TreeHouse Foods Inc (THS) 2018 Q1 法說會逐字稿

Welcome to the TreeHouse Foods First Quarter 2018 Conference Call. This call is being recorded. At this time, I will turn the call over to TreeHouse Foods for the reading of the safe harbor statement.

Good morning. Before we get started, I'd like to point out that we have posted the accompanying slides for our call today on our website at treehousefoods.com/investor-relations.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words such as guidance, may, should, could, expects, seeks to, anticipates, plans, believes, estimates, approximately, nearly, intends, predicts, projects, potential, promises or continue or the negative of such terms and other comparable terminology. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause the company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievement expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31, 2017, and other filings with the SEC discuss some of the risk factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented during this conference call. The company expressly disclaims any obligation or undertaking to disseminate any updates, revisions to any forward-looking statement contained herein to reflect any change in expectations with regard thereto or any other change in events, conditions or circumstances on which any statement is based.

For the purpose of our discussion today, statements such as Private Brands or the former Private Brands business refer to the TreeHouse Private Brands business. Private label, on the other hand, refers to the customer and corporate brand industry.

I'd now like to turn the call over to the Chairman of TreeHouse Foods, Mr. Sam K. Reed.

Thank you, P.I. Good morning, everyone, and welcome back to our TreeHouse. Today, Matthew and I are delighted to be joined by Steve Oakland, our newly appointed CEO and President. Since we last spoke to you in February, our team has been hard at work on the construction of the TreeHouse of the future. Steve's arrival has brought a new sense of urgency and strategic focus to our transformative agenda.

Slide 4 lays out our comprehensive blueprint for TreeHouse 2020, which as announced last August, is designed to couple improved go-to-market effectiveness with supply chain efficiency in the digital age of private label. Our internal renovation started with simplification and the reduction of more than 25% of our SKUs. Having accomplished that, we are now in the process of optimizing our supply chain. Earlier this year, we announced the centralization of our manufacturing operations.

In tandem, we have also announced a major SG&A initiative, which you'll hear us refer to as Structure to Win. The remodeling of our leadership team is now in place and the subsequent support function design will be completed by midyear. Taken as a whole, these initiatives will return our TreeHouse to private-label fundamentals in order to deliver progress, productivity and prosperity in transitioning from the past to the future.

As we look to that future, I'd like to properly introduce our new CEO, Steve Oakland. Steve joined us just 6 weeks ago, following an intensive and comprehensive search by our Board of Directors. In November, our board identified a clear set of executive search guidelines for CEO candidates. Those criteria included food industry background, and importantly, deep experience addressing the issues which we as an organization face today, whether the complexity inherent in private label or the rapidly evolving retail landscape. The board also sought a skilled executive with a high-performance track record and someone who would bring successful experience in integrating large-scale businesses. The ideal candidate would be a proven leader who had driven organizational transformation.

Finally, the board sought someone who is excited about the challenges of TreeHouse, someone with demonstrated tenacity and fortitude and one who could also see the opportunities ahead and their strategic promise. Of the many candidates considered, Steve emerged as the one uniquely qualified and fully capable in all respects. Steve joins us following 3 decades of strategic growth at Smucker's. He has led virtually all of their businesses during that time and been key to much of their growth from a $200 million fruit spreads company to the $7 billion diversified enterprise that it is today. He's managed this extraordinary growth through integration of complex businesses, supply chain consolidation, hedging commodity volatility and strategic portfolio management.

As a company founder, I am so pleased that we have found an executive of Steve's caliber and character to lead our organization over the years to come. All of us, whether customers, suppliers, employees or shareholders, should know that Steve and his band of TreeHousers will ensure that, once again, we will be growing strong, standing tall. Steve?

Thank you, Sam, and good morning, everyone. Thank you for joining us. I'm familiar with many of you on the phone and I'm looking forward to getting reacquainted. I'd also like to welcome those who I've not yet met and let you know that I look forward to getting to know you as well.

The question I'm asked most often is why did I join TreeHouse? At some level, that starts with why private label? It's an understatement to say that it's a dynamic time in the packaged food industry. I've spent the last 35 years primarily in the branded food and beverage world. And while you'll never hear me disparage brands, I think that difficulties in our industry are well documented. And not just for brands, but for our customers as well. In the foreground of all of this is our quest to serve the evolving consumer, whether it's millennials, digital access or the changing eating patterns across all demographics. Combine this with the bifurcation of our industry coming from the growth of hard discounters and the emergence of e-commerce. So as I thought about the relationship between the customer and the consumer, it comes down to the retailer wanting to build loyalty and create value. And a key way to do this is with private label.

So the next question I'm asked is how my time in the industry could be relevant to TreeHouse and to private label. It is true that I've had limited direct exposure to private label. However, I've managed some of North America's largest brands in key categories like coffee, peanut butter and the baking aisle, highly competitive businesses that rely on commodity purchasing and operational excellence. I understand that as a category leader, in order to be successful, it's imperative that you help the retailer build the entire category. So I do have firsthand experience of what private label means to the customer, and I'm fortunate to already have relationships with many of our customers.

What's exciting to me personally is the opportunity to participate on the other side of those category dynamics at a time when private label is so relevant. Not only has the relevance of private label to the customer and the consumer never been greater, but there's still upside opportunity for private label and for TreeHouse. You only need to look at the average penetration of 31% across Western Europe to see that there's meaningful potential for private-label penetration in North America.

So why TreeHouse? I have to admit to you that I've admired Sam for many years for what he's been able to accomplish and build within our industry, first at Keebler, and now at TreeHouse. And as I considered the landscape and the best opportunities, TreeHouse quickly made it to the top of my list. Private label affords our customers the opportunity to differentiate themselves and to provide value to the consumer.

TreeHouse is a portfolio like no other. We have scale, and we have opportunities to be unique. We have premium, better-for-you, natural and organic offerings, which now represent over 21% of our sales. We are the private-label leader in 22 of our 32 categories, and we have clean label offerings in 26 categories. No other organization can say that.

As you're all aware, TreeHouse has faced a number of issues and challenges in the past several years, and we need to do things better. We must improve our execution to deliver results, and I come from a culture where execution is a core competency. We must be better operators in order to succeed. I have seen firsthand the benefits of a process-driven environment.

We must get our cost structure right. This is table stakes today, and I fully support the work around TreeHouse 2020 to deliver 300 basis points of operating margin improvement over the next 3 years; and Structure to Win to deliver $55 million in annual savings that's already well underway. In my first 6 weeks here, I've been getting up to speed on our businesses. I can assure you that we are taking a look at all elements of the portfolio and shining a bright light on everything we do. We will take the necessary steps to turn TreeHouse around, not only from a process, cost structure and organizational standpoint, but also in terms of restoring top line growth. I'm very conscious of the investor disappointment over the last couple of years and the urgency to restore confidence in the company and the management.

But I've been quite impressed, impressed with the organization, impressed with the people and impressed with what's been accomplished today. I'm joining TreeHouse at a time when we've made many hard decisions, but also at a time when we're designing, rewiring and implementing better process. The work ahead is not going to be easy, but we have a very solid team committed to getting it done. I had a chance 3 weeks ago to attend our annual leadership meeting, which included more than 80 members of our senior leadership team across the company. The energy level and dedication among this very talented group is extremely high, and I'm encouraged and proud to be part of it. While I'm still in the early days, my plan is to come back to you later this year with further thoughts around strategy, vision and value creation.

