TreeHouse Foods Inc (THS) 2006 Q3 法說會逐字稿

Good morning, and welcome to The TreeHouse Foods 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 facts and can generally be identified by the use of words such as may, should, could, expects, seek to, anticipates, plans, believes, estimates, intends, 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, the actual results, levels of activity, performance, or achievements to be materially 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 31st, 2005 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 evaluating the information presented in this presentation. The company expressly disclaims any obligation or undertaking to estimate any updates or revisions to any forward-looking statement conveyed herein to reflect any change in its expectations with regard thereto, or any other change in events, conditions or circumstances on which any statement is based. This call is being recorded.

At this time I'd like to turn the call over to the CEO of TreeHouse Foods, Mr. Sam K. Reed. Please go ahead, sir.

Thank you, Allen. Good morning all, and welcome back to our TreeHouse. Dave Vermylen our President and COO, and Dennis Riordan, Senior Vice President and CFO are with me today. We will address third quarter performance, the outlook for the full year and market conditions as well as strategic initiatives and growth opportunities. I can summarize our quarterly report as follows.

Strong third quarter performance led by a 56% increase in adjusted EBITDA, or operating cash flow, from $18 million to more than $28 million. Continued revenue growth in our three major product categories, pickles, powder and soup, accompanied by a margin gain of 160 basis points. Smooth integration of the soup and infant feeding operations, highlighted by an efficient seasonal build up, resulting in favorable variances and soup volume, revenue and margin.

Unlike the preceding two years, no September surprise to spoil the quarter's results, due either to the acts of God or mistakes of man. Cucumber crop difficulties were more than offset by productivity gains and cost reductions. Increased earnings guidance for the year, based upon broad based margin gains and gathering momentum for soup and non-dairy creamer powder sales during the winter months. Those are our headlines for the quarter.

Since last year's bust we have turned around and regained control of our legacy businesses. We have stabilized our platform, and are well positioned for further growth and improvement. We will continue to make steady progress developing our private label, food service and industrial businesses, in spite of difficult pickle category dynamics, weak supermarket channel trends, crop shortfalls and input cost inflation.

David and Dennis will now explain how that progress translates into improved current performance and brighter future prospects, especially in margin expansion. I'll return later for a few preliminary thoughts about the coming year and future growth opportunities. David?

Thank you, Sam. Good morning, everyone. I'll cover top line operating performance for the legacy Bay Valley business along with soup and infant feeding. On legacy Bay Valley, while net sales were up only 0.6% we are encouraged by the mix of business as we continue to focus on our private label, food service and ingredient businesses centered on pickles and non-dairy creamer.

Pickle and non-dairy creamer sales were up a combined 2.7% led by pickles up 3.3 and non-dairy creamer 2.0. These growth rates are slightly above the prior six-month growth rates. The principal sales softness in our business was in our other segment, which was down almost 8%. Our other segment consists of our aseptic and refrigerated businesses. Much of the decline was related to refrigerated co-pack business we had last year at the time of the spin off from Dean Foods, which we did not have this year.

That co-pack business was adjusted gross margin neutral. While the loss affected our top line, our other segments profits grew nicely. While our pickle sales were good, we again faced challenges with the cucumber crop. As I mentioned in our Q2 call, back in early August. We are only seeing a fair crop due to early season wet weather. That wet weather effected us again late in the season, especially in the southeast in the month of September. That resulted in both higher crop costs and lower plant utilization.

The Oxford business has now been consolidated into our pickle factories, but the AGM on that incremental business is still lagging our food service goals as we are living with some low to no margin pricing agreements that we agreed to maintain through the end of this year. The retain pickle market showed a slight improvement in year-over-year dollar sales, though with a 2% unit decline. While one quarter does not make a trend, it is encouraging to at least see dollar sales above year ago.

Our private label share declined slightly as our price gap versus branded competitors narrowed. Branded pricing was below year ago levels, despite likely higher costs. In regard to our powder business, while our net sales were up only 2.0%, we began to see a rebound in ingredient powder sales. As I noted in August, after a warm spring, our ingredient customers has reduced inventories resulting in a soft Q2, when our total non-dairy creamer sales were down 1%.

