TreeHouse Foods Inc (THS) 2007 Q1 法說會逐字稿

Good morning and welcome to the TreeHouse Foods Investor Relations Conference Call for the first quarter of 2007.

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, think to, anticipate, 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's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievement expressed or implied by these forward-looking statements.

TreeHouse's form 10-K for the period ending December 31, 2006, 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 disseminate 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, 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 Felicia. Good morning all and welcome back to our TreeHouse. We will report on first quarter performance, food industry conditions, our outlook for the remainder of 2007, as well as our latest acquisitions and their strategic value to TreeHouse.

As is our custom, I am joined this morning by David Vermylen, President and Chief Operating Officer and Dennis Riordan, Senior Vice President and Chief Financial Officer.

David will address market conditions, Q1 progress and challenges, our agenda for the rest of '07, as well as our new strategic growth opportunity in Mexican and Southwestern foods.

Dennis will analyze the past quarter in detail, as well as provide guidance for the balance of the year.

First please allow me to summarize our past performance, present situation, and future prospects in the context of our TreeHouse strategy and the macro trends affecting the packaged food sector.

As we are now all too aware, commodity and input cost inflation has returned with a vengeance. Direct input costs, excluding labor, are now forecast to increase at triple the rate estimated only six months ago following the fall harvest season.

The complex of Midwestern grains, edible oils, and dairy byproducts have rapidly escalated in price in response to bio-fuels, foreign demand, and energy uncertainty.

Legacy Bay Valley margins were particularly hit hard, especially in retail grocery private label categories, where pricing actions typically follow those of the national brand leaders in a well choreographed annual ritual. Legacy margins fell by almost $6 million in the quarter.

Although adjusted EBITDA or operating cash flow increased 23% to $27.6 million, it registered its lowest quarterly level since the soup and infant feeding acquisition last April.

We have instituted a comprehensive round of pricing actions, coupled with productivity programs to regain ground lost in Q1 and to recover full margins by mid-year.

We now expect direct input cost inflation in the range of approximately 8%, almost three times that originally budgeted.

The combination of pricing and productivity measures already undertaken and in the pipeline assures that we will fully recover the originally planned AGM or adjusted gross margin in the second half. David will provide more color commentary and details shortly.

TreeHouse has announced three strategic initiatives, two acquisitions, and one minority investment within the past three weeks.

These ventures all share common themes of strategic growth and superior return. Although smaller at present, they hold great promise in opening new vistas for TreeHouse and in leveraging Bay Valley Food's infrastructure.

San Antonio Farms, with its dedication to quality, freshness, and premium products promises to be our first real growth vehicle.

Positive category demographic and healthy food trends have converged to generate great momentum in premium, private label salsa consumption. Santa Fe Ingredients offers proprietary technology and great cost advantage in Mexican peppers, including jalapenos, a key San Antonio Foods ingredient.

In combination, these two businesses provide the base for extending the Bay Valley platform into Mexican and Southwestern foods. I am confident that we will make the most of this opportunity and in doing so inject a new element of on trend growth into TreeHouse.

DeGraffenreid provides a small but critical opening to the QSR, quick serve restaurant, segment within the foodservice channel. While Bay Valley currently serves the industry leader with a highly specialized product, we have missed the broader QSR market.

DeGraffenreid's singular focus on consistent quality and low-cost production for the entire QSR customer base will immediately benefit our foodservice channel. With minimal investment and hard assets, it is the perfect bolt on for Bay Valley.

With that summary as a prelude, I'll now turn it over to David.

Thank you Sam. Before I provide a review of our top line performance, I'd like to focus in on the margin pressure experienced by our legacy business in the first quarter.

Dennis Riordan will provide specific detail on commodity escalation and I will focus in on our pricing strategy.

As we developed our '07 operating plan last fall, we knew there was going to be an escalation in bio-fuel and dairy related commodity costs early in the year, but not to the extent we and other food companies are seeing. The laws of supply and demand no longer seem to exist.

The key decision we made last fall was to not take retail pricing until after we completed the systems and supply chain integration of soup and infant feeding into legacy Bay Valley. A successful integration requires an enormous data transfer as well as complete systems testing.

Taking customer by customer price increases on top of a system integration would have put the integration at risk. The good news is, is that the integration went extremely well and was seamless for our customers, which was our number one objective.

