TreeHouse Foods Inc (THS) 2005 Q3 法說會逐字稿

Good morning everyone, and welcome to the TreeHouse Food Third Quarter Investor Relations Conference Call. 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 events, and can generally be identified by the use of words such as may, should, could, expects, seek to, anticipates, plans, believes, estimates, intents, predicts, projects, potential, 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 registration statement on Form 10 discusses some of the 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 evaluation--the information presented in this presentation. The company expressly disclaims any obligation or undertaking to decimate any updates or revisions to any forward-looking statement contained herein to reflect any change in its expectations with regard thereto, or any other change in events, condition, or circumstances on which any statement is based. And finally this call is being recorded.

At this time I would like to turn the call over to the Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed. Please go ahead, sir.

Thank you, Abe. Good morning everyone, and welcome back to TreeHouse. Our executive team led by David Vermylen and Nick McCully are with me today to review third quarter performance, and our outlook for the year. Three months ago I concluded our first investor call noting that TreeHouse is ready, willing and able to take on all challenges and to pursue all opportunities.

We have since been directly challenged by an improbable combination of soft market conditions, supply chain interruptions, and one-time events. After exceeding plan in July and August these factors produced a dismal September and a disappointing quarter.

Let me provide a summary of the impact of these factors which David and Nick will discuss in greater detail. The Pickle category continued its year-long decline while the Powder category flattened out after good growth throughout the year. Two explosions at non-dairy creamer powder drying operations and the inefficient startup of a new DOT (ph) dryer reduced powder output, hampered shipments, and cut into margins.

Hurricanes closed Gulf Coast sugar refineries curtailing industrial powder shipments and exports, and also spread airborne crop disease hindering cucumber harvest and pickle production. While one can only talk about the weather, we can and have taken immediate action to protect our agriculturally-based businesses. Powder supplies will be protected by a seasonal inventory build, and more diligent operation of our dryer facilities.

Critical ingredients and other inputs will be procured in a manner that ensures continuous supply even during a time of shortage. Crops will be spared future damage by Internet tracking of airborne disease and selective use of fungicides. We are, however, temporarily stuck with weak category dynamics in Pickles and Powder. Given these market conditions we must develop more effective private-label and food service customer solutions.

These require time to develop into mature sustainable programs. As a result, we have lowered our revenue forecasts for the fourth quarter and for the full year. As we look forward we now also see an impending surge in energy-driven inflation which is beginning to hit the entire foods category. The full impact of these cost increases is expected to affect margins across the food industry in the last quarter of this year, and well into the first quarter of 2006.

Pickle and Powder margins are particularly sensitive given their high reliance on natural gas-based fuel and packaging. Private-label and food service margins also react faster given the lack of branded marketing and other discretionary spending. Accordingly we are compelled to undertake a year-end and comprehensive price increase across all product categories and channels of distribution.

While the full impact of energy inflation is not yet known and the affect on volume cannot yet be precisely predicted, we are determined to move forward now in order to regain our historical margins. We face new structural cost challenges, and must move forward early in those categories and channels where we have a substantial stake.

Given the sudden and rapid escalation in energy-related costs as well as the still to be determined effects of pricing, we have decided to withhold 2006 guidance until early in the first quarter when this year's flash results are known. David Vermylen and Nick McCully will now in turn address market conditions and financial performance for the quarter past and the rest of the year.

Thank you, Sam. I'll briefly cover the top-line results. Revenue for the quarter was up 1.6%. Sales in the July/August period were up over 3.5%, but the business softened measurably in September. For the quarter our Non-Dairy Creamer Powder business was up almost 5%. Our retail Non-Dairy Creamer business was up just over 7%. The retail creamer market is measured by our IRI, was down almost 4% in dollars and 9% in units.

Our retail business that is not measured by IRI was up leading to our total retail net sales of plus 7%. We believe that the combined IRI and non-IRI measured non-dairy creamer market was flat. This compares to growth of around 5% earlier in the year. Our IRI measured private-label dollar sales were flat and our share grew 1.4 points. Our Cremora brand share declined as we refocused our efforts on private-label.