Ingredient sales picked up nicely at the end of Q3 and we are encouraged by current momentum. The retail non-dairy creamer market also showed a modest gain after declines in the first half of the year. On soup and infant feeding, we are very pleased with both top and bottom line performance. While we are not presenting a year-over-year comparison, revenue exceeded our internal goals and AGM exceeded our objectives. Dennis will provide color on AGM performance.

While the third quarter is a low soup consumption quarter. The canned soup market measured in dollars was up a healthy 7% versus last year and our consumption trends were quite positive. We are in the peak shipment season and the signs are encouraging. Shipments are good and our customer service levels are outstanding. A significant improvement over last year. Our improved planning and customer service levels played an important role in our strong Q3 margins. The key in Q4, will be retail take away, which really escalates heading into the holidays.

No only are we pleased with the operating performance of the business, but we are very pleased with the management talent and its potential to add value to legacy Bay Valley. In that regard we have integrated the Bay Valley and soup and infant feeding retail sales and marketing organizations under the soup and infant feeding leadership team and transferred operating responsibility for Bay Valley's aseptic cheese sauce manufacturing to the soup and infant feedings operations team.

In addition to the retail sales and marketing integration, we are making excellent progress in other areas of the integration. Operating purchasing, finance and HR have all been integrated. The most critical projects yet to be completed relate to IT and supply chain integration. Our goal is to complete the integration in late Q1, '07 as we head into low soup seasonality. We are on plan to accomplish that goal. Once those projects are completed we'll be completely unbundled from Del Monte.

As we had into 2007, we are putting a great deal of emphasis on driving adjusted gross margin improvements in two areas. First, aggressive cost reductions and productivity improvements. And second, aggressive customer profitability management. We continue to generate a good amount of revenue with very low to no margin customers. And as we did in '06, we will make continued strides in improving the profitability of these customer or move on.

I'll now turn it over to Dennis.

Thank you, David. Our third quarter results include a full quarter of the soup and infant feeding business, which was the primary reason for the very strong year-over-year revenue growth of 46.4%. Excluding soup and infant feeding products, sales grew at 0.6% as we continue to focus on rationalizing our sales of branded products to focus on private label and concentrate on higher margin business.

Note that we showed growth in our three key product groups of pickles, powders, and soup and infant feeding with a sales decline coming from lower co-pack revenues in our refrigerated products business. Gross profit in the quarter was 54.2 million, compared to 34.3 million last year, with the increase driven by the addition of soup and infant feeding. Excluding soup and infant feeding, gross profit would have been 36 million, or 20.8%, an improvement of 90 basis points over last year, due to shifting away from lower margin co-pack business.

When analyzing our segment results, we look at gross profit, less commissions and freight expenses on customer shipments. We refer to this contribution measure as adjusted gross margins, or AGM. Our pickle AGMs were 11.1% in the quarter compared to 13.2% last year, as we experienced higher than expected cucumber costs due to late in the season weather problems. This caused us to purchase crop at higher than expected prices.

In addition, as David pointed out, the margins on the Oxfords Foods business continued to be lower than expected, due to low contracted selling prices which could not be offset through lower costs due to the crop issues. Our powder business experienced very strong AGM improvement over last year, finishing at 18.6%, compared to 14.6% last year. Most of the improvement was due to prevention of the problems in the third quarter of last year, as our current year margins are only slightly lower than our full year run rate. Still, we've had a very good year with AGM improvement programs as year to date AGM in the powder business is 18.9% compared to 15.9% last year.

Soup and infant feeding AGMs for the quarter finished at 16.8% due to favorable manufacturing variances associated with the ramp up of production in the third quarter. This was a very strong improvement over the second quarter soup and infant feeding margins of 10.2% which were negatively impacted by the roll out of inventory revaluations associated with purchase accounting and lower production volumes, which effect plant efficiency.

