TreeHouse Foods Inc (THS) 2005 Q2 法說會逐字稿

Good morning and welcome to the TreeHouse Foods second quarter investor relations conference call. This conference call contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition to discussing historical information certain statements made during this call relating to the financial condition, results of operations and business of the Company which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used herein the words anticipate, believe, estimate, expect, will, and other similar expressions including when proceeded or followed by the word not are generally intended to identify such forward-looking statements. Such statements are intended to be covered by the Safe Harbor provisions for forward-looking statements contained in such act. And we are including the statement for purposes of invoking the Safe Harbor provisions. Such forward-looking statements include, but are not limited to statements about the operations of the Company, the adequacy of the Company's allowances for losses associated with the loan and lease portfolio, the quality of the loan and lease portfolio, the process of continued loan and deposit growth and improved credit quality.

Forward-looking statements involve certain estimates or assumptions known and unknown risks and uncertainties, many of which are beyond the control of the Company and reflect what we currently anticipate will happen in each case. What actually happens could differ materially from what we currently anticipate will happen due to a variety of factors. You should not place undue expectations on any forward-looking statements. We are not promising to make any public announcement when we consider forward-looking statements in this call to be no longer accurate whether as a result of new information, what actually happens in the future, or for any other reason. This call is being recorded. At this time I would like to turn the call over to the CEO of TreeHouse Foods, Mr. Sam Reed.

Thank you. Good morning everyone and welcome to our TreeHouse. It is a special place where shareholder value is created through customer solutions in the private label grocery and food service sector. I am joined today by the Senior Executive TreeHouse Foods team, David Vermylen, President and Chief Operating Officer and Nick McCully, CFO and Senior Vice President of FInance will address the quarter's results, strategic progress, and our current outlook. Additionally Harry Walsh, Senior Vice President of Operations, Tom O'Neill, General Counsel and Chief Administrative Officer and Greg Lewandowski, Senior Vice President of Finance at Bay Valley Foods are also in attendance.

TreeHouse Foods was formed by five us, all Keebler Foods alumni, seven months ago in order to establish a growth platform in the private label grocery food service and industrial segments of the packaged foods industry. We have witnessed the rapid growth of corporate brands in both the retail grocery and food service channels of distribution. This growth and the increasing demands of corporate customers for product quality, customer service and economies of scale are driving an inexorable consolidation among the manufactures and the distributors supplying both of these channels. Today a cottage industry of more than 1500 private label suppliers, mostly focused on a limited array of products in regional distribution is coming to an end. Tomorrow in its place a modern consolidated industry of a few dozen national suppliers will largely replace it and take its place.

TreeHouse Foods was formed to capitalize upon the opportunity, the Symberit impending consolidation, and subsequent industry transformation afford for the creation of shareholder value. It is our goal to be the supplier of choice based upon superior product quality, customer service and consumer value to both the private label grocery and food service industries. It is our strategy to develop customer solutions using our customers private label and food service corporate brands to achieve this goal. It is our policy to expand our platform to new and additional product categories via organic growth and acquisitions. In doing so we will generate superior returns for those investors who believe in the TreeHouse vision and our ability to develop it into an extraordinary enterprise that leads its peers in profitability and growth. Now, David Vermylen and Nick McCully will in turn bring you up-to-date on our progress of this strategic agenda, current market conditions, financial performance, and the establishment of our new company. David.

Thank you Sam. I'll briefly cover the top line results and highlight some key initiatives now underway. Before I do that I would like to reiterate a point we made on our road show regarding our refocus on being a private label and food service supplier. In 2004 and into 2005 the Company made a strategic shift to investing behind brands versus private label given our almost 90% private label pickle and nondairy creamer shares. This led to investing and expanding distribution of Peter Piper Pickles, and a major consumer relaunch of Cremora, a non dairy creamer. Neither of these initiatives succeeded and over the past few months we have been returning to our retail heritage private label. Over the next few quarters we will have some branded comps to deal with and we will highlight the effects.

