers take into account the adjusting items that we disclosed in our Q1 and Q2 releases.

Adjusted net income is expected to be in the range of $180 million to $195 million and adjusted EBITDAS should be between $700 million and $725 million. The canned soup business on an annual basis was about $210 million in sales, so that reduced our topline guidance by about $115 million, since most of the sales fall in the latter part of the year. As we've previously said, the impact of ongoing operating profit from that sale is negligible.

As we think about the second half of the year, we continue to expect the fourth quarter to be our largest, given the seasonality of the business. Our guidance for the third quarter is EPS between $0.75 and $0.83, with an implicit EPS range of $1.28 to $1.35 for the fourth quarter. We've included Slide 18 to help you think about the pieces that get us from the first half adjusted net income of about $64 million to a second half that's between $116 million and $131 million.

For the purpose of our discussion, let's take the midpoint at about $124 million for the second half net income. As we look at the back half of the year, there are 2 key drivers of the improvement; increased volume and cost reductions. The second half lift in volume of mix is primarily seasonal, but also reflects some large incremental business in nuts and condiments that we have won and are already shipping. The higher volumes also provide significant absorption benefits. On a [ship] volume basis, the first half and the second half relationship is similar to 2016. The cost improvements are a combination of the impact of the plant closures in Q1 and new initiatives across all divisions. Each division and plant has a discrete set of actions we're tracking.

With regard to pricing, while it looks rather modest here, pure pricing was actually higher. So we did recover our commodity exposure. However, as Sam said, we've seen meaningfully higher bid activity that is projected to compress the overall pricing contribution in the second half.

Before I get into the details of TreeHouse 2020, let me first address what I'm sure many of you are thinking. What changed since we last spoke with you in May? On Slide 19, we've laid out for you in broad strokes the underlying thinking around maintaining our guidance at the time versus where we sit today. The bottom line is that the environment remains tough on a number of factors, of course, disruption for retailers.

Back in May, it appeared that the bid activity had peaked, now it seems like it is intensifying as some of our customers struggle to compete effectively. Volumes have not only been weak, but they've been extremely choppy, as Sam showed you on Slide 8. And this makes it very difficult to run our plants efficiently. We need to adjust accordingly.

Commodity prices are largely where we expected them to be with patchy increases. Our pricing actions will start to flow-through in July as we expected. I can't say enough about the success we've had integrating the Private Brands business, and what it's given us in turn is greater transparency and clarity on what must happen in order to transform our TreeHouse. The environment today is more competitive, market dynamics continue to evolve, and it is driving margin compression across the industry at all levels.

Over the last 4 or 5 months, we've been installing some new IT capability that allows us to drill down into our disparate ERP systems and spreadsheet-based data and start to analyze our business in a much more insightful manner. This has enabled us to look at revenue and profitability not only by SKU and customer, but also by line within our manufacturing plants and to couple that with projected utilization data. This is a huge unlock for us and is the enabler for our next wave of operational improvement, TreeHouse 2020.

On Slide 20, you'll see we've have laid out the action steps and our expectation that these actions should achieve 300 basis points of operating margin expansion by the end of 2020 based on current volume, price and mix.

We went from 20-plus plants to more than 50 when we closed the Private Brands transaction. Our operational misses have been magnified by this environment. Simply put, we have excess capacity, we have too many non-strategic customers, and we make too many marginal SKUs. So our first step will be to realign production, which will involve plant closures. Today, we announced 3 plants, as part of Phase 1, full closure at Brooklyn Park, Minnesota; and Plymouth, Indiana, and a partial closure of Dothan, Alabama. We will also seize production permanently on approximately 20 additional lines as part of Phase 1. We expect these actions will be completed by mid-year 2018.

TreeHouse 2020 has been designed with an eye towards optimization and enterprise-wide transformation. We expect the 3-part actions to translate into restructuring charges of $45 million, of which $15 million will be non-cash. Our plan is to come back to you with similarly specific actions that will go out through 2018 on our year-end call in February.

With that, let me now turn it over to Bob to give you his perspective on the operations and the key elements and enablers of TreeHouse 2020.

Thank you, Matthew. I'm really pleased to be joining you on today's call, and look forward in the coming months to meeting many of you who are on the line with us this morning. This is certainly a dynamic and exciting time to be embarking upon this journey with TreeHouse. Having known Sam and a few of the team members for many years now, and having a background in the food space, both as a customer and a manufacturer, I'm really excited about the opportunity we have ahead of us to build upon our private label leadership position within the Food and Beverage landscape.

In these first several weeks, I've been working to get up to speed quickly and engaging my fellow TreeHousers. And I have to say that I've been thoroughly impressed with the team and the bench strength we have here at TreeHouse. I also see significant opportunity to advance the business by building upon all that has been accomplished to get us to this point in the company's transformation.

So with that, as an introduction, let me speak more specifically about the key elements of TreeHouse 2020. These are my early insights on how we'll go about continuing to transform the company and deliver the 300 basis point margin expansion goal by the end of 2020 that both Sam and Matthew outlined in their comments. Much of this work will involve basic blocking and tackling as we work to further integrate and optimize the businesses we've acquired to fully leverage our unparalleled scale in private label. We'll also continue our focus on consumer relevance with Premium, better-for-you, natural and organic products. We plan to build these capabilities while lowering our cost structure, which we will accomplish through portfolio management across our categories, through simplification and network optimization. I also see opportunities for us in more systematic revenue and margin management to respond to the margin pressures being felt across the grocery sector today.

Turning to Slide 21. The early phases of our work in TreeHouse 2020 will focus on 5 key priorities. First, we will maintain our steadfast focus on simplification, both from a product and category perspective, but also from a customer perspective. Today, we make too many SKUs. We are on the path to eliminating 25% of our current SKUs. From a customer perspective, we will be guided by our 2x2 matrix. We are deep into segmenting our customer base and shifting focus to the large and growing customers strategically committed to private label, as well as standardizing commercial terms and eliminating exceptions across our customer base.