Our Powder Ingredient and Export business was up 5%, but customer business disruptions in September caused by the hurricanes resulted in cutbacks in shipments. A number of our customers ran out of sugar which they blend with our non-dairy creamer to make products such as cappuccino mixes. In September our sales were below a year ago versus a running rate of over plus 10% through August.

Our total Pickle business declined by 4.5% which is the same decline we experienced in the second quarter. Similar to the second quarter we had modest growth in food service more than offset by declines in retail pickles. More than half our retail decline was in branded pickles which we are de-emphasizing as we refocus on private-label.

We estimate that the total retail pickle market was down about 3%. Within the IRI universe the category was down 5% in units and 4% in dollars the same as in the second quarter. However, in September the IRI universe was down 6% in dollars and 8% in units which is of concern to us. For the quarter our private-label business continued to gain share with our dollar share up 0.3 to 25.1 and unit share up 1.0 to 30.6. That private-label share growth is consistent with the second quarter.

Our branded pickle dollar share declined by 2.1 to 5.9 virtually all due to the decline in the Peter Piper business. Like Cremora, we are having to live with the year-over-year declines in Peter Piper following last year's unsuccessful expansion. As we look at our total retail pickle decline, half of the decline is due to market softness, and half due to branded declines.

The good news is that we are gaining share in both private-label pickles and non-dairy creamer. That's exactly what our strategy is focused on. The bad news is that the markets are, in total, softener now than in the first half of the year.

Our other businesses which include aseptic cheese sauce, refrigerated dressings, creamers, and liquid eggs were up 11%. Before I turn it over to Nick, I'd like to follow up Sam's comments on pricing. Based on industry detail we see our costs escalating at rates comparable to many other food companies. We are all cost-challenged. The difference between private-label companies and branded companies is that branded companies have a bigger basket of other costs they can use to provide a degree of offset.

Eliminating one free-standing insert and a branded company can offset 1 to 2 million in natural gas increases. We don't have that luxury. While we have been very good at offsetting most label infringe increases through productivity improvements we have to offset this accelerating cost pressure through price increases.

The rapid run up in costs is obviously not unique to us except that the pasteurization of pickles and drying of powder are energy intensive, and our products are mostly packed in either glass or plastic which are also energy intensive. The cost of the container we use to pack a kilo of non-dairy creamer has gone up almost 50% in the last 2 years most of that increase coming right now. It's a significant part of the product's cost. That increase in the cost of the canister alone increases the case cost around 5%.

While costs have risen in the past 2 years at more moderate rates, we have not had the organizational commitment to get price increases. Where we got increases we'd often give them back somewhere else. Our sales incentive plans were not tied to customer profitability so why really go to bat for the increases.

The hallmarks of a good private-label company are quality and service, productivity gains, supply-chain improvements, and finally pricing to maintain customer profitability. Our biggest shortfall is in pricing. We're going to change that. Rather than approach pricing on a piecemeal basis we are making it a company-wide effort across all products and all channels.

We are providing people with detailed rationale for the increases by customer rather than just simple national announcements. Second, we are tying sales organization incentive plans to accomplish our account-by-account pricing objectives and total customer profitability. In the recent past our incentive plans had nothing to do with individual customer performance. That's ending.

We know there will be customer push back but we have the facts to show that our goal is to offset our increases, not to take advantage of the environment. I'll now turn it over to Nick.

Thank you, David. I will cover third quarter results and update our guidance for the full year. The headlines for the quarter are, first, it was a somewhat difficult quarter with results down year-over-year. Second, we adopted FASB 123R share-based payment, and third we are lowering our guidance for 2005 driven by cost increases, soft sales, and a lag in getting effective price increases.

First I will walk you through the P&L to describe results for the quarter. Net sales were up 2.7 million or 1.6%. If you jump down to the segment information at the bottom of the page, you will see that Powder was up 2.9 million and Pickles were off 3.6 million. The balance is in the Other segment which includes the refrigerated and other businesses and there we saw an increase in our refrigerated dressings business.