Net sales for the quarter are up 2.6% led by nondairy creamer which was up 14%. Pickle net sales were down 4.6%. All the pickle decline was in retail as our food service sales were positive. The retail pickle sales decline was due to continued market softness and significant decline in our Peter Piper brand following last year's unsuccessful effort to expand the brands distribution base. For the quarter is market as measured by IRI was down 5.7% in units and 4.5% in dollars. The addition of Wal-Mart we believe the decline was closer to minus 2 to 3%. The good news is that within the IRI universe our private label unit share was up a full point to 30.4% of the total pickle relish market despite having lost a major retail customer last year late in the third quarter. While our private label units were down 2.6%, this is a good improvement from the first quarter when our units were down 10.8% and our share down 2.9 points. Our branded pickle share declined by 1.7 points to 6.2 with most the decline due to Peter Piper Velocity and distribution declines following last year's unsuccessful launch.

Significant cost increases continue to playing pickles. These increases are generally energy driven and affect the total industry. However we are not yet seeing pricing action on the part of the branded leaders. On the strategic front two key initiatives are underway relating to quality and capacity. We recently completed a major consumer study that has provided us with a clear benchmark for product optimization in 2006. On capacity we have initiated a study that is looking at customer and channel profitability, along with capacity utilization in order to develop the optimum operating model. Nondairy creamer sales were up 14%, with volume up about 10% and pricing up almost 5%. Good growth took place in private label retail an ingredient in export sales. As with Peter Piper Pickles the relaunch of Cremora did not succeed with net sales and retail share declining. The market is measured by IRI was flat in dollars and down in units. Virtually all the market decline is attributable to the Cremora decline.

Within the IRI universe our private label unit share grew 2 points, 46.4% of the total nondairy creamer market. Good retail growth is taking place in the nonmeasured channels. Tayzine costs continue to grow, while we have had made great progress in passing along cost increases it's a prolonged customer by customer effort with the results always lagging the cost increases. We also face high co-packing costs as we are outselling our capacity. We will be bringing on 10% more capacity late in the third quarter which will help eliminate the co-packing costs. The other segment which consists of our shelf stable cheese saws, and pudding business, along with refrigerated dressing, liquid creamer, and egg substitute business was up over 6% in net sales. This was primarily driven by cheese sauce growth. We had a smooth sales transition on the businesses we transferred over from Dean, Mocha Mix, Second Nature, and Rod's dressing, and we are developing strategies and programs that will affect '06 sales.

Finally, since the date of the spend I have spent a lot of time with key customers describing the customer and our strategy. The response has been excellent. The retailers desire to deal with fewer, but larger and more efficient private label vendors is clear, with one retailer talking about giving priority to master suppliers who can show up at the door with one sales person, one order, one truck and one invoice for multiple product categories. This sounds like the Bay Valley model. I will now turn it over to Nick.

Thank you David, and good morning everyone. I will take you through the financial results for the quarter and highlight key items that investors should be aware of. My approach will be to walk through the income statement and the supplementary information that we attached to the press release. Before going through the P&L line by line let me provide the financial headlines. First we completed the spin-off from Dean at the end of the quarter. This triggered recognition of $9.5 million in one time spin-off transaction costs which impacted the P&L. Second from a segment perspective the refrain is powder up and pickles down. Of our two segments, one is doing great, and the other continues to struggle. Third the quarter saw the continuing build up of the new general and administrative costs associated with the new TreeHouse Corporate Management team, which also impacted the P&L. And finally earnings before interest and taxes declined quarter over quarter after adjusting for one time items. These results are consistent with our expectations and the guidance that we have provided.