Second, network optimization. SKU reductions allow us to make very targeted decisions on the optimization across production lines and plants throughout our network. We plan to reduce our manufacturing footprint. And today, we announced Phase 1, which includes the closure of the 3 plants that Matthew detailed for you. We'll also be permanently shutting down numerous lines that are projected to operate at low utilization levels. Phase 1 includes approximately 20 such lines that we plan to decommission. Over the course of TreeHouse 2020, we plan to increase our capacity utilization by up to 20% from existing levels, but still maintain flexibility to grow.

Third, we must become more agile in our delivery approach. I'm talking here about more than just reducing our manufacturing network. We'll also optimize our warehouse footprint. Our mixing centers will become more agile, allowing us to more deeply integrate into our customers' supply chains. We'll build capabilities across the spectrum of full customer requirements from full truckloads to mix pallets of the entire range of TreeHouse products. This agile distribution capability will be particularly meaningful as e-commerce customers become a greater force going forward, because that is how they typically order from suppliers.

Fourth, continuous improvement across the network through a standardization of processes. We'll implement a TreeHouse management operating system that embeds into our company continuous improvement operating methods and principles. This work will improve efficiencies, throughput and quality.

And lastly, systems and process integration. We're nearing the completion of the order to cash piece of our SAP conversion, and we plan to turn next to the manufacturing platform of SAP in the rollout of that platform to our plant network. With the powerful new business and analytical tools we've built, we also have the opportunity to optimize pricing and margin based upon a clearer understanding at the SKU level of our margin, input costs and cost to serve. As our organizational structure continues to mature, these analytical tools also provide the platform for improved forecasting and planning across our divisions.

The landscape around us is evolving rapidly and we must adapt accordingly. As the leading private label producer, we are uniquely positioned to meet consumer demand, regardless of how it might shift over time across evolving retail and e-commerce channels.

With that perspective on the market, TreeHouse 2020 is the next step in the evolution of the company's vision. I'm confident that we have the resources, the team and our Board's support to deliver an enterprise-wide transformation. So in case you can't tell, I'm very excited about the future of TreeHouse Foods and really pleased to be here.

With that, please allow me to turn it back to Sam for his closing.

Thanks, Bob. As shown on Slide 22, TreeHouse 2020 represents the culmination of a transformation whose roots are strategic expansion, organizational integration and systemic simplification. Despite uneven financial performance, we have accomplished much in the past year. Customer service restored; retailer relationships repaired; IT systems integrated; supply chains linked; organization unified; and most critically, portfolio simplification embraced.

Leveraging these accomplishments with strategic insights enabled by a new technology has spawned TreeHouse 2020. It will prove to be both evolutionary in directing the tactical execution that drives performance, as well as revolutionary in revealing the strategic insights that should define our competitive advantage in the digital age of private label.

As we embark upon TreeHouse 2020, we remain as enthusiastic and as committed as ever about our private label prospects. We appreciate your support as we continue our focus on delivering superior shareholder value over time.

Alan, please open the phone lines for Q&A.

(Operator Instructions) And we will take our first question from Jonathan Feeney with Consumer Edge Research.

So a couple of questions, one more broad and one detailed. More broadly, you mentioned in a couple of places in the script, increased bid activity. And I'm a little bit perplexed. I'm trying to understand what's happening here? Because all we see -- if you look at the weighted-average volume in private label over any period, 2, 3, 5 years, certainly on the Private Brands business, it's up and you've done nothing but closed plants it seems, and I haven't heard of branded players sort of, maybe, making any kind of efforts to manufacture store brand items. So when you talk about this increased bid activity, are customers just getting more savvy about finding little pockets of excess capacity out there? Or if you could just give me some flavor for what you think is going on at the customer level as far as their data goes? They feel empowered to rebid business that you, maybe, wouldn't have been rebid. And my detailed question, if you wouldn't mind is, what base are you kind of thinking about when you talk about 300 basis points of operating margin expansion for 2020? Will that be like a full year '17 number or some other number?

John, this is Sam. Bob and I'll touch on these 2 matters together. First, let's take the bidding. The circumstance is that when you look at the totality of private label, the traditional supermarkets have suffered greatly as the channels of distribution have shifted to hard discounters, and now we see coming as well e-commerce. And that the activity that has greatly heightened has been really instigated by the retail grocers who as -- there is a squeeze on volume and foot traffic across all of our outlooks -- outlets. We had anticipated -- as Matthew had indicated on our last call that we thought that volume -- bid activity had, in fact, reached a new high level, leveled off, but we have found out since that it is -- dramatically continues to increase. I'll ask Bob to comment about our approach going forward, and then Matthew and I'll come back to the 300 basis points.

Okay. Thanks, Sam. Sam said one of the TreeHouse maxims is to live in the marketplace and clearly a higher bid activity among a number of key customers is part of that marketplace that we live in today. As a backdrop, I'd say, we're a scale player in nearly every category we supply today, and we have scale across our portfolio of products. And so as we look and say, how do we respond to this increased bid activity? Then we see the real opportunity for us is to engage customers to look for ways to jointly reduce costs and then to share in those cost savings. So areas like product reformulation, standardization of packaging sizes, bracket pricing, improved demand planning, deeper supply chain integration, indexing for commodity input, these are all opportunities to help our customers to lower their costs without just a pure margin give back on our part. And some of our customers are really skilled at this sort of approach today. We're working with all of our strategic customers to help them achieve the lowest total costs, and then to share in those savings. And frankly, there is no other private label supplier with the breadth and scale to be able to take this approach. So over time, I see the conversation shifting from "give me a lower price" to "how can we work together to lower costs and share in our savings?" And that's the big opportunity. Our best customers are taking this approach today, and we think it's a winning formula. And so we'll work to build the capabilities within TreeHouse to make certain that we can reframe the conversation in that way.

While we address your second question, Jon, I'll provide some background and then ask Matthew to elaborate. The 300 basis points is the expected improvement that will -- the run rate where we'll be when this project ends at the end of year 2020. I think going forward, you can consider that an annuity on the current basis -- the current business. It's important here to understand that while cost reduction and rationalization of our asset base is a substantial part of this, that it really is a broad-based comprehensive program that starts with the proposition that we put 13 companies together, and find that we have now, after 1-year of rationalization, still 23,000 SKUs and 1,100 customers. And we're -- process is about redefining in the context of our 2x2 strategies. How do we go to market with customers? How do we go to market with categories? And as a derivative of that, how do we organize the rest of our business? Matthew, would you like to elaborate?

