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TreeHouse Foods, Inc. (NYSE:THS)
Q3 2018 Earnings Conference Call
November 1, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the TreeHouse Foods Third Quarter 2018 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to TreeHouse Foods for the reading of the Safe Harbor statement. Please go ahead.

Pi Aquino -- Investor Relations

Good morning. Before we get started, I would like to point out that we've posted the accompanying slides for our call today on our website at treehousefoods.com/investor-relations. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words such as guidance, may, should, could, expects, seeks to, anticipates, plans, believes, estimates, approximately, nearly, intends, predicts, projects, potential, promises, or continue, or the negative of such terms and other comparable terminology.

These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause the company or its industry's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievement expressed or implied by these forward-looking statements. TreeHouse's Form 10-K for the period ending December 31, 2017, and other filings with the SEC, discuss some of the risk factors that could contribute to these differences.

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented during this conference call. The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in expectations with regard thereto, or any other change in events, conditions or circumstances on which any statement is based.

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

I'd now like to turn the call over to the CEO and President, Mr. Steve Oakland.

Steven Oakland -- President and Chief Executive Officer

Good morning, everyone, and thank you for joining us. I am happy to be with you today reporting our third quarter in a row of delivering on our financial commitments. This quarter's results top both our internal expectations and external guidance. Adjusted EPS of $0.62 was above the top end of our guidance range as pricing has substantially caught up with our cost, and we managed through unanticipated issues related to two hurricanes. I'm also proud of our sequential improvement in direct operating income margin in our baked goods, condiments, and meals segments.

Before Matthew gets into the details of the quarter, let me cover two topics. First, with regard to the hurricanes, Hurricane Florence hit in the month of September. Most importantly, we are grateful that our employees and their families are safe. And although our Carolina plants did not sustain serious damage, as you can see in Slide 5, our Robersonville snacks plant and Faison pickles plant were both hit by the storm. And both were shut down for eight days due to Florence, its aftermath, and the resulting flooding. Loss production time at these plants, along with several days of downtime at our three affected warehouses resulted in a drag of a few cents per share in the third quarter. Despite this literal headwind, our organization proved resilient.

Hurricane Michael in October, although somewhat less severe in terms of its impact on our operations, resulted in several days of downtime at our Dothan, Alabama, snacks plant. And we expect a negative impact of that storm to show up in our fourth quarter results. The less obvious, but important, issue around the adverse weather is the damage sustained to the cucumber crop. About a third of our country's cucumbers are grown and processed in the Carolinas, Florida, and Alabama. We are now facing supply shortages as well as increased shipping distances which will likely drive costs higher in the months to come.

As you know, our pickle business represents just under a third of our condiments segment. Given the prospected nature of these issues, we've done our best to factor that into our fourth quarter guidance. There are further constraints in the supply chain that are still being evaluated. For example, one of our large packaging suppliers with operations in the Florida Panhandle has been down and does not expect to be back at full production at that site for another six months. So, while less direct, these are issues that are still be assessed and, at a minimum, will likely affect us down the road.

The second topic I'd like to cover is a continuation of our discussion in August around how critical customer service is to our retailer relationship. I'm pleased to say that we're making good progress and that, three months later, I feel much better about our service levels. In fact, for some customers, service is no longer an issue. And the lingering service challenges are largely contained to those categories where we are capacity constrained, such as aseptic broth, frozen griddle, and our bars business.

As we seek to be the preferred supplier of custom brands and capitalize on the growth of the private label industry, we must do more than manufacture and distribute high quality custom food and beverage products. It's about thought leadership, innovation, and the relentless focus on execution that will enable us to provide great service and to be that supplier of choice. We're running a marathon here, not a sprint, but it's important to recognize the progress that we've made. A short 15 months ago, we announced TreeHouse 2020, and nine months ago we embarked on the Structure to Win initiative. We are improving our organization and building capabilities as a result of both of these programs.

I'm pleased to report that we remain on track, and in some cases, like Structure to Win, we are well ahead and the benefits are flowing through to our bottom line. We are also well down the path to redefining our strategic planning process and shaping our organization's cultural journey. I'm excited to share more details on what all of this means for 2019 and beyond when we host our Investor Day in New York on December 11th.

Since our first quarter call, I've had the pleasure of meeting many of you face-to-face in New York, and since then I've spent a great deal of time on the road, listening to our customers and getting to know our people throughout our organization through townhalls, plant visits and divisional reviews with the leadership teams and the general managers. I've taken time to do a deep dive and I've come away even more enthusiastic about the opportunities that lie ahead.

As I think about how we frame the opportunities, we all know that the consumer packaged goods industry is changing and consolidating quickly. On a macro level, retailers today are facing competitive pressures and disruptions on many fronts.

Growth from limited assortment and hard discounters, a shift to cleaner labels, growth within natural and organic, and the rise of e-commerce and click and collect. The good news in all of this is that private available has an important role to play for our customers in all of these disruptions. Amid this evolution, I'm confident that TreeHouse has a long runway for growth.

It's clear that the retailers are seeking to build their own brands to drive traffic and improve profitability. We recognize that outstanding customer service has to be the foundation of the relationship with our customers. In fact customer service is as critical to the retailer partnership as cost and quality. To be frank, we haven't consistently delivered on our service commitments over the last two years, so that's an area where we have great focus, and we are seeing improvement, in some cases, significant improvement.

With that, let me turn it over to Matthew to provide you with the details on the quarter and the balance of the year.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Thank you, Steve, and good morning, everyone. Thanks for joining our call today. Let's start on Slides 8 and 9 with our consolidated third quarter results. On the top line, revenue of $1.39 billion was at the bottom end of our guidance range for the quarter. Sales were down 10%, or 7.5% when you exclude 2.5% obscure rationalization and the sale of the McCann's business.

The topline was a little softer than anticipated, driven by unfavorable volume and mix of 8.9%. The primary drivers were loss volume in our snacks division, where we lost the majority of a large low-margin piece of business; and meals, where as I mentioned last quarter, being first in the market with pricing late last year cost us to some degree. Lastly, as Steve mentioned, we faced some softness in production and fulfillment due to the impact of Hurricane Florence.

Pricing was a bright spot this quarter, contributing 1.7% to overall sales. In some cases, such as condiments and meals, you can see pricing realization was closer to 3%. Our third quarter adjusted EBIT margin of 5% improved by one-tenth of a point compared to last year's third quarter, and was 1.2 points better sequentially. This improvement was driven by input customer recovery as well as overachieving our Structure to Win SG&A goals.

Third quarter adjusted EPS of $0.62 was above the top end of our guidance range. Even when you exclude the tax tailwind of about $0.04, we finished the quarter well above the midpoint of our guidance. This represents the third quarter in a row where we've delivered in our guidance, and I'm really encouraged by our progress.