The gross margin slipped to 19.9% from 21.2% a year ago, and 21.5% year-to-date. As noted we were hit with a couple of unusual cost events in the quarter on top of the ongoing increases we've been seeing in energy-related costs which have affected glass and plastic container costs plus factory operating and break costs. Two unusual items were, first, we started up a dryer expansion project at our Pecatonica, Illinois plant and there were some difficulties getting it up to planned capacity. We incurred additional start up costs. Second there were some crop and throughput issues in our pickle processing plants which drove increased costs.

SG&A increased by 8.1 million versus a year ago. Included here is 4.8 million from the adoption of FASB 123R. There are also 2.6 million of TreeHouse corporate costs which are included in SG&A and the balance of the increase is due to increased costs at Bay Valley as a result of being a separate company from Dean Foods primarily in the areas of IT, information technology, and pension expense. You'll see that the management fees at Deans stopped this quarter with the spinoff. Other operating income and expense for the quarter is the reversal of a purchase accounting reserve which is included in operating earnings for GAAP, that obviously is not part of our current operations.

Reported operating income or EBIT was 9.4 million. If you add back the FASB 123R expense of 4.8 million, and exclude the other operating income of 300,000 gets you to 13.9 million for the quarter, which compares to last year's 16.3 million. The comparable quarter-over-quarter decline of 2.4 million is attributable primarily to two items. First as noted, the higher G&A costs for TreeHouse corporate and Bay Valley as a separate operation, which together are approximately 1.7 million higher than the year-ago quarter.

Second, the cost increases unique to this quarter as well as the ongoing cost of inflation we are suffering. The income tax rate for the quarter looks high. We took the effective rate on a year-to-date basis up to 39.4% as we analyzed the effective state taxes on TreeHouse as a separate company. The year-to-date adjustment to the provision ran through the third quarter resulting in the higher apparent rate for the quarter. We had been using 38%. Reported income from continuing operations was 4,953,000. If you tax effect the FASB 123R charge and the Other operating income and pull those two items out, it gets you to 7.7 million on a comparable basis or $0.25 a share, diluted share, versus $0.33.

Let me provide a couple of comments on the adoption of FASB 123R share-based payment. We decided to go with this standard effective with our first full quarter as a public company in order to provide ongoing continuity rather than wait until the first quarter of 2006. FASB 123R applies to TreeHouse for our share-based compensation arrangements for stock options, restricted stock, and restricted stock units. These arrangements are somewhat unique at TreeHouse for several reasons.

First, they were negotiated with Dean Foods by the five founding management investors of TreeHouse, part of our employment agreements, and those negotiations were done in the context of the spin-off as a whole. Second, they were designed as a 3-year equity incentive package, and we don't anticipate anything else for the founders for the first 3 years. Third, the restricted stock and the units are all performance-based with the restricted stock requiring that TreeHouse exceed the median shareholder return of a peer group and the units requiring attainment of better than the opening stock price of $29.65.

Finally, they were designed without any concern for how we would have to account for them under FASB 123R. Following the rules of the standard, TreeHouse along with its compensation consultants and accountants determined the value of the share-based payments and the period over which to recognize the expense. Needless to say this was a complicated exercise. The amount per quarter through 2006 is 4.8 million per quarter, and then it will start ratcheting down. That equates on an after-tax basis to 9.4 cents per share per quarter. It would take me too long to explain why the expense is front heavy, but effectively two-thirds of the cost is recognized over the first six quarters.

And finally, last note, this is purely non-cash. It will be reflected in the diluted effect on shares outstanding under the requirements of the accounting standard. The last topic for me is that TreeHouse has revised its guidance for 2005. This is primarily triggered by the weakening of business conditions that we saw at the end of the third quarter. We find ourselves in a lag period as energy-based and other costs ratcheted up quickly, and we have not been able to recover margins through pricing actions with quite the same speed.

As a result we are being cautious about the current quarter and we are not yet providing guidance on 2005, 2006, excuse me. Our specific revisions are net sales were taken to the range of 685 to 690 million, down from 700 million. Reported operating earnings EBIT should be in the range of 41 to 43 million. The reported number includes 9.6 million of FASB 123R, and 7 million of other operating expense. If you adjust for those two items our adjusted EBIT would range from 58 to 60 million. That compares to our previous guidance of 64 to 67 million. Depreciation and amortization are forecast at 17 million.