The success of that integration was critical in support of our buy and integrate business model. We were also beginning to see SG&A benefits associated with the integration.

Our '07 plan assumed very limited Q1 pricing but did assume higher input costs. But our actual Q1 input costs exceeded our plan, especially on legacy Bay Valley.

Dennis will provide greater detail, but the escalation in corn sweeteners and soy bean oil costs has been north of 20%.

That caused about a 200 basis point AGM impact on legacy Bay Valley, compared to where we closed 2006.

Our soup and infant feeding AGM hit a solid 15.1%. And while input costs were up, SIF input costs are not as bio-fuel or dairy driven as Legacy Bay Valley.

We are taking significant pricing in 2007 to offset the input cost increases. Of the total 2007 pricing, only 4% was realized in the first quarter with all of that being in our industrial businesses, where we have some cost pass through contracts.

As of May 1st, all non-dairy creamer pricing is in effect and our goal is to have pickle and soup pricing in effect by the first of June.

Our pricing should be fully operational as we enter Q3. Annualized, our pricing target is close to $50 million.

The bottom line is there are no fundamental, strategic, or operational issues associated with the legacy Bay Valley AGMs.

When costs escalate dramatically above all reasonable expectations, there is an inherent cost pricing timing lag, which will in the short-term negatively impact margins for a quarter or two. However in the long-term we will recover those margins.

We faced a similar situation 18 months ago post-hurricane Katrina and we quickly recovered. If late this year the bio-fuel and dairy complex problems continue to drive commodity pricing, we will not hesitate to take additional cost justified pricing.

Let me turn to our top line performance. After being down 2.4% in the fourth quarter of '06, legacy Bay Valley revenue was slightly above a year ago.

Combined pickle and power sales were up 2.3%, with powder up a solid 7.4% after being up only 1% in the fourth quarter. Soup and infant feeding revenue achieved its plan.

Retail market conditions in the quarter were more favorable than we saw at this time last year. Pickle dollar sales, as measured by IRI were up 1.2% and our private label sales were equaled a year ago.

The non-dairy creamer market was up 4% and our private label business was up 3.5%. The soup market was up 6.3%.

Turning to the acquisition front. We are very excited with our pending acquisitions of San Antonio Farms, our acquisition of DeGraffenreid Pickles, and our equity investment in Santa Fe Ingredients.

San Antonio Farms is the leading producer of premium quality private label and foodservice salsa. The company currently has limited sales resources and is disadvantaged in terms of distribution.

This business will be a perfect fit with Bay Valley and we are excited about being in a category with excellent growth prospects in both retail and foodservice. This business has been growing at a compounded 15% and we are confident that growth will continue.

Our modest investment in Santa Fe Ingredients is based on two basic facts. First, unlike pickles, the pepper market is growing due to the growth of Southwestern and Mexican cuisine.

Second, the patented harvesting and processing technology we are investing in should significantly reduce pepper saucing costs, which should, beginning in 2008, benefit both legacy Bay Valley and San Antonio Farms and allow us to be a significant bigger player in the retail, foodservice, and ingredient pepper markets.

The harvesting technology is quite a breakthrough. Right now, jalapeno and chili peppers require hand harvesting. This patented harvesting technology eliminates hand harvesting and one machine can harvest in two hours what it takes 50 to 60 people to harvest in six to seven hours.

San Antonio Farms and Santa Fe Ingredients will be cornerstones and are developing more value-added products in higher growth markets such as Southwestern and Mexican foods in both retail and foodservice.

DeGraffenreid is a foodservice pickle company with strong distribution in the South and lower Midwest with most of its business being with chain accounts. It too is an excellent fit with Bay Valley's foodservice pickle business, which is more distributor focused.

We are acquiring the book of business and the production equipment, but not the plant, which gives us flexibility down the road.

In summary, it was a frustrating quarter due to escalation and commodity costs but a good quarter strategically.

We completed the complicated systems and supply chain integration of soup and infant feeding that was seamless for our retail customers.

We now have a one sales person, one invoice, one truck go to market platform and one that we can add on to creating SG&A synergies.

We made two acquisitions, one that launches us into the high growth salsa category and the other that is a perfect bolt on to legacy Bay Valley.

We made a strategic investment in a company that could have excellent cost and market growth benefits for Bay Valley. And we have the pricing plans in place and the commitment from the organization to bring our AGMs back to their targets. I'll now turn it over to Dennis.