Yes. I think as we get into executing TreeHouse 2020, and in particular, Phase 1, the good news is we're starting in the middle of the year. And what that means is we'll start realizing some benefit relatively early in 2018. So I think that this improvement in margin as coming off the full year 2017. We won't be realizing any material benefits in this current fiscal year.

And we will take our next question from Chris Growe with Stifel.

Can I ask you first off and then a bit of follow-on to John's question there. But the -- with such a positive volume growth environment for private label right now, where are you seeing the competition? Is it more from existing private label competitors? Or is it more on how retailers are merchandising branded products? I'm just trying to understand kind of the [miss] there, if you will, on the volume side?

I think that you have to look specifically at the supermarket industry and look at all of IRI. The phenomena that we see that are important are really 2, that for the aggregate growth in private label in the last quarter or the last 6 months or the last 12 months, more than 100% of that growth across general food and beverage has come from a handful of customers. And the remainder of the industry, you take all that is tracked, and the last quarter has had an average loss of revenue in private label of 9.6%. And so you have a handful of -- that are succeeding and a very great majority of those other stores, primarily supermarkets, that are syndicated are really struggling to maintain their presence. And in the course of that, they've tracked it back to lower foot traffic and the bidding for the business that is left has been really quite intensified. The other matter underneath this is that not only is there a transfer within the traditional grocery sector, but for the next quarter, as an example, it would be the first time ever that less than 50% of TreeHouse revenues come from syndicated grocery. And it indicates that there is a shift to other outlets, [hard] discounters being the leading example now, but e-commerce to come right behind it. And what that has done, again, occasioned by the lower foot traffic is, in effect, put a lot more up for bid and on a lot more frequent basis.

Okay. I had a follow-on question, if I could, in relation to TreeHouse 2020. I had built-in or had assumed that your margins would improve roughly by that rate, courtesy of all the synergies coming through from the ConAgra Private Brands acquisition. So I just want to understand how much of those activities are now being kind of put underneath the umbrella of TreeHouse 2020? And then as you think about the reduction in SKUs and the simplification program, do sales come down during this time, which [you get] more profitable? Just trying to understand how that may work over the next few years.

I'll -- in short form, I'll open and -- first, 2020 is a new and comprehensive program that -- it follows on the benefits coming from the acquisition and the integration work that's already been accomplished. And so that -- you have to look at those things as individual and complementary components. Matthew, more there?

I think the only other thing is when we've looked at Phase 1, you know it's in a fairly chunky phase. The impact on revenue is somewhere in the $60 million to $70 million range, negative. And AGM, we think will be neutral to actually positive as we really have targeted here some particularly unattractive business, in terms of prioritizing the highest returns upfront.

And we will take our next question from John Baumgartner with Wells Fargo.

Matthew, just to stay on the 2020 program. So you've got the 300 basis points of margin expansion. But if we dig into that, what are you thinking about in terms of the growth savings and the reinvestment needs, I guess, to net out to 300 basis points? I mean, it sounds as though over a 3-year period with the volatility going on, this is really going to be a moving target? And it also sounds as though building this agile distribution capability, that can be pretty costly as well.

Yes. I think -- we were careful to stress that this was a constant volume mix and price because it is a very dynamic environment, and we don't quite know how that's going to play out. But the nice thing about this program is it's going to be pretty easy for us to measure because we're going to have a very clear line of sight on the costs that go away as we close these facilities. And we're also going to have a pretty good line of sight on the headcount that we add, the places where we transfer this production to. So I think although the world is going to be moving, I think our ability to track these kind of actions is going to be very clean and something we can report out to you on with good transparency. So I feel pretty good about being able to lay something out, get it done and tell you what we've got.

John, this is Bob. On the agile distribution network, you know, I'd say that our distribution networks strategy is twofold. The first is to really optimize our footprint against our manufacturing capacity today in our customer needs that will drive substantial cost reduction. And then we'll invest a portion of that back to build this agile distribution capability. And in fact, we're providing this sort of agile distribution today just not as cost-effectively as we could. And then so we see the market moving that way requires some level of investment, but it will allow us to provide those type services at lower cost over time.

And Bob, if we think that the retail environment, and you're seeing downward pressure on pricing, a lot of commentary around more competitive bid prices, what is it you think that would keep U.S. private label operating margin structurally higher in comparison, say the low-single digits you see over for private label suppliers over in Europe? Why should the equilibrium be higher here long term?

I think, when you look at the scale and cost advantage that we have, and when you look at the elements of TreeHouse 2020 that will continue to allow us to continue to reduce those cost elements, we think we've got a position in the marketplace that will allow us to differentiate, to help our customers to grow their private label portfolios and do that at the most competitive cost base possible. And that should give us a margin advantage over those norms that you're talking about.

And we'll take our next question from Bill Chappell with SunTrust.

Just a quick clarification on 2020. So if you -- in this year with, let's say, 11.5% EBITDA margins, is the goal to be exiting 2020 with 14.5% EBITDA margins? Is that the right way to look at it?

Yes. That's the right way to think about it because this program is likely to take us through the tail-end of 2020. So we'll be wrapping up and executing the final pieces of it then. So it really is an exit run rate. I mean, we're going to work like crazy to pull this ahead. And I think -- it's not a great thing to say for all of our constituents, but we've closed a number of plants now. And I think we will over time become more adept at it, and I think we've got that opportunity to pull it in. But right now, that's our run rate going out of 2020.

Bill, this is Sam. As reference points, TreeHouse legacy's high point was 15.6% and Ralcorp at the time that it was -- in the time that we've overlapped with them, their best was 12.9%. It's getting us back to that golden era, if you will.