If you turn to Slide 10 on the year-over-year comparison and the key EPS drivers, you can see the excellent results our Structure to Win initiative is delivering. In the third quarter, the SG&A expense improvement of $0.16 offset almost the entire division DUI decline of $0.18. On a year-to-date basis, we've already achieved our original full-year 2018 goal of $30 million in savings. And, in fact, we could exceed our annual run rate goal of $55 million of savings in this calendar year.

Moving on to Slide 11, we've shown you the year-over-year walk for total division DOI on a dollar basis. Division DOI of $155 million in the third quarter was down $12 million versus last year. Pricing net of commodities, packaging, and freight and warehousing is now positive, though we are still experiencing some operational headwinds due to unfavorable plant performance in snacks, as well as in beverages where we are still working to get our creamer system back to full production following the completion of a new labor agreement in Pecatonica.

Division SG&A improved year-over-year by $8 million as we've implemented better expense control and are aligning our resources more appropriately across the divisions.

On Slide 12, we've further broken down the division DOI to give you a sense how each segment is fairing and the key drivers. I'm not going to go through all the puts and takes, but let me hit the highlights. In baked goods, we've done a nice job with pricing to offset inflation. As we've said on prior calls, being one of the first in market with pricing did result in some loss volume. We continue to work through capacity restraints in frozen griddle, and the tightness of the refrigerated freight market continues to present challenges for the dough business. The underlying performance in beverages continues to be masked to a large degree by the challenges we face this year in getting Pecatonica back up to full production.

Let me take a quick step back and frame the segment for you. I think about our beverage segment, with annual sales of about $1 billion, as being comprised of three big pieces -- the single serve coffee and tea business, the nondairy powered creamer business, and finally, Protenergy broth, aseptic beverages, and all other, such as powdered sugar free drinks. These three big pieces are roughly equal in revenue. So, as you walk across the slide, where you see minuses for beverages, this is almost entirely due to operational challenges and volume as we work toward getting the Pecatonica plant back up to its normal run rate. Our single serve business is relatively healthy. And, in fact, our full year single serve filtered coffee volume is expected to be within a couple of percentage points of 2017.

Finally, as we've noted before, we're in the process of adding capacity of Protenergy to fulfill the strong demand for aseptic beverages. Quickly on condiments, there's not a lot to say here aside from commending the team on a job well done. I would point out that, across all of our segments, the condiments business is the most advanced on its TreeHouse 2020 and TMOS journey. And, as such, the year-over-year improvement really speaks for itself. We look forward to similar improvements as we roll TMOS out across the rest of our plants.

Meals and snacks, as we've noted previously, where lost volume as a result of our pricing actions, has been the most evident. Some of the larger volume losses were not particularly profitable pieces of business, which is why the year-over-year DOI dollar decline is less meaningful. This speaks to our continued focus on margin management.

On Slide 13, you'll see we've added a chart showing DOI margin on a divisional basis. We're pleased with the sequential progress, as evidenced by three of our five divisions -- baked goods, condiments, and meals.

On Slide 14, you've seen the chart on the left before. All signs point to continued tightness in the freight market, and everybody in the industry is working to address the challenges here. Earlier this year, our spot market usage was unusually high. And, as you've heard from Steve before, we seek to recover inflation, but we cannot price for our own inefficiencies. So, what you see on the righthand side of this slide is the progress we've made to date on reducing our spot usage.

Recall earlier this year, I described the action steps we were taking to functionalize manufacturing, stabilize our production and shipping schedules, become the customer of choice, and complete a comprehensive RFP to establish multiple carriers in each lane. I'm really impressed by what we've accomplished here. Over the last three quarters, we've achieved a reduction of more than 50% in our spot premium expense, and our lowest spot utilization rate since last summer.

Slide 15 is our current outlook on freight, packaging, and commodity costs. The inflationary trend continues with significant cost increases for freight and packaging. And, in commodities, more inputs rising than falling. On the packaging side, it's plastics, cartons, and corrugate. Based on the number of boxes that show up on my doorstep -- and I'm sure yours too -- that shouldn't be a surprise. As a result, we are back in market to talk with customers about the need to recover in put cost inflation.

Next, let's turn to the balance sheet. On Slide 16, we finished the quarter with net debt of just under $2.3 billion. Since the Private Brands acquisition, we've reduced net debt by over $600 million. As we have been reducing our debt this year, we have made strategic open market repurchases of about $200 million, primarily to buy back our 6% notes. With regard to working capital, we continue to manage this closely and are pleased with the $126 million improvement since year end 2017.

As you saw in the press release, we are tightening our guidance today and lowering the top end of our range by $0.10 to $2.05-2.25. Given that the third quarter topline was a bit weaker than we had forecasted, we believe it's prudent to trim a bit off the top. On Slide 17, we've laid out where our outlook has changed, even if modestly, for the remainder of the year. You'll notice that the impact of the hurricane has been called out in a couple of places, both from a topline perspective as well as to take into account what we know today about the operations and crop sourcing challenges.

In addition to any hurricane related volume softness, our expectation is that the third quarter volume trends continue into the fourth quarter, and similarly, declines will be primarily in meals and snacks. Our expectation is that our full year sales will close out the year near the bottom end of our previous $5.8- 6 billion range.

We saw good success with pricing to offset the Canadian tariffs and that will flow through in the fourth quarter results. So, pricing will substantially cover commodities, packaging and freight inflation, and now the impact of Canadian tariffs.

While normalizing our nondairy creamer business has cost our beverages segment more than originally anticipated this year, it has also been a slower path to recovery than we expected. We can see some improvements, and our assumption is that we will reach full production by the end of the fourth quarter.

Lastly, as I mentioned earlier, the cost reduction initiatives are well on track. Structure to Win is exceeding our original expectations. We have achieved the $30 million in savings through the third quarter and now expect the savings in this calendar year could exceed our original exit run rate goal of $55 million.

Slide 18 provides you with a line item detail for the fourth quarter guidance of $0.88-1.08. You'll note that our range for the fourth quarter is $0.20 in comparison to the $0.10 quarter ranges we've provided to date this year, reflecting the calendarization of our earnings.

On Slide 19, we've updated our full year cash flow guidance. We've taken our CapEx guidance down by $10 million to $190 million and tightened our expectations for the contribution from liquidity initiatives, which reflect improvements in working capital. We have lowered our estimate for cash restructuring charges for the year by about $25 million to a range of $140-150 million as we rebalance our TreeHouse 2020 focus to projects such as expanding the TMOS rollout and consolidating our warehouse footprint instead of further plant closures.

As a result, we are extremely close to fully funding our 2018 restructuring costs with improved liquidity. The bottom line is that we are now calling for underlying cash generation of $150-180 million this year, which is up $30 million from our prior estimate. Factoring in the $30 million in proceeds from the McCann's Irish Oatmeal sale, in total we expect to generate $180-210 million. Our priority for cash usage is to deliver and stay comfortably under our debt covenant limits as they step down through 2019.