Soup and infant feeding margins exceeded our expectations, as we were able to make significant improvements in customer fill rates and other customer center -- metrics. In total, adjusted gross margins for the legacy business, that is without soup and infant feeding, finished at 15.3%, compared to 14.2% last year, as the decline in pickle margins were more than offsets by improvements in our other product categories. This brings our year to date AGMs in the Legacy business to 16.4% compared to 15.6% last year and represents AGM improvement in each of our three quarters this year.

In regard to operating expenses, first let me clarify that the freight and commission expenses are included in the line item, selling and distribution expenses on our published income statements. The total expenses were 36.9 million in 2006, compared to 24.9 million in 2005. These operating expenses are net of nonrecurring gains of 1.2 million, plant shut down costs of 0.5 million in 2006, and gains in 2005 of 0.3 million related to the disposition of assets from closed facilities.

Excluding these items, operating expenses would have been 37.6 million in the third quarter of 2006, compared to 25.2 million in the same quarter last year. The 12.4 million increase in operating costs is related to the direct SG&A costs of the soup and infant feeding business which totaled 9.7 million and increases in general and administrative costs associated with our first year Sarbanes-Oxley ad compliance and higher staffing related costs due to the overall growth of the business.

Interest expense in the quarter was 4.5 million, compared to only 0.4 million last year. Last year we had only very minor levels of debt outstanding to meet working capital needs, while this year we have the debt associated with the soup and infant feeding acquisition. As we previously announced, during the third quarter we refinanced our debt by entering into $100 million, seven year fixed rate, private placement offering.

In addition, we amended our credit agreement by increasing its capacity from 400 million to 500 million, reduced certain interest costs and created more flexible terms and rates in terms of interest coverage and other leverage ratios. Subsequent to the September financing, we determined that the short terms debt classification we used in our second quarter, 10-Q, in anticipation of the refinancing was too conservative and should have been classified as long term. As a result, we will issue an amended second quarter 10-Q to reflect this line item change on the balance sheet.

Please be aware that this reclassification has no effect on the other financial statements, footnotes or discussions of operations. Although the reclassification to a less conservative presentation has no effect on our results, the amendment is being done to ensure we provide the most accurate information possible. Our effective tax rate in the quarter was 35.5%, which is lower than our run rate of approximately 38% as we had favorable adjustments to our federal and state tax accruals, commensurate with filing our tax returns during the third quarter.

Finally, on an all in basis, our EPS for the quarter amounted to $0.26 per share, compared to $0.16 last year. If we exclude the unusual items effecting operating expenses, we would have had -- an operating EPS of $0.24 per share, excluding the gain from asset sales compared to $0.15 per share last year, excluding those one-time gains. The increase in EPS, operating EPS in the quarter came from improved results of the Legacy business, but was primarily due to the addition of soup and infant feeding.

Overall, we are pleased with the continued profit improvements at the Legacy Bay Valley foods business and very happy with the strong third quarter performance of soup and infant feeding. Now I'll cover the outlook for the balance of 2006. We have completed the third quarter in a high note with earnings that exceeded our expectations and positive fundamentals that we believe bode well for the fourth quarter.

Our focus on improving our margins ahs helped us weather the normally volatile third quarter, while the addition of the soup and infant feeding business have provided additional size to our company that further helps to insulate us from peaks and valleys of our Legacy business. Although optimistic, we are very much aware that the fourth quarter plays the most important role in our full year results due to the high volume of shipments associated with the soup and non-dairy creamer product lines.

We will continue to focus on operating improvements in the fourth quarter, and believe our already established programs will maintain their momentum and result in our fourth straight quarter of year-over-year margin improvement. We see continued challenges in the pickle business, but expect that our other businesses will compensate.

We also expect that the soup and infant feeding margins will be difficult to maintain at the Q3 level as we experience the high volume of fourth quarter shipments, while managing the process to get the right product mix to the right customers on a timely basis. In light of the strong third quarter results, and our view of the business trend so far in the fourth quarter, we are raising our guidance for full year operating EPS, that's excluding non-recurring items, but including the stock option expense to a range of $1.05 to 1.08.