That sounds good. And then just, and I know we keep going back to the bidding, but historically, I guess, TreeHouse did not participate in blind bids, that was -- you wanted only customers that wanted to partner with you and do good, better, best and really build out their private label. Has the market changed when you're talking about competitive bidding? Are we seeing more blind bids, cost only? And how would you kind of compare this to what's going on to what happened in the K-Cup segment when Green Mountain came in and took a lot of the economics out of the overall business because they bid so heavily?

Bill, I have a close friend who mastered this in the food service broad line distribution business. Would you talk about it?

Yes. I'd be happy to, Bill. As both a customer and supplier, I've seen this sort of intense bid activity, really, almost my whole career. And I think it's never just about price, it's about the basket of capabilities that you bring and the ability to help your customer to drive their business forward. But make no mistake that price is a component of that. And so as we look forward, we see opportunities to work with customers to drive costs out of our system and to drive margin expansion into their business and in a way that we can share those things. And so I don't look at the increase bidding activity as a parallel risk for the organization, but it is part of the environment that we have to respond to. And I think there are a lot of tools that we can build to engage customers in a way that will allow us to do that.

And then in terms of how this compares to, like, what Green Mountain did?

Bill, I think in it -- there is no comparison, if you're going back to the launch of 2.0 and all of the associated misconceptions about what that meant. With regard to more recent activity, the good news for us is that the private label has returned to lead the entire single-serve beverage category, and it's become bifurcated between Starbucks on one end and private label on the other end. We would -- we're delighted to have the big market opportunity that we have for private label there.

And we'll take our next question from David Driscoll with Citi.

So just to clear up something here on 2000 -- Matthew, I believe, you said that base of 300 basis point improvement is where you end up on 2017 for operating margins. Your slide doesn't actually have that number on it. When we try to take that information and work it together, it would look like you're guiding us to 6.1% to 6.3% margin on the year for '17, is that correct? Is that the base that we're using for the 300 basis points?

It's definitely the full year 2017 number, and that seems a reasonable approach to that point -- data point.

Okay. So then you add the 3 to that, you get to something like 9%, just a little bit over 9% by 2020. Sam, the question is this, when we look back at the historical margins on Ralcorp and TreeHouse, that type of margin was where these companies were for long periods of time, TreeHouse actually was better than that, and there were periods where Ralcorp was better than that. I guess -- I'd just like to hear your thoughts on -- you put together the largest private label company in the United States, the dream here was that the combination of these entities would produce cost savings through a much streamline cost structure, national private label company that's never been seen before. And I think all of us on the outside thought that margins would then be in excess of things that we had seen in the past, but the 2020 view doesn't do that. It really just puts you back towards where these companies were in the past. So is it fair to say that many of the cost savings that are happening, they're just going from TreeHouse to your customer base. So you get back to 9, but you can't really go beyond that because these customers are under all the pressures you've described today, and this is really the force that's limiting, maybe, the upside that all of us thought was potentially there?

Well, I'll go back, David, to saying that from the very beginning, we said you have to live in the marketplace. What is different from my original expectations is that the rate of change over these 12 years has just been really quite extraordinary. And we have had to adapt to it. And at any moment in time, what you have is an asset base that is formed in this context of a prior marketplace that you got to then reinvent and reform that. And it is critical that you stay relevant in that circumstance. And let me give you one really -- 2 really fine questions. If you go back to when we started, everything we shipped was full truckload lots. It was one destination, oftentimes only generally one category, and it all went to supermarkets in full family size packages that were set for at-home consumption. And then in the context of the recession, a German retailer emerged in this country that had a very limited product line and each category had representation of 1 or 2 items. And none of what they wanted was in the same configurations that supermarkets had. We developed a business that bookkeepers would indicate is of only marginal value, but its logistics, its supply chain are so efficient that it is a good business for us to have, although you will not find any cases going to that customer that ran off of the old system. The second matter I'll lead you to is to think about the single-serve coffee business. We started that from nothing, and it was a difficult, expensive, litigious buildup, and what we have now is a business where we make over 1 billion cups of private label coffee, and that's led us into non-coffee items. We're now the national leader in the non-brewed products. And that entry into beverages expanded our view of private label so that now the fastest-growing segment of our business, I think, up 17% in the quarter is beverages and its aggregate. And along the way, everybody in this industry, manufacturers, retailers, wholesalers has got to become more efficient and that's what 2020 is about, both that and reconfiguring the portfolio. I think that it's useful historically to note kind of numbers from the past, but you really have to translate that into the opportunities in this current market.

And we will take our next question from Robert Moskow with Crédit Suisse.

Can you -- 2 questions. One is, what percent of your sales now come from these alternative channels? You said that [50%] is non-measured by Nielsen, but it sounded to me that you are saying that the hard discounters have been dilutive to your margins. I imagine, e-commerce is probably dilutive to your margins, also. So just looking at those 2 channels, maybe, you could give us a sense what it is today compared to history? And then secondly, 2018, I thought I heard that Phase 1 is going to be fairly chunky, $60 million to $70 million of headwind. Does that mean that 2018, we shouldn't expect any kind of net improvement in operating margin right off the bat? And it's kind of like back-half loaded in the 3-year plan to 2020?

With regard to what we used to call alternate channels, they have become mainstream. And Bob is leading the company through strategic look at our kind of customer portfolio. And the prior -- what we have today is the work that has been done over the last several years, and we've been able to put customers in broad groupings. And we see that when you look at those that are committed to private label and are highly collaborative, these are really, Bob, if I could characterize them as the customers with whom we're going to grow in the future, are they not? And I don't see AMP in the list.

Yes. I agree with that. So I think our challenge will be as consumer demand shifts to be certain that our products are in a position to be able to get to those consumers. And in other industries that I've been a part of, margin profiles and e-commerce, as an example, don't look that much different than they do in traditional channels. So we'll see how all that plays out over time. But it's a question of the value that you add into that channel. And so I think as e-commerce grows, there is an opportunity for us to play an important role there. I'd also just say, from my vantage point, this is a business division-by-division, category-by-category analysis, to say, what's our position in the category, what's or scale, where do we add value? When Sam talks about portfolio management, where do we see trends going over time? And how do we make certain that on a category-by-category basis we're well positioned to meet the evolving customer needs that we're talking about?