Now let's walk down through the profit and loss statement. Net sales at $185 million were up 4.7 million or 2.6% versus a year ago for the quarter. If you jump down to the segment information at the bottom of the table you will see that the variance is largely explained by pickles being down 4.6 million and powder being up by 7.7 million. The remainder of the change in net sales is attributable to other primarily aseptic cheese sauce sales. David has explained what's happened and what the conditions are in each of our segments. Gross margin or gross profit fell by 2 million or 160 basis points to a rate of 21 .9%. Again the best way to understand it is at the segment level. For segments we report adjusted gross margin which is gross profit less direct selling and delivery costs which are basically brokerage commission and freight out to customers. Pickle adjusted gross margin fell by 2.9 million while powder was up 200,000. This explains most of the difference in gross profit. Pickles were impact by volume declines which caused some under absorption of plant overhead. There were also ongoing cost increases in packaging cost for glass and plastic containers and in utility costs both to run the plants and freight to customers. Both the natural gas increase at the plant and delivery costs are driven by increases in petroleum costs.

Due to competitive market conditions in pickles we have been unable to pass through all of these cost increases as prices to our customers. Powder has also than impacted by higher costs, primarily for plastic containers and the cost of Tazine the milk derivative that we use to make nondairy powdered creamer. However competitive conditions have allowed more robust pricing in this segment, in addition due to capacity constraints, we have had to utilize a co-packer to satisfy demand at a cost in margin penalty to us. This penalty will abate with the fourth quarter as additional capacity comes on line. General and administrative costs were up about 2.8 million. Of that the TreeHouse Corporate group accounts for 2 .2 million for the quarter explaining most of the increase. The management fee paid to Dean foods, clearly this will be the last quarter for this cost as we have now separated from Dean.

Other operating expense net or other income and expense, let me explain what's in this line item. There are three items, the first is the one time spin-off transaction cost which were 9.5 million in the quarter and 9.6 million year-to-date. These are the legal accounting and investment banking costs which were incurred in order to accomplish the tax free spinoff of TreeHouse to the Dean shareholders. This should be it for these costs and they are clearly one time nonoperating costs. Partially offsetting these expenses are two gains included in this line, the first is the sale of an idol plant which generated 1.2 million of gain and the other is segment of litigation over fructose pricing for 1.1 million. So the net included in this line is 9.5 million of expense, less 2.3 million of gain and with a slight rounding difference gets you to 7.1 million impact on the P&L that's shown in that line item.

Interest expense is for the ongoing costs associated with our capital leases. Should comment on the tax rate for the quarter. Which looks somewhat out of line. The reason for it is that the spinoff transaction costs are largely not deductible for tax purposes. They generate book expense but no tax deduction. If you exclude the 9.5 million of these costs from taxable income the underlying effective tax rate is around 40% for the quarter and 38% year to date and we continue to expect a 38% effective tax rate for the year. Discontinued operations are the nutritional beverage business we discontinued at the end of 2004. Shares outstanding were determined as of the date of the spin-off to Dean shareholders of our stock on June 27. Since these shares only became outstanding effective on that spinoff distribution date we simply carry back the number of outstanding shares to prior periods to calculate earnings per share. The diluted effect or difference between basic and diluted average common shares is the effect of outstanding stock options. The supplemental information we provide includes depreciation and amortization and then as we talked about there is some segment information.

Looking at the overall results, if you exclude the one time spinoff transaction cost of 9 and a half million our EBIT would have been 18.6 million versus 21.4 million for the year ago quarter. If you further take out the two gains that were recognized in the quarter of 2.3 million, in other words take reported EBIT and add back the entire line of other operating expense of 7.1 million would get you to 16.2 million of EBIT versus 21.4 in the year ago quarter. The decline again is attributable to the new TreeHouse corporate costs, the effective cost increases and volume in the pickle segment. In terms of diluted earnings per share, reported earnings per share was $0.04, the one time transaction costs were worth $0.31. So earnings per share adjusted to exclude the one time transaction cost would be $0.35. If you further deduct or pull out the two gains that were recognized in the quarter those were worth $0.05 and would get you back to $0.30 on a pure operating basis.