Sam, I'll turn it back over to you.

Thank you, Dennis. Our revised guidance equates to a 40% improvement in adjusted EBITDA over last year. The coming quarter will complete our recovery from last year's troubles and set the stage for an even brighter future in 2007. We have accomplished this turn around in the old fashioned way. Specifically, we have stabilized Bay Valley Foods with new operating management following last year's implosion.

We have undertaken productivity gains, cost reductions and long overdue price increases to counter input and commodity inflation. We have improved planning and execution of operational fundamentals, especially in the management of the repetitive seasonal cycles affecting our primary products. We have expanded into a new and attractive product category, canned soup, in order to extend our private label grocery portfolio.

We've invested in food service pickles, the most attractive channel in this category, via a bolt on acquisition of a key regional supplier. We have reorganized the Bay Valley Foods management team to include the integration of savvy soup and infant feeding veterans and the addition of skilled newcomers. We have come a long, long way since this time a year ago. The outlook for 2007 is full of promise for continued margin expansion and top line growth of our product and channel portfolios.

To begin with, our management team has finally reached its full strength and is now equipped with improved tools. These include ;Bay Valley Food's sales and marketing teams are now organized by channel of distribution, retail, food service and industrial, with incentives based entirely on channel of distribution margins, key customer margins and total Bay Valley Foods operating profits.

Low margin customers and non-strategic business, ranging form legacy contract packing to regional brands have been targeted for margin improvement or strategic deemphasis. Operations and supply chain functions have been integrated across Bay Valley and the soup and infant feeding business, and all key management positions filled with experienced industry professionals.

The best practices of our legacy Bay Valley business in Green Bay and our new soup and infant feeding business in Pittsburgh, have been adopted through the combined and integrated organization. Our debt capacity has been increased to $600 million at favorable rates and terms, allowing for both capital projects to improve margins and acquisitions to expand the business.

Next, with regard to acquisitions, we continue to experience a favorable strategic environment with growth beyond our legacy pickles and powder portfolio. Our private label and food service customers recognize the benefits that only a single, multi line supplier can offer. Further, our customers understand the advantage in service and cost that only a large scale, integrated supply chain can provide.

Finally, our operating management team has demonstrated its skill in the integration of the soup and infant feeding acquisition, and in the capture of supply chain economics of scale and other synergies. This strategic environment will continue to favor TreeHouse, regardless of the tactical climate of the deal market. As we approach the peak of our first soup season, we are secure in the knowledge that our first strategic acquisition is a highly successful one.

Soup has expanded our market presence, increased our clout and further diversified our portfolio. Accordingly, we can ring in the new year with a sense of promise rather than last year's gloom, and with a clear mandate to pursue the next strategic opportunity.

Allen will now take questions and comments.

Thank you Mr. Reed.

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And we'll begin with Terry Bivens with Bear Stearns.

Good morning, everyone.

Morning Terry.

Sam, on the soup business, if you could talk about that a little bit. Did you get any pricing in the quarter? Obviously Campbell took some I guess on their condensed line. And the Nielsen numbers looked awfully good over the last period there for private label soups, so -- I'm wondering how you're looking at the business vis-à-vis your price gap with Campbell, as we go into the season.

Good morning Terry. Let me ask David Vermylen to address that particular issue.

Okay, good morning David.

Morning, Terry. The key for us -- I mean firstly, you're absolutely right. I mean the consumption trends in the category are looking good, private label is doing very well. The -- in the area of pricing, we have not been taking any pricing. It really has to be managed -- that pricing really has to be managed through your pricing promotions strategy with your retail customers. And that's what we're working on right now. We're pleased with the progress we're making on the top line as we've gone through this integration.

And where, in general, do you see your price gaps with Campbell and Condensed, just in terms maybe of a percentage.

Terry, I'd have to get back to you on that, I don't have the specific detail in front of me of where we are right now.

Okay.

I can -- we can provide that.

Okay great. Thank you.