And the 2018 kind of phasing?

Yes. Let me take that one. As we've gone through this SKU analysis, we found that there are a number that are clearly not worth our time to move. And that's a piece of business that I said we'd be walking away from, roughly $60 million to $70 million in revenue, but basically that's AGM 0 or negative. So from an ongoing profitability, we're walking away from that, we're no worse off. We will be taking out these fairly sizable chunks of cost as we go through '18. So I think we will see material improvement as we go through '18.

Okay, good. So there's no -- it's Phase 1 for -- and 2018 is probably pretty similar on an average basis for that 300 basis points? Maybe it's 100 in 2018?

You know, we haven't calendarized it yet. We're in the early phases of our planning process for next year, and we've got to weigh up all those variables. So we'll have a better view on that as we get towards the tail end of the year.

And we will take on a question from Farha Aslam with Stephens, Inc.

Question around where that $60 million to $70 million of that SKU rationalization is coming from. Could you just give us some color on, which categories or business lines that are being rationalized?

Farha, we have taken the customer 2x2, the category 2x2, and others, and have delved into this and looked at where are those instances we started with where we have marginal SKUs and non-strategic customers. When we started that venture, we believed that we had 1,700 unique customers. We thought that because we had 13 different databases that we put together. We subsequently found out that there were 1,400, and we have plans going forward for 1,100 of that. At the same time, we've set a goal of, I believe, 25% for SKU rationalization. It extends over the totality of our businesses. Four of the 5 divisions are [effective] in very similar fashion to a greater extent. The one that as somewhat of an outlier is beverages, and it's largely because the businesses that we acquired were relatively new. The other matter I'll point out here is that we own 125 of our own brands. We think that a lot of the SKUs that can -- will be initially eliminated are ones that have quite small quantities, have high costs of conversion, with it comes to packaging and unique labels, and we will, and -- over the course of 2020, rollout a strategy for the brands that we own and provide offerings to small customers whose economics cannot justify manufacturer's expense of creating unique propositions, either in formulations and labels, and I think we'll find out that, that -- there'll be a substantial offset after a period of transition in that regard.

That's helpful. And just as a follow-up, you highlighted that you're exposed to different segments of the retail market. Could you just share with us kind of the portion of your business that's in that more competitive area that is contracting versus the portion of the business that is in the very attractive, high-growth kind of discounters and online? And kind of the growth rates and contraction of each of those?

Well, we can answer some of that in indirect ways. I don't -- if you go back to my beginnings in this business, we just always thought that 90%-plus of it was syndicated channels, and supermarkets were the lion's share of that. By the way, I was fascinated to see a study that came out earlier this week that indicated that the supermarket industry is now 4x -- has 4x the real estate that one would have thought based on the volumes. If you go to health, and there's a chart in the text that shows you the difference between better-for-you, national brand equivalent and hoping price points. And then lastly, we have gotten away from the segmentation that was channel-based. We track the top 100 customers closely, and I can tell you that the growth rates are the largest in retail where new formats have found a way to make themselves extraordinarily relevant to consumers. And as Bob had indicated, a lot of that is driving the unnecessary costs out of the system without it affecting the quality of the product that is on the shelf.

Maybe just a couple of extra points of clarification. I think in Phase 1, most of the revenue is going to come out of meals and condiments with the plan we've got ahead of us. So in a very short-term look, Sam's comments are obviously correct over the longer term. That'll be the micro. And then just to recap, the slide we had in the deck, I think it's Slide 13, that premium better-for-you natural organic now makes up about 19% of our business through the first half of the year, and it's growing at about -- we think, about 4% or 4.3% year-over-year. And we see much more stable margins in that segment than we do in the national brand equivalent and opening price point. So as -- I think, as Bob said earlier, this is going to continue to be an area of us to focus on and sort of move into the right place.

And we will take our next question from Joshua Levine with JPMorgan.

I guess, just a quick question, and then a larger one. Of the sales guidance cut from $6.4 billion to $6.6 billion, down to $6.2 billion to $6.3 billion, how much of that was just simply related to divesting the soup business? And how much of it's related to lower volumes and price mix?

Yes. Soup was $115 million of that.

Got it. And then a larger question. The 300 basis points. You've talked about this, right? About how the 300 basis points by 2020 is based on current price mix and volumes, right? And you talked about the intensifying competitive environment, you talked about plans to cut SKUs. So I assume you've done, obviously, some work around just sort of the margin sensitivity, should sales not come in as expected, right? And I know that there are questions around business mix and all of that, but like, can you help us think about sort of how the sales may come in? If let's -- how margins could come in if sales come in, let's say, 5% lower or 5% higher?

Yes. I think, Bob articulated actually earlier in maybe prepared and in response to some questions, the very tactical approach we're going to take to engaging more fruitfully in that bidding activity and finding a more sophisticated way to manage it rather than it just continuing to be relatively transactional. So I think the real opportunity for us is to do a better job of selling our proposition and our value-add and figuring out those more nuanced ways to deal with that pressure.

Josh, we're still bullish very much so on private label. We believe that when you look at the millennial's consumer that I described, and then the components of the program that Bob described, we're focused with laser intensity on providing products that -- whose intrinsic value is such that they will continue to appeal to the millennials, and we'll see a shift. It will no longer be the national brand equivalent that was the mainstay of this. And so -- I was so pleased, this quarter we extended the analysis of organic, premium and better-for-you products with bated breath, that it has been to 19.7% before including ConAgra Private Brands, and lo and behold, when we wrapped them up, we stayed in the 19% round. So this is a huge move across the totality of our company. Now it does require that we rearrange the asset base and the supply chain, but I'll take market relevance any day. Phase 2 of the challenge is of how do we supply that product to the other alternative. But let's be really clear here, we're -- it is our presumption, we're highly confident that private label products in our categories, particularly in better-for-you premium organic are still going to be -- give us plenty of runway for continued growth. And as we talked about in the past, when there is the opportunity for it, we'll take positive measures to expand investments in better-for-you products, particularly beverages, value-added snacks and then making sure that we've got e-commerce capability.