You will note that the quarter and year-to-date results are consistent with the guidance that we provided prior to the road show. Where we said that operating earnings before one time transaction costs would be 64 to 67 million and earnings per share would range from $1.23 to $1.30. One comment on the outlook in terms of stock based compensation expense, this will occur in the second half of the year as we intend to early adopt financial accounting standard 123R as of July 1, however this is a very complicated accounting standard to adopt, particularly for the restricted stock and restricted stock units which we have in addition to stock options, so we don't know at this time whether the amount we provided in our guidance for this 4.4 million will cover the cost of stock based compensation.

That's a lot of information and I hope it's clear. Further details and specifics will be in our 10-Q, which should be filed by the end of the week. Therein you will find additional details as well as balance sheet and cash flow. You can e-mail us at info at TreeHousefoods.com or call us if you want to get on our investor mailing list or get notification of press release and SEC filings. Also please feel free to let me know if you have any suggestions as to what to include in our earnings releases and our conference calls as we establish investor relations policies for our new company.

David and Nick have summarized the current state of the business. Our financial condition and performance and the near term outlook. Before opening for your questions let me note that we have also made substantial progress on a number of strategic fronts. Specifically our customers corporate brands are once again the cornerstone of our go to market strategy. The Cremora and Peter Piper brand initiatives have been curtailed after costly and ineffective forrays into brand marketing. The legacy assets and related refrigerated businesses are now fully integrated into our newly named operating company, bay valley foods. The Suiza legacy assets and related refrigerated businesses are now fully integrated into our newly named operating company, Bay Valley Foods. These refrigerated products and the distribution system that supports them have been integrated into our portfolio and segmentation strategies as well as the Bay Valley supply chain and IT system.

Our supply chain is undergoing a strategic reassessment to improve margins, capacity utilization and product consistency. Nondairy creamer capacity is being expanded, pickle capacity is under study, refrigerator production is being upgraded, and logistics costs are now assigned to individual customer and product P&Ls. Instead of systems based on the Keebler model they have been rolled out to approximately 100 TreeHouse and Bay Valley foods employees. All middle managers have a personal stake in the business and a direct influence on the creation of TreeHouse Foods shareholder value. They are also actively engaged in the development of our critical strategies and communicating those strategies to customers, suppliers, employees, and other TreeHouse partners.

Finally our organic growth in acquisition strategies are being pursued in both existing and expansion product categories. A comprehensive consumer preference studies will direct both our product innovation and our search for small scale bolt-on acquisitions in our core pickle and nondairy creamer categories. Additionally potential acquisition candidates to extend our platform to new product categories and new distribution channels are being screened for strategic fit and growth opportunity. While we cannot predict the exact timing of this inherently lumpy process of acquiring businesses and adding product categories to the TreeHouse portfolio we like our chances as a strategic acquirer with synergies that others do not enjoy. In summary, after five months of transition with Dean foods and six weeks as an independent public company TreeHouse is ready, willing, and able to take on all challenges and to pursue all opportunities. We will now open the line for your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Robert Moscow, Credit Suisse First Boston.

Morning. I would just like to know, in the guidance that you gave for the year, did you already include these two one time gains in that guidance, were you aware of those gains?

No. The guidance is on pure operating basis, so it did not include those two particular gains.

You said it was on a pure operating basis, is it still on a pure operating basis.

Yes, yes it is.

So we can exclude the two gains from your guidance.

Yes. That is correct.

$1.23 to $1.30 as well?

That is correct.

Okay, good. Let me ask about, obviously you're taking share in pickles, which is good, but are you actively gaining business from customers also or are you losing business in some areas as well due to competitive pressures or is it pretty stable in terms of what you're getting within the customers.

In terms of the customer base it's very stable. I mean we're always dealing with different processes, but the only one that has had an effect was a large customer that we lost at the end of the third quarter last year. But other than that it's very stable.