And we'll go next to John McMillan with Prudential Equity Group.

Good morning, everybody.

Morning, John.

Feels like a Keebler call. Well congratulations. Just, if I'm -- technical stuff first. The 0.6% sales gain includes a pickle acquisition right? What's the total organic number, do you have that?

I don't have that handy right now, but it will pop up in our 10Q on Monday John. I'll have to get back to you on that piece.

Okay. And just -- we've gone from GAAP guidance to adjusted guidance, but I'm just trying to make sure, what exactly -- in your adjusted guidance of 105 to 108, are you taking out $0.04 worth of charges or $0.06 worth of charges.

John, this is Sam. Good morning.

Hi.

Just to address that matter conceptually, and then Dennis will answer the specifics. We decided after the last conference call to expand our discussion both in the written narrative and in the conference call to include adjusted EBITDA, primarily because it is the key indicator that we watch internally with regard to the state of the ongoing business.

Yes.

And also because the market watches that carefully.

Absolutely.

Have come to the conclusion that while we had put all the pieces out there, that we were not fully communicating our words, even though everyone else could do the calculations. So that's the background and it was decided at the end of the last call. I'll now ask Dennis to specifically answer the quantitative aspects.

And John, I think to answer your question, the number at this point is 4. This is based on a similar guidance that the -- you analysts have provided to the street, where you're looking at $0.26 for Q1, compared to a reported --

Yes

Fully diluted 24. You had 24 for Q2.

Well, see I actually have 25 for Q2 because I added --

My mistake, 25 for Q2. 24 for Q3. And that basis of guidance gets us to the $1.05 to $1.03, which implies $0.30 to $0.33 for Q4.

Okay, so basically, your guidance went up from a range of -- your guidance went up about 13%, [take] the midpoint? Just trying to -- your guidance went up from, is it 92 to 97, the 105 to 108. I can figure it out. But basically you took $0.06 out.

Net of 4. There was $0.02 in Q1, 4 in Q2, and this $0.02 went to -

Positive [inaudible] that's -- and just in terms of the deal market Sam, what -- I know you're not going to talk about what's in the pipeline, but sometimes pipelines are big, sometimes they're small. I think as I kind of listen to your words it seems to me -- you might have something going on now. Can you just kind of address that in terms of -- whether the pipeline you're looking at is much bigger than it was six months, a year ago?

Well, couple of comments John. First of all, while, in David's words, a season does not a year make, and we still have to execute against the soup season, what's clear to us now is that, in fact, all of the planning that goes back to last spring with regard to a seasonal ramp up here is paying back very well. And we still have to hit the peak, we still have to watch consumption and weather patterns and then we've got to complete the integration in the spring of next year.

Having said that, we can turn a considerable amount of the TreeHouse energy and effort into something other than the recovery of our Legacy business and the expansion into soup and we are looking now and considering the number of matters with a clear field and clear mandate in front of us. And I'm pleased to be back to that.

I think the other point to make, and we see it all the time with our customers, and the different channels of distribution is that -- the fundamental strategy that we put forward, as a company, by the conceptual analysis that David developed and the acquisition filter, I mean we are seeing now the real benefits that our customers are enjoying of this and that reinforced the fact that the strategy is correct and reinforces our resolve to find the opportunities to fully employ this capital.

Well said. If I could ask David, just one last question -- all the soup companies talk about soup consumption, consumption, consumption but obviously this is kind of a different category where there's a lot of pantry build. And I was in Chicago yesterday it was 70 degrees, I'm in New York today, its 70 degrees, its one thing to -- it isn't really consumption to put it in the pantry.

Is there any way -- and I know you're just getting your feet wet in this category, where you can kind of measure the pantry build, and measure to the extent that retailers featured these products in September and October and there was a little bit of a build?

John, I'm not sure if we have access to sort of in home diary panel data that could measure that. So our best read is definitely not our shipments, it really is what gets pulled through the scanners. It's a good question.