Thank you David. As David indicated, we began the first quarter of 2007 with a variety of operational successes. But these were offset by significant input cost increases that drove down our legacy business AGMs.

Sales in the quarter were $259 million compared to $172.7 million last year, an increase of nearly 50% due to the addition of our soup and infant feeding business.

Excluding soup and infant feeding products, sales would have been $173.2 million, slightly up compared to last year.

Continued weakness in retail branded pickles, combined with the rationalization of our branded products was offset by stronger than expected sales of non-dairy powdered creamer. Soup achieved its budget and rebounded nicely from an unseasonably warm December.

Gross margins in the quarter were 20.1% compared to 23.4% last year. The decrease was the result of very high input costs. As David stated earlier, these increases were not only significant in size, but they happened very quickly.

Let me give you a few examples of the magnitude of the increases from the beginning of last year's fourth quarter to the beginning of this year's first quarter.

First, corn syrup rose 14%, casein increased 10%, and non-fat dry milk increased 50%. By the time we initiated new pricing, we were behind in trying to match up to the input cost increases.

As a result, we saw very weak margins in the first quarter primarily in our legacy businesses that rely on those inputs.

Pickle margins were down from 16% to 11%, due primarily to the high costs associated with sweeteners, vinegar, and corrugated combined with lower absorption of overhead due to volume decreases.

Non-dairy powdered creamer margins were down from 19.7% to 17.2% due principally to the high cost of sweeteners, soybean oil, and casein, partially offset by some pricing in the quarter.

Soup and infant feeding on the other hand showed nice margin improvement due primarily to greater operating efficiencies as a result of synergies from integration activities.

Operating expenses increased to $36.1 million in 2007, from $28.3 million last year primarily due to the addition of the soup and infant feeding business.

Partially offsetting the increase from soup and infant feeding were lower stock option expenses and lower administrative expenses.

As a percent of sales, total operating costs improved 250 basis points to 13.9% of revenue from 16.4% in the first quarter last year.

Interest expense during the quarter was $3.8 million with the increase coming primarily from debt associated with the purchase of the soup and infant feeding business.

The effective tax rate for the quarter was 38.9%.

Net income from continuing operations totaled $7.4 million or $0.24 per diluted share compared to $7.4 million and also $0.24 per diluted share last year.

Excluding one time plant closure costs reported in the first quarter of 2006, the earnings per share last year would have been $0.26.

In summary, we got off to a slow start to the year due to the escalation of input costs and the timing of price increases.

However as David indicated, our pricing programs have gone very well and we are comfortable that we have now covered our input costs increases with offsetting price increases.

We have already seen margin improvement from Q1 based on the early analysis of April results and expect to continue out trend of lower operating costs as a percent of revenues.

However the real benefits will come late in the second quarter when the full effect of the pickle and soup price increases takes hold and our internal cost savings programs fully develop.

In terms of balance of the year guidance we believe our already implemented pricing and cost savings plans will result in us meeting our previous guidance of $1.29 to $1.34 in fully diluted EPS.

Further, we are comfortable with the $0.27 to $0.29 range of street estimates for the second quarter.

We do not expect meaningful accretion from the addition of San Antonio Farms and DeGraffenreid acquisitions this year due to having their results for only part of the year and the incremental costs associated with purchase accounting and in particular the GAAP required write ups and the value of inventory along with incremental integration costs.

As we stated in our previous press release, we expect San Antonio Farms to contribute $0.05 per share in 2008. The DeGraffenreid business will be slightly accretive after considering financing cost. Sam, I'll now turn it back to you.

Thanks Dennis. Before we open the phone lines for your questions and comments, I will offer three observations on the past several months at TreeHouse.

First, whether from commodities, energy, or politics, we are in an era of direct input cost inflation that must be shared by our customers and consumers rather than born solely by manufacturers.

Gone are the days of simply absorbing those costs and making the margin shortfall up elsewhere with cost savings and heart power.

The food industry's current circumstances place a premium on a business system such as ours with its synergies that come with scale and customer advantages of the one order, one shipment, one invoice, one sales person business system. Adversary will sharpen our competitive advantage.

Second, there is an inherent lag in pricing to offset rising inputs costs in our private label foodservice and industrial business model. While we have plotted a steady strategic course of margin expansion, there are periodic headwinds and cross currents that may slow our passage.