Let me close with highlights of the quarter on Slide 7, and then turn it over to Matthew to take you through the details. We delivered first quarter results toward the high end of our guidance range. Q1 sales were just under $1.5 billion, and our adjusted EPS was $0.18 despite a higher-than-expected tax rate in the quarter. Our TreeHouse 2020 efforts are well underway and we're starting to see operational improvements. And our Structure to Win efforts are ahead of plan. Importantly, we are reaffirming our 2018 adjusted EPS guidance of $2 to $2.40 a share.

Now, let me turn it over to Matthew, and I'll come back at the end with some closing comments.

Thank you, Steve, and good morning, everyone. Thanks for joining us today. Starting on Slide 9 with our consolidated Q1 financial results. As Steve mentioned, revenue of $1.48 billion came in at the top end of our guidance range of $1.4 billion to $1.5 billion. Adjusted EBIT margin of 2.8% was down 2.2 points compared to last year, in line with our expectations. Adjusted EPS of $0.18 came in above the midpoint of our $0.10 to $0.20 guidance range despite a $0.01 drag due to the higher-than-expected tax rate.

As you'll see on Slide 10, our reported revenue declined 3.6% year-over-year. Included in the first quarter of 2017 was about $43 million of Soup and Infant Feeding revenue, that's the business we sold last May; and roughly $40 million of prior year revenue related to SKUs that we have eliminated as part of our rationalization program. Excluding both of those items from 2017, we delivered revenue growth of 1.9% this quarter.

Baked Goods, Condiments and Snacks all delivered improvement over last year, driven by some early flow-through of pricing. Meals was down slightly, excluding Soup and Infant Feeding. And Beverages was impacted by the loss of some coffee business that we talked about last quarter as well as the Pecatonica, Illinois, strike. I'm pleased to report that we have recently resolved the 5-month strike, with both parties coming to a satisfactory agreement. Unfortunately, during that period, due to the use of high-cost temporary labor, production of our nondairy creamer came at a higher cost. We are looking forward to getting back to full production at Pecatonica. However, we will have some start-up costs associated with that process that I'll cover later.

On Slide 11, adjusted EPS in the first quarter declined $0.43 year-over-year, more than explained by the division DOI decline of $0.58, offset in part by lower SG&A.

Slide 12 lays out the DOI deterioration on a dollar-millions basis. Division DOI was $48 million below last year, and total division DOI margin of 8.9% was down 2.7 points. As you can see, we had about a $14 million decline in volume and mix. The biggest driver within this was absorption as a result of lower volume, followed by adverse mix and, in particular, Beverages due to the strike. And finally, there was some minor margin deterioration related to SKU rationalization.

You can also see we had a headwind of about $10 million due to pricing that had not yet caught up with commodities. The biggest chunk of the decline by far, however, was due to freight, which I'll cover in more detail in a minute.

With regard to the operations, I'd point out that if you exclude the impact of the Pecatonica strike in the quarter, our operations would have shown a positive or green bar, reflecting some of the progress we're making on our TreeHouse Management Operating Structure or TMOS.

Finally, other and SG&A was a small benefit of $3 million, primarily due to tighter expense control.

Going down a little further to the 5 divisions on Slide 13. You can see how they performed in comparison to last year. There are 2 things I'd like to call out on this slide. First, as you can see, freight is presenting headwinds for all of our businesses, although some are feeling the impact more than others, depending on local market conditions.

Secondly, you see that 2 of our divisions, Baked Goods and Beverages, showed the biggest year-over-year declines. Baked Goods faced disproportionately higher freight costs in the quarter compared to our other divisions due to a combination of locations, carriers and capacity. And as I mentioned earlier, Beverages was materially impacted by the Pecatonica strike, accounting for more than half of the division's deterioration in the quarter.

On Slide 14, we provided a bit more color on the freight headwinds. Everyone is talking about how tight the freight market is right now. Not only have freight costs continued to increase with no sign of short-term relief, but we've also seen our carrier acceptance rates decline about 25% over the last year. Declining acceptance rates force us into the spot market, so it is critical that we become the customer of choice for our carrier partners. One of the ways we manage this is by stabilizing our manufacturing and shipping schedules. So you can see why centralizing our manufacturing and locking down schedules will be critical elements of our improvements. We're also working with multiple carriers, diversifying our carrier mix and conducting a comprehensive RFP process.

Let me now direct you to Slide 15, where we've given you an update on our net debt position and working capital progress. We ended the quarter with $2.4 billion in net debt and improved our working capital by $141 million in comparison to the first quarter of 2017. Our focus on working capital is ongoing and as the year progresses, I think you'll see us make some nice headway on inventory and payables.

Turning to Slide 16. During the quarter, we put some swaps in place to reduce our future interest rate exposure. Every 100 basis point increase in LIBOR translates into roughly $5 million of additional interest expense to TreeHouse annually. We took our fixed-to-floating ratio from about 65-35 at the end of 2017 to 80-20 as a result. Given the rising rate environment, we believe that this is a prudent approach.

Slide 17 details our capital allocation priorities for 2018. Starting at the bottom of the pyramid and working our way up, we first outlined investment in the company in the form of CapEx. We also have some near-in investments around TreeHouse 2020 as well as severance for Structure to Win that are specific to 2018. As you know, we also have a 10b5 program in place to repurchase shares to the tune of $50 million annually. And finally, we'll delever.

On our February call, I said that the underlying cash flow of our business remains strong. Slide 18 gives you some color around our cash flow outlook. First, on CapEx. We believe that our original guidance of $215 million will now be closer to $200 million. As I look at how efficient we've become with our capital spending, we think the right target for CapEx on a longer-term basis is closer to 3% of sales.

In addition, in 2018, we are implementing a set of liquidity initiatives around our working capital to the tune of approximately $120 million to $140 million, which we believe are very important in a year when we need to fund our restructuring investment. We estimate that the impact of TreeHouse 2020 and Structure to Win investments will be between $165 million and $175 million this year.

As you move across the chart, we'll complete the $50 million in share repurchase in accordance with the 10b5 program. So when you peel back the onion, it's clear that the underlying free cash flow of this business is quite robust.

Moving next to Slide 19 to give you an update on TreeHouse 2020. Our announced action steps for 2018 are well underway, and in some cases, like the TMOS rollout, we are running slightly ahead of schedule. We've pushed back the timing of the Battle Creek closure to mid-2019 to provide short-term flexibility in the marketplace. As we continue our analysis around ongoing plant rationalization and optimization, we'll come back to you later in the year with any further announcements.

Let me spend a few minutes on TMOS, the rollout of our TreeHouse Management Operating Structure, as seen on Slide 20. We shared a bit of this with you back at our Investor Day in November, and we've now successfully completed full implementation of TMOS at 3 sites. The full implementation includes dedicated resources, roughly 4 to 5 months and more than 60 activities. We're working on an additional 10 sites where we expect to have full TMOS completed by the end of 2018. As you can imagine, this is an important initiative given the magnitude of the impact it can have on both running the operations more efficiently, and as I mentioned earlier, stabilizing our manufacturing and shipping schedules in order to improve our carrier acceptance rates and be the customer of choice in this very tight transportation market.

On the right-hand side of this chart is what we're calling TMOS [Lite]. Two modules: one centered around scheduling, and another around foundation building. So for the remainder of our plants that won't have full implementation of TMOS this year, TMOS Lite allows us to get into the plant with some basics and quickly unlock some of the issues that can drive up operational efficiency.