Before I close, I direct you to Slide 20, which shows our quarterly adjusted EPS progression in 2018 compared to 2017. Our organization has achieved a great deal this year. Despite the difficult start to the year and the initial disconnect in pricing for inflation, once we got over that -- you'll remember, I told you on our second quarter call that the back half of this year would look very similar to the back half of last year. You can see on this chart that the sequential improvement is largely driven by normal seasonality, a measurable improvement in our creamer operations in Q4, and then, to a lesser degree, the pricing recovery for the Canadian tariffs.

I'll close by saying we are pleased to report the third quarter in a row of delivering on our financial commitments, including offsetting the operational challenges of the hurricane. Let me turn it back to Steve to wrap up with his closing thoughts before we open up it to Q&A.

Steven Oakland -- President and Chief Executive Officer

Thanks, Matthew. In closing, I'd like to fully frame for you what I see as the current challenges and a long-term opportunity. You've heard Matthew talk about our balance of the year forecast, guiding to softer volume trends. It's important to understand that these are specific to TreeHouse. Our volume losses are a result of historic performance. If you think back to last year, and even over the past two years, we were dealing with integration, spotty execution, and declining service levels. So, at a time when we had frustrated our customers, we then were one of the first in market to aggressively price for inflation. This forced some of our customers to evaluate their options and bid out volume.

Giving the long selling cycle in private label, we are now feeling the burden of those decisions in the topline. It's going to take some time to lap those losses as well as feel the benefits of our recent wins. I reinforce this point so you understand why you keep hearing me emphasize the importance of customer service. As I said earlier, I believe we are solving those issues. And, as a result, we stand on a much stronger base today than we did a year ago.

The important distinction to draw out here is that our near-term volume challenges are not systemic in nature. They are not the same issues that big food is addressing. Private label is growing and our capabilities line up perfectly with the growth of e-commerce and the movement to natural clean label and organic. We are not trying to solve structural declines. We are solving operational issues, and therefore we can win. I also believe that we are now running better, as a leaner organization, than when I arrived in late March. The work around TreeHouse 2020, consolidating operations, rolling out TMOS, getting the entire business on SAP order-to-cash by the end of the year, is ongoing. I want to commend our employees here at TreeHouse for their commitment and the effort that everyone is putting forth. The hard work and dedication has not gone unnoticed.

And finally, as we look forward, much of what we need to accomplish relates to strategy and returning TreeHouse to growth. I'm excited to share our thoughts around how we plan to do that, and to give you a much better sense for our strategy and vision for delivering shareholder value in 2019 and beyond, at our Investor Day. I look forward to seeing you then.

...

And with that, we will now open the call up to your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrew Lazar with Barclays. Please go ahead.

Andrew Lazar -- Barclays Capital -- Analyst

Good morning, everybody.

Steven Oakland -- President and Chief Executive Officer

Good morning, Andrew.

Andrew Lazar -- Barclays Capital -- Analyst

Hi. Two questions, if I could. First, you mentioned you're back on the market, talking with customers about the need to cover some incremental input cost inflation. I guess, when you do anticipate some of those pricing actions would flow through? And, I guess, having just gone through this, do you feel confident that you've got a good sense of volume elasticity. And, maybe with better service levels, perhaps the volume elasticity is a little less extreme this time around. That would be the first question.

Steven Oakland -- President and Chief Executive Officer

Yes. Certainly, Andrew. I think pricing is very different today. And that's why I've talked so much -- I think some of our teams say I harp on the service thing, I think, is a quote. But our service is in a much better place. I think there's three things. Service is first. Second, I would argue that the absolute need for pricing from a dollar standpoint is significantly less than last time, right? So, the pressure on us to push through the kind of pricing that we did last time is less. And third, I think, and most importantly, there's been an awful lot written about who all are out there with pricing for freight, primarily for certain commodities. Some commodities, quite frankly, are going down.

So, the dialogue with the customer is much more broad based. It's much more holistic as TreeHouse. And I think we're swimming with the stream right now versus -- I think we were at the beginning of the stream last time. So, those things all together, I feel much better about it. And I would suggest we'll see it in the first quarter -- the impact of it in the first quarter.

Andrew Lazar -- Barclays Capital -- Analyst

That's helpful --

Steven Oakland -- President and Chief Executive Officer

[Crosstalk] And we understand that, so we have our cost covered, understanding that. Right.

Andrew Lazar -- Barclays Capital -- Analyst

Gotcha. And then, you've been able to grow, as you talked about, operating profit this year with Structure to Win and some of the work you've done around the plants and some acquisitions. Sales and gross margins are still likely down for the year. As we think about '19, albeit it's preliminary, I guess what becomes the key driver of growth and does volume need to grow next year to generate the type of growth in the bottom line that you would look for?

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Sure. Andrew, this is Matthew. I think the biggest difference we're looking for next year in terms of the full year profitability and the margin profile is to avoid that significant gap that we incurred in the first half of this year. If you look at the back half, we're pretty much in line year-over-year. The gap was all in the front half and related to that delay in getting that pricing implemented. I think, as Steve said a number of different ways, the environment is different, the cost pressure is much better understood, and we're coming off a much better service level.

And, frankly, we're on it earlier than we were a year ago. So, key to us next year is going to be avoiding that lag. And then, secondarily, obviously next year is a big year for TreeHouse 2020, and we'll be lapping some -- in the early quarters, some SG&A advantage. So, they're probably our key drivers as we think about next year's improvements.

Andrew Lazar -- Barclays Capital -- Analyst

Great. Thanks very much.

Steven Oakland -- President and Chief Executive Officer

Good.

Operator

Our next question comes from Ken Goldman with JP Morgan. Please go ahead.

Kenneth B. Goldman -- JPMorgan Securities LLC -- Analyst

Hi. Thank you so much.

Steven Oakland -- President and Chief Executive Officer

Hi, Ken.

Kenneth B. Goldman -- JPMorgan Securities LLC -- Analyst

Just to follow-up on the 2019 -- and I know you're not going to give too much guidance on it. But just to refer to something you have said. I think you said, regarding TreeHouse 2020, you expect a significant step-up in the plan's margin impact next year versus this year. You may have reiterated this today. If so, I missed it. But, I'm just trying to get a better sense of some of next year's tailwinds. And TreeHouse 2020 has the potential to be a fairly meaningful one. So, I'm just curious if you're still seeing it that way.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah, we are. We've talked about the calendarization of this being about 80 BPs this year, 130 next, and then 90 as we tail off in calendar year 2020. We still view the profile that way, and frankly have been really impressed with some of the momentum we're getting out of this TMOS activity, where we're driving continuous improvement and standardized practices. The beauty of that is the investment is relatively low and it doesn't take productive capacity out in an industry that continues to grow. So, in the prepared comments you would've heard that we're pivoting our focus in 2020 a little. It's the faster payback, less investment intensive, better return use of resource.