I think where it -- where that -- where pantry build would really have a big effect John, is when you get some of the retailers who will run sometimes on private label, 10 for 10 deals. That's where you can get the build. But other than that, I don't think people are building any excess pantry inventories, I don't think they're waiting for the great flood to come.

Okay. Thanks a lot.

On -- John, let me just answer -- Terry asked the question a little while ago on the price gaps. Our pricing, for example on condensed, the retail pricing over the last four weeks in September was the same this year as last year, through both base scan and promoted scan and where we did see an increase is in the retail prices, say for Campbell's Condensed. So the gap has increased.

For -- they can manage their retail pricing through their promotions strategies, most of our product is sold through EDLT and to get a retail price increase on our business, we really need to pass through a price increase. And what we would not be wild about is the retailers taking the price up and then just stretching their margins and us not benefiting from those increases.

And we'll go next to Robert Moskow with Credit Suisse.

Morning. Congratulations. Just one technical thing. Did you say what the debt was at the end of the quarter? Is it still 255 total or is it more than that?

We have not disclosed that. But it's in that range, very close, just slightly north.

Okay. And if you could give me a sense, you really haven't mentioned anything regarding pricing for 2007, and yet, I would imagine the commodity cost outlook is probably for some continued increases in your cost, not nearly like what it was in '06. Is there any -- what do you see your commodity costs outlook look like for '07, like high fructose corn syrup and soybean oil, and do you think you need to do anything to offset it?

Robert, this is David. Two things just in terms -- yes, we're definitely saying -- forecasting increase in soybean oil and corn sweeteners and with everything else pretty much being reasonable year-over-year change, certainly not what we were experiencing at this time last year. Our focus on pricing as I described at the end of my opening comments. We're really going after pricing and focusing in on low to no margin customers first. That's where we really think we've got to make the greatest gains.

Secondly, on our powder business where we do use a lot of sweeteners and soybean oil. A lot of that business is ingredient and we have a cost pass through contracts to offset that. But again, our primary pricing focus on the retail and food service side will be targeted customer pricing based on the current adjusted gross margins being realized today.

Thanks David. And on that subject, your gross margin in pickles you said is down, because you've inherited some booked business there from Oxford. Is that behind you now or when do we think that that will be completely behind you?

We will be living with a lot of those prices through the end of this year. And so we're moving forward now on that kind of pricing so it will affect our results next year.

In 2007.

2007. Yes.

Okay. Okay. And then lastly, gross margin in soup goes down in Q4 sequentially. You said it had to do with meeting customer demand? Can you give me a little more color on how that works? I mean if you're sales up but your margins down.

I said that we would have challenges I think to maintain that strong margin we had in the third quarter. Just because we had a lot of efficiencies and when you get into the fourth quarter you're in the height of the shipment season and its imperative that you've made exactly the right mix of products at the right time and have them in the right warehouse to satisfy customer needs.

Any -- any risk in that causes extra freight and handling which could affect the margins. So we had an excellent third quarter. I'm not ready to jump up and down and say we absolutely have that again in the fourth quarter, but we'll certainly try our best.

Okay, but sales generally go up in Q4 in this business sequentially don't they?

They do.

Retail take away?

They do, but our promotions also go up as well, and that has -- as we enter into season so. I think you'll actually find margins are better when you're coming out of season when the promotions are ending.

Got it. great. Thank you again.

Now we'll go next to Andrew Lazar with Lehman Brothers.

Good morning, everyone.

Hi Andrew

Good morning.

In the release you talked about, I think, $0.09 year-over-year, your contribution to earnings coming from the soup and infant feeding business. Does that correlate to kind of what the accretion was from that business in the quarter?

That's -- yes.

Okay. I think you had originally, coming into the year said for the year accretion for the year would be about a nickel.

That's what we were expecting, yes.

Got it. And so, is there -- I guess an updated view on perhaps the level of accretion in this business, relative to that? And, I'm curious how the $0.09 was kind of calculated because if you just use the, sort of the EBIT from soup in the quarter, and sort of tax effect it. You get a much bigger number. Are there costs in there? Maybe that run through on allocated they -- an allocated line or something that would bring it down to 9 in the quarter.