However, we have traveled this route before and as our record clearly demonstrates, we will neither be thrown off course nor fail to reach our destination. We may be delayed but we will not be deterred.

Third, our acquisitions team has demonstrated that its actual performance is an equal match to its long anticipated potential.

We have completed the seamless integration of the soup and infant feeding business following a complex carve out transaction, year long systems transition, and complete reorganization of retail grocery private label sales and marketing.

In the meantime, our teal team identified and brought to fruition three smaller but significant opportunities to expand our business, leverage our infrastructure, and reward our shareholders.

Our TreeHouse has grown by more than 50% in the past year, acquiring nearly $400 million in new business along the way and in doing so further improved our future prospects. I expect that there will be more of the same again and again in the days to come.

Felicia, please open the phone lines for Q&A.

Thank you. (OPERATOR INSTRUCTIONS) We'll go to Robert Moskow of Credit Suisse.

Good morning.

Good morning Rob.

I guess that I'm having some trouble reconciling the tone of the call with what was in the press release because in the press release you say that the results met your internal expectations. But then you also say on the call today that commodity costs rose much higher than you expected and it's a slow start to the year.

So which is it? Did it meet your expectations or did you've always expect a slow start to the year and just the rest of us didn't realize it?

Well we expected the slow start given that we knew we were deferring any pricing, even though we were going to have higher input costs. And clearly the input costs came in significantly higher, especially in the grain-based and dairy areas.

Okay. And then, I guess I'm surprised that you were surprised on high fructose corn syrup coming in higher than expected. Do you have a forward contract on high fructose corn syrup or how are you positioned there?

Well on syrup we're covered through the year.

Okay. So did that come in higher than you expected in the first quarter or not?

It came in -- part of the challenge is when the contracts come up. And that huge increase in the fourth quarter that was a surprise to us.

Contracts came up and they were higher than you expected.

Yes. That's because of the market pricing in Q4.

Right. And the pricing initiatives that you're putting through right now for pickles, this is the part of the business that concerns me the most, are they enough to fully offset this year the higher commodity costs or are they only partially offsetting this year?

In every instance, we are taking price increases that will fully recover the costs that are anticipated now and to do so, rather than just a percentage basis on a dollars per unit. And at present, we have forward coverage on most of those commodity cost increases.

The place where we continue to have exposure relates more to our non-dairy creamer business where in fact a big part of that volume is pass through costs to industrial customers. But we are well covered when we are mark to market currently.

Okay. And then Sam, you said that the Spring/Summer season you expect the higher pricing to be in effect for the pickles business.

I imagine just from the numbers here, is that the highest volume period for you during the year or do you have to protect merchandising price points during that time period?

We will have everything in place at the latest by the beginning of the third quarter. And pickle pricing along with other commodities is being taken now. We are adjusting the marketing programs to reflect these higher costs.

And we have found very good acceptance of the price increases. As I mentioned in my comments, all of the non-dairy creamer pricing is in effect as of May 1st and customer by customer they have been very accepting of the aggressive increases that we're taking.

And the key to getting those increases is literally sharing with them the increases that we are seeing in the commodity costs and being able to cost justify every recommendation that we're making.

Okay. And then if I do the math on what the back half of the year implies in order to meet your annual guidance, I'm getting like an operating income growth number of something like 25%.

Is that being driven by pricing or do you need volume to grow in order to get those numbers? And then secondly am I close in what the math implies?

Rob, the primary drivers will be margin along with operating expense as a percent of revenue continued and having that continue to go down from year ago levels.

The sales -- we are not being aggressive in our legacy business sales, so the focus is on price recovery for input costs and internal cost savings. So it will be primarily a margin play.

Okay. Thank you.

We'll go to Ken Goldman of Bear, Stearns.

Good morning.

Hi Ken.

Question on acquisitions, I just want to get a sense for what's still in the pipeline, not to not give you credit for the small accretive ones you've just done, but I think some investors are looking for more of the larger kind.

I'm just wondering if you see some of those larger ones on the immediate horizon? I know you can't be specific, but if you can give us some sense of how you're seeing that.

The question has to do with the pipeline with regard of future acquisitions. And we are working on a full agenda right now of prospective expansions of the business.