So how is this enhancing our business? You can see on Slide 21 some of the metrics we're tracking. And obviously, for competitive reasons, we can't give you the absolutes here, but rather a sense for magnitude of the improvements we are delivering. We fully implemented TMOS in 3 plants to date and the results are impressive. Our plant efficiency, or OEE, is up 15%. We have reduced our downtime by more than 50% and seen our line utilization improve in the mid-teens. Service levels are high, tracking above 98%. The benefits of TMOS are enormous and are good for all constituents: our customers, our employees and our investors.

Let me now take you through our guidance on Slides 22 through 25. We're maintaining our guidance for the year, but obviously there are moving parts. We're pleased with the progress we've made on pricing for input cost inflation. If you'll remember, commodities and pricing for commodities is something we started talking about with you last November. Our teams did a nice job getting after it and the remainder of that pricing will show up in Q2. No surprise to anyone that freight continues to present a headwind.

I didn't include a slide on our Structure to Win, but as Steve mentioned earlier, we are running ahead of plan and expect to exceed the $30 million savings target in 2018, with the ongoing run rate still expected to be about $55 million. TreeHouse 2020 is tracking at or slightly ahead, and we remain comfortable with our full year guidance range of $2 to $2.40.

For the second quarter, we're guiding to $1.3 billion to $1.4 billion in sales and $0.20 to $0.30 in adjusted earnings per share. As we compare our Q2 outlook to the prior year, volume and mix will be down due to the continued impact of SKU rationalization. And as we report each quarter, we'll call that out. Pricing will come close to covering freight and commodities. And we will have some operational drag as we get Pecatonica back up and running, estimated to impact EPS by $0.06 per share in Q2. On the positive side, we anticipate continued SG&A savings and benefits from amortization and tax.

We've summed everything up for you on Slide 26. So let me now turn it back over to Steve for his closing remarks. Steve?

Thank you, Matthew. Let me close with just a couple of thoughts before we open it to Q&A. First, I'm proud to say we delivered our first quarter and I'm looking forward to measuring our progress in the quarters to come. And while I said it earlier, I'll say it again: I've been impressed and encouraged by what I've seen at TreeHouse so far and with what the team has accomplished to date. But it's clear to me that there are some things we do well and there are some things that we do not. I understand that our investors have high expectations, just as I do. I also recognize the sense of urgency to turn this business around. We are evaluating everything we do closely. I don't have all the answers for you today, but changes will be required. My commitment to you is that we will come back to you in the near future and communicate our plans to deliver shareholder value and return this business to long-term sustainable growth.

Finally, let me close by saying I'm excited to be here, I'm proud to follow Sam, and I look forward to capturing the opportunity ahead. With that, let's open the call up to Q&A.

(Operator Instructions) And our first question will come from Chris Growe with Stifel.

And Steven, welcome aboard there.

Thanks.

Sure. So I just had a question for you to kind of kick it off. And as I think about the transition you're going through -- that the company is going through this year, as we the move to the second quarter, obviously, price realization to me seems to be very important as our key factor, not only to the earnings for the second quarter, but to get you -- to get that growth we need in the second half of the year. So I just want to understand the importance of that, how you think you're tracking towards that. There seems to be some good progress this quarter. And then also to understand TreeHouse 2020, the cost-saving programs as well and how that can be an influencing factor for the second half of the year.

Sure. Well, let me give you the macro because I've had a chance to, in the last few weeks, be with a couple of our largest customers, be with our sales organization and obviously, sit in on this. And Matthew, obviously, can give you the details better than I can at this point. But I can tell you that the conversation with the customer, the conversation with our sales organization around commodities has been very productive. And most of that -- virtually all of that is through. And I think you saw that in the charts that Matthew showed you. Freight's the bogey, right? And freight's the bogey that everybody's talking about. We're talking about it with the customer. So there's a lot of work in 2020 to position ourselves to mitigate the freight by being where we need to be, when we need to be there. So I think freight is probably the most complicated of the discussions we tried in this -- frankly, in this dialogue to give you a little transparency to that and to the work we're doing. And if you can imagine, in private label, given the number of cases that we ship, freight's a big deal for us. So I've been very impressed with that team to date. You asked about 2020. I tell you, 2020 really is positioning the business for the future. We will see benefits of it today and we will see benefits as we go through the rest of the quarter. Maybe I'll let Matthew comment on what he thinks is driven in the forecast. But really, 2020 positions this business to take advantage of the private label -- sort of our vision of private label as we go forward.

Yes. I'll touch on a couple of things here. I think the team did a really good job getting out ahead of this pricing issue. We knew how much commodities were coming at us. We knew there'd be a bit of lag and we were very transparent about that. And that's really a big driver for why Q1 is where it is. But we're really 90-plus percent of the way through that. We've got a couple of stragglers that we need to close out here. And a lot of that pricing is actually in market and being transacted as we speak. So as we go into Q2, we'll get a nice pickup quarter-over-quarter. I think on the freight side, we talked about this in a little bit more detail, maybe than some others, but it really comes down to us to carrier acceptance rates. In a very tight market, people will go where they can make the most money. And that's where the load is ready, they hook up, they get away, and that capacity is making the biggest return. And the interplay between TMOS, functionalizing manufacturing, centralizing that, having a centralized S&OP process and the stability we can bring to our plants and our shipping schedules, I think, will really pay off in mitigating what is really the biggest unanticipated headwind. We have the inflation piece of it covered. But that's the piece we're wrestling with. And I think we're on it. And then finally, we talked about TMOS. We're off to a very good start there. We're really encouraged by the metrics in the 3 plants that we've gone through. And I think as we showed you on Slide 25, TMOS, the plant closures and the SKU rationalization will build consistently as we go through the year. And then the final one, Structure to Win, we always said would be a Q2 contribution, growing in Q3. We got a little bit ahead on SG&A. We pulled ahead some of those actions to realize cost a little bit quicker, which is flowing through. And we said on the call, although we didn't quantify, that we think we'll beat the number we picked for 2018. So I think that's the texture and our view of how the year will unfold. It's very consistent with what we told you at the start of the year.

Okay. And just a quick question, if I could, to follow up on volume. As you're entering these pricing discussions and we're seeing some pricing come through, are you -- and obviously, what I'm looking at is ex the SKU rationalization, are the conditions for volume growth still -- or I should say for volume overall, deteriorating? Or are you seeing like more sort of elasticity to the pricing is what I'm trying to get to.

I think what we're seeing is you can't dodge these commodities. Everyone's is facing them. The margins in our business are slim, as you know. We don't have trade to toggle back and forth. So I think we're in an environment where most people are seeing the same kind of pressure. We have seen a number of customers, when confronted by what is a material amount of pricing, put us out a bit to check the market. But I think that's just sort of prudent reaction to what's really been the first across-the-board pricing for many years at this company and in the industry, I think.

And next, we will hear from David Driscoll with Citi Research.

And welcome, Steve. Nice to have you over here, getting to talk to you again. So the first question is directly to you, Steve. You've been at TreeHouse for just like a little bit more than a month. There's a guidance reiteration today. I think you said in your prepared script that you endorse the 2020 program. I'm just kind of curious, why do those things today? Just given such a short period of time at the company, why endorse the forecast? Why endorse 2020? And I feel like you've been kind of left a little bit of an out when you said that you don't have all the answers today and you'll have to come to us in the future. So can you kind of square the box for me? I mean, I'm trying to just be as clear as I can about what your thoughts are in the 2020 program and the guidance. Because it sounds like you endorse them, but then maybe left a little bit open. But I feel like after just a month on the job, maybe if I was in your shoes, I wouldn't have done -- I wouldn't have -- I would leave myself some outs. What are your thoughts?