Finally, reported diluted earnings per share should range between 66 and 70 cents per share for 2005. As noted we're taking our effective tax rate to 39.4% instead of 38%. EPS, excluding the effect of FASB 123R and Other operating income, should range between $1.11 and $1.15 and our previous guidance was $1.23 to $1.30. That's it for me and I'll turn it back over to Sam.

Thanks, Nick. All of you should now have a better understanding of the current challenges we face at TreeHouse. You can also appreciate the unusual combination of factors that have, and will continue to affect us through the year end. We are now in a temporary lag period where all our actions trail events. We are aggressively pursuing programs required to restore Pickle and Powder margins.This effort is the urgent mandate of all at TreeHouse and our operating unit Bay Valley Foods. We expect better visibility of the business after year end, and we'll report back to you soon thereafter.

It should be noted that we did not see it coming. Eight months of satisfactory performance had not prepared us for September and the current prospects for the fourth quarter. As a consequence we must now mend our ways as well as fix our business. This lesson is lost on no one at TreeHouse or Bay Valley Foods. Before opening for your questions, allow me to address the opportunities as well as the challenges at TreeHouse. We are still ready, willing, and able to pursue all strategic opportunities. These include bolt-on and strategic acquisitions both in private-label and food service sectors. Neither our strategic vision, customer relationships, capital structure, nor management team has been impaired by this temporary stumble. We will recover both rapidly and fully in pursuit of superior shareholder value.

We are down but we are not out, and we will come back. We'll now take your questions.

Thank you, Mr. Reed.

[Operator Instructions].

And we do have a question here. This is John McMillen of Prudential Equity Group.

Good morning everybody.

Good morning, John.

You might not have seen it coming, Sam, but it looks like Gregg Engles did by the way he sold some options, so that's a comment more than a question. Just in terms of the pickle disease issues mentioned in the press release is that more for your sourcing of pickles? My understanding is Blastik (ph) and some others in the industry source more from Michigan where there hasn't been any disease in the cucumbers. Can you just talk about how that specific problem is more related to you than maybe your competitors?

John, we believe that the downy mildew disease affected crops in the Mid-Atlantic as well as the Mid-West. All of the companies have operations in both areas, and we think that it is affecting the entire industry. What we have determined is that there is technology now through Internet-tracking of these airborne spores that with diligence will allow us to, grower by grower, area by area, apply fungicides to prevent a virulent outbreak. And we did not employ that diligence this year but will do so in the future.

So some of these issues, given the nature of the cucumber crop, one crop a year, these issues could impact you to varying degrees throughout the balance of the next let's say 10, 11 months?

Well I think, John, that we've got ample warning now and the available systems to in fact curtail the extensive damage. And it should be noted that this year's strains that originated in Florida in the spring were particularly virulent, but they'd die out with cold weather over the course of the year.

Okay I got that. Now basically if I look at your earnings from operations at $0.25 in this quarter is your guidance, I'm trying to strip out charges, is your guidance for the fourth quarter roughly in line with what you did in the third quarter? So roughly kind of even sequential trends?

No it's actually a little bit lower, John.

Okay I'm just trying to make the numbers add up. Just so, a little bit lower, in the $0.05 area?

Well we've given, I believe the year-to-date is $0.58 and we've provided guidance of $0.66 to $0.70 on a reported basis so that's $0.08 to $0.12 for the quarter, and then you've got about $0.09 for the FASB 123R in there.

Okay so that gets me to $0.21.

Yes.

Or a little bit lower. And this $0.09 you're one of the first companies to take the stock options. I'm choosing to kind of be consistent and ignore it. But boy $0.09 a quarter, I mean you're talking about $0.36 kind of is an annual run rate? That's much higher as a percentage of profits than everyone else that we follow in the industry. I mean this is more like a tech company, Sam. I mean is this--I guess I just didn't see it coming to this level. Is my math right there?

Your math is correct, and it's primarily driven by the restricted stock and restricted stock units. I think that's about two-thirds of the expense. And those two items were, as I described in my remarks, really somewhat unique to TreeHouse because they were part of the negotiation with Dean Foods to accomplish the spin-off and hire the TreeHouse team en toto (ph). So it also covers 3 years.