Okay. Regarding acquisitions, can you tell me -- some of your peers when they make acquisitions may or may not integrate them with the overall operations, prefer to let them run on a stand alone business. When you're looking at acquisitions are you looking specifically for companies that can be integrated into your distribution centers and sales force?

I think Robert, the best way to describe it is we have an acquisition filter that we use as we're looking at different opportunities, the key elements of the acquisition I think their are six key elements, the first is the fit with the current business and clearly our current business is primarily a dry grocery platform. The other key criteria are the market size, the growth of the market, market share concentration, where we have identified, we prefer markets where there are really just one or two major national businesses. Third -- or fourth area would be barriers to entry to a certain extent the higher the barriers ultimately that's a better business for us to be in. Very important to us for both not only the vendor or supplier margins, but the customer margin structure so that the customers see it as a winning category that they're willing to invest behind in terms of merchandising support. And then finally, potential synergies both on the cost side as well as on the top line side.

Thank you very much Robert.

A reminder to our audience we would like to limit everyone to three questions. We will go next to Terry Bivens, Bear Stearns.

Good morning, everyone.

Hey Terry.

Just a couple of questions here. On pricing, you mentioned that you weren't able to really cover all the additional costs in pickles, can you give us a little more color on that, has Vlasic attempted to take pricing, is it just a tough category to price up in, what's the outlook there for maybe a little bit more robust pricing vis-a-vis the cost line?

We have not seen anything in terms of pricing. There will be some market by market some different changes, maybe in promotion price points, but nothing that is going forward really officially to cover these kind of costs. Basically we're dealing with a very similar cost structure, primarily driven by the packaging costs and freight costs, et cetera, but we have not seen anything in terms of list price changes.

As you look, we're hearing from some chains that perhaps there's less promotional activity with pickles than there may have been in years past. Is that -- do you sense that the grocers are kind of shifting some promotional things that may have been held with pickles into other items now?

I think that's a good perspective. I think that is going on. It's not one of the largest categories and I think one of the things that we need to do, the industry needs to do, is bring back a little bit more innovation and imagination in order to get the customers excited about the category.

Okay. Then lastly, Sam, with an eye towards what you did at Keebler, can you give us a little more color on perhaps the timing of acquisitions, I think there are those who thought that perhaps there might be a road map already out there, maybe if you could offer your perspective on when we should expect to see deals.

Well, I can assure you that it is our highest priority second only to getting new business on maybe a stable performing platform. Unlike Keebler there is not the ripe industry of companies all of one category that are the exact counterparts of Sunshine Biscuit, our president baking company who were immediately available to us. What we are doing here Terry, is looking through the filter that David described to identify those categories that are the best strategic fits for us, so that once we identify a category we will then pursue several acquisition targets in that category or a closely related one, one after the other. We don't have an exact timetable and we will really be driven by the market opportunity rather than any predescribed or predisposed schedule.

Thanks very much.

Thank you Terry.

Our next question comes from John McMillin, Prudential.

Hey, Sam, can you say Peter Piper pickled peppers three times fast?

John, weren't you impressed that I didn't trip over that at least twice.

Operator, that shouldn't count as one of my questions.

No, sir.

The 4% sales decline in pickles, the 4.6, what was that price in volume?

It was primarily volume, John. The specifics will be in the 10-Q and if I can find it I can give you the answer. For the quarter volume was actually down 6.1%, pricing was up 1.5%, net down 4.6%.

So with volume down 6.1 the idea suggested by another questioner, that you're taking share in pickles is somewhat, I guess you're taking share in private label pickles, but the only ones getting share in pickles and it has been the same story for a long time is Mount Olive, isn't that correct?

Yes. Though actually in the quarter from a unit perspective Mount Olive lost some unit share even though it gained about 10 ACV distribution points.

I looked at part of the category it looks like they're priced at private label.