Got it. If I could just sort of ask one more. In thinking about sort of the long-term growth outlook, right? And I know part of Phase I is getting your -- or part of this plan is to get your utilization rates up 20 percentage points. I guess, the first is where is the utilization rate now? And then with that, right, because if private label is going to grow, or your -- the expectation, right, and the comments by a lot of your retail customers are that it's going to continue to grow, right? Then, I noticed you're also pulling back on your CapEx guidance, right? So I'm just wondering, how much also may that be a little bit because you're pulling back on some plans? Or is it -- that maybe you're pushing that into '18? Or simply you're just pulling back?

Yes, a couple of points. This is Matthew. I'd probably rather not tell you precisely what our utilization is for competitive reasons, but we do believe we've maintained enough flexibility to get more than our fair share of any growth that's here. So I wouldn't worry about this action constraining the upside. We have not cut it that fine on purpose. On the CapEx side, you know, the team here, I think, have done a tremendous job this year responding to the profit pressure we've been under. And frankly, a direct request to be more ruthless and efficient with what we're spending. And we haven't taken any capacity-related spending out. In fact, we are spending very selectively to increase capacity in certain areas, where we've got firm orders and clear line of sight. So we're not mortgaging the future for this year by any means, and still believe we have plenty of extra capacity going forward.

And we will take our next question from Jon Andersen with William Blair.

First question from me. I guess, I'm trying to get a little better sense for kind of the orientation of your customers right now. Obviously, there's a lot of change happening, a lot of transformation happening in food, grocery. Is your sense at this point that, whether it be a supermarket or an alternative channel customer, that they're really just focused on price right now, looking to lower costs across the board? Or are they also looking to do more private label, to do more volume in private label as a way to either differentiate their stores or improve profitability of the category overall?

Jon, this is Bob. I would say, we don't have a customer today who isn't saying that they want to grow their private-label portfolios within their business because they think that it drives increased consumer loyalty, and so that's a macro trend in our favor. I think, the opportunity there for us is to then work with them on a category-by-category basis to apply our asset base and capabilities to say where are they underpenetrated and where can we help them to grow. And so when we look to combat these margin pressures, that's part of the work that we'll do to help the retailer to grow the margin dollars that they're generating out of their private-label portfolio by bringing insights about where they're underpenetrated, how we can help them to grow, what the competitive dynamic looks like in each of these categories. And that there is nobody else in private label, I believe, who can bring that level of insight to the retailer and partner with them at senior levels to help them achieve those objectives.

So your sense is that retailers are in aggregate, are looking to do more private label, have more of a shelf presence in private label in the principal categories in which you compete, not maintain or harvest that?

Yes. That's our sense. I think retailers have to optimize their margin dollars by SKU and by category. And so the private labels got to offering a compelling value proposition to consumer, and it's got to generate margin dollars for the retailer. But that's the role of private label, and so it's helping the retailer to understand where they have gaps today and how to fill it in. Now that said, every customer and every industry wants lower costs, right? And so we've got to manage that part of our relationship to help lower the cost structure and serving them and then share a portion of that benefit back.

Okay. This has been asked a couple of different ways, but I'm going to take one more stab at the 2020 program. Is there -- maybe you help us with in terms of the phasing of the 300 basis points of margin improvement over -- during the course of that 3-year period? Clearly, if you're calling out 300 basis points by the end of 2020 as a run rate benefit, there's been some consideration of kind of the phasing in addition to just the absolute level of improvement? So anymore color there would be helpful.

This is Sam. I think, Jon, that you could expect that the rate of improvement will be something that is a steady and gradual, I don't know, quarter-by-quarter. But clearly, over the course of the 3 years, we'll be tackling larger projects than Phase I, and the benefits of each of these measures with regard to consolidations are being carefully looked at through the same capital allocation model that Matthew had talked about. And to the extent that we're putting greater investments in later than you would expect, that the benefits that would come out of that would be proportionally greater as well. And I think, the -- this is a company that has said we're going to [parade off] the business in every dimension, and then reconcentrate our efforts on where the future -- where is the business making money now, where is the future growth. And some of the greatest benefit will be coming from those jettising (sic) [jettisoning] those well-intentioned projects that, when you put them under the -- a scrutiny of daylight to show that they weren't worth working on to begin with, and that I think focusing on those 34 customers, where we believe all the growth is, and then continuing to look at the remainder of the 100, that are the backbone of the traditional industry. The benefits of concentrating there will -- are not in our plan, but they are obvious to me, that those will incur -- accrue as well.

And I'd squeeze one more in. Just on the capital allocation, your leverage ratio is now below 3.5x. Matthew, I think you mentioned in your prepared comments that you have more capital allocation flexibility at this point. What are your priorities for excess free cash? And have those changed at all in light of 2020 in kind of where you sit from a balance sheet perspective at present?

Yes. I think, we are really, really pleased with the debt paydowns since we made the transaction. And whilst the profits haven't quite been where we've hoped they've been in a couple of these periods, the cash generation is clearly a strong point. And I think in the past, that there was a history of farm levering up, acquiring, levering back down and growing this business, which is very clear what happened, and that was the exclusive focus. I think with the scale we're at now and our position in the industry, we've got optionality for a more balanced approach to capital allocation than just that. But not prepared to make any statements right now in terms of where we're headed.

And we would take our next question from Brett Hundley with The Vertical Group.

Just 2 questions from me. Matthew, just very quickly on commodities. You talked more about the near term, it seemed, and effects that you're seeing in your business and pricing that you're taking. But can I ask you a little bit longer term, maybe, 6 to 12 months out, when we look at the curves for soybean oil or various types of wheat that you guys use in your business, it looks like comps are kind of escalating higher. And so I just wanted to get a comment from you on what you're seeing longer term and how you're positioning your business?