Kenneth B. Goldman -- JPMorgan Securities LLC -- Analyst

Thank you for that. My follow-up is -- I realize you have an Investor Day coming up. I know you're not going to get too far ahead of yourself, but you've talked about being in this process of refining your priorities. Can you let us know where you are in that process? Are there any learnings you can share so far about any kind of focus you might have on the business looking ahead?

Steven Oakland -- President and Chief Executive Officer

Ken, what maybe I can do -- I'd like to frame what we plan to share in December, in New York. I think what we plan to share is a more clear look at our portfolio going forward. I mean, we've talked a lot about that we're looking at everything we do. So, we feel like we'll be able to give some more definition on that, give you some definition on the organization that we think can take advantage of that and support that portfolio. We think we can share what we think our current portfolio and capabilities -- what can we deliver near term. And what I mean by near term would be '19. And then, what we can deliver from that -- what kind of expectations you should have for TreeHouse long term. So, some metrics around it.

And then, importantly, how we pivot this to growth. We've got some tailwind and Matthew talked about that on our cost structure. We've got some tailwind on some other items that'll carry us for a while. But, how we pivot this to growth -- and, importantly, the role of organic growth in a business that's -- where the fundamental categories are growing. So, we see all those as the key tenants of the presentation in December.

Kenneth B. Goldman -- JPMorgan Securities LLC -- Analyst

Great. Thanks so much, Steve.

Operator

Our next question comes from Chris Growe with Stifel. Please go ahead.

Christopher Growe -- Stifel, Nicolaus & Company, Inc. -- Analyst

Hi, good morning.

Steven Oakland -- President and Chief Executive Officer

Hi, Chris.

Christopher Growe -- Stifel, Nicolaus & Company, Inc. -- Analyst

Hi. I just wanted to follow-up a bit on the pricing. You're pricing net of cost, even if you include freight, was positive this quarter. I think you mentioned you had some pricing coming through for the Canadian tariffs. I guess I want to understand, as you continue to push for more pricing, as you indicated earlier, just how to think about the volume factor there. So, is that just opening you up to more risk? Or are you seeing competitors also priced that's -- and you're sort of going up in line with where the competitive environment is allowing you to hold share, or gain share?

Steven Oakland -- President and Chief Executive Officer

Chris, I can take a stab at this and Matthew can comment. But I would suggest -- there's been so much written about what's going on in price. Obviously, you hear it from the big branded folks. You don't really hear it from the private label industry. But the private label industry is impacted as much or more by freight, as much or more by commodities. The commodities are hit and miss, right? Some are up and some are down. So, we'll work with each customer on each category appropriately. But I think it is an industrywide event, and I think the nice thing is now we're ahead of it but yet our -- the rest of our universe is well ahead of us. So, we're not the first ones out there at the tip of spear, I say, on this one.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah, I think I'd just add a couple of points, if I can. We've said publicly a number of times that we can't price for our own inefficiency and we're not intending to here. It becomes a very fact-based dialogue. The customers drive us through these detailed cost sheets. I think our guys have done a very good job with that. In some of these areas as well -- take freight for example. We don't need to debate freight too much. If the customer thinks they can transport it more efficiently and have more leverage, they can pick it up. And we're totally profit neutral and agnostic to that.

So, I think there's a degree of -- this is actually leading us to lean out the supply chain and find some opportunities between the two of us. So, it's leading the supply chain system to actually some more efficiency.

Steven Oakland -- President and Chief Executive Officer

And in most cases -- a year ago, we were asking them to pay more for bad service, right? And, in my prepared comments, when I talked about the volume losses you see today -- the customer was looking at our performance to that point and they had to make some bets. So, we were losing the ties, right? The fact that we've improved our service, that we've improved our relationship -- I know I've had a chance to be with our largest customers, our midsized customers, and our small customers. And I've seen that relationship pivot dramatically in the seven months or so that I've been here. So, I think the customer feels a little better about us as an entity, about what we're capable of. And so, when it comes to something like this, that's an industrywide thing, I feel much differently, I think, than we did a year ago.

Christopher Growe -- Stifel, Nicolaus & Company, Inc. -- Analyst

Okay. Thank you for that. And just quick follow-up. In the quarter, there was a comment about LIFO liquidation benefit, that would primarily accrue to the economist business. And obviously, it's some hurricane expense on the other side that offset that. I think you defined that in the release as almost $5 million. How much was that LIFO liquidation benefit? As I look at all the puts and takes of the quarter, some of those unique items, were those a net benefit or a net detriment to the quarter in EPS?

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

I think, when you look in the Q -- when we file it -- you'll see the LIFO liquidation was about a $4 million item. We haven't talked about LIFO in the past, but it's almost an ongoing joke here as to what the accountants are going to come up with in terms of a negative LIFO thing. It has been far more of a headwind than a tailwind. It's just that the accounting rules require you to call out a liquidation. So, we've done that and been very transparent about it. What we haven't done in the past is call out the headwinds.

Christopher Growe -- Stifel, Nicolaus & Company, Inc. -- Analyst

Okay. Thanks so much.

Operator

Our next question comes from Amit Sharma with BMO Capital Markets. Please go ahead.

Amit Sharma -- BMO Capital Markets Corp -- Analyst

Hi. Good morning, everyone.

Steven Oakland -- President and Chief Executive Officer

Hi, Amit.

Amit Sharma -- BMO Capital Markets Corp -- Analyst

Matthew, quick one for you and then one for Steve. Matthew, in the press release, the stock-based compensation was around $5 million, I think. Is it trending lower than what you have outlined and do you expect to catch up with that in the fourth quarter?

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

We've had a bit of a reduction in stock-based compensation as we've adjusted the headcount here. As we've mentioned in the prepared remarks, we're running well ahead of our Structure to Win goals, and now expect to be closer to the 55 that we committed to for run rate actually within the calendar year. So, with that, as people go out, we're truing up the stock-based compensation. So, we've got a nice little pickup there.

Amit Sharma -- BMO Capital Markets Corp -- Analyst

Got it. But below the initial $55 million for the full year, right?

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah.

Amit Sharma -- BMO Capital Markets Corp -- Analyst

Okay. Got it. And then, Steve, I completely agree that you will come to New York next month and lay out a lot of these things. But I was a bit surprised by -- well, not surprised, but it was interesting to hear you say that most of the issues that you're facing on the volume side are operational versus structural, right? That doesn't mean that you're not looking of structural improvements or structural remedies for the operating performance that we saw earlier this year, or even in the last few years.

Steven Oakland -- President and Chief Executive Officer

Well, maybe I can bring some more definition to my definition of structure, OK? I would suggest -- I want to make a comment on long selling cycle as well. So, hopefully, that will bring it to life. What I meant by structural is they're not category specific. It's not consumer driven. We're not facing fundamental demand issues. We're facing our ability to be that best supplier, right? In cases like creamer, and broth, and bars we're frankly not delivering the orders that we're given to by the customer, where we have that customer on allocation. So, we've got categories where we're fundamentally not delivering what we've either committed to or what the fundamental demand is.