And the way the accounting standard worked out, and this was incredibly complex. I mean we had to hire U.S. Associates (ph) to help us with the analysis, the accounting is so complex. It ends up front-ending. It's taken 3 years of expense and basically saying recognize two-thirds of it over the first half of that 3-year period. So you've got a high level of expense because of these negotiated restricted stock, and restricted stock units. Then the accounting standard is driving us to recognize 3-years of expense on a front-end loaded basis.

So, as you look at this expense into '07, the 36 number will come down?

Oh it will drop down, yes.

Yes okay so I guess I have a better understanding. Thanks a lot.

Sure.

And we'll go now to Ken Goldman at Bear Stearns.

Good morning.

Good morning, Ken.

A question on the acquisition environment. A lot of investors I believe that we have talked to are starting to get a little bit frustrated with--I know you guys had talked about lumpy acquisitions, but a lot of investors had hoped some more would come by this point or some would come. I'm just wondering if you guys are frustrated or whether you're seeing multiples higher than what you thought? Just curious to get some color on the environment out there.

Well it should be noted that I think we're in our fourteenth week as a public company. It is still very early in the game for all of us. With regard to the general environment we think that the prospects of fulfilling our growth strategies through acquisitions are really quite excellent. We are looking at number of small bolt-on opportunities and we'll, as we indicated at the very beginning, use our acquisition filter to consider strategic opportunities both as they're brought up by sellers, and more importantly as we perceive those in looking at categories beyond our base.

With regard to pricing and values it is important to be prudent and diligent, and to make only those moves that are strategically sound. This team has been doing that together for an extended period of time, and we'll continue to practice the same strategic forethought and financial care that we--that we have in the past. So our view is that in spite of some frustrations that may be premature on behalf of others, and in spite of large sums of money that private equity groups have and tend to focus on branded or fast growth opportunities, that our strategy and our strategic prospects remain intact.

Okay and you haven't seen multiples then for companies that you might have been looking to purchase rise in the last year? Have things stayed flat or have they become a little tighter for you?

Well I think generally they've stayed in a fairly close range and that there are outliers that have been related as special situations where there was rapid growth on top line in one particular instance. And then others where the properties for sale offered a clear strategic advantage to a large buyer, and one was willing to incorporate some of that additional benefit into a premium in that instance.

Then one more, I'm just hoping to understand a little bit better what's happening in the pickle category? In the summer of 2004 it seemed like that was a cool wet summer. That's what Gregg Engles had said at the time which may have explained why the Pickle category had slowed then. But obviously it's gotten worse since then. I'm just wondering why you guys think it's getting worse, and what needs to be done to really turn that around if anything.

This is David. I think that--I mean the pickle category has been declining a few percentage points for quite a few years. In the third quarter it declined, our estimate when you combine IRI and the non-IRI measured channels, we estimated a decline of about 3% which is consistent with the second quarter, and is pretty much consistent with the running rate over the last few years.

We were surprised by the fact that in the month of September it dropped down at a rate of about twice that decline so we are concerned by it. I think that the key challenge in the Pickle category is that what we lack in the Pickle category are the brands that invest in innovation, and consumer marketing to help drive the top line. It's a very quiet category in terms of key marketing elements, and in the packaged goods world innovation and consumer marketing is critical to driving the category. So I think we're faced with a category that is--needs some leadership.

Okay, thanks very much.

And we'll go now to George Askew of Legg Mason.

Yes, good morning.

Good morning, George.

Have you seen to date any pricing actions out of your competitors in your categories?

We'll avoid speaking specifically but the answer is yes. In different channels, in both Pickles and Powder we are seeing movements going forward. In addition we are--we are seeing across the food industry a lot of advances. I mean it's--as I said in my comments everyone in the food industry is facing cost escalation.

Right.

It's not just unique to us. It may be a little higher for us given that we are more energy dependent given our packaging in terms of glass and plastic.

Right, okay good. On the acquisition front, well, Sam you said this is the pricing and fixing the core business is 'the urgent mandate'. It would seem to me that by definition means that you're going to take resources away from the acquisition front, so to speak, at least for a quarter or so. Is that fair to say?