When we look at the business we do put costs over there, including the bulk of the interest cost.

Right even --

Because in our view the borrowings were related to soup and infant feeding.

Right. Even if I --

That has a big effect.

Okay, but there would be nothing else kind of wacky. Because even when I take out like the full interest cost I still get a number that even seems a lot bigger than $0.09 in the quarter, just looking at the EBIT in soup, taking out the interest expense and then tax effecting it. Just want to be sure I'm not missing anything.

There's also -- we also have corporate charges. Some corporate related expense. It ranges -- it's at the $0.09 Andrew. We could always.

Yes.

Try to clarify that later.

Okay. And then, I guess more importantly, the reason I was sort of going down that path, was because as I start to think about next year, and sort of the incremental accretion that can come perhaps from this business -- because you still have a big quarter of it. That will be your first quarter of next year, from a seasonal standpoint. Is there a way that -- I know you haven't kind of laid it out in detail yet, but is there a way we can start thinking about how incremental it can be in '07 versus '06 based on what you're seeing?

Andrew, not at this time. We're not ready to talk about '07 guidance and, as we've said, this is the big - this is our big quarter. We want to make sure we get well into it before we think about '07 guidance.

And then -- so there's two other quick things. One, as you go -- and this is going to deal with '07 as well, but its more -- maybe more factual, but the way sort of the options expensing has hit you, obviously it was kind of an accelerated way for the last couple of quarters, and then its kind of hard to calculate how that will look next year relative to this year. Because I'm trying to get a sense of is there, even a boost, if you will, to EPS in '07 because the options expensing the way it works will be less than this year. And I guess directionally is that the case? And then, do we have any way of calculating that?

Directionally that's the case and based on the terms that were laid out and are public, the expenses will maintain themselves fairly steady for the first half of the year an then in the second half is when you start to see a drop out, but I haven't provided and we aren't fully calculated yet on that. But I'll cover that when we go through the guidance for '07 I believe.

Okay. The direction of that is obviously a help as well.

That will be a help, yes.

Okay and there -- I know we don't have the amount yet, but obviously from an accretion standpoint there should also be, because you only have the soup business, not for the full year, there'd be some help there too.

Exactly, yes.

And then last thing is just, tax rate I know is lower in this quarter, do you -- what do you expect it to be for the year? Is kind of this lower run rate the ongoing or do we probably now go back up to where you've been over the last couple quarter?

we're still using 38%. Even though it dropped because of our share count being where it's at, it was actually in dollars, not a very big drop that caused that. So 38 is, I think, the right number to use for your models.

Got it. Thanks, very much.

And we'll go next to Jonathan Feeney with Wachovia.

Hi, good morning. This is John Baumgartner on behalf of Jon Feeney. I have two questions for you. First off, with regard to pickles, from your prepared comments, it seems apparent the competitive dynamics remain pretty intense. Can you see any sort of an inflection point on the horizon there? And what might be the catalyst that can kind of get you to that inflection point?

And then, secondly, we've also been hearing with regard to private label in general that some of the larger retailers out there have recently become less aggressive in their promotional and merchandising activities, in the various categories. Are you seeing any pull back in support for your categories?

This is David. In terms of the retailers, no. We are continuing to see a great commitment, at lest in our categories in terms of private label. So we don't see that as an issue and clearly on the soup side, as you look at the growth of private label soup over the last couple of years, it has -- the last 18 months since we've been looking closely at the business, its been high single digits even 10% range.

So that requires both innovations on the part of the manufacturers as well as support on the part of the retailers. And I love to have a cogent answer for you on the retail pickle competitive environment in terms of as cost pressures effect everybody, yet we see the two big national brands pricing at below year ago levels. We just think as the cost pressures continue to go up, sooner or later the retail prices will need to move. I just don't know when.

So it's more just a -- I guess a function of a pricing as opposed to just general consumer disinterest in the category.

Yes, yes. I mean the consumer disinterest in any category generally relates to what the manufacturers are doing in terms of innovation and marketing. And the pickle category is a category that for the last few years has lacked that kind of leadership.