They are operating at a very low price point, yet investing in terms of distribution expansion more like a brand. But they are clearly going to be facing some of the same cost pressures that everybody else is.

But they have one efficient family controlled plant, you have, and I don't pretend to know much about pickles, it just seems to me Sam you got six plants, they're all over the place, I guess that's the history of the industry, but cucumbers kind of grow most times, most years, is there any advantage to having six isolated plants rather than one efficient operating plant?

John, in the four days that we were a public company in the second quarter we were unable to see execution of that -- but I think you clearly point out that current trends indicate that this category has a lack of branded leadership and as a result soft volume trends that all of the processors and all of the manufacturers will have to reassess and make, develop strategic plans in that light. One of the things that we will do though, is continue to invest in research and development, continue to work with our customers to give them exactly the product taste and flavor profile that they want, and also to continue to make, undertake packaging innovations so that we maintain our number one spot throughout the retail grocery. private label. and the food service sectors.

Nick, when you're looking at this 123 to 130, whatever it is, you're looking at a $0.30 quarter, correct?

This quarter yes. We're at $0.66 year-to-date, we did $0.30 in the quarter, so I think it's pretty consistent. The only thing that will be different in the second half of the year is the adoption of FASB 123R, so I will have to factor in some stock based compensation expense, that was built into the guidance.

I know I'm way over my allotted questions, but we're having a good time. The Cremora brand, I followed this going back to Borden, I guess I always thought it was a, in the scheme of things, a decent brand just in terms of powdered beverages have you -- did I hear right you're discontinuing the brand?

No, we're not discontinuing it. There's some pockets of distribution which are good, I think one of the -- again the skill set for building a branded business, John, is very, very different than private label and I think some of the pricing strategies and the promotion strategies that were pursued to relaunch it were flawed and so the relaunch did not succeed. The product quality is excellent and it's a good brand, but it's a very different kind of operating model that requires a different skill set.

The great thing about cookies and crackers was you really couldn't load even if you wanted to because the stuff was so perishable. Is this shipment in powdered beverage in line with consumption?

It certainly is, John. In both the private label and the foodservice and the industrial sectors. So we enjoyed your three questions.

Likewise.

Our next question comes from George Askew, Legg Mason.

Yes, hi, George Askew here with Legg. Okay, three questions. The timing for the initiatives that you enumerated, the supply chain assessment, pickle capacity study, consumer behavior study, are those third quarter projects, second half projects, '06 projects, what's the timing?

In general these are projects that we plan to complete in the fiscal year 2006. And will David Vermylen and Nick McCully, and Harry Walsh are currently kicking off a strategic agenda and tied into the '06 budget. And that's where the key activities will be undertaken, completed and begin to flow through the financial statements.

Okay, good. You mentioned the performance of the other segment, I note that that includes a handful of noncore brands, but can you give us an update here? During the month of June you kind of indicated that you were re-evaluating some of those brands and product lines. Is there any update there?

Nothing that we can really report at this time. A big effort obviously is underway in looking at the businesses that we moved over from Dean. Mocha Mix, Second Nature and Rod's dressings and we're really working on those right now and will have probably more to talk about as we are finalizing our '06 plan.

Okay. And then finally, just, Sam, from the acquisition front, the question came up on timing before, setting aside the -- any specifics, I mean do you feel like you're ahead of plan on acquisitions, behind plan, on plan, as far as the timing that you might have in your heart of hearts there?

I'll answer it in a broad and general way. From a personal perspective every time I come back to Green Bay and come back to Chicago I am more encouraged and more positive about the opportunities that we have. Clearly the newer in ones will be closely related to our existing product categories and those will be small. When I look across the broad field in both retail grocery and private label, private label and food service and hear back from our customers and our own teams I'm uniformly and consistently more positive that we have the right strategy, the right structure, the right capital structure and the right team to make very substantial acquisitions and ones that will not only generate more cash flow, but give us greater growth opportunities as well.