I don't see a trade off there. We have in recent weeks completed our executive succession plan at Bay Valley Foods, and have a new president of that division who has quickly gotten command of these matters to, in particular, include the comprehensive price increase. And while we have to clearly focus at TreeHouse on making sure that we have the type of early warning systems and the close attention to the key performance indicators, I think that our agenda here will still largely remain that of finding strategic acquisitions, and using those to supplement our current base. And to the extent that we have more work to do we will start earlier and stay later.

Okay fair enough, and then lastly is there anything about your reduced expectations and performance and GAAP numbers given the option and restricted stock expenses, anything about that that would affect your $400 million credit line?

No.

Okay good. Very well, thank you.

Thank you.

[Operator Instructions].

We'll go now to Zack Blasis (ph) at Jade's Capital Management (ph).

Yes I was curious if you had some balance sheet items like cash, total debt, accounts receivable, and inventory?

That will be in our 10-Q which will be out next week.

Okay what was your CapEx for the quarter?

For the quarter it was 3.4 million.

And what would you expect that to be for the year? Are you still in the $15 million range?

Right at it, yes, 14 to 15 million.

Okay and then far as the pricing, the price increases you're talking about when was the last time that you guys got a price increase for your end products?

Well pricing in the past has tended to be done periodically and by individual customers. So there's no--there was sort of no history of--across a full channel at a certain percentage, at one point in time. So it really has been very much on a piecemeal basis. And as I mentioned in my opening comments very often where there would be an increase with customer A there might be a decrease with customer B or we would set out to have an increase of X% and settle at a much lower rate, and that rate not covering our cost increases. We're not going to do that this time.

Right and if I'm looking at the last year's fourth quarter and implied sales for this--for the quarter we're currently in I think it's like 164 million roughly of revenue versus 180 almost. Am I looking at the right numbers?

I believe so, yes.

Okay are you assuming any--getting any pricing in the fourth quarter?

Right now only one variable is that as we move through with the price increases there could be some possibly incremental revenue. There could be some trade buy-in behind the increases. But it's very difficult to forecast that at this point in time.

Right.

But it's a good question.

But, but, but you're still, I mean the guidance seems to imply that both sequentially and year-over-year that excluding the 4.8 million which I agree is a big number, you know, excluding that it still looks like the EBITDA margins are going to be down a fair amount sequentially, and even more so from a year-over-year perspective. What's going to change that trend because this coming in for a couple, couple quarters now?

Well I think while you have access to the quarterly data that the more important trend analysis is to be based off of September. As I'd indicated to you that we were running on plan through August, and then it was the last 4 weeks of the quarter that were particularly disappointing in both sales revenue and in terms of our margins.

And as we forecast the fourth quarter I think it's a fair thing to say that we have exercised an abundance of caution in two regards. One, our--the amount of Powder sales we have budgeted for the remainder of the year are based off of the September run rate and take into consideration that we've got a number of operating and supply chain issues that we've got to remedy. Secondly that while the implied margins for the fourth quarter are in fact lower than a year ago for the entire quarter, they are a substantial improvement over the run rate as we entered--as we entered that quarter.

But has October been tracking with your expectations for the fourth quarter guidance?

I think in terms of the top line, yes. We haven't seen the final numbers but they will be generally consistent with the guidance.

Okay thanks.

Thank you.

And we'll next to Richard Wang (ph) at Oz Capital.

Good morning, just wondering most of these--I'm just trying to quantify one-time events like hurricane exposure, you know, plants explosions etc., have you done that in this quarter and could you share that with us?

We couldn't hear you very well Richard.

Most companies typically try to quantify one-time exposures like hurricane, plant explosions, those sorts of things? Have you done that for this quarter, and if you have could you share with us what that EPS would look like?

We haven't isolated those items and provided that as specific information.

Okay thanks.

And something is going to happen every quarter, you know. This we were hit with kind of an unusual confluence of events this quarter, but I don't want to characterize them. I mean they're one-time in one sense but they're also part of ongoing operations.

That is it, thanks.

And our next question will go to Scott Kirk (ph). Is it T-Cap or T-Capital.

Oh no, T-Cap is fine.

Thank you.

