TreeHouse Foods Inc (THS) 2008 Q1 法說會逐字稿

Good morning, and welcome to the TreeHouse Foods Investor Relations Conference Call for the Fourth 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 guidance, may, should, could, expects, seeks 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's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31st, 2006 and subsequent quarterly reports discuss 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 statements 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 would like to turn the call over to the CEO of TreeHouse Foods, Mr. Sam Reed. Please go ahead, sir.

Thank you, Cynthia. Good morning all, and welcome back to our TreeHouse. David Vermylen, Dennis Riordan, and I are pleased to report our first quarter results and outlook for the year. We are off to an excellent start for the new year having met all expectations for earnings, revenue growth, and strategic execution. This fast start augers well for continued progress in coming months.

2008 will be a challenging year for the package foods industry in general. I am confident that it will also be one of great opportunity for TreeHouse.

Let's first review the key developments of the first quarter. Operating income or adjusted EBITDA increased 35% to more than $37 million on the strength of last year's acquisitions of E.D. Smith and San Antonio Farms.

Sales revenues, excluding acquisitions, grew almost 5% as our established pickle and powder categories showed both revenue growth and margin improvement. Newly acquired E.D. Smith also posted double-digit top-line growth across its broad portfolio.

Gross margins, including those for the recently acquired businesses, were essentially constant on a pro forma basis. Commodity and energy inflation was virtually offset by pricing actions in all major product categories and in all three business units.

Our supply chain demonstrated great resilience in responding to a non-dairy creamer powder plant fire that threatened our industrial and export ingredient business. Although the plant will remain under construction throughout the summer, we have maintained our full book of business without a loss of customers or revenue.

Turning next to the outlook for the full year, I see a mix of daunting challenges and enticing opportunities on the immediate horizon. Direct cost inflation is now forecast at $100 million, all inclusive, for the year. This amount, which exceeds last year's rate of increase by almost 80%, is a cautious estimate driven principally by the Midwest grains complex and energy markets. When marked to market, it is now estimated that our entire industry faces ingredient packaging and fuel inflation in the range of 15%.

Our greatest challenge will be to recover these higher commodity and energy costs and, in doing so, improve our gross margins, at least in absolute dollar terms.

Unlike years past, we anticipated the inevitable and, as a result, launched an early round of price increases last year. We now find that another round is required to counter further cost run-ups. We should be aided somewhat by consumer behavior, as reflected in recent trends across a broad array of supermarket private label categories.

Our strategic decisions to downsize marginally profitable pickle capacity, invest in condensed soup packaging, and expand premium salsa will shift volume to higher margin categories. We are also in hot pursuit of productivity gains, procurement initiatives, and SG&A economies of scale in order to cut cost up and down the P&L.

On a parallel track, our growth in innovation initiatives, designed to drive top-line growth in strategically targeted markets, are posting excellent results in their early stages. Equipped with a product and channel portfolio strategy as our guide, we have added the term "top-line growth" to this TreeHouse sales and marketing lexicon.

Cross-border shipments of newly acquired product categories to newly expanded territory, fostered by closed Bay Valley Foods' E.D. Smith cooperation, have been particularly gratifying.

Additionally, the development of natural and organic product innovations, especially in salsa, soup, and salad dressing, have brought new customer interest and distribution opportunities to TreeHouse in both its Canadian and U.S. branches.

Other than input cost inflation, operating expenses are running favorable to plan. SG&A fell 130 basis points versus last year, largely due to economies of scale in the combining San Antonio Farms and E.D. Smith into the existing Bay Valley Foods infrastructure.

The outlook is also favorable for interest expense and taxes, the latter due to our Canadian expansion.

Lastly, both our product portfolio and management team have been fortified by the E.D. Smith and San Antonio Farms acquisitions. While the business climate is the most challenging in decades, we find ourselves with more opportunities and capabilities than ever.

The addition of salsa, salad dressing, and access to the Canadian market have energized our portfolio and expanded our reach. We can be assured that our expanded Bay Valley operating team will exploit every opportunity and meet every challenge in the coming year.

David Vermylen and Dennis Riordan will now take you through our recent performance and immediate outlook in far greater detail and with color commentary on specific developments. David?

Thank you, Sam. Good morning everyone. My comments will focus on two areas. First, I