So, that's what I mean by structural. These are not structural to our industry or our category. Private label industry is growing. If we simply hold share, we will have organic growth, right? So, honestly we would hope to do better than that over time. And we'll talk about that in December.

I did make a comment on long selling cycle. So, if you think about a year ago, the TreeHouse organization is out with price. They're very aggressive with it because, quite frankly, we had to be, right? We were not in a position for that not to happen. It was on top of these bad service levels. And maybe it wasn't as functionally organized as I would argue we are today, and as streamlined as the process is today. So, as that worked its way through the cycle, the customer decided, "Well, you know what? Given that I'm going to get this volume, I'm going to take -- even if it's an equal price from another vendor." Well, that other vendor takes any -- six months is a Herculean effort. More like 9-12 months to transition that volume.

Because, if you think about it, there's the bid. Then there's a formulation process. You have to have the formula approved. You have to have the packaging approved. Typically, there's a plant trial. There's a QA audit. This is a long process. So, the volume challenges in the third quarter and the fourth quarter that you'll see lap here -- that we're lapping here -- are decisions the customer made 9-12 months ago. So, we've had some wonderful wins in the last quarter. So, those are going to show up in our sales 9-12 months from now.

So, the long selling cycle is what I was trying to articulate there, and the fact that the challenges in our topline are not category specific, are not industry specific. They are, in fact, a result of the performance we had a year or so ago and the pricing we took on top of that performance.

Amit Sharma -- BMO Capital Markets Corp -- Analyst

That's great. Really helpful. It's just a really good clarification. So, thanks for your definition of structural. But, you do plan on addressing your asset base, or your portfolio, next month, right, as part of that wider discussion?

Steven Oakland -- President and Chief Executive Officer

As clearly as we can. Yes.

Amit Sharma -- BMO Capital Markets Corp -- Analyst

Got it. Thank you.

Operator

Our next question is from Rob Moskow with Credit Suisse. Please go ahead.

Robert Moskow -- Credit Suisse Group -- Analyst

Hi. Thanks. A couple of questions. Steve, do you have any metrics on your fill rates today and how they have improved or at least stabilized over the last few quarters? You say that your service levels are better, so is there any metric that you can provide on that? And then, secondly, the sales guidance range for fourth quarter is so wide. And if you hit the low end of this range of $1.4 billion, I just don't see how the EPS is achievable unless there's some kind of adjustment on the tax rate below what you've guided to. So, maybe Matthew can help understand the circumstances that would get you to $1.4 billion in fourth quarter.

Steven Oakland -- President and Chief Executive Officer

Matthew, do you want to catch that one and then --

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah. As you know, we guided down volume a bit -- and I'll talk of the midpoint, Rob. We guided down here -- we came in in Q3 lower than we had expected. And the really interesting thing about that is we were tracking bang on the first two months of the quarter. And everything we missed in Q3 versus what we expected came out of September. So, we think there's a hurricane impact there. Clearly, it's tough to correlate because the customers don't give you that kind of granularity. But we think there was a piece for that.

The other piece we've been struggling with all year, and it pervaded Q3 -- and it's going to roll in to Q4, but we think will be fixed -- is our headwinds in the creamer business as we recover from this strike at Pecatonica. That's been an ongoing headwind. When you can't produce, it gets fairly quickly to sales volume and hits the bottom line. So, that's an issue.

And then, when we looked through our forecast in detail, as Steve mentioned, we've got three categories where we're capacity constrained -- griddle, Protenergy, and bars. And we're working hard in the plants here to meet the demand, but we are struggling to meet that level that we had in the forecast. So, we pulled that number down a it. It's a focus of what we're doing every single day to squeeze out an extra bar, an extra griddle, an extra Protenergy. So, that frames up the thinking of what drove us to pull that midpoint down.

Steven Oakland -- President and Chief Executive Officer

Sure. Rob, there could be a little headwind in our pickles business too, just because of the uncertainty on the supply chain there. What I did -- and the reason I passed that question off first -- is I've got the fill rate data in front of me. But the fill rate data is hard for me to roll up in total because some are cases, some are pounds, and some are dollars, right? And we mix 32 different categories or a wide variety of things. So, let me try to frame it in this regard. The customer typically looks for about a 98.1-98.5%. To recognize 100% is very difficult to do, and probably would require both of us to have too much inventory.

We had categories, when I arrived, that were below 90, quite frankly. That wasn't the majority of them. We had a lot of categories in the 95-96 range. We now have a lot of categories above 98.1 -- above what the customer is asking for. And we've had multiple months in a row of meeting the customer's demand at their level. We have a few categories -- the reason I can't give you a number for the whole company. Those items that are on what we call allocation -- so, griddle, bars, Protenergy -- in our broad business, we give the customer a forecast and they may or may not order to that forecast. Sometimes they order above it, but we only fill -- we tell them we have 100,000 cases a month for them. That's what we provide. That's what we agree to.

So, some of those numbers are not the easiest to extrapolate. So, what I would suggest is, we have gone from what I would call below acceptable service -- mid-90s to high-90s, and in most of our categories. We have a number of places that we need to get better, but we've picked up, I would argue, at least 2% across the board in customer service in the seven months I've been here.

Robert Moskow -- Credit Suisse Group -- Analyst

Okay. Thank you.

Steven Oakland -- President and Chief Executive Officer

Sorry for the -- that's a tough one to give you detail on.

Robert Moskow -- Credit Suisse Group -- Analyst

Yeah, I mean, when you come to the Analyst Day, you might consider providing some metrics around it, just to how you measure it and how you foresee the progress.

Steven Oakland -- President and Chief Executive Officer

Sure.

Robert Moskow -- Credit Suisse Group -- Analyst

Okay.

Operator

Our next question comes from John Baumgartner with Wells Fargo. Please go ahead.

John Joseph Baumgartner -- Wells Fargo Securities -- Analyst

Good morning. Thanks for the question.

Steven Oakland -- President and Chief Executive Officer

Good morning, John.

John Joseph Baumgartner -- Wells Fargo Securities -- Analyst

Matthew, I want to come back to beverages. Still some noise there from the Pecatonica plant. But is it your expectation for the segment to finally be more of a structural margin floor in the high teens, kind of where it is now? I mean, how do you think about the balance between the cost savings and logistics improvements coming through, set against what still seems like pretty competitive pricing?

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah, we feel pretty reasonable about the margin profile and the earnings in that category this year. It's really a story all about creamer. The rest of the business is performing pretty well. Margins in Q3, in coffee, are good. So, we feel pretty good. The other thing that tends to get a little bit masked here is it is a competitive category, but it's also growing fast. So, we think our single serve filtered coffee is going to be within a couple of percentage points by the time we get to the end of the year of where it was last year. And you'll remember, at the end of last year, there was a lot of talk about a big chunk of business we lost. That's really been filled in by category growth. So, we like this category and we see some stability there. We do have work to do the balance of this year to finally put a nail in the creamer operations and get that back to where it needs to be.