I just wondered, I realized you're not guiding to next year but could you help us understand the factors that could cause the year to be kind of in line with the previous assumption that the top line would be up slightly or not? I guess I'd like to get a feel generally for whether you're looking for the top line to grow next year ex-acquisitions or not? Thank you.

I believe it will based upon our preliminary planning work. You know even for this quarter that just past sales were up 1.6%. It's almost entirely volume-based growth. It slowed down at the end of the quarter but the Powder business was still up 5% overall. Refrigerated businesses are doing fine. They were up. Pickles we've talked about the continuing secular decline.

So all of that is very consistent with what we've provided as long-term guidance back in June. I believe we said that we expected Powder to continue to grow in the 5% neighborhood, and Pickles to be a flat to a modest decline, and that overall the company might look at the--like the 3% organic rates, and that feels about right.

Okay and then a follow-on question, on the acquisition front I recognize you can't speak to specific acquisitions but I think one analyst had commented some people had expectations of acquisitions was correct. And I wondered if you might be able to help us understand the timeframe. I realize you've only been public for 14 weeks and have a lot going on. So just in a general sense should we expect to see activity this year or first half of next year or if you can just quantify a general prime horizon when you think we might see some results from your work there?

Well it's not our policy to comment about either specific opportunities or timeframes. I will tell you that we are actively engaged in looking at a number of situations, and that level of activity meets, at least in my case, the expectations I had articulated when the company was first formed. What we have to be careful of is to make sure that we are rigorous in our due diligence, and that businesses we look at either provide an immediate bolt-on benefit or if they're strategic in nature, pass through the criteria that we've explained in detail with regard to our acquisition filter in that model.

Can you give us a sense that the opportunities that you're seeing now fit into the former or latter category? In other words are they more strategic in nature and potentially dilutive? Or are they accretive?

I'm not prepared to go into that amount of detail.

Okay, thank you.

And we'll go back--we'll go back to John McMillen of Prudential Equity Group.

In response to your October sales question, I think Sam you were implying that October sales trends were a little bit better than September given how bad September was?

John, we haven't seen the final numbers. I would say they are consistent with our guidance for the quarter.

Yes I'm just wondering if this one month fall of a cliff, Sam, was something that just was one month falling off a cliff? Or was, kind of continued in October?

I think that the--the year-over-year as we finalize the numbers, I would say that the year-over-year was in the general range of where we were in the month of September.

I guess you answer the financial questions. Sam does the strategic ones. If I could just have David for a second. On the whole powder creamer brand strategy, I don't pretend to be an expert on it. But I guess don't companies have to list brand stats in their products starting January if I'm not mistaken? What are the powdered creamer implications of all of this if any?

Well we've had to do quite a lot of labeling on the products, but the levels of Trans fats per serving are at such a level that it in most cases it translates to zero. But we're following all of the guidelines. And again it differs by customer by formulation.

And just my last question, just to the extent the stock stays weak, at what point, if any, do you say using your free cash flow to make an acquisition of your own stock, which I guess is not your corporate mission when you went public, but still at some point it's got to be viewed as alternative investment. You know at what point do you just kind of draw the line and go in that direction?

John this is Nick. I think it's way too early in the game for us to be looking at alternative uses of our capital. We are committed to the mission of growth through acquisitions and we, as Sam said, we are not disappointed with the pace of activity in terms of things we're looking at.

You have to be disappointed in a $31 stock down to 23. At some point if it goes to 13, you're just not going to do that, that's basically what you're saying?

No I'm not saying that. That would be a new set of facts and circumstances. And if that happens we would revisit our cost to capital and its uses.

Great, thank you.

And gentlemen we have no other questions at this time. So, I'd like to turn the call back to Mr. Reed for any closing comments.

Thanks to all you who dialed in today, and we appreciate your interest in our business, and hope we were able to give you a clear picture of what has transpired, and a compelling notion about what we are about to improve the state of our business. We will, once we have better visibility of the coming year, after having put into effect our price increase, and after having rectified some of our operating problems, we will get back to you with guidance with regard to 2006. Thank you very much.

Thank you that does conclude our call. We do appreciate your participation. At this time you may disconnect. Thank you.