Yes. That's a great question. And when you look at commodities, we track about 30 commodities on a weekly basis as a team. And when you look at August prices compared to Q2 of a year ago, I think 25 of those commodities are up and 5 are down. Hence, the dialogue that you've heard on the previous calls with Dennis and this call. When we look at Q2, or let's say, August over where we were in Q1, there's about 15 up and 15 down. So as we said, it's a little patchy. I think the thing that's emerging and it's probably been emerging in the last 60 days is what's happening in grains. Primarily, wheat and (inaudible), and really, really substantial increases in price, I think, around concerns on the harvest. So that is the area that we are hyper-focused on right now, and where we're going to need very, very early dialogue with our customers on those commodities to make sure we don't get exposed here. So that's really the prime area of focus in commodities.

I appreciate that. And then my last question, Bob, this may end [proving] for you. I wanted to revisit the SKU rationalization efforts that are underway and kind of tie that back to your manufacturing footprint. So there is -- it's very clear in my mind at least that you guys have a substantial volume opportunity in front of you, and a lot of that is related to a number of different customer types that are coming through on the radar for you. And, of course, all those different customer types have demands for differentiated products, as you talked about, Sam, as they try and create consumer allegiance in this new marketplace. And so I'm -- I guess, what I'm curious about is, is your SKU rationalization effort kind of at odds with the volume opportunity that's out there for you? And how do you manage that? I assume you're having conversations with your various customers, and I'm curious if you can only take your SKU set so low as a need to service this volume opportunity that's in front of you. And then, I guess, related to that, I'm curious if it acts as a governor on margin potential for your business, unless, of course, the retail set further consolidates?

Yes. Actually, we would say that the SKU rationalization is a key unlock for us to drive higher velocity in the business that will enable us to pursue these opportunities that you're talking about without adding a bunch of capital. And the reason for that is, back to Sam's point of the 2x2s, we're focused in the SKU rationalization on customers and SKUs that are low or noncontributing from a margin standpoint today. And the reason for that is they are, in many cases, small runs, and the changeovers associated with those runs drive a lot of expense. So to the extent we can migrate those customers to more common formulations, house brands, improve the efficiency, reduce the changeovers, that improves the velocity of the line. It creates additional capacity for us to take on these other opportunities that could prove to be very large volume opportunities over time. And we're making investments in emerging customers that we see as good opportunities over time. So we're not shortchanging those opportunities, but it's more a function of businesses that we've inherited over time that really won't be anything more than they are today, and that aren't contributing a lot to the overall performance of our company.

And we would take our next question from Akshay Jagdale with Jefferies.

Just again, along those lines on the topline, relative to your 2020 vision, what is your expectation for private label penetration for the industry? I mean, I know that's been the pitch for the industry for a while, but in food, private label penetration has been relatively flat for several years, and all the customers that are focused on private label have been focused on it for a while. So the reason I ask this is because I think you can be successful with your 2020 vision without private label penetration significantly improved in aggregate. And so if it does expand, maybe there could be upside to your [inner vision]. Is that a good way to think about it? That's my first question. Then I have a question on margin.

Akshay, it's good to hear you from again. The data that are in syndicated channels will next quarter -- those customers will be less than half of all of our business. And you can track, in those syndicated channels, that the food and beverage 102 -- general food and beverage has been flat for several years now at 17% and several tenths. What it doesn't show you is what's happening in other channels that are not syndicated, and that is where all of the growth is. And we talk of -- for years we've heard the industry talk e-commerce will be inconsequential because in its aggregate, it was only 2% of total food. That's 100% of all the growth. And you got the greater phenomena going on in brick-and-mortar that are not in syndicated markets, and that will be our strength. Those are the up-and-coming businesses that will want to differentiate themselves on the basis of product and service as well as cost, and as Bob had referred -- stated earlier, so it will be -- it will definitely be in different places, and we'll have to -- we'll find those nooks and crannies and build a business there as well. So the opportunity is still manifest from our perspective.

To clarify on the volume side, so what I'm really asking -- so what just said is, it's not very visible and it probably won't be visible to us in the measured channel, this whole private label penetration shift, right? But my question really is, in your 2020 plan, what is -- do you hold sales flat, despite a 25% cut in SKUs and all kinds of sort of rationalization? I mean, is that the plan, is flat volumes, despite a 25% cut? And if that is the plan, flattish volumes, then how does that sort of jive with private label penetration going up because if you have flat volumes and private label penetration is going to go up, that means total private label is like declining or something. You get my drift? All I'm -- I'm just trying to get some clarification on what we should expect on the topline by 2020, because if your top line is 25% less and margin's at 300 basis points higher, it's a very different outcome.

Yes. This is Matthew. Let me address that. In the prepared remarks, we talked about the contribution this program would make at constant volume price and mix, because it's so difficult to assess those dynamics out over a 3-year period. And, obviously, we're going to commit to measuring this very clearly and very visibly and be totally transparent with you. On the other side of it, we've maintained capacity to grow the business, as I mentioned. So there's no real short-term limit here on participating in that growth. And the SKU rationalization, to go back to Bob's comment, when you look at the enormously fragmented tail and the way we can lop off a lot of SKUs that have very lower volume per SKU and then go to one of our bigger customers that has declared plans to expand and [plonk a canful] of SKUs in there with a huge volume per SKU, I don't necessarily see those 2 in conflict. Does that help?

Yes. That's super helpful. And then, just on margins and sort of the achievability of the margin targets. We really appreciate the greater visibility, the color, the depth of the presentation. That's helpful. But maybe this is for Sam, but in light of what has transpired in the last 1.5 year, 2 years, since you've bought the Ralcorp business, your numbers have come down and they continue to come down and you, obviously, talked to us as to what happened there. But why should investors believe that we are at an inflection point such that the next couple quarters or even into '18, [winds] you faced that caused your numbers to be lower than what you had projected doesn't continue, right? Like I think most people believe that this big share opportunity, volume opportunity in private label and that you can, in fact, at some point get the margins higher. But my question really is, why now? Or should we wait for another 2 quarters, right? That's really what I'm trying to ask you. And we see all the numbers you've given, but you have a greater sense of that inflection from everything you look at and the people you've hired. So would love to get your perspective on that.