John Joseph Baumgartner -- Wells Fargo Securities -- Analyst

And then, I guess just going forward, your thoughts on the move into liquid coffee. I mean, do you expect that to be accretive to the overall beverages segment margin as it ramps, I guess, in 2019 and 2020? I guess, what's your take on the competitive environment there? Should we anticipate another Wild West scenario, as we had in single serve, with the influx of capacity and pricing pressure? Or is there more of a competitive moat to support the capital investment there?

Steven Oakland -- President and Chief Executive Officer

Maybe I'll comment on it first and Matthew can comment on it. I would suggest that we've seen great demand for the capacity that we're bringing online really quickly, both from the branded players for Co-Pack and from private label customers to launch into the category. So, if you think about great a category this is, how much its grown, and how little private label there is, we're encouraged, quite frankly, by the demand for that capacity when we bring it on later this summer or spring, right? Late spring, early summer.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah. I would say it's not an inexpensive proposition to get into. And it's not an easy technology, but we think the synergies with our experience in the broth business are going to give us a competitive advantage here. And I would think like many of these categories, you're going to see a life cycle evolution of the margin structure that, over time, drifts down. But we're excited about that.

Steven Oakland -- President and Chief Executive Officer

Yeah, that's a natural bolt-on to our beverage business.

John Joseph Baumgartner -- Wells Fargo Securities -- Analyst

Thanks for your thoughts.

Operator

Our next question comes from Steve Strycula with UBS. Please go ahead.

Steven Strycula -- UBS Securities LLC -- Analyst

Hey, good morning. First part of the question would be -- Matthew, would you mind simplifying or unpacking the third quarter volume declines a bit more? They're down 7-7.5. How much of that would you say is really specific to Q3 versus having a little bit of a tail going into 4Q and beyond. I know there's some noise with the plant disruptions and hurricane shifts. So, that would be much appreciated. And then I have a follow-up.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah, I would -- we ended up missing Q3 internally versus where we thought we were headed by about $30 million, roughly, in round numbers. We think that was awfully coincident with the hurricane. We've been tracking real well by then. The other pieces, as we went into that quarter was -- as I mentioned, the creamer thing is not fixed. And that weighed on sales in the quarter. We think it will weigh on sales in Q4, but we'll be out of the woods by the end of the fourth quarter. So, we talked a little bit, in response to one of the earlier questions, about some of these areas where we could undoubtedly sell more than we could currently make.

And we thought we had a little bit more capacity, frankly, in a few of those categories, than it's turning out we actually have right now. But it's all hands to the pumps to try and free as much of that up as we can. So, we've been pretty thoughtful when we put that number out there, and it's something we're working to beat because those categories are on fire and we'd like to get our service across the board back to where they need to be. And they're the three, really, that we talked about where we're struggling.

Steven Strycula -- UBS Securities LLC -- Analyst

Okay. And then, a quick follow-up for Steve. As I think about some of the longer customer win cycles that you were talking about, it's evident that your service rates are probably improving those right now. But, for some of the attrition that we're seeing from fall of last year, does that take time to cycle out through the first half of Calendar '19? And the context of why I'm asking that question is because, as I look forward ahead to the Analyst Day, the Street's modeling earnings growth in excess of 20% for the next year or two. So, I just want to see if that properly accounts for some of the customer account loss that might be enduring into the first half of next year. Thank you.

Steven Oakland -- President and Chief Executive Officer

Well, I think it does. And I think I led to the dialogue around how long it takes for those things to come in and come out of our topline. I think we will bring clarity to the opportunity in '19. We would normally not guide '19 that early, but that is our hope in December. So, we think we'll bring clarity to that when we're together in December.

Steven Strycula -- UBS Securities LLC -- Analyst

Thank you.

Operator

Our next question comes from Bill Chappell with SunTrust. Please go ahead.

William B. Chappell -- SunTrust Robinson Humphrey -- Analyst

Thanks. Good morning.

Steven Oakland -- President and Chief Executive Officer

Good morning.

William B. Chappell -- SunTrust Robinson Humphrey -- Analyst

Just a couple of questions, actually, about the hurricane impact in the quarter. I understand, with the cucumber crop, that's too early to tell. But on the loss shifts, shouldn't that just pop back up to some extent in the fourth quarter, and maybe even a little bit later? Or are these actually just lost sales?

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

I would think of it more in terms of that few cents that we called out, as really being overhead absorption in the quarter where we had operating assets that we were paying for. We had people that we were paying and we just didn't have the ability to produce. So, when we talk about it being a few cents in the quarter, it was really a function of the cost side. There's a little bit of that cost hung up on the balance sheet that will roll off in Q4. So, that's the biggest thing that we factored into that few-cent comment in the prepared remarks. But those plants are all back up and running. In fact, as we look at October, plants have been running well and volume's looking pretty good. So, we don't think we have too much residual -- other than what we just talked about there, that's mechanical -- on the balance sheet.

William B. Chappell -- SunTrust Robinson Humphrey -- Analyst

Got it. And I guess, Steve, following up on Rob's comment on the wide range of the topline, it's also a pretty wide range on the bottom line. Is that really just all the operating leverage from Point A to Point B? Or are there other factors that we should consider in such a wide range -- a $0.20 range -- for one quarter?

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yes, it's interesting. We talked about this internally quite a bit and Steve made a really good point. A $0.20 range on a buck is a lot different to the $0.10 range we had on $0.18 in the first quarter. So, actually, when you look at the amount of earnings we've got in the fourth quarter here, our range as a percent of the earnings is actually probably the lowest we've had this year. So, I think that's the way we think about it internally.

William B. Chappell -- SunTrust Robinson Humphrey -- Analyst

Okay. Thanks so much.

Operator

Our next question comes from Pablo Zuanic with SIG. Please go ahead.

Pablo Zuanic -- Susquehanna International Group, LLC -- Analyst

Thank you. One question for Matthew and then one for Steve. The margin expansion in condiments, even if you take out the LIFO issues, still about 400 BPs, right? That's quite significant. Can you talk about -- that was over one year. So, talk about how that translated into margin expansion to the other divisions. Is clearly significant in the context of having 300 basis points in expansion by 2020 for the company as a whole. So, I see it as a very positive sign. But, more color would help. You're at 14%, roughly, margins there. Is that sustainable? If you could talk about that, Matthew.

And then, a question on coffee for Steve. In the case of broth, you made a reference that you have a private label business but you also have a co-packing business for branded players. Do you see that as an opportunity in the case of coffee? Not just to be -- given that your main -- that Keurig has entered very aggressively into private label over the last few years -- K-cups -- is there an opportunity for you to take business away from them on the branded side?