And that's the pace that you expect?

As I said I have been more encouraged. But yes, at the expected pace or even better.

Thanks.

We will go next to Bob Cumins, Shields and Company.

Good morning everybody. I have two questions only, although maybe I'll think of a third one, but the first question has to do with, let me put it this way. Those of us that followed the old Dean foods under Howard Dean years ago used to always hear about the pickle crop, seems like it was a big crop that was bad for earnings, but it was a small crop that was bad for earnings, too. Can you just update us on the pickle crop and are ingredient costs either benefiting or hurting your earnings currently?

I think the pickle crop has been very good, the spring harvest down in the southeast was good. The harvest in the Midwest right now looks exceptionally good. I spent a full day going through the farms of Wisconsin about two weeks ago actually picking cucumbers myself, riding on harvesters, going through graders and everything else really to get a more hands on experience. Everything we are seeing right now we are in very good shape.

Okay. That sounds great. My second question is financial. You were lucky enough or shrewd enough to be spun off without any debt by Dean foods, which obviously gives you a lot of opportunities. I'm wondering to what extent you used that aggressively to build the Company, in other words if you find one or more really attractive relatively large acquisitions are you willing to leverage up the balance sheet considerably to take advantage of those and will you look strictly for accretive acquisitions or are they more likely to be dilutive in the early stages?

I will answer the second part of the question first. We really looked at it from a strategic point of view and a long-term value creation point of view. David went through the acquisition filter and it's really the strategic opportunity that drives it rather than a specific financial test of accretion or dilution. As far as the use of the capital structure we have in place a $400 million five year revolving credit line, it's essentially under the investment grade type of parameters that allow us to go up to three and a quarter times leverage in terms of debt to EBITDA. That given our existing EBITDA run rate and given the EBITDA of an acquired company, the 400 million, the math works out that that gives you a pretty good range of how much value you could acquire. Your question was would we go beyond that and I think the answer to that is that in the right circumstances we would use all elements of our capital structure, including taking on additional leverage if the right significant opportunity came along. But we've set it up initially to operate within an investment grade framework.

Okay, that's a good answer, thank you and good luck to you.

Thank you Bob.

[OPERATOR INSTRUCTIONS] We will go next to Patrick Jengosian Sequa Capital.

Good morning. Can you just expand a little bit further on the private label pickle business. It seems like the characteristic of having 90% market share, you have the inability to price to your input costs seem at odds with each other, so can you just explain those two divergent qualities?

Well, it really comes down to the price spread that the retailer is trying to accomplish versus the branded business. So in the private label world you really do need to be operating underneath that umbrella.

So is it fair to say given the six strategic criteria you listed for acquisitions that the private label pickle business doesn't have that favorable margin structure with the customer margin you mentioned?

The customer margins for private label are good. I think it has more to do when you think of the acquisition filter, it's the -- sort of the market share concentration and what are the strategies of those key branded competitors. One of the things that we are seeing and I think one of the previous questions related to I think it was John McMillin that asked the question about Mount Olive, in the pickle category Mount Olive operates closer to private label in terms of pricing, so that to a certain extent is sort of a roof on pricing as well.

Okay. And just again referring back to these six criteria for acquisitions. You didn't mention any financial criteria, I was just curious we're in the world where private equity firms are flooded with cash and this is a highly LBLable business and recent deals have been getting done, in the double digit EBITDA multiple levels, I'm just curious if you can articulate a financial criteria for acquisitions, what would be your appetite for taking on dilution in initial years?

Well, this is Sam. As Nick indicated, we do not have a single litmus test in that regard. We really look at strategic value and the long-term opportunity first. And once we understand that we will then come back to the dynamics of the capital structure and the amount of risk and leverage we're prepared to take in each instance. All of us have been -- we have been together since 1991, and except for the three years that Keebler was public all of that experience has been in the world of private equity and looking at leveraged buyouts ourselves. And while we understand that there is a substantial amount of money available to private equity firms the real key is to have a strategic insight with how to -- not only how to acquire a business, but what importantly to do with it afterwards and whether money is tight or loose. We will have that advantage.