And the most important of those are [BCs] that we have developed internally and have been working on for quite some time to basically to find product categories that fit our acquisition filter much like premium salsa.

In addition to that, the number of properties that are up for auction that fit our general criteria, the number have increased.

So again, I won't offer specific names, nor product categories, nor dates. But we see that general conditions are improving in that regard, that volumes are up, and that I think clearly as demonstrated, we've got the capability and the capital.

All right. And then just one question on the DeGraffenreid acquisition, you've bought the production equipment and you're entering into a lease for the land and building, but you're also saying that you're not committing to further production capacity.

Can you help me reconcile those two on how is it not committing to further production capacity to have extra of their production equipment?

Well it really is in the fixed assets, the amount of equipment that's in DeGraffenreid is modest compared to the total infrastructure that we have within Bay Valley.

And as we are looking at our entire pickle footprint by having entered into a lease agreement on the property, we'll be able to look at the optimization of the entire network. The moving the equipment around and everything else is a very small part of network rationalization. We really like that property.

Our people have been down there a number of times and Joe Coning, Bay Valley's CEO, was down there on Monday and see more opportunity in that operation now then we even realized during our due diligence.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) We'll go to Andrew Lazar of Lehman Brothers.

Good morning everyone.

Good morning Andrew.

Good morning.

You've talked about the great acceptance you've gotten from a retail perspective on some of the recent pricing actions. I'm curious when you took pricing in some of these areas 18 months ago or so, I'm trying to recall what the ultimate kind of consumer reaction was.

I don't recall it being horribly negative. And I know that was a worry at the time because you were sort of newer to some of these brands and hadn't taken pricing on a lot of them in many, many years.

What's the learning from the consumer reaction then as it relates to how you think the overall volumes will react.

And I guess part and parcel of that would be from competitive standpoint, I'm assuming, but it not be right, that your close in sort of competitive set and some of the branded players in some of these areas are kind of doing similarly such that gaps remain relatively similar on the pricing front.

Andrew, this is David.

Hi.

On the -- in terms of volume, we took the big increases back in the November/December of '05. We really saw very little consumer reaction.

There was the only place that we actually lost any business with was one powder customer who was just not going to accept an increase. And we decided that for our pricing strategy we needed to walk away from the business.

But just in terms of consumer velocity and our ingredient business et cetera, it's really been quite stable.

And I think in terms of pricing, what our people have found as they've been going in with price increases, the people at the retail customers that we're dealing with, they're sitting there with a stack of price increases and we're just another one on top of it.

And I think across the food industry, there is more pricing underway than there has been in years. And it's going to continue that way.

Okay. And then lastly, the production year-over-year in total operating expenses was I would assume from your perspective a real bright spot.

And you talked about obviously hoping to see year-over-year decreases as you go through the next couple quarters.

Do you think the magnitude of those types of declines year-over-year that we saw in this first quarter can kind of continue through the year?

That would help give you a little bit more obviously comfort level in sort of the full year forecast.

Andrew, Dennis here. We expect that we will continue to see improvement. One of the things we talked about last year was the first year full year of go public costs including Sarbanes-Oxley and others. And we've been able to begin reducing those costs.

So we expect to see some continued improvement there. In addition, the stock option expense is down and that will continue to be down. So we're pretty positive that we will continue to see reductions.

I can't commit that the percentage decrease will be the same, for instance in Q4. But we will see the continued drops.

Great. Thanks very much.

We'll go to Jonathan Feeney of Wachovia Securities.

Good morning. Thank you.

Hi, Jonathan.

Could you tell me a little bit about the adjusted gross margin potential in the soup and infant feeding business?

Because it occurs to me that it's a relatively low number as I think 15%, I know improved from the fourth quarter that you're showing right now.

If you compare say gross margin in that business versus the gross margin of the branded players, it's an enormous difference.

And I know there's a difference, but I'd say that difference of just cuffing it would average 20%, not 35% if you went across private label category.

So you do think there's -- can you give us a sense what your long term sort of expectations are for AGM in that soup and infant feeding business?

This is Sam. Let me talk about the structural components of it and then with that introduction ask David to address the private label soup component specifically.

First with regard to the structure, we acquired in the soup and infant feeding business really three interrelated product lines that all share the same production and distribution facilities.

The largest single component is private label soup. And that is of great strategic importance to us and where we are most focused building the business as well as making the kind of capital investments to improve margins.