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Do you want me to go first with condiments?

Steven Oakland -- President and Chief Executive Officer

Yes, please.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

You're spot on. We shouldn't count on that LIFO repeating. So, it's very appropriate to adjust that out. But I think the condiments division is furthest along on its journey to plant rationalization. We're starting to see those benefits really come through. And also, they were right at the front of the line in terms of TMOS. When we see the results that's yawning in those plants, it's really, really impressive. So, we're looking to replicate that experience as we roll that out across the rest of the year of the business and see similar kinds of improvements. That's what makes us so confident in the 130 BPs next year, from squeezing that out of cost, with TMOS at the front of the line leading the charge there.

Steven Oakland -- President and Chief Executive Officer

Sure. And --

Pablo Zuanic -- Susquehanna International Group, LLC -- Analyst

[Crosstalk] Matthew, can I ask one -- before Steve answers that question. When Post Holdings talks a private label, they make a big deal about having a very high share of the categories they operate in private label. Can you give us just big picture in terms of where you are? Because, obviously, you have a very diversified portfolio. In some parts, you don't have as much share of private label. In other categories, you have very high share, right? I had thought in condiments your share wasn't that high. So, to me, it's quite possibly impressive that you're going to get that type for margin expansion with apparently not having such high share within private label. So, Matthew, if you can just give some big picture color in terms of the portfolio in key categories in terms of share of private label. Thanks.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah, I think if you go back to probably our last call -- and if not, it was the one before -- we lay out the categories and denote them in two different ways. One is where we have meaningful, premium, better for you, natural organic options. And I think the other dimension we used was where we were number one or two in the category. So, I think that's something I'd go look at. I think the real story here is a story of operating effectiveness, efficiency, and what TreeHouse 2020 can really bring us. And the condiments division stepped forward and we're at the front of the line here, and we're really seeing those benefits on the cost side as opposed to the market leverage side.

Steven Oakland -- President and Chief Executive Officer

Yeah, and I think -- to your point, Pablo, that's why we're so encouraged by it as well. The progress we see in the plants where we're running it, and we've got it occasionally in other divisions -- it's not just in condiments. But, we're very encouraged by that progress as well. And that's why you heard us talk in the prepared remarks about a pivot to more of that 2020 spend being on TMOS. We will have a lot of detail on that in our Investor Day in December.

When it comes to our mix between contract pack for other branded manufacturers and private label, I would suggest that our single serve coffee pod business has a lot of private label opportunity. And we see that as a growth business. And not that we would be against a contract pack for someone else. But there's a lot of opportunity in private label there. The contract pack I spoke to was in this ready-to-drink liquid coffee. And that will be both cold brew and other forms of that. That business right now, as we bring it online, has had, probably I would say, a disproportionate amount of interest from the big brands on contract pack capacity.

So, that suggests to me that just capacity in that environment is a little tight right now. So, we are, by definition, a private label manufacturer. Contrack pack has an important piece of certain businesses and certain segments for us, and I would expect it to be part of our ready-to-drink coffee business, quite frankly -- especially as we start out. But, I think the opportunity in single serve coffee pods in private label will consume is in the near term.

Pablo Zuanic -- Susquehanna International Group, LLC -- Analyst

Understood. Thank you.

Operator

Our next question comes from Akshay Jagdale with Jefferies. Please go ahead.

Akshay Jagdale -- Jefferies, LLC -- Analyst

Good morning. Thank you for the question. I have two. First one is for Matthew. You've referenced the back half of this year a number of times, but obviously delivery of that is highly predicated on 4Q. Can you just talk through your level of conviction on delivering on the significant sequential improvement that's implied by guidance? Obviously, there's a margin portion of it and there's also seasonality, which we understand. But when I look at the sequential margin progression chart that you have up by division, I mean it's a mixed bag, right? So, in aggregate, you need 150 basis points or so margin improvement sequentially. And I'm just trying to get a sense for why you are very confident with that. And then, I have a follow-up for Steve.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah, I'd draw your attention to Slide 20, and I think it's a great question. What we've said this year is that the first half was going to be very difficult and it was primarily around this disconnect between input costs and pricing. And we said, once we were over the hump of that, the back half of this year was going to look very much like the back half of last year. And certainly, when you're within five cents, I'd say that's very similar. So, Q3 we're very, very close. If you look at the walk to Q4, there are three big things, and we feel really good about them.

There's the normal seasonal uplift that we get -- and you know the categories that that impacts every year as we go into Halloween, Christmas, and the Holidays. We do have this creamer recovery. And when we did the forecast here, more of that was a forecast than it is today. We're really pleased with the way production rates are coming up there. I think we've got good line of sight to delivering on that. And that has been a pretty material drag on our earnings all year. And then, the final one was the Canadian tariff pricing. If you remember, we said we'd incur the cost for that in Q3 with nor pricing, because of a lag to get it in, and that we would fully recover the cost of the year in Q4. So, you're seeing that over recovery come through.

I think the other thing is, if you look at the margin improvement Q2 to Q3, it was also very impressive. So, I think there's a lot we feel good about here. There's a lot we think is very similar to what we've done before. And it's all items we either got in or got our arms tightly around.

Akshay Jagdale -- Jefferies, LLC -- Analyst

Perfect. And just, Steve, a longer-term question -- structural versus nonstructural. I would argue that food companies -- the structural problem that branded food companies have is more related to market share. Yes, the category growth dynamics, obviously, have -- are slow or worse than they were. I agree with that. But I think the bigger issue for branded food companies is market share losses. And that's where I would ask for more color from you. Maybe it's an Analyst Day question, but over the last 10 years, if I look at my model for TreeHouse, the organic growth is less than 1%. And, by my estimates, because TreeHouse has always had dominant market shares and there's a lot of bidding activity, it seems to us that there's share loss that happens there more so than share gains.

So, I understand there's -- you're going to improve the operational component of this, but I wonder what your view is on market share looking back and if there needs to be a material shift for the company to grow in line with whatever your view on the category is. So, it's a longwinded question, but you perhaps you can answer it at the Analyst Day.

Steven Oakland -- President and Chief Executive Officer

Well, actually, I thank you for that. In the answers that I had talked about -- when I talked about strategy and our presentation in New York in December, I did make a point to talk about how we return TreeHouse to growth. And maybe a fairer statement is how we pivot TreeHouse to growth. And there was no -- it wasn't by accident that I called out that we'll talk about the roll of organic growth. The organic growth one, two -- whatever the percentage is -- 3% or whatever that number is in this business, is dramatic. And we are in a position where we should be able to do that. And so, we'll talk about that. Now, it won't happen in every category and it'll be higher in some and lower in others. But, there's a real opportunity for this business to deliver if we're able to do that. So, your question is spot on, why I made sure that was in my comments today.

Akshay Jagdale -- Jefferies, LLC -- Analyst

Thank you.