So do you have any financial criteria established to date as far as the dilution levels you're willing to accept on a deal?

No, we would not want to apply that simplistic an approach to it. It's too much of a case by case strategic analysis.

Thank you.

Thank you.

We will go next to Herb Conner, Conner Capital Management.

Good morning.

Hi Herb.

Much has been said about pickles, I'm just curious how daunting was Nabisco when you took over Keebler as relates to the pickle situation currently?

I have a great deal more courage now. These businesses are ones that are substantial in size, have not had the dedicated strategic focus of their parent company, parent companies on an exclusive basis, and they're ones in, at least in the pickle industry where there is currently a dearth of national brand leadership. We saw similar situations and segments of the biscuit business years ago and we worked to do our part to turn that around. I think here, I like the hand that we have been dealt. If it were perfect and things were growing double digits and highly profitable we would not be on this call. But that's our opportunity and we're pleased to have it and optimistic about our ability to perform.

I would then suggest or I'm led to believe that it will be part of your product line in five years?

I certainly believe so. I think our entire strategy here is to build upon the businesses that we have and we regard the pickle business as a strategically important business and one where the long-term prospects will be excellent. And the industry is going through one of those cyclical soft spots and we will manage our way through it and when -- and emerge an even better operator and competitor.

One last question on pickles. You made reference to the fact that you lost a major account. I also assume that you guys are not doing nearly what you would anticipate with current accounts. Can you give us a little bit of color on the ability to regain a lost account or develop a heck of a lot more business with what accounts you're dealing with currently?

Well, we're certainly working with our current customers on building the business and while our IRI units were down on private label about 2.5% as I noted early on, we did gain shares. So that we are gaining share within the retail pickle world. I think in terms of dealing with new customers to be sold and prior customers to be regained, the key for us is to be out in front of them and that is what we are doing. I mean while the customer we lost a year ago we are having a great deal of contact with them to really focus in on are they getting from their current supplier the level of product quality and customer service that they used to get from us.

Great, thank you very much.

And our next question is a follow up from Terry Bivens, Bear Stearns.

Another pickle question. If you look at some of the market share data it seems to me that -- look at Mount Olive for example, the market share is basically what it was at the end of '03, there doesn't seem to be a great deal of variation in market share from that point. So I guess the question would be if you look at kind of flat to declining in the measured channels would it be fair to say that a good indication of how well you will do in pickles and Sam, you did say it seemed to be pretty strategically important here, is how well you do at Wal-Mart from this point forward, is that a good way to look at the business?

That's a very good way to look at the business. And clearly building our business with Wal-Mart is very high on our priority list.

And presumably as you make acquisitions and come to Wal-Mart with more categories, then that's all to the good as well I would assume.

It's all to the good as we really go after being -- I'll refer to a large customer I was with last week talking about being the master supplier, our goal will be with Wal-Mart and other retailers to be the master supplier of choice.

Understood, okay, thank you.

And gentlemen at this time we have no further questions. Mr. Reed I would like to turn the call back over to you for any additional or closing remarks.

Thanks. To all on this call and all who will hear the Webcast, we are delighted in your interest and your confidence in our new business. We will not disappoint you. We have come back from a -- reincarnated as humans, not elves this time, but we see an extraordinary opportunity in front of us. And this consolidation of manufacturers and distributors that's being undertaken in the retail private label and the food service industries will reward those who get out in front of it, are prepared to establish their position, their strategy and make strategically sound bets and we intend to be in that vanguard and hope that you are with us not only at the beginning, but for the whole ride. We'll look forward to talking to you again to report on the third quarter. Thanks all.

Once again ladies and gentlemen, that does conclude today's conference, you may now disconnect.