In addition to that, we have an infant feeding business in the Nature's Goodness brand and in contract packing for Hain Celestial and their Earth's Best.

There we have to improve the economics on a small business, primarily through productivity programs as I mentioned earlier with the recognition that that is.

While it's substantial, it is a small part of the business and one that is third in terms of its national brand footprint.

The third element of the business are a number of legacy contract packing arrangements that include making foodservice products for H.J. Heinz and also making retail products for Del Monte Foods.

In the nut segment, we have long term agreements that relate to a cost plus scenario but which we have the opportunity to improve through productivity gains and a reduction of waste, et cetera. The number that we report is a combination of those three businesses.

And when one looks at our retail private label soup business, I think it's quite safe to say that the margins there are better than the blended matter of the three. And it is also the business, which offers the most growth potential for us.

So that's the structural background. David, do you care to comment on the private label soup?

I think the near and the greatest opportunity is going to be now that the soup and infant feeding is on the Bay Valley IT system, we will be able to measure the profitability of every product and every customer, which the private label soup organization has not been able to do.

One example that I will highlight is we do a very large chicken broth business with a very large retailer. And we have quickly discovered through our systems, that that item loses a tremendous amount of money every year.

So we have already gone to that customer and presented them with here are the facts and here is what we have to do. Again we only have a couple of months -- less than two months worth of data in the system.

But we're already beginning to find those opportunities. And I think that's a big part of what will allow us on the private label soup business to improve the adjusted gross margin.

Maybe without giving a long term target, can we -- that will come up over time you think, that adjusted gross margin should come up substantially?

I think I'm not sure to what degree until we are really able to mine the data so to speak. But when you seen an opportunity like that, you realize there's a lot of opportunity in front of us.

Thanks. Just one follow-up question, Sam, you wrapped up the comments with -- and I think Dennis just mentioned too, this across the board pricing going on in food.

And it occurs to me that there have been periods where the manufactures have eaten cost increases before. And it's not like margins are zero in the manufacturing industry.

What is it that's at the margin different this time you think that you feel so strongly that pricing needs to come up across the board? When you're talking to customers, how is it different right now?

I think it is in two respects different. First in terms of a general circumstance, I think there is a growing awareness among consumers and customers that there are certain cost elements related to agricultural products and also energy that have in the last few years shown a steady increase. And that is at a rate that is beyond what we had become accustomed to.

I think there is also a recognition that some of the factors underlying those changes have to do with matters that are not inherent in the micro-economics of those markets.

But they relate to policy decisions or international matters that people have a growing awareness that those factors are distorting market conditions. That's the general circumstance.

I think secondly and a more important one with regard to TreeHouse Foods is that we are providing a service of great value to our customers.

And that as we expand this integrated business system, where there's one face to the customer, one order, one shipment, one invoice, and that customers can with no increase in deliver lead times get full truck loads of mixed products at the lowest possible delivered costs and that we can do that consistently as well as build our product line and our offering around their marketing programs that our customers are seeing the benefit of dealing with TreeHouse Foods and recognize that that benefit will only increase over time and that we should be paid for that.

Okay. Well thanks very much.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go to Pablo Zuanic of JPMorgan.

Good morning everyone.

Good morning.

Good morning Pablo.

Good morning.

I have a couple of questions, but first just trying to assess the potential for the price increase here.

Walk me through your competitive picture in your four main products. Because if I think of soup separate from infant feeding, the retail label separate from non-dairy creamers and separate from pickles, where do you see better potential?

I know you touched on it before but from my perspective, where do you have scale? Where do you have a cost advantage? Where do you have a brand or the private label business that gives you an edge over competitors?

Costs are up for everyone but clearly some people have more or less pricing power. In soup Campbell has been increasing prices. So I think that there you're all in good shape. But in the other three categories, remind me what the competitive picture there that will allow you to increase prices in line with the industry?

Well, I think in terms of, Pablo, this is David. In terms of non-dairy creamer, there is on the retail side, there is nobody out there with the scale and cost position of TreeHouse. We have somewhere in the close to 90% share of that market.

And it's due to our cost position, the quality, and the service that we bring to the retailer. And I think as we have gone through with our pricing on non-dairy creamer, it's been aggressive pricing. And it has been accepted.

In pickles, we've been seeing through promotion prices growing, pricing taking place in pickles. And again, we have an 80% share of private label pickles.

