TreeHouse Foods, Inc. (THS) Earnings Call Transcript & Summary

Welcome back to Day 3 of presentations. I hope everybody is having a productive conference thus far. One administrative item, I've got a Bloomberg, sort of B unit, remote log-in situation that someone left over on the charging table there. So I'll hold on to this and if it's yours, just come see me and we'll get this back to you. So we're going to kick off our first presentation of the day with TreeHouse Foods. First, please join me in thanking TreeHouse for sponsoring the snack break this morning. Also want to just take a quick shout out to this year's CAGNY President, Andrew O'Connor, for hosting an epic afterglow last night. And Steve Oakland -- and CEO, Steve Oakland's more than 1 year tenure at Treehouse. We've seen clear sequential progress for the company in becoming a smaller, higher growth, leaner and less leveraged organization. 2020, should prove to be a key year in which TreeHouse expects to not only continue to make progress on margins and cash flow but to return the business back to top line growth as well. This is a key for investors to gain confidence that TreeHouse can take on the mantle of being a predictable asset through which to participate in the growing private label arena. With that, I'll turn it over to you, Steve, and thanks for being here.

Thank you, Andrew. Good morning, everyone. I just jumped by our forward-looking statement. I apologize. I think you all know this is available both on the deck and in the website, and we always encourage you to look at that as in reference to what we're going to discuss today. It will be myself and Bill Kelley, our CFO, presenting today. And I hope to leave you, really with 3 things before I turn it over to Bill to take you through the financial performance and our outlook. I hope to cover and share with you our thoughts on private label and where it fits within the consumer goods segments and how attractive it is, and we think that it is one of the most attractive segments in retail food. Also take you through TreeHouse and the progress we've made, and Andrew mentioned a couple of the metrics but talk a little bit about the effort we're making and how we're trying to become a much more focused and higher performance organization to take advantage of that opportunity in private label. And then we think there's a number of strong both demographic, economic and structural opportunities for private label going forward. So why we feel so good about the future. So I'll take you through those things. And then, like I say, Bill will wrap up with financials and an outlook. Okay. When I stood here a year ago, we would have said that there was a recession coming, right? That we were in the late cycle of all of this growth and private label, as you know, has historically done really well in those times. That may not, in fact, be the case now, right? There's mixed data on that. The interesting thing is, for the first time in private label cycles in the United States, despite the fact that we've had strong economy, we've had 5 sequential years of private label growth. So there seems to be a number of other factors, and I'll talk about those, and I think they are the next 2 blocks, which are demographics and the changing retail landscape that are giving us significant opportunity in private label. So if you step back for just a second and you think about the retailers across the country and in the simplest of segmentation, you think about the hard discounter, the value retailer today, the traditional supermarket, what's going on in club specialty and e-commerce, I think you'll see that private label plays a significantly different role across each one of these channels. But interestingly enough, it's important to every one of these channels. And so I'll speak a little bit more today about how we at TreeHouse are segmenting what we do to better provide those needs to those retailers, how do we help those individual retailers with different needs execute their strategy. I think the real message here is that, yes, margin is still important. Private label has always provided great gross margins but it's way more than just a margin game today with our retailers. We'll also talk a little bit about, yes, private label is growing and if -- this chart gives you the percentage of CPG scan sales by size of manufacturer in private label. So we all know that private label over the last 5 years or over the last several years has had great compounded growth rates. The other phenomena in grocery is the evolution of the niche and disruptor brands, we'll call them, the small disruptor brands. And I think you've heard me describe TreeHouse in the last 20 months or so in the most simplest of terms, as the supply chain for our customers' brands. And that's very true in private label. The interesting thing is, as the small and niche disruptor brands are growing, they're coming to Treehouse and they're becoming an increasing opportunity for us. And as they begin to grow and become material, they're looking for the capabilities that we have. So we'll talk a little bit about that, and we'll talk a little bit about our co-pack business as we go further. But we're seeing an opportunity in the 2 fastest-growing segments of retail today -- of food retail today. I think it's not surprising this chart shows us the difference in what's happening in traditional supermarkets and what's happening in other channels. It's not surprising that traditional retail is having a tough time against those channels. But the encouraging part about this chart is that private label growth in the alternative channels is actually significantly faster than that in traditional retail. And so similar to the chart I showed earlier, we see these other channels relying on private label for their strategy, and we see them requiring, quite frankly, very different things from both TreeHouse and from private label. These charts also help me set the stage for the strength of private label. The chart on the left talks about sort of by age group and by demographic the attractiveness of private label as the store brands influence where you shop. And the interesting thing is that if you look at millennials, according to this data, 69% of them and an increasing number of Gen Zs actually select the retailer they go to based on their private brands. And the chart on the right, basically looks across demographics and across all age groups and talks about the interest and different things for private label. And so I think if you -- the accumulation of all this data just continues to suggest to us that private label is in a very different place today. It's in a very different place across generations, it's in a very different place against demographics and a very different place across the retail base. Now I tell my team they only put this chart up because I'm on the Boomer line, right? And I'm going down. But as we know, the millennial this year became the largest demographic group from a purchasing power standpoint. And the projection is the Gen Z group will have the same effect, will become #2 in 2025. And the importance of this is that we know that millennials are some highest propensity consumers to consume private label. Well it appears that the Gen Z group is coming fast with the same trends. And so what this suggests to us is that -- and quite frankly, this is some of the data that our retail customers are looking at, and it makes it pretty clear that there's going to be some structural opportunities for organic growth going forward for private label. And if the retailer is going to win, they're going to have to address these 2 segments going forward. Now the question we ask and the question I would be asking if I were in your seat is, okay, so how fast should that grow? And how -- what should we expect from private label? What should we expect from TreeHouse? What are those opportunities? I think that's the hard question. And I think it's clear -- the data, this has been the teledata, the data would suggest an average of about 2.5% growth rate. But depending on the category, depending on the retailer, we see very different growth rates across that spectrum. So I think if we do well, we'll have accelerated growth. I think if we just do category average, we'll do pretty well. So we'll obviously be doing everything we can to get that to the top of that curve. So if we think about TreeHouse now, if we change gears and start to think about TreeHouse, you'll all remember that in 2018, we laid out an enterprise strategy that refocused the company on the customer. It focused on operational excellence and I think our challenges operationally were pretty well detailed in our customer service rates and our challenge with our retailer partners. It focused on commercial excellence, how do we rebuild those relationships. It focused on our portfolio and you've seen us do a number of things there from selling our snacks business to the sale that we're working on today on our cereal business. And then it focuses our people and talent. And I think we've been public with the new mission vision values in the TreeHouse way. So I'm really proud of the team and the amount of time that I've been here, it's been still, a little less than 2 years but the team has made great progress and there's a number of things listed on the slide, but we made great progress across all of these areas of our strategy. But fundamentally, we thought about it very sequentially and I think it was important. We focused on operational excellence first. When we felt like we stabilized the base of our business, we built a commercial team. At the same time, we focused our portfolio, we did some definition on who we are and where we thought we could win, and then we've worked on putting the right people and talent in those places to take advantage of that. This is a little different depiction of the same slide. And it sort of helps us understand that we built the base on customer service levels. We defined what we were going to sell and how we were going to do it with our -- with both our people and our portfolio. But I think it talks about how we now pivot to growth, and we're counting on our commercial organization to continue to build customer intimacy. And what we mean by that is really understand their strategy and how do we leverage the capabilities of TreeHouse across their strategy. And we're starting to understand, and I'm pleased to say that those -- the dialogue, and I'll speak to this a little bit more in a second, the dialogue has gone up a level. And we're starting to understand individual retailer strategies and those retailers that need value and those retailers that need experience. And we're building organizations within TreeHouse to be able to deliver both of those and leverage our capabilities against it. You've seen me use this slide a lot and you've probably heard me talking about customer service more than maybe some of you think is necessary, but I think the important note is that this has allowed -- this has been the facilitator to elevate the conversation with the customer. And if you think about the progress we've made here, how important private label has been and how -- quite frankly, how different the TreeHouse the customer sees today. Now we've talked about portfolio. You -- we've talked about rationalization, we've talked about SKU rationalization, we've talked about a lot of those things. We want to be sure that we understand that we are still, by far, the largest private label manufacturer as far as number of categories -- reach in the categories. We operate in 29 categories, we have leadership positions in 17 of those, and we have 27 of those categories where we offer premium, better-for-you and neutral alternatives. And as I get into the next couple of slides, you'll see why that is so important. And it's important because as we talk about the dialogue that we're having with the customer, and that -- when we talk about the challenges that the customer has, and I talked about this on the call, but I'll go a little bit deeper. If you think about a 16-ounce box of spaghetti on a shelf in the center of the grocery store, right? The retailer is trying to do a price point. The retailer is trying to make a statement, either against brand or against competition for price. That same retailer is having a conversation with a different group in our organization about cold brew coffee and a 16-ounce bottle and a cooler at the front of the store. And so if you think about how differently those 2 conversations are and the resources required to make both of those projects work, one has to drive value, one has to drive experience, okay? And so we think there's a unique opportunity for us to really bifurcate the resources we put against those different businesses. If you think about it on the value side, we'll talk in a minute about value engineering, we'll talk about the optimization of formulas, we'll talk about how we use supply chain and make-to-order, how we drive total cost to the retailer and how we drive cash to TreeHouse. And then on the premium side, how we leverage our R&D, our sensory, our innovation resources and how we make those things going much faster. The other piece of data that we have with our customer is, and this is not a surprise. I think if you think about -- across the store, you think about immediate consumption categories, and we'll have some of those for you at the break. But if you think about our bars business, our snacks business, all of those different businesses versus what's going on in the center of the grocery store, we see that in -- across the IRI database, we see 2.8% versus 1.3%. So that's not a surprise to anybody. When you look at the private label data, it's even more dramatic, if you see what's going on in immediate consumption categories versus center-of-the-store categories. So it's clear that we have -- we're blessed to have significant opportunities in both categories but we have about 1/3 of our portfolio in the immediate consumption categories. So there's an opportunity for us to accelerate growth on that side of our business. So what we thought we'd do is share a little bit of the data that we use internally and the way we look at the business internally. I think we showed the 2x2 on the left of the screen, a number of months ago when we were together, and we've gone through and mapped our categories across what's the role in our portfolio for each one of those categories, whether it be generate cash, change course, drive growth, et cetera. And you've seen us operate in the change course box, which were -- most of those were underperforming businesses that we decided to divest. But those efforts are primarily finished or virtually finished. So now we've started to take a look at where are each one of these categories in what we'll call the category life cycle, which is the chart on the right. Which one of these are emerging or growing, which one of these are maturing and which one of these are in the very mature, the declining stage of their category life spans? And then what resources need to be there, and what opportunities are there across the retail space? And so I've got examples, further examples of each one of these and what we're going to do. But we really want each one of these businesses to fulfill both its role for the retailer and its role for TreeHouse. So what has to happen differently across those businesses? So I spoke to this on our last earnings call, you think about the cracker business. It's a stable center store business, you can call it snacking, it depends on the format. It's growing about 1% a year. But within that category, we've got some really interesting subsegments of this category that are growing nicely and it's not a surprise. I wouldn't think to any of you, given how TreeHouse was formed with the ConAgra private brand/Ralcorp acquisition, that TreeHouse is, I would say overweighted to a lot of the old mature center store grocery categories. And we weren't participating in things like snackers, we weren't participating in sandwich crackers and those things. So the package on the right, out of respect for our partners, that's one of our control brands but that's an example of a product that's being launched as we speak right now with a number of private label brands to provide small, independent on-the-go packs and portable crackers. And I'll show it to you and a couple of other things. So I think as we take the legacy TreeHouse business, and we evolve it to the categories of the future, you'll see much more of this kind of work from us. We're doing the same thing in our sandwich cream cookie business. We've got -- we've launched multiple on-the-go packs, it can be put in lunch boxes and on-the-go and snacks. We've also talked a lot about ready-to-drink beverage in this launch. And it's a great category, driven by our friends at Starbucks and Dunkin' and there's a lot of innovation across the category. Interestingly enough, there's only 1.4% private label today in that. So we think it's a really nice opportunity. That business is off to a nice little start. We're currently participating with a couple of nice private label customers. And I think you'll see us start to be a partner to some of the little disruptive brands as we go forward as well. So we think this is another example of the ready-to-consume categories that can provide a tremendous amount of growth for us. But given the fact that 2/3 of our business is in the center-of-the-store categories, I thought it would be helpful if we started to look at how do we optimize those and where do we find growth and partners and things for those. One of those opportunities is with co-manufacturing with a lot of the new niche brands that are starting up and really disrupting some of the center-of-the-store traditional categories. We've talked a lot about growth that we've projected in 2020, the sequence of that, how it tends to be back half oriented. One of the reasons for that is some of the contracts that we show you here. So think about gluten-free, think about high-protein, think about alternative flours, alternative ingredients, think about longer-term contracts, our partners, we have opportunities for pass-through agreements. We have very different contractual arrangements in traditional private label. So as we think about the center-of-the-store and some of these categories like baked goods, beverages, meal solutions, there's a number of opportunities for us to help those folks grow and a number of opportunities for us to bring scale to these smaller businesses. The other concept that we introduced on our earnings call was made to order. So I thought I'd bring it to life here today. As we also think about how -- if we think 2/3 of our business is in that center-of-the-store, how do we bring the customer value? How do we help them and TreeHouse, fund their growth initiatives? So currently, our refrigerated dough business is about 80% make-to-order. In our make-to-order businesses, we have higher customer fill rates, we have much lower inventories. We virtually only hold raw material inventories. We have very little spoils, we have very little damage or very little other cost in that business because there's very little inventory in it. A business like pasta has very similar characteristics. We make pasta with bulk ingredients, we have a very quick cycle time in our facilities. The channels will be working with a customer to align order lead times, to align the transition times for this. But we think there's an opportunity to take businesses like pasta, which today are about 5% or less, made-to-order, to significantly higher percentages of made-to-order. The impact of that is lower inventory, lower waste and quite frankly, better value for the retailer and better value for TreeHouse. It allows us to generate significantly more cash in these businesses and allows us to provide the customer exactly what they need, which is better value in the center of the grocery store. So I think you'll hear us talk about that. You'll hear us talk about progress on these different things. But we think it's an opportunity for us to really run TreeHouse differently as we go forward. The other concept I mentioned was value engineering. And we've got some great opportunities now that we again have a dialogue with a customer that's at a different level. And so we thought we'd give just a couple of examples of it. As you can imagine, the salsa business has formulas that have all kinds of ingredients from peppers and onions and tomatoes and all these different things. We have a team now that's working with each one of our customers to better align with exactly what they dream or what they view as quality, what they view as unique, what they view as the right price point. And we're able to design salsa products -- this is just one example, but we're able to design salsa products that are as good as or better than anything on the market today and provide significantly different values. And so our teams are working across those products. When we look at something as simple as pickles, the legacy TreeHouse business has over 500 brines for pickles. We've got over 100 dill brines for pickles. So the opportunity for us to work with customers, to consolidate those choices, to bring late-stage innovation to them, to bring a lot of simplicity to this is dramatic. So I guess, what I would say is, we're about to roll TreeHouse 2020 off. The next real organizational opportunity across that center of the grocery store is to bring those value businesses to make-to-order and to bring them to value engineering and to really help the retailer understand the opportunities that there are to drive cost out of their business and continue to delight their consumer. So what does this mean? It really means a set of different activities as we start to bifurcate these categories within TreeHouse. For the commercial organization, the immediate consumption, it's a place where we're going to focus on top line growth. It's a place where we're going to go with customers that have that opportunity. It's a place where we will ramp up innovation, and we'll be on consumer trend. Conversely, with a customer, we're going to be focusing on share growth, how we take pieces of business back that we've lost. How do we drive cash flow out of this business? How do we simplify our trade terms? How do we simplify the product portfolio? And then how do we work with the customer to drive value engineering? When it comes to our operations team and our supply chain team, if we look at immediate consumption, you're thinking about investing in those high growth categories, things like beverage, things like snacking, things like single-serve packaging, all of that stuff. You'll see a number of investments on the capital side and on the R&D side. We're tooling up our innovation organization and our commercialization organization to go significantly faster, how do we align those businesses to the small and emerging disruptive niche brands. On the operations side in the center-of-the-store, it's really about Lean. It's about productivity. It's about continuous improvement. How do we become more made-to-order? I think in the consolidation of a number of these companies, we've taken a concept out of the business, and we've driven too many handlings in this product. We handled the product too many times. We brought too much complexity to it. So -- and then how do we use contract manufacturing across that business, really to fill capacity. How do we drive cost out? So before I turn it over to Bill, I think I'd like to go back to what I started with. The private label, and in some cases niche brands are the most attractive places in food today that we've made a lot of progress across TreeHouse in a relatively short period of time, and that we're making even more progress as we take our strategy to the next level as we pivot to taking advantage of the opportunity. And I think the future indicators are even stronger than what we've seen before. So with that, I'll turn it over to Bill to take you through our results and our outlook. Thank you.

Thank you, Steve, and good morning, everyone. I'm very pleased to be here with you and present to CAGNY in my very first time. I've been at TreeHouse for just under 4 months. In the past several months -- or I'm sorry, just over 4 years -- under 4 years. In the past several months, as my responsibilities has grown so as my determination to deliver on our financial commitments. I truly appreciate the opportunity we have ahead and I'm excited for our future. Let me focus you a bit on 2019. As Steve mentioned, we made significant progress over the past year and I'm proud of what our teams have accomplished. We expanded EBIT by nearly 10% and grew EBIT margin by over 90 basis points. Our performance is very credible in food and beverage as EPS growth of 21% versus prior year was pretty strong. We are incredibly focused on growing our top line. As you can see, our result in 2019 was down 6.5%. With all the other things that Steve mentioned, our #1 focus is growing the top line of our business. This is a look at our strategic goals over the time frame of 2020 to 2022, and we expect to grow our business. Our target organic revenue growth is 1% to 2%, and that's really driven by our focus on commercial excellence. A strong top line will drive an EPS greater than or equal to 10% growth on the bottom. And again, the leverage we get out of our operational capability shows up in our P&L. We expect our strong cash flow to continue and over this time frame, we will generate cash flow of up to over $300 million. Let me be a bit more specific about 2020 in our guidance for this year. First, let me start with our top line. We are projecting revenue of $4.1 billion to $4.4 billion. As Steve mentioned, 2020 will be a tale of two halves for TreeHouse. Q1 and Q2 top line will be down 3% to 5%, which includes a headwind of $175 million to $200 million in loss carryover business and pricing concessions, items that incurred in 2019 that will wrap into 2020. Our second half is when we really expect to grow. We expect our top line to be up 2% to 3% as we have secured new business and commercialization has begun. Just as a reminder, in private label it takes at least 6 months to secure new business and fully implement it and commercialize it for our customers. Our adjusted EBITDA of $480 million to $510 million represents the leverage in our P&L as we continue to get the top line growth. Our EPS guidance of $2.40 to $2.65 represents 6% growth at the midpoint. This slide breaks out our 2020 projection top line performance and the cadence that I just described. Let me say a few things about our financial planning and our forecasting. We now have greater visibility with our IBP process or Integrated Business Planning than we've ever had before. The process is iterative and we get better during each cycle. It's not lost on me that in Q4, we did have some challenges, particularly in our Beverage segment. Our beverages team is on top of those issues and as a category, Beverages represents a tremendous growth opportunity for the company. When you think about cash flow in 2020, we will be generating cash in the $250 million to $300 million range in 2020. This includes a $25 million item that we expensed in 2019 for a legal settlement that we'll pay in cash in 2020. CapEx is $135 million. I want your takeaway on CapEx to be that we will spend about 3% of our net sales revenue on CapEx over the long term. Working capital continues to generate cash for us. We've made great strides, particularly in finished goods inventory. We do have an opportunity and a strong focus on structural working capital reduction that will really help link IBP to making sure that working capital continues to generate cash. As Steve mentioned, our cash restructuring caps down quite a bit in 2020 as the TreeHouse 2020 program that was the transformation of our operations continues to wrap up. Let me leave you with a few key takeaways. As Steve said, at TreeHouse we believe in private label. It's one of the most attractive segments in food retail and is completely supported by the growth that's generated by the shopping habits of millennials and Gen Z shoppers. Retailers recognize the opportunity to drive traffic and to generate customer loyalty. The portfolio of TreeHouse is unmatched. Our ability to improve our performance is evidenced by what we've done with -- continue to improve our service and generate better-than-expected service levels. And then finally, we will deliver our 2020 guidance. We continue to be confident about our future and our 2020 guidance is reflective of that. I'm going to turn it over to PI here for our Q&A. But just as a reminder, we do sponsor the break this morning, and we have some nice TreeHouse products for you to try. If you like sweet and savory, you have to try the filled pretzels. Those are my favorite. Thank you.

Actually two questions, Steve. Of the 17 leadership positions you have, how many of those do you feel like you have true competitive advantages in those categories? Were those leadership positions translate into some kind of pricing power or real leverage with the retailer? Is it all of them? Or just some of them? And then just a clarification on the co-man slide, I think it said that co-man is less than 10% of your total sales. But then there were a bunch of projects that seem to be -- we see that those are incremental growth projects for 2020. And can you give us a sense of how much volume, if so, that -- and growth that those represent?

Sure. Well, I would make a couple of comments. We are leaders in a number of categories, as you saw on that slide. And I would have said that our operating performance didn't allow us to take advantage of that up to this point. And so I would suggest that today, that's changed dramatically. And I can't tell you if it's 17 or 18 or whatever the exact number is or 22, the exact number, but I would suggest that in the majority of those today, the customer has so much better confidence that we will deliver, that we can now have those conversations and that we have -- pricing power is an awkward one for me to say. But I would suggest that we have the opportunity to do more for the customer to be their preferred vendor, right? In the majority of those. It is not that long ago when that was not the case and it wasn't the case because of our size, it was because -- it was the case because of our performance. I talk a lot about service and I can't say enough that the change in service has changed the dialogue, has repositioned those businesses to be what you're asking and allowed us to present growth in the back half of next year. As far as co-man, yes, and many of those co-man opportunities are opportunities that we know, they tend to take a little longer because they have shelf life testing, they have consumer testing, panel testing, all those kind of stuff. And that's where those were in the back half of next year and why we think we can -- many of those are -- there's a couple that are in the first half of this year, but many of those are in the back half of next year, if you think of that slide and why we can guide so comfortably to growth in the back half.

So is it not possible to give us a sense of how much volume that those represent, those 4 projects? Or...

Yes, I don't know that we can guide to that on an individual project basis, sorry. Okay.

Back here to Andrew, please.

Steve, you talked a little bit about how this is the first year where TreeHouse has gone through a more significant sort of bottoms-up process around forecasting versus what had been the top-down process before. Can you get into a little bit more detail around what that means? How it might have been done before versus now? And why that again leads to some of the increased visibility that you're looking for around this pivot to top line growth in the back half of the year?

Sure. You know what I'll do, I'll give you just the fundamental structural things and I'll ask Bill to talk about the process, things that have happened. Bill's been involved in 4 of the processes. I've only been in -- this is my second one. So when I arrived, the -- my direct reports, the CEO's director reports had 4 different business cards. Okay? Lived in different cities. I direct reports in St. Louis and in Manawa, Wisconsin. So to say we were independent or fragmented, I think, was an understatement, right? So today, my direct reports are TreeHouse employees, right? My direct reports are in Oak Brook for the most part, right? We -- well, virtually all of them are in Oak Brook. And so we have consolidated the organization so that we now come to work every day, and we come to plan everyday as one TreeHouse. So it is that fundamental. And that has allowed us, quite frankly, there's a couple of things that have allowed us to build the process that Bill will talk about, the systems integration. We rolled out 100% order to cash on SAP. We've done -- we've shut down a number of ERP systems, we've consolidated our manufacturing and our distribution systems dramatically. So that has allowed tremendous visibility. But it's also allowed us to build one shared service organization, one financial services organization versus fragmented organizations, one sales organization. So those structural elements have really allowed us to bring the sophistication to business planning that you would expect from a company our size. It was impossible to do when we were so fragmented. So, Bill?

Yes, the other part, I guess, I can add to build on Steve's comments, in terms of the structure of the company as well, now that we have a commercial organization, Dean and his team has done a fantastic job with building customer account-specific plans and being candid, that's not something we had in the past. So as you can imagine, in private label, the levers of trade and distribution and in-store displays and promotion activities are all controlled by our customers. Our ability to understand that clearly, and put that into our financial forecast is a tremendous opportunity for us. I talked a bit about this IBP process or innovative business planning. Our ability to have a long-term view and to actually look at the fourth quarter as we sit here now for next year and understand what's confirmed, what's secured and what do we have to go chase. It's just different than what we've had in the past. I think as the organization has evolved, our ability to get away from just top-down trend-based planning and into bottoms-up rigorous, very specific account action plans, it is just very different. Steve mentioned the systems, they give us a great capability, but so does our organizational structure and so does our leadership in our commercial organization.

Can we go half the aisle there to Chris Growe, please?

Steve, the one piece of -- that's I think, caused the discount multiple that persists for TreeHouse and some successes that investors have had, has been the volatility in the business. And so as I see a slide on increasing the amount of co-manufacturing activity, I immediately think volatility. Maybe I shouldn't think that, but I'm curious on your thoughts on that. The other side of having capacity available for that would be, there could be capacity reduction, actually could be beneficial to your cost. And then I'm also curious and related to all this, like how -- if you look at the new business wins, are you counting within that co-manufacturing activity? Or are those truly new contracts with large retailers, different from co-manufacturing?

Sure. I think we will pivot to growth without co-manufacturing. So our data would suggest that's the case. I wanted to talk a little bit about -- and maybe it wasn't overt enough, as we look at co-manufacturing, we're looking at partners who need -- a lot of this new food industry. If you think about what's happening in these new emerging and disruptive businesses, they do not have supply chains at all. And when they were tiny, they were too small. They were all -- I would argue they are all. We'll have some products that break today where you can try some of these things that we're doing. But I think they've grown up, quite frankly. Some of these businesses are pretty good-sized businesses. I can't imagine an organization that manages complexity better than TreeHouse, right? I mean, that's what we do, right? We make 100 versions of the same thing every day. So co-man for us, I would argue, isn't complex and quite frankly, many of the agreements, because these companies are growing so fast, they're looking for real long-term partnerships. They have pass-through cost mechanisms, which we don't have in many private label contracts. Many of them are multiyear in length and many of them have very different trajectories of growth. So I think co-man can be all those things you were concerned about, and it can also be very stable. It can also be really important. It will be different in our businesses, in our growth categories, we'll be very careful where we allow those assets to go because we can be selective. In some of the center store stuff, where the categories are declining, filling that capacity is really important. So it's going to fill 2 very different roles in our portfolio. But the work we're doing today, we think, is really helping us to be part of that disruption, part of that, to be the supply chain. If you think about it, it's really private label and niche brands. They're changing food space. If we can be part of both of those, we think it's a healthier business and healthier place to be.

Come up front here to Bryan. Right next.

Two questions. One, Steve, I think last year, your commercial organization, you really highly incentivized service levels, getting service levels better. So...

Actually, the top 45 people in the whole company.

So if you can just comment on how your -- what the incentive structure is from here.

Going forward? Yes. And this is a public document, so you can find the filing. We did an accelerated growth program. When I arrived, as you can imagine, a number of those things were all underwater. So how do you get the whole organization or the leadership team and the organization focused on a couple of key things that we felt -- that we really felt were -- or I felt personally were foundational. So the first year was service. Now it's growth and service. So that same program runs for 3 years to the top people across the organization and excluding me. And it pays only if -- and again, you can find this in the filings, if we meet the 98.1%, there's no -- doesn't pay below that, and if you meet 2% growth.

Okay. And then just a follow-up on Chris Growe's question on co-man. We've seen with other companies where in the beverage industry, where they'll take equity stakes in some of these emerging companies, so that if they help that business grow and that business gets acquired, they lose the manufacturing, at least they get paid on the back end. So as you're sort of looking at the economics with some of these emerging brands, is that a consideration?

Yes, I think we're probably -- many of the companies that have done that are some of these larger beverage manufacturers. I think our balance sheet is coming to a place where we can start to think about that. And I think those kinds of partnerships make sense. And quite frankly, we've got some partners we work with today that, they did another round of cash raise, we would be interested in being in that, right? But I don't think our balance sheet really puts us in that position prior to this.

Over here to Jon, please.

And Bill, welcome. Thank you to the private label CAGNY party.

Thank you. It's a lot of fun.

Sure is. Steve, it strikes me, we incentivize people around growth. These businesses, much of the businesses here, but prior managers of these businesses, growth really, per se, hasn't been the problem. And there's lots of growth to do, it can get the commercial organization that understands, and you can understand what it costs to provide these products. But you have the commercial organization that actually makes that happen. And so 2 questions, first of all, do you feel like the commercial organization, the sales organization is incentivized and disciplined properly, so when you go do something like snackers, those are shorter runs, that's more expensive, the cost that went into that, you get paid for that? That's my first question. And secondly, there's always been this back and forth, not just since you've -- not since you've joined. But I mean, historically, about what's the best way to run sales forces in private label? Do you have a customer-centric organization, where one face sells a whole bunch of different things? Pluses to that are obvious. The minuses, each one of your 17 leadership positions has a very different competitive landscape. There are some places you can name your price. There are some places that are definitely competitive. So that's my second question. Where are you in your commercial organization on that? Is it -- how do you blend that customer-facing with category level expertise?

Sure. Well, let me answer the first one. I think we brought -- and what I heard in your first question is, do we really understand the cost of what we're doing, right? Across all of these categories and all these things and as we add innovation, can we really get activity-based cost across that? And I would say the discipline we've done, we talked about bid committees and things that we've talked about earlier. So we have a revenue management organization, which is very similar to what you'd see in a much more sophisticated, larger CPG organization that they reports through both the businesses and finance works directly with our sales organization. So I think we have our cost structure much better in line than we ever did and we understand what these things are worth. The good news is on things like snackers, private label exists at a price to brand, right? We don't set pricing, retail pricing, obviously, and our customer really doesn't, the brand does, right? There's a gap that has to be for that to be effective. And so as long as our general managers and our business unit presidents put us in segments, and we manage our portfolio in a way that we know there's enough room, enough head space in those places for us to make our margins and the customer to make their margins, we're generally fine. And I would argue the sophistication has come to that organization that we understand that. So I don't know, Bill, if you want to comment on what's happening.

Yes, I guess, just to add one thing before we leave the topic. The other part, and it wasn't your question, but you talked about commercial but the other asset that we have now is this operations organization. We have an agility there and a capability that we didn't have before. In a decentralized model with all those categories, all the plants ran in kind of different ways, whether it's TMOS or Lean or just the leadership of our manufacturing organization, we have capability now to be very flexible and to deliver. You go back to the IBP process and connecting the demand curve coming in, you really give operations a chance to win. And I think that's the other part of this that really drives some leverage in our P&L.

Yes. And then when it comes to, should we be one sales force or multiple sales forces. One of the first questions that I went in my first week with the company, I went to a couple of as you can imagine, our largest customers, they all know me from years of working together. And they looked at me and they said, it's not uncommon for you to have 2 sales reps from different divisions in our lobby, calling on the same buyer sequentially, and they don't know each other. So how do we ship on truck from your distribution center if your people don't even know each other, right? And so we took that into account when we built the thing. The largest customers have dedicated people for baked goods, dedicated people for meals, dedicated people for beverages. So we have that customer expertise. In those places where we have a sales manager that carries the whole bag, the general manager and the team in each one of these category GMs is their friend. They're really the gateway to the customer, the detail comes from the general management staff. So we are different in that regard. It's not something where, in branded CPG, we would send out a program and there'd be a -- there's an Internet site with all the data and a launch kit comes to your home and you go out and sell it. That doesn't happen in ours. It's an interactive, individual account-by-account sale, either with a dedicated sales organization, if it's a large enough customer or if it's a broad-based representative, they go back to the office and they bring the general manager with them. So we have dedicated resources to go. Each one of the divisions has their own dedicated sales leader that make sure they coordinate the right resources, hit the right customer for the right program. So it is a more complicated sale in that regard.

Go back a couple of rows to Ken.

In speaking with some of your larger customers, a couple of themes have come out about private label. The first is that, yes, it's great to have high quality. It's great to have a variety for that matter, but still, low-cost is still going to be one of the larger determinants. And the second thing I'm hearing is that some of your -- some of the branded manufacturers that perhaps some of the -- they're presenting in this week have been doing a little bit more private label as their volumes have maybe been a little flatter for a little longer than what they've hoped. So I guess my questions are, first, are you spending enough on CapEx, right? You're talking about 3% as an ongoing number. If being low-cost from an operating perspective really is that important to your customers, is investing in -- are you investing enough in capital to sort of ensure that you're getting that ongoing low cost operating structure? And then the second question is, do you agree that it's an increasing threat from branded manufacturers that you're seeing? Or is that more, a little bit more hype?

Sure. A couple of things I would say. I would tell you that we are -- we have to be the masters of complexity. We have to be the masters of changeover. Many of the things that make private label work at scale and across multiple categories, are work system. It's Lean. It's a high productive workforce that understands those things. And we have a long way to go there and a lot of opportunity to drive cost out of our system. So I think the capital question is a good one. I think for the time horizon we can see, we've got plenty of capital in our system. Quite frankly, the opportunity for us is work system, is how do we make changeovers more predictable. How do we make those things? How do we start that line better the next time when we -- how do we run more red items and then you only do a color wash, have so many flavors. Literally, it's that physical in a factory. So you run red, you run blue, you run whatever you're running, right? And so how do you make sure those things happen? How do we value engineer to make it late-stage differentiation so that we have more bases. They'll have more dill pickle bases, and we just simply add something to it. So I think there's an awful lot of opportunity for us that's noncapital.

So I can just add that piece on capital. I think to your point, I think our dollars are fine. Our mix can improve. So as we spend more on growth and balance that with maintenance or rationalization, I think we have an opportunity here to address. We see what you just described, and we're looking to focus our dollars in the right way.

Let's take one more.

Let's go across the aisle there to David Driscoll, please?

David Driscoll. So 29 categories drives complexity, but it's always been one of the base propositions of TreeHouse, that this would allow the company to have perhaps the lowest delivered cost because of the significant logistical efficiencies and the benefits of these very complex ERP systems, SAP, et cetera. So 2 related questions to this, in the presentation, you really didn't say it but I'd like to know how many of the categories that you compete in, are you the lowest delivered cost in your opinion? And then just very related to that, you've guided in the first half of the year, $175 million of lost business. If you've got that low cost position, why are we still seeing those business losses post the improvements in service level?

Sure, sure. A couple of things. We've talked a lot about the length of sales cycle. So let me touch on the, why do we have wrap in our number still. Quite frankly, TreeHouse lost the ties, okay? We gave the customer a reason. Our service level, our unpredictability, gave the customer a reason to move or to try moving from us when we were right on price, quite frankly, when we were there. Being lowest cost producer doesn't mean you always price at the lowest, right? I mean, if you price it to the market. So there are times when we were priced to market, and we lost business because we were -- because they didn't trust our service levels. I think we've talked about, we've had a number of customers today tell us that, well that wasn't the right decision. Now that you're back, we want to be back with you. But so I think there was more lost business that was not visible to us. I know a number of you have asked me a similar question. It's a great question. I can't tell you how the lack of visibility going forward by not having this one commercial organization, by not running IBP. We're now looking out 12 months, right? 18 months. We have a demand plan and a volume plan. So we understand from a manufacturing standpoint, what we're capable of and what the customer wants. We're asking questions at a higher level on customers than we've ever done before. So I think it's really, it took that long for those people to finally leave us, I guess, is a nice way to say it. And then how many places and why aren't we lower cost? And how many of those? I don't think we ever talk about that individually what the number is. I think we are the low-cost producer in a number of places. I think we now understand what a small bid, medium bid, large bid, what it clears at. We have discipline in our system. And so we know where to price those things. As you can imagine, categories that are declining, individual competitors will do things just to cover fixed overhead. So regardless of what your actual costs are. So the dynamics in our business are much more complicated than just where with the low-cost, what business. That's why we don't guide to grow as fast as maybe potential for private label. Some of those categories are unprofitable and participating in that growth doesn't make sense. So it's a really delicate balance and I think that will be the thing that we're going to need to show ourselves and The Street and all of our constituents that we're able to balance that as we go forward.

Great. Let's leave it there. Take you to the breakout. Please join me in thanking TreeHouse for the snack break.