Well, David, let me give you those. I think it's important that we understand what 2020 really is doing. 2020 positions this business for the strategy. I do think there's an opportunity for us to further refine what do we think the future of private label is going to be. And then configure the business to get us there, right? Having said that, cost structure is table stakes, right? We have to have a manufacturing platform and -- which is TMOS, which drives out inflation. We can take the customer commodities, right? The customer gets that and I've heard that loud and clear in my customer visits. But we can't take them other cost increases. And I think you all know, you've seen the cost numbers that have come out of the big CPG organizations for years. So I think a sophisticated, employee-led, continuous improvement effort is very mature in our industry. And it's new to us. So these are the kind of things that I think are table stakes regardless of our strategy. Now, are we in all the right businesses in all the right places? Maybe not. So we'll take a hard look at those. But I've got to get the denominator right so that we can put the numerator in a place -- as we start to understand the strategy, we can go after that numerator, right? We have to take advantage of the growth in the categories. So I don't see anything going on that would suggest it'll limit my strategic options.

That's really helpful. Matthew, one question for you. This is building on Growe's question. But the Q2 to Q3 change in earnings, it's really big. And can you just kind of hone us in on the 1, 2 or 3 points that really give you confidence that you can step earnings up as much as you otherwise have to do in order to meet the full year guidance? You gave a lot of commentary of 5, 6 different things that are going to happen. But I just don't have a sense of the numerics of them and how certain are some of these items. How good is your visibility on that second quarter to third quarter jump in earnings per share?

That's a good question. And I think the -- what underpins this is getting this pricing in place. And we should have -- as I said, there's a few stragglers here. And we're now in early May. That will undoubtedly be in, and we'll have a very, very solid, full Q3 of pricing. The other thing that really is going to help us here is this SG&A project. We've had some, quite frankly, some unplanned attrition as we came through the first half that got us ahead. We pulled ahead a set of these actions. But numerically, there's still a lot of work to do there and we said we'd get it done by midyear. So that's going to give a nice lift in Q3. And then as we go through TMOS, we talked about 3 plants in. Think about as the baseline that's now improved, we're now onto the next 3 and the next 3 and the next 3. But also, plant closures. As we lock those doors and that cost finally goes out, we're going to start harvesting that. We will also flush out, finally, the back end of the SKU rationalization. Because of the nature of a lot of these SKUs, they're slow runners. They're clogging up the warehouses. They're taking up a lot of square footage. So as we finally work that out of the tail of the system, we're going to be running less SKUs, higher runners, less changeovers. And we'll be in a much better position as we get into Q3.

And our next participant is Ken Goldman with JP Morgan.

And Steve, welcome as well from me.

Thanks, Ken.

I wanted to ask a little bit about what you're looking at with the strategic review. I know you -- it's just beginning and maybe not even -- maybe hasn't even begun yet. But the consensus view of people who I talked to in the industry is that TreeHouse does a lot of things well, but there are certain things it doesn't do well and certain customers it doesn't work as well with and certain categories it doesn't work as well with. And I'm just curious as you start this review, is it possible that you come out with a conclusion that TreeHouse, in order to grow, it needs to shrink first, right? That maybe you'll need to pull back from trying to be everything to everybody? Or is that not on the table as an option?

Well, Ken I would say everything's on the table as an option. I think you can't go through what we've been through and not look at yourself closely, right? So yes. Do we do everything well? Where does scale matter? Where does scale not matter? We talk about -- I talk about the progress. And the progress isn't evident. I get it, right? The progress isn't evident, but think about things like -- I'm going to say a sentence that you don't hear very often: successfully launching SAP, right? Say that really slowly. So this is a business that now has gone from 13 ERPs to 3, right? I mean, can you imagine this, right? We now have data to unlock all this inefficiency. We're going to have a manufacturing platform to bolt things onto. So it's really a different business or it will be in the near term. So as I sit with my team, I'm saying, okay, here's the TreeHouse of the future, right? Here's what it looks like. Do all the legacy businesses fit? Are they in the best hands? That's a question we have to ask. And then we have to ask ourselves, where do we see the opportunities in private label across the consumer and customer base and how do we position ourselves to get there? So I think your question is fair. I think it's one of the questions we're asking ourselves. But we're really saying, how do we leverage this new platform against what our view of the industry is? There's a pretty clear view -- or I don't know if it's clear, but there's a lot of views on where the branded universe is going. There's really no other TreeHouse comp, right? There's nobody else of our size and scale taking a look at the private label from the size and scale that we're looking at it from. So I think -- I do think the premise is there. I think the opportunity is there. And I think we'll get back to you. I get we need to get back to you soon. I mean, 6 weeks is reckless for me to do it now. But I think I would expect us to get back sooner rather than later.

And then can I ask a quick follow-up? You have a different tone on pricing than some of your branded peers out there. And you're talking about, if I heard you right, covering most of freight and commodity inflation with pricing. Do you think there's something structurally advantaged in being a private-label company today and the ability to take price in that your customers are your partners in a way that perhaps is not the case for branded? Or -- I'm just trying to get a sense of -- because I think the consensus view out there among investors is that it's harder to take price as a private-label company. And maybe that's not correct right now.

Ken, I would suggest that all of our customers are challenging price, right? The hard discount revolution, if you want to call it that, has put an emphasis on price point, right? And the transparency that e-commerce brings, brings that same pressure. But I would tell you, I think our margins are pretty clear to our customers. And I think there's very few retailers who don't have a public statement that they want private label to grow. So we're their largest vendor in many of these things. They understand that they're not being gouged. I mean, it's pretty clear that our margins are our margins. And so passing commodities on, I think, is a reasonable conversation. Passing our own inefficiency on is not a reasonable conversation. Hence the 2020 work and hence the Structure to Win work. So I think as we position ourselves so that all we have to ask the customer for is inflation and commodities, I think that's a reasonable conversation. We're going to have to give it back when there's deflation, so we won't margin up when there's deflation. But I would suggest as long as the conversation is there, as long as we're transparent with them, it may cause a few times for them to check the market, which they do, which is fine. But yes, I think they recognize that brands have more margin than they do and they recognize TreeHouse does not.

Yes, and just to add to that. I don't think these conversations were in any way easy. But I think in some cases, what they've unlocked is a joint desire to look at the value chain and drive waste out at the intersections where the customer may not realize things they do drive a bunch of cost into us. And I think this freight has really been the big unlock. The better demand signals we can get, the smoother those are, the whole carrier of -- the customer of choice thing kicks in, and we become attractive freight to carry at agreed rates. So I think it's unlocked quite a few opportunities here that we didn't have line of sight on before and should help with the partnership aspect.

Yes, long term.

And our next question will come from with Farha Aslam with Stephens Inc.

Congratulations, Steve.

Yes, thank you, Farha.

I have a question regarding the pace of RFPs. If, as you're passing along pricing, you're seeing an increase. And the strategy that TreeHouse has been implementing to manage the RFP process better, how's that going?

I -- this is Matthew. I would say if you look at the first quarter, the pace of bid activity was actually down a little. So not quite as frenetic as it's been in the past. As we mentioned on the last call, we hired a VP of margin management, who's a guy that comes out of the food space and has stood up margin management functions at other food companies in the past. And we're just in the process of realigning our internal organization under that individual and then looking at what we need from the outside to supplement, which I think will be very modest but very focused in terms of increasing that capability. And we're continuing with our bid committee review, where we get input from strategy, we get input from the business. We obviously get -- Steve and myself weigh in on these. And we like the way that process is working. So it's a very important part of what we're doing. And it's critical that we don't let the margins leak away from us.

That's helpful. And just a bigger-picture question, longer term. Steve, as you look at the business, do you think that TreeHouse is currently cost-advantaged versus its competitors in the categories in which it plays? And do you think 2020 can get it there? Or do we need more?

Well, Farha, that's an interesting question because we're in 32 different categories. So I would say we've got some categories where we do really well and we've got some categories where we don't. So that's part of the analysis that we're trying to do right now, is understand what categories do we think -- what categories are we there? 2020 has some places where we're -- we've consolidated operations, we're moving distribution centers around, those kinds of things, to better align them and to drive cost out to get them to where we think we need to be. We take a look at bids that we win, obviously, but we also take a really close look at bids that we're losing. And we understand what our margin structure is and what we think those bids are going at. And so that gives us a benchmark for where we have to be long term. And then I think the next phase that will be is to decide which ones of those categories do we think have the real future opportunity. And where do we invest and where do we not? Where do we harvest, where do we invest? All of those classic strategy questions. So I would say in some of our businesses, we're in great shape. And in some of those businesses, we have some work to do.

And our next question will come from Jonathan Feeney with Consumer Edge.

Welcome to the TreeHouse, Steve.

Thank you.

A question for you and a question for Matthew, please. What -- I appreciated your answer to Ken's question. We're all wondering about the criteria for portfolio reshaping. But could you take a step back and -- what's your impression of what -- and tell us what's your impression of what makes a great private-label business? Is it -- I mean, I think you have a very valuable perspective on that from your time at Smucker, so looking it from the enemy lines, if you will, if you can call brands that, on the other side of the table, anyway. And for Matthew, can you get into -- explain a little bit about the new timing for closing the Battle Creek facility? What are the criteria that goes into that? And what -- is there anything strategic implied in that new timing?

Well, let me try to do this with -- again, with a limited view of this. But it is kind of fun, I must say, to have all of you ask me questions from the other side of the desk, right, of why private label was attacking my old businesses. But I think if we look at -- I have to -- I say we first have to look at the category, right, the consumer in that category, right. How does the consumer decision tree work in that category? And then how important is that category to the customer? And remember, the customer is trying to drive loyalty, trying to drive trips, trying to drive all of those things. And private label is one way you do that, right? And so it really takes -- we have to take a look at that. And then have to take a look at what's the margin structure in the category and is there really room for private label to be successful. So we've got a great strategy team here, and that team -- that's the kind of work they do. And as -- and we have mapped categories that we like and categories that we don't. And those are the categories that we'll invest in. So, it really is that look. It's what's the decision tree in the category? What's the customer? How -- where's the customer's thoughts on it? And then does that all work from a consumer point of view? And size, of course, we need a certain size for this all to make sense. We -- at our scale, we can't do -- we can have variety, we can have organic, we can have natural, we can have all those things we talked about, but they need to be in material categories. Matthew?

Yes. On the Battle Creek, I wouldn't read too much into that. We're constantly looking at the economics of these things even after we make the decisions. And as demand ebbs and flows and the bid situation is fluid, we looked at the economics. And it just makes sense to keep this thing open a little bit longer than we originally planned, avoided us having to shed any business prematurely, and we think it's the right thing to do.

And yes, there are some things going back and forth in there. It saves packaging and changeovers and different things. So there is a pretty robust analysis on that, and this one just said push the timing back, then the return is better. So...

And next, we will hear from Amit Sharma with BMO Capital Markets.

Steve, welcome. Two quick questions for me. Matthew, any update on the consultants' review of the snacking business? I didn't hear much today. If you can provide us an update on that. And then Steve, fully appreciate the candor in terms of how everything is on the table in terms of looking at TreeHouse from a longer-term respective. Just want to get your perspective on -- look, some of these outcomes, as was alluded earlier, may require for you to become a smaller company, right? Do you get the sense that the board is fully onboard with that line of thinking if you do have to become smaller and exit certain businesses? Do you get the sense that you would have support at the board level for those decisions?

Maybe I'll take that first. My current Chairman is sitting next to me here, and I know that I have Sam's support. And I would tell you, one of the other reasons I took this job is because of the board. I had a chance to meet with each one of them individually. And I think both -- at all levels, but especially our directors, are very supportive of doing what's right for our shareholders, all of our constituents, right, building a better TreeHouse. And so I think they support doing -- they don't support doing it just to do it. They support going to better. And they're counting on me to bring that forward.

I think on the Snacks study, that work is coming to a close. It's given us some good insights, and it was really a postmortem into the drivers of that business over a really extended period of time. And I think we got some insights and transparency in a relatively opaque system. And thank goodness, one of the ones we've now got rid of, called simPRO, probably never heard of that before. But that was not a good system. Didn't really support running the business effectively. So now we're on SAP, top to bottom through Snacks, which is a great advantage. But we do have those insights over time, and we'll feed those into our strategic planning process and make sure we take account of all of that with them. It was a pretty useful endeavor.

And is that one of the categories, Matthew, where commodity pricing or inflation pricing is still lagging inflation or not?

No, no. It's -- we've got some elements to that, as we've talked about before. But we've got really robust pass-through models that are great for us, great for the customer. And we've got some areas where we still haven't got that in place. And that's one of the things when you look to the future, what does a good snack business look like? Some of the attributes, I think, in these very highly commodity-dependent categories is absolutely getting to that pass-through model. It's tough to make them work without it. So this study gave us leads in all of those areas where we think we need to get to, to make that viable over time.

And our next participant is Brett Hundley with The Vertical Group.

Steve, welcome. Nice to meet you over the phone. I have 2 questions. My first one is for Matthew. It's good to see pricing coming

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through across the portfolio. And really, you saw it broad-based pretty much, minus the Beverages segment. Regarding the latter, is it just not required as much given your raw materials there? Is it more competitive there? Is it delayed? Should we see that in Q2? I just wanted to get an update on that. And then my second question is for you, Steve. It goes back to your view of private label. And I completely understand your current view on private label being very advantaged. And I completely understand your wanting to sit down and think about the longer-term picture for private label. We've been kind of doing that ourselves when you think about decentralized exchanges and how private label fits within that story and things like that. So I understand the need to sit down and look at your products and customers, et cetera. Maybe another way to ask the question on private-label positioning right now relates to supply chain integration. I think that TreeHouse has been doing a lot of supply chain integration work, especially with strategic customers. As you sit down in your seat and then think about that, do you -- are you completely on board with going as far as possible on that supply chain integration? Do you think that you might need to pull back a little bit? Can you just talk a little bit about that and some of the benefits, risks that, that presents to you?

Do you want me to kick off with the Beverages pricing?

Sure.

I'd say there's 2 things going on there. Obviously, the Pecatonica strike weighed on our network in the first quarter and put some pressure on service levels. So I think in some areas, we could be a little bit delayed in pushing some pricing through there. But a piece of this is what we've talked about before, the single-serve beverage market is very competitive. Every bid there is a tough one, and that's where we see some of the price pressure. I think we saw that tail end of last year and talked about it, and we continue to see that. And that's really the dynamics. I think once we get Pecatonica up and running and that nondairy creamer system back where it needs to be, that's a tremendous category for us and one that is a hidden gem in our business here.

I think that is an important statement. We think of that Beverages business as all single-serve coffee beverages. It's not. There's a lot more in that business than that. And the Pecatonica overshadowed some of that. So I think we said in the prepared remarks, that was more than half of the decline. So we all know that single-serve coffee price compression that's going on. The good news is that category continues to grow, and we continue to see opportunity in that category. So that's one where we're positioning ourselves to be a much more effective national producer across the board on single-serve. But that business for us, that business unit is much more than that. And so we get this Pecatonica thing -- we're pleased that we've come to an agreement with our employees there, and we're looking forward to putting that behind us and getting them effectively back to work. And so I think that'll shed a much better light on that particular segment. With regard to the supply chain consolidation -- or the supply chain work, remember, you have to remember that as a private-label business, we manufacture the customer's brand, okay? And so we are their supply chain. So connecting ourselves together, where it makes sense, is very important. And I think we're all open to that dialogue. There are some places where it makes a lot of sense and some places where there's less. But Matthew mentioned it earlier in one of the Q&As, I think this has opened dialogue. The freight challenge has opened dialogue with the customer on the supply chain that will pay benefits in the future. So if you think about it from the standpoint that we are their supply chain on these items, then I think working together on supply chain is pretty obvious.

And our next question comes from Robert Moskow with Crédit Suisse.

Welcome, Steve.

Thank you, Rob.

Can I drill down a little bit more on the coffee category? Since you have so much experience on the branded side in coffee, what do you think are the -- I guess, the opportunities for a private-label supplier to get more distribution, either at the expense of what the brands are doing in single-serve or maybe just providing more category growth? Like -- you've been selling this category for a long time. How is the pitch different now that you're on this side?

Well, I think it's -- I still think it's a great category. And private label is not going to displace all the branded business. I mean, I think I said in my opening comments, I think the brands have a great position here. I would suggest what we do is very, very focused in coffee. It's private label, single-serve capsules. In that single-serve capsule business, the good news is we're starting to see that continue to grow, but we're seeing it grow across all demographics, across all channels. So I think there's opportunity for us to have reach in this, for us to make the hard discounter, for us to make the -- all levels, super premium. We do a great job with 100% Colombian coffee. So I think it's important that we look across the customer landscape, look where private label is important to that customer and where can we bring them, whether it's value or premium. I think we can do both, and we do, do both really well. The nice thing is because we're not really a roaster, we have access to all kinds of coffees, all kinds of varieties, all kinds of different offerings that we can bring the customer. So we can really take that single-serve beverage aisle for them with their private-label offering, we can take it wherever they want it to go, whether they want it to be value or where they want it to be premium. So we're going to hop on and ride that with them. And I think the brands provide us a great price umbrella. And again, we hope that KGM is successful in continuing to grow household penetration of those machines.

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

Matt, wanted to ask about the mention of some of the margin pressure in Beverages stemming from the shift to delivery from the customer pickup model. Can you speak to that in a bit more detail, maybe how widespread that is among customers, and then I guess, the extent to which other categories or segments can be vulnerable moving forward?

We talked about, I think in the tail end of last year, about having some distribution challenges around single-serve at a certain point. We're well beyond that now, so that's in the back of this. So can you just give me a little bit more detail on what you want me to answer there?

Yes. In the press release, in the Beverages section, there was a highlight about this shift in mix from customer pickup to delivery as one of the margin pressure points for the quarter.

I think that's across all of our businesses. There may be some in Beverages just because of our location there, where a lot of it comes out of. But I do think when freight's tight, it's not just tight for us. It's tight for the customer. And so the customer is challenging all of the -- obviously, our customers' freight departments are very savvy, and they're trying to decide with limited capacity what should they pick up, what should they drop off, what should they have delivered to them. So it does cause everybody to rethink their pickup rates, to rethink their pickup locations. It goes back to that collaborative effort with the customer. I'm not sure it's focused on single-serve beverage. We can -- we'll dig into that maybe and get back to you. But I think it's more across our business. Baking had a lot of freight hit it this quarter, and there's a lot of work going on to help the baking business with its freight. But I'm not sure that, that -- that's, I would say, more across our business. Matthew, is that fair?

Yes. We've seen a little bit in this tight market of customers wanting to move from customer pickup to delivered and effectively shift the problem to us. And that's part of the dialogue. That's part of bid management, and it's also part of being on top of your costs in that particular lane, in that region to make sure when you make that transition, you got the data, you priced it right and you don't have margin compression. Ultimately, if we get this right, that move between customer pickup and us ought to be margin-neutral over time.

So I guess, to build on that, on one hand, you have a pretty substantial SKU rationalization that's being undertaken right now, which, I guess, should reduce your need for freight going forward. But then on the other hand, you're also executing a pretty sizable capacity reduction. And I guess what we've seen across the industry is that there's a distribution penalty involved, where the manufacturing capacity comes off-line, logistics have to go and catch up. In the meantime, you're kind of caught out over your ski. So how do you think about that in balance and vulnerability in 2018 and moving forward? How fast can you adjust that on that shipping side?

One of the great things about TreeHouse 2020 is the team are looking at the whole supply chain. So as they're optimizing plants, they're also optimizing the warehouse footprint. And they're doing those both in isolation to take waste out, but also in conjunction so that as we take the capacity out on the manufacturing side, the warehousing is going with it. So this is a synchronous effort under one leader. And I think we avoid that risk.

Okay. And Matt, just one last one. Can you say what percent of your freight right now is on spot versus, I guess, maybe this time last year?

We said in the chart that there was about a 25% difference in carrier acceptance. Not all of that ends up in spot, but that will give you some indication.

Yes, much of it does, but not all of it.

Yes.

And our efforts really now are around RFPs that give us a backup, a secondary and a third qualified carrier around different lanes. So we hope to change that dramatically as we go into the back half of the year.

And our next question will come from Bill Chappell with SunTrust.

Wanted to go back just to pricing just to make sure I understand the dynamics. Can you just, kind of, give us an idea of how much of the pricing that's expected to go through in '18 has gone through maybe on a percentage basis and what's still left? And then also, just trying to understand a lot of the pricing, I know there's, kind of, 60-, 90-day lead times to get this through, but then we've had the incremental step-up, especially on freight. Are you adding on to those planned price increases for freight? Or is there another round that's going to be needed down the road for freight and other commodities as we move to the back half of the year and into '19?

Yes. Let me take a start there and then see if Steve wants to weigh in. But I would say over 90% of the planned freight that we had -- and I'll call it Q1 although we were out in market with some commodities before Christmas. But if you think of that first wave, which is the vast preponderance of everything we need, 90% of that is now -- 90-plus percent is now agreed to and beginning to be transacted. So that is behind us. As I said in the prepared remarks, we got a few stragglers here that we're closing out, and that's very close to being done. The piece that's left is there were a few commodities where, when you looked out in the forward market, it looked like there was inflation in the back half, but a lot of it was the forward-carry. So we've held off to see if the real cost pressure is there before we go to market. It's a relatively small amount of -- single-digits amount of pricing that we need to get. But that is out there as -- I'll call it midyear, early Q3, we got to make a decision based on latest market input. And then it really comes back to freight. And we're tackling this aggressively from an operational perspective and hope to mitigate as much as we can.

Yes. And I think it's important as we talk pricing in this business, Remember, many of these are contracts, they have different timing levels. So some of this you can do on that 60- or 90-day time frame and some of it you can't. And so it's pretty complex. I would suggest that the team has done a yeoman's job on this. This is one of the areas -- when I talk in the prepared scripts about how impressed I am with the organization, this is one of those places.

Got it. And then on the SKU rationalization, I don't know if you're going to give it by division, but can you maybe help us where the biggest delta is between growth and then organic growth excluding the SKU reduction? I'm just trying to understand where the biggest changes are coming and if that should continue?

Sure.

Yes. I'm just looking at a schedule here, make sure I read this right before -- in case I misquote you. But I think when you look, excluding SIF and SKU rat, we're seeing some nice growth in Baked Goods, we're seeing it in Condiments and we're seeing it in Snacks. I would say that the headwind a little bit is in Beverages, and we talked about that in terms of a fairly large piece of business we lost late last year. So three of...

There's some other non-coffee in that, too. There's -- the hangover effect of the Pecatonica [strike] hurt us on some volume as well. We couldn't fill a [large buy].

For sure.

And we will now move to Pablo Zuanic with SIG.

Two questions. I mean, one, obviously, (inaudible) today. People are, I suppose, happy with the target of 300 bps being reaffirmed. But one question I have, Matt, is Beverages continue to concern me in the sense that it's a high-margin business where margins were down 600 bps this quarter and they have been down for a while. So when you're giving this guidance of 300 bps in a very simplistic question, how should we think of Beverages? That's not a driver? It's one that we lag or it's one that's going to be an offset? And if you can also just give some context, because we keep talking about K-Cups is not everything in Beverages and so on. But just give us a rough idea about what's K-Cups within Beverages in terms of earnings, in terms of sales? And/or just compare margins within some of your products in Beverages, if you can do that, Matt. And the second one, it should be for Sam and for Steve. And again on K-Cups -- and maybe we shouldn't focus so much on single-serve, clarity would help of course. Sam, the way I think about it, over the last 4, 5 years, we heard different things. Green Mountain entered the category, was very aggressive with prices and just started to pull back supposedly, but now we hear from [KVP] that they are making a bigger push into private label. I understand they are -- they still have a small share of private label, but it's a big push area for them. They see that as a continued threat. The category may be growing and accelerating, but it seems that the pressure on private label single-serve coffee for you will increase, both in terms of losing business and in terms of profit margins. So if you can comment on that, Sam, in terms of historical perspective and maybe Steve on your views there. And the last one related to that, Steve, do you see an opportunity in coffee -- although TreeHouse is a private-label company, do you see an opportunity to co-pack for some of the branded guys, for say a Smucker's or a Starbucks?

Do you want me to start with the margin story?

Sure.

In the first quarter, we said that half of the profit deteriorations, if you think of it in terms of dollar-millions profit, was due to the Pecatonica strike. And it had impacts not just in manufacturing costs, but also in freight as we moved production around the network to some extent. And also, as Steve mentioned earlier, in shipped volume, was a little bit lower than we would have planned and the demand in the market. So think of half of that as pack related, and we're beyond that. And that's -- once we get through this Q2 ramp-up again, Q3 and beyond will be totally back to normal there. The other thing, and Steve made the point and I've been making it for a long while, Beverages is a lot more than just single-serve beverages. Directionally, the nondairy creamer business is broadly equal in size when I look at Q1. So it's a big business, and we have a great position in it. And the other thing that gets a little bit left behind, but is really on trend and really growing, is the Protenergy business, which is broth in aseptic packaging, and that's an absolute diamond that we just can't make enough of. So this division is really complex. It's a lot more than single-serve, and there's some stuff in there we absolutely love.

Pablo, it's Sam. Thank you for the question. I think with regard to single-serve Beverages, the big issues are these, that for us in private label, you'll see us move much like we have in other categories to where, I guess, Matthew indicated in his remarks, over 20% of our product line now is in premium and better-for-you products that are highly differentiated. I think Steve's experience will accelerate our ability to differentiate TreeHouse from other private labels here. And then lastly, the fact that the brand will invest in growing the category, that only is a good thing for all of private label. Steve?

Thanks, Sam. And with regard to the contract pack versus private label, we have a substantial -- it's not our primary business, but a substantial contract pack business today with a number -- we don't talk about individual customers, but we do that today. And we obviously look at what's the best use of our capacity, what's the best return. Obviously, I know a lot of those other folks. And so if that, in fact, is -- it fits for them and fits for us, it's an opportunity. If not, I do think there's an opportunity for us in single-serve beverage in the coffee pot business. And there's -- it's a dynamic category, and we all know that the margins were really high in it for everybody, and the margins have compressed. The good news is the consumer continues to vote with their wallet. We've got this new piece of equipment out over Christmas that was much lower priced. You have to think that will drive private label, the consumer who buys that lower-priced machine will buy private label K-Cups over time. And it's up to us to work with the retailer to give them a product that is priced right and is intriguing to the consumer. So that will be our plan.

And our next question will come from Scott Mushkin with Wolfe Research.

Want to get back to some of the comments on the second quarter. I think one of the headwinds is the soft volumes that you guys laid out there. I was wondering if you could get into a little bit more detail on why it seems like sequentially you get volume softening up a little bit. And then I had a broader question.

I think sequentially -- there's a lot of seasonality in our business. And there's more seasonality since the acquisition of the Private Brands. And I think a lot of it's around Baked Goods and the Christmas and pre-Christmas season. So we will see that Q4 being a big quarter and sequentially, you're going to see some difference. I think the thing we're really pleased with is once you take SIF out and this SKU rationalization, most of those SKUs that we got rid of were negligible, in large part, AGM. The underlying volume is actually up, consistent with private label. So we think we're participating in the growth of private label and are really pleased with that.

Is that your expectation for the second quarter, too, that ex the rat, you'll see volumes actually up? I took the softer volume comment to mean that you would actually see volume softening up.

We're going to have a similar SKU rat impact in the quarter. And we'll see how things shake out. But we feel pretty reasonable about the volume outlook and our projections for the balance of the year.

Yes. I would expect that to be similar to the first quarter. But I would encourage you to think about -- just do the math on taking out 25% of the complexity in your manufacturing organization. And we'll do a better job of serving the customer here. We'll have more stuff ready on time, ready to go. We can operate with much more efficiency. And if you take the bottom of that tail out, and those are all short run -- I mean, it's not that those weren't important in a moment in time. But given our size and scale today, I think that's going to unlock the opportunity for 2020.

So -- and I appreciate you letting this call go on a while. My more, I guess, strategic question for you guys is -- we cover a lot of the retailers. We're starting to see some of these guys report. They're not doing very well, I mean, collectively. Some of them are. Publix does well, but it's really hit and miss. And so looking at TreeHouse 2020, the idea that you can bring margins to your bottom line versus you may have to give it back to some of your partners, I guess, I'm trying to -- I'm struggling with that a little bit. A lot of your customers are just having a hard time. And will you need to help them with some of the activities you're doing and we won't see it, as shareholders, drop all to the TreeHouse bottom line?

I think we have to be sure that we give that customer -- our customer partner the right value, okay? Now I don't think we can price for our inefficiency, but I don't think we have to give our efficiency gains back. But we can price for commodities, but we can't price our inefficiency. We have to become the low-cost vendor given our size and scale in those categories. And I think we have a line of sight to do that. And as long as we're comfortable we're doing that, I think there's a great opportunity for us with those customers you mentioned. And you're right, it's a different set of dynamics, depending on the customer. One almost universal thing is they're looking for help, and they're looking for private label to help them build loyalty, drive trips and give value to the customer.

And our next question will come from Steven Strycula with UBS.

So 2 quick things to really run through. First would be on Matthew. For the second quarter revenue guidance, just wanted to understand the trajectory of what's causing the lumpiness in the second quarter revenues to be down. Is it the volume you're talking about in Beverage? Or there are a few other items that are hitting some of the different segments? That would be my first question.

I think the biggest thing is SKU rationalization. We're going to see a little bit of acceleration in that. As I mentioned, we've stopped manufacturing these SKUs, but there's a lot still in the warehouses. So we were selling through that still, to some extent, in Q1. And I think that sell-through is going to tail off pretty dramatically in Q2. And by the time we get to Q3, we'll be out of it. So there's probably a little acceleration in that.

Okay. And then on the free cash flow piece, thank you for putting the bridge out there. The liquidity initiatives that you highlight for $120 million to $140 million, what is driving that? Is it working capital pieces? And where do you get confidence right now with the retailers squeezing working capital out of the system? How you guys are able to make that be a cash flow positive for you guys?

Yes. It's entirely working capital. I think we've managed the CapEx very tightly last year. We're managing it tightly this year. We dropped it $15 million from our original guidance. But in the working capital space, we hadn't previously tapped into accounts receivable monetization like many competitors. We've got good programs in place around that. But the real opportunity here is to take inventory out of the system and also to work on the payable side of life. We've got our huge initiative there to, I would say, basically catch up with where a lot of the industry is on the accounts payables terms. So we're into both of those programs. We've got the purchasing and the treasury teams working together. And we're very, very confident in delivering that number.

Okay. And then my last question would be for -- just want to understand Steve's perspective on branded. Is this -- are you seeing any branded food manufacturers entering private-label production? Is that a longer-tailed risk in your view? We've seen it happen in household, personal care across select retailers. Do you see that playing out? I know it happens in spices with McCormick. They're pretty open about it. But are you seeing it across your portfolio as new entrants from branded guys?

No, not -- I wouldn't make that general statement. I think one thing that I've learned very quickly is the difference in margins and the way that these businesses are valued. And so in my previous life, I know we just felt like we couldn't support that kind of dilution. And so as long as we run our TreeHouse as tight as we can, I think we can keep that from happening. I mean, obviously, there'll always be the occasional one. And I think some of those household and personal care items, the margin structures are very different in those businesses than they are in a lot of things we do. So I don't think that we see that as a threat. I mean, it could happen occasionally. It could happen at one large customer or something like that, but I'm not sure we see that as a big threat.

And we will now hear from Akshay Jagdale with Jefferies.

Can you hear me?

Yes.

Welcome aboard, Steve. But I won't ask you a coffee question, at least not for now.

Well, that's the first time, Akshay, in the hundreds of times we've talked.

We'll have plenty of time for that, I think, so I'll leave the coffee questions for later. But I wanted to ask you about your decision to come over to TreeHouse. And a lot is being made, obviously, about your background being in brands versus this being a private-label business. And everything you've said today, very useful commentary, so we appreciate that. But it seems to point to, to me, a very basic thing, which is you've seen a tremendous amount of value created in branded food companies through cost management and margin improvements, right? And you were an architect -- I mean, you drove a lot of that at Smucker's. So there seems to be a huge opportunity here at TreeHouse. And on top of that, you've dealt with a lot of integration at Smucker's, and that's what is -- TreeHouse is a rollout story. So those 2 factors to me seem like the main primary reasons for why you've come over here and where the opportunity is. And then when you talk about all the dynamics that are in favor of private label, I mean, that's been the case for several years. But to really capture that, I feel like you need to fix the first 2 that I mentioned, and that's really the opportunity. So am I sort of understanding this properly? Is that a good way of summarizing where you think the value creation is going to happen? And I have a second follow-up.

Akshay, I think you've got it perfectly correct, right? We -- and remember, this was a roll-up of businesses, and it doubled in size in one transaction. When you double in size in a transaction and you buy a business that was integrated, it's a totally different organizational structure. You need SAP. You need all of these processes. You need these things. So the opportunity for me to come in, in a category that's growing, in the industry that I, frankly, have worked in for 35 years and I enjoy, and to step out of the turmoil of trying to figure out where the brands are going was a neat opportunity. We need to get the fundamentals that you mentioned right so that we can start to look at where are the future opportunities. Once we build process and once we fully implement SAP, we have a platform for bolt-on acquisition that drives synergy. So I think we also have a different proposition than the previous TreeHouse.

That's helpful. My follow-up to that is really on timing of the potential turnaround, right? I mean, TreeHouse -- obviously, there's a lot of capable people at TreeHouse. And from the outside looking in, which you were and now you're not, you have certain views of how the organization is structured. So there's really been no doubt that there's a cost takeout opportunity here, but it's just taking a while to turn that ship around. And you talked about the systems and the people. You've only been there 6 weeks, but the margin for error here is so little with the margins being so low. What can you -- I mean, what have you learned since you've been on the inside in terms of just the risk of how long it might take to turn this around?

Well, I think the time lines that we have -- I mean, when you talk about implementing an employee-driven, continuous improvement across 55 locations, right, and that's what we have today, that's a pretty big undertaking. And the fact that we're having the kind of momentum, I'm really encouraged by the momentum there. But we have a 3-year guide out on 2020. And so I think over those 3 years, we'll continue to improve our performance. We'll continue to hone our portfolio and our strategy. And then when we're done with that, we will have the cash flow to really invest in our strategy. So as we get to the end of that TreeHouse 2020 plan, we need to have everything lined up so that we can apply that cash flow against all of those great opportunities, against our shareholders, against executing our strategy and against driving value, right? So I think over the next couple of years, as this all unfolds, as it starts to come to market, we can start to invest in our business and in our strategy.

And for our final question, we will hear from Jon Andersen with William Blair.

Welcome, Steve.

Thank you. We'll end with the Chicago guy.

I appreciate it. I'm exhausted. I can't imagine how you're feeling at this point in the call. I'll keep it simple. Just one question for you. Historically, I think your Food Away From Home and Industrial and Export segments have been about 15% or 20% of the sales of the company. As you think about the business today and the transformation that's going on at TreeHouse, what role do those 2 businesses play as you look forward? Do they become smaller parts of the business, less emphasis, more emphasis at retail grocery? Or is there still a significant role for those elements in the portfolio?

Thank you. I think Food Away From Home and -- the opportunities are unique. They're not as broad-based. I think in the Away From Home business, we have to target ourselves. Sometimes, the margins are not as good. I mean, just historically, the margins are all over the place in that industry, at least from what I've seen so far. And so we just have to be targeted there. I think there is opportunity. We have capacity. We have scale and capabilities. But we just have to be very targeted. I think our core business will be supporting the retailer in private label. It doesn't mean we won't have a robust Away From Home business, but it probably won't -- I wouldn't see anything so far that would suggest it will become a significantly larger portion of our business.

And that does conclude our question-and-answer session for today. I'd like to turn the call back over to Mr. Steve Oakland for any additional or closing remarks.

Well, I'd like to thank you all. And those of you that were able to stay this whole time with us, thank you for your patience. And I personally want to thank the team at TreeHouse for all their hard work again and, quite frankly, for their warm welcome. I think the last 6 weeks has been great for me, and I look forward to the journey with all of them. And I look forward to, quite frankly, 3 months from now, doing this again. So thank you all. Have a great day.

And once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.