And the supply chain dynamics of being in that business and servicing private label customers is enormously complex and for someone else to get into that when you're dealing with one customer you may have 60 SKUs and a national brand may have 60 SKUs across the country. To be in private label and to do it is a real challenge.

So I think as Sam articulated that the one truck, one delivery, high level of service and our scale and our ability to meet the needs of those customers puts us in a good position. There is always push back. There is always the treat of a bid. But you've got to stand tough.

Let me give you one very, very good example on our pickle business in terms of going forward with pricing. I can't mention the customer name, but trust me it's in our top ten on retail pickles. And we had for years had a hard time getting any pricing through them.

It's a big customer and within our company the attitude was, well it covers a lot of fixed overhead. This year we knew we had to get aggressive pricing because it was one of our lower AGM customers.

We went in there and our sales organization knew that we were standing behind them. And that is, this is the increase we're going to get. And if they won't accept it, we will walk.

Not only did we get the price increase accepted, but we picked up a lot of new business associated with it because no one else could match what we were doing. And in fact, we had some new ideas that we could bring to the market.

So the private label world is a tough world. But we've got the scale and the product quality and the customer service to move these increases through.

Thank you. That's very useful. And just to follow-up, after the recent deals where are you in terms of the balance sheet? How much cash is available for acquisitions?

Pablo, the 10-Q will be out shortly today. So it will have a little more detail. But Q1 is our strongest cash flow quarter. We ended last year with $230 million in debt and had a very strong cash flow quarter.

We're in excellent shape even with these two acquisitions. We have the $500 million line of credit. We can bounce that to $600 million quite easily.

We can take our leverage rates up to four times debt to EBITDA. So we've got plenty of room and that won't hinder our ability to continue to go after larger deals.

Thank you. And just one last one, in terms of option expense, the idea was that the first year it was $0.38, '07 was supposed to be $0.19. Last quarter you increased the guidance for option expense for this year to about $0.32.

How should I think about option expense into '08 or '09? And also, you had talked about option expense in '07 being front-loaded.

You only booked $0.05 in option expense this quarter, in total of $0.32. So walk me through option expense this year and how to think about it going forward please. Thank you.

The option expense for this year should be very consistent with what we had in the first quarter on a go forward basis. We'll see a slight decline coming in at the end of the second quarter due to the normal vesting.

We'll probably have some more option grants. But I think for the time being, consider Q1 to be indicative of the full year.

And just on that point can I interrupt? I see you have give guidance of roughly $19 million in option expense for this year, I'm sorry, $16 million.

Yes.

Which was (inaudible) of $0.32. Now the first quarter was $0.05. So you're saying the option expense for the year should be $0.20, not $0.32 then?

No, the option expense number that I gave for the first quarter or during the guidance for the year is actually slightly higher than what I think our run rate's going to be. We're slightly under that projection.

Well go next to John McMillin of Prudential Securities.

Good morning everybody. Can you hear me all right?

Go ahead.

Okay. Sam, is the biggest risk to your business plan this year that costs keep going up?

John, I think that the risk with regard to cost is the lag time that it takes to recover those. And we will as we go forward, to the extent that these markets move, we will have some built in delay to recover them.

When you look at the current costs, and David indicated that we've got $50 million of annualized pricing and have seen great acceptance to date of that.

Matched to that is commodity and direct input cost inflation in the neighborhood of around 8% of those particular costs. Most of that is in one way or another covered for the remainder of this year.

And that which is not, is primarily related to our non-dairy creamer business where we've got at least in the bulk and industrial section the means to pass those through with the slightest of delays.

So there is of course the risk that markets will move again. And with that there will be an inherent delay.

But I think that we're confident that we have covered that and that confidence is reflected in reiterating that the guidance that we provided for the full year in fact is -- still stands.

And at this time I'll turn the conference back to Mr. Reed for any additional remarks.

Thanks Felicia. Thank all of you again for joining us this morning. We appreciate your continued interest in TreeHouse.

We are as the quarter indicated going through operational challenges at the same time that we see great new strategic opportunity at our company and that we are both determined and confident that we will meet your highest expectations in the short-term for present performance and in the long-term for future growth.

We hope that you decide upon an extended stay at the TreeHouse and are with us on our next call in August. Thank you.

That concludes today's conference call. We thank you for your participation.