I could offer 2 things. I think, one is look at the transcript of this call and the materials that were presented, and then go back and look at the first one after we had made the most recent acquisitions. And I think, among other things, you'll see a far richer fabric, texture of information tie into the strategy and market conditions. And that speaks to the fact that we've learned a lot about this business that we did not know when we concluded due diligence, and we're applying that. I think that's one part of it, Akshay. I think the other matter here is while we have not exhibited a fireworks display here, make no doubt about this, 2020 is the single largest thing that has transpired in the manufacture of private label. I won't hazard a guess on the retailing side. This is the largest undertaking, and it is a bold and challenging thing that reflects that, we believe we know where the market is headed and that we've got to -- by staying the marketplace, rearrange our TreeHouse, and not to do that in small isolated ways but across the entire gamut in order to prepare us to be able to serve that market. Will it be a market that is the same as it was when it was -- a decade ago? Obviously not. I don't think over a period -- as markets get moved toward higher degrees of perfection, it gets -- margins become tougher and tougher to get for all aspects. But I think the key here is that the consumer will see that we've got a better proposition than national brands that have foregone innovation, foregone research and development, foregone adding benefits to their products and then communicating that with consumers, and we are more than willing, more than ready to provide them with a superior alternative.

And then Sam, if I could just add. That view of the market place. We also believe that we can run TreeHouse more efficiently and effectively based on the outline of TreeHouse 2020 today. And things that we've talked about, like the continuous improvement culture, the TreeHouse management operating system. One common way to measure productivity and performance across our plans, that's a big productivity unlock for us. The insights we have around data and analytics and margin by SKU that allow our managers to start managing their categories, to optimize margin by category, that's another big unlock for us. So much of the work that has been done here over time puts us in a place where we can now start to turn the dials on the business in a way that will drive margin expansion and a lot of places that will all add up. And I'm excited to be here, to be a part of all that in this next phase.

And just one last one, and thanks for taking the extra time. But Slide 3, really indicative of some of the major changes, which is people. So you've got -- Sam, if you could just comment. I think, you're done with the major hires on your team. So maybe just talk through the team as part of this transition, which to me it seems like, obviously, TreeHouse is going from sort of a roll-up story to being now a best-in-class or even better than that operator, right? And that's reflected in the people that you've hired, and then it looks like the processes and the data and the information that you guys have on a day-to-day basis is greatly enhanced too, which should help you, right? So I think to -- those 2 seem to be the biggest changes that have occurred, that will enable this unlock, but would love to get your perspective because, obviously, you've been the architect of it and you've seen -- you've been part of the whole journey. So am I seeing that correctly?

I think there -- I think that you are, if I could describe my understanding as follows that, when this business was started, we had only 1 vehicle for generating shareholder value, and that was the idea that we would create a consolidated portfolio that would provide advantages to the customers. And that the way to go get it was acquisition. We had absolutely no patience for organic growth and development at a time where we were simply trying to get enough mass to be noticed by our customers, and that strategy worked well for us for an extraordinary period of time. We found out that the market did not pay a premium for organic growth and food, given the nature of the category. And then we moved from the center of the store out to growth businesses and beverages and snacks, and with the ConAgra acquisition publicly-stated that we were shifting a mission there, making a pivot to becoming the industry leader whose responsibilities included leadership and financial performance outside of the acquisitions alone, and it can generate value on a more balanced approach. I think Matthew has articulated that on several occasions quite well, and that's why we're about this, and when you look at that list of all of the managers there, there's only one cowboy, and he's not on the list. We got skilled professional managers that know how to develop businesses and how to use modern tools and appeal to modern consumers and our customers. So they reflect the mission, and we are -- we have filled up the group and feel that -- I've never felt better about a team that we've been with.

And we will take our final question from Amit Sharma with BMO Capital Markets.

Just very quick questions. Matthew, the better-for-you and organic growth, you said, about mid-single-digit, 4.3%. That has slowed down a bunch from what you reported for the legacy business for first half '16. Is the slowdown just in the legacy business? Or is it just the function of slower growth in the Private Brand business? And I have one more quick one.

Yes. We haven't bifurcated those, but as Sam said, we are very pleased with the addition of that -- all of that product into a more complete suite of data, that our number wasn't diluted. Because I think our hypothesis was that the Private Brands penetration there was probably a bit lighter than the legacy business. So we are very glad about that. And I suspected some -- the lore of large numbers. This is a chunky business now, and it's probably growing faster than the rest, and we're happy with that. And we're going to continue strategically to drive it.

Got it. And then you mentioned several times, there is a bifurcation customers. Customers will get back what private label is [and other terms are] transactional. Can you provide us any clarity or any insight into -- for those customers who actually understand what private label is? And more strategic for them, what would be your margin structure with those customers?

There you have -- we look at the overall economics, what's the margin structure, what investments that we have to get there, what the growth prospects are and what you tend to find is that your better opportunities as a manufacturer are with retailers that are growing and succeeding, product categories that are growing and succeeding, and then ones where they can leverage the intellectual property that we have and create in conjunction with the customer a unique identity. And when you add those together it, there is a broad array -- a range from the top to the bottom of the overall economics for us, and that's why, I think as Bob clearly laid out, we're shifting the resources to go where those opportunities are. And I would expect that, that will improve their business and improve our business at the same time.

And I get that, Sam. Just to clarify on that quickly, are those customers already above your consolidated margin line? Or you expect them to get there over time?

Unlike a branded company that is only concentrated on the consumer and their margins customer by customer, differ only by trade allowances and what you get for that, we have a very broad array and are [through in the 2x2] committed to improving the margins in this business in their aggregate and apply that individually at a category level and individually at the customer level. But you have to do at the customer level, if you're going to do this well and sustain it is, as Bob said, form a partnership about how to build that business and benefit in an indirect way from the success of our customers.

And it appears there are no further questions at this time. Mr. Sam Reed, I'll like to turn the conference back to you for any additional or closing remarks, sir.

As the Summer draws to a close, Bob, Matthew and I look forward to seeing many of you this fall and winter, and we will provide periodic updates on the company and on our new bold venture, TreeHouse 2020. After all, we're TreeHouse, growing strong, standing tall.

And ladies and gentlemen, that does conclude today's conference. I'd like to thank everyone for their participation. You may now disconnect.