Great. Thanks David.

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And we'll go to Pablo Zuanic with JP Morgan.

Hi this is actually [Reynaldo Besance], on behalf of Pablo, how are you guys?

Fine.

Thanks for flying Reynaldo.

Great. Can you just be a little more specific, and I may have missed this, but can you be more specific between sales break down between condensed and ready-to-serve soup in the quarter?

We don't provide that breakout. The most detailed information we'll give out is -- will be out next week in the Q, in the MD&A portion.

Okay. And you tell us what percentage of soup sales is each.

We will not.

Okay, okay. And just from a demand perspective. What are you guys seeing in terms of condensed and ready-to-serve soup and where's the growth potential here for a private label. And the reason why we think this is important is because we think you guys have a lot more growth potential in a ready-to-serve where the margins are generally lower. So we're just trying to get a sense here where you guys are seeing the growth potential in the category.

You're absolutely right. There is more growth on the ready-to-serve side than on the condensed side. But over the last year or so, the condensed, which back in the -- late 1990s and early 2000 was declining, condensed is actually showing, is a pretty healthy and obviously very profitable segment.

Ready-to-serve has been the real racehorse in the category for quite a few years and while the margins are lower, the price per case is higher and your profitability per case is quite reasonable relative to condensed. It is certainly a mix issue, going forward, for everybody, but we've got a lot of programs in place in terms of where we make our capital investment etc, in order to improve the margins on ready-to-serve.

Right. Okay great. Thanks. And -- now you lump soup and infant formula here in the press release, but which performed better in terms of sales growth and margin - profit margin trends.

Could you repeat your question again, I'm sorry.

Well, you guys lump soup and infant formula, but which performed better in terms of sales growth and profit margin trends?

Both did -- for the third quarter both soup and infant feeding had good quarters and in terms of year-over-year, pretty much comparable rates and they're both very good -- our private label soup business and our Nature's Goodness infant feeding business both grew and both have good margins.

Okay. All right great. And just -- if I may, one more. Do you find that given the higher commodity costs seen by the food companies, that you guys could have a greater argument in trying to raise prices to retailers, or the strength of this argument was kind of lessened by a fuel prices coming down here?

I think that last year we were very aggressive on our pricing because we had sort of across the board increases in commodity costs, energy costs, packaging costs, many of those weren't wrapped around the whole escalation in energy prices, the end of last year. As we're looking out to '07, where we're really seeing, in stead of across the board increases in a lot of areas, we're really seeing a very focused principally in corn sweeteners.

And that is focused, primarily, again on our non-dairy creamer business and as I mentioned in a comment early on. A lot of that business is -- we do a large ingredient business where we have cost pass through contracts.

Okay. All right great. Thanks a lot.

And we'll go to Justin Boisseau with Gates Capital Management.

Hi. Thanks for taking my question. A few housekeeping items on the balance sheet and the cash flow statement. What was the CapEx for the quarter?

Again, I'd prefer to wait until the 10-Q comes out, which will be on Monday, to go through the balance sheet items.

Okay. Are you still targeting the 22 million in CapEx for the year you previously guided towards?

I think it will be a little lower than that at this point.

Little lower than 22. And, were do you think the net debt will come out for the end of the year? Would you expect it to be around that 258 number that you were at most recently?

Again, we normally don't project n the balance sheet. So at this point, I'm going to take a pass on that.

And it appears we have no further questions at this time. Mr. Reed, I'd like to turn it back to you for any additional or closing remarks.

Thanks again to all of you for calling in this morning. We appreciate your ongoing interest in the company, the TreeHouse story and our improving prospects. We hope to see many of you next week at the annual Private Label Manufacturers Association convention and trade show in Chicago. For those of you that can't make it, we'll next talk to you in February, and talk to all of you at that point with final -- 2006 results and 2007 guidance. Thanks again, and good morning.

And ladies and gentlemen, that does conclude today's call. Thank you for your participation, you may now disconnect.