Operator

Our next question comes from David Driscoll with Citi. Please go ahead.

David Driscoll -- Citigroup Global Markets, Inc. -- Analyst

Hey, thank you, and I appreciate you squeezing me in here. So, a couple of questions. Steve, first one is a just a follow-up to -- on what you -- you answered a couple of things here about what you're going to tell us at the Investor Day, but I'd just like to ask, are the strategic actions really significant or is this just pruning? Can you just give us a little bit of color here on the magnitude as to what it is you're going to reveal to us on the December Analyst Day?

Steven Oakland -- President and Chief Executive Officer

Well, I would pare it down to just say it's hard for me to comment on that. But, I think the expectations are that we do the things necessary to bring TreeHouse to where we call think it can be. So, I understand the expectations on the business and on me for that day. And I hope I don't disappoint you.

David Driscoll -- Citigroup Global Markets, Inc. -- Analyst

Okay. Matthew, a couple of follow-ups. I think you've already said a couple of things here, but different questions. I'd like to put them together. The first one is that, in the third quarter, pricing covered inflation. That produced the 5% margin. I think, secondly, you said that -- I think, to Andrew's question, you said that the big thing in '19 is to not repeat the big problems of the first half of '18. So, said differently, right, your third quarter has already shown that you've had pricing to cover the inflation, 5% margin. When you just start to think of what that means for the first half of '19, I think that's why you're saying you have some confidence that you don't repeat the disaster of the first half of the year.

And then, finally, I think you said on the call that there would be 130 basis points of margin delivery specifically from TreeHouse 2020, and that would be on top of anything related to pricing covering the inflation that's gone on this year. Each of those pieces that I've laid out right there, am I correctly restating the different pieces that you've laid out on the call here? I'm just trying to consolidate this information and make it clear.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Yeah, I think -- we talked about, by the time we got to Q3, the pricing would've caught up with the input cost challenges. And clearly, in Q1 and Q2 it didn't. So, we're pleased with that gap being closed. It's very clear to us also that it is not a sustainable business model to have inflation that's very clear, very in front of you, and not have it in price and then go through this six-month lag. If this is the profile of our business going forward, that's not going to be acceptable.

So, as we alluded to, we're out in market having those discussions right now because there's very clear inflation right in front of our nose as we sit here on freight, on packaging, on some commodities. And, as Steve said, some are down so some people are going to get a pleasant windfall. The other item is the 130 basis points of 2020 we see for next year. As we've said all along, that is a constant volume mix and price. And we are going to have a difficult lap in the first half of last (sic) year. As you've looked at our volume profile this year, you can see the back half is weaker. As we go through next year, we're going to have a difficult comp in that first half. And that's the pressure that we'll need to work our way through.

David Driscoll -- Citigroup Global Markets, Inc. -- Analyst

Okay. I appreciate that. We'll look forward to the Investor Day to spend a little bit more time on '19. Thank you.

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

Thanks, David.

Steven Oakland -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from John Andersen with William Blair. Please go ahead.

Jon R. Andersen -- William Blair & Company -- Analyst

Hey, good morning, everybody. Thanks for the question.

Steven Oakland -- President and Chief Executive Officer

Good morning, Jon.

Jon R. Andersen -- William Blair & Company -- Analyst

Most of mine have been asked, so I just wanted to spend a minute on Protenergy. You mentioned that there's a capacity expansion going on there. Could you talk a little bit more about the profile of that business? I think at the time of the acquisition, it was mostly a broth business. Is that still accurate today? And then, with respect to the capacity expansion, what are the objectives around that? Is it pure capacity to do more broth? Are there capability enhancements to maybe do other things in aseptic as well? Just trying to get a better profile of what's going on in that business and what your expectations are. Thank you.

Steven Oakland -- President and Chief Executive Officer

Sure. I would say, as we define Protenergy, it is still the broth business. The other aseptic things we're putting around it, we'll call different segments. But, it is primarily our broth business -- or it is our broth business. And it's been a fascinating category. If you think about a category that's been around forever, all of a sudden that business has just taken off from a volume standpoint. And I would suggest that private label has gained a tremendous amount of share. There have been a couple of our largest competitors get behind this, promote it, advertise it, and change their distribution mix, their merchandising mix, etc. -- their shelf set -- which has driven a lot of volume that none of us expected, quite frankly, in the industry.

So, we've got customers that are 230% of what they were a year ago type of thing. So, we talk about capacity constrain, I mean, the numbers are that dramatic, right? So, that's going on. There also segments in that -- of bone broth -- of much more upscale broths, which are on trend. And I would argue our new protein drinks are part of different diets. So, I would think there's two things going on here. I think there's just been this swing by a couple of our largest retailers -- frankly, by many of our retailers, and not just our largest ones -- that have swing that category more toward private label.

And then, on top of that, you have this consumer dynamic of these specialty items -- these ready-to-drink items, ready-to-use items. So, we have a couple of great dynamics there. We invested in some capacity for chasing it a little bit. It's a nice business, but we have some work to do on our manufacturing footprint and on our ability to produce that at world-class rates.

Jon R. Andersen -- William Blair & Company -- Analyst

And has the -- in broth specifically, has the conversion largely happened from out of cans into the aseptic cartons, or is that still going on? Is your growth opportunity more the private label piece, just picking up relative to brands in that aseptic format?

Steven Oakland -- President and Chief Executive Officer

I think it is. It's virtually all aseptic format. And that's what the opportunity for us is.

Jon R. Andersen -- William Blair & Company -- Analyst

Great. Thanks so much. Look forward to seeing you in December.

Steven Oakland -- President and Chief Executive Officer

Yep. Great. Well, with that, I think we'll call it a day. And I'd like to thank everybody and we look forward to seeing you all in December. And we'll sign off 'til now (sic). Have a great day.

...

Operator

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

Duration: 74 minutes

Call participants:

Pi Aquino -- Investor Relations

Steven Oakland -- President and Chief Executive Officer

Matthew J. Foulston -- Executive Vice President and Chief Financial Officer

David Driscoll -- Citigroup Global Markets, Inc. -- Analyst

Kenneth B. Goldman -- JPMorgan Securities LLC -- Analyst

Christopher Growe -- Stifel, Nicolaus & Company, Inc. -- Analyst

Robert Moskow -- Credit Suisse Group -- Analyst

Steven Strycula -- UBS Securities LLC -- Analyst

Amit Sharma -- BMO Capital Markets Corp -- Analyst

John Joseph Baumgartner -- Wells Fargo Securities -- Analyst

Pablo Zuanic -- Susquehanna International Group, LLC -- Analyst

Akshay Jagdale -- Jefferies, LLC -- Analyst

William B. Chappell -- SunTrust Robinson Humphrey -- Analyst

Jon R. Andersen -- William Blair & Company -- Analyst

Andrew Lazar -- Barclays Capital -- Analyst

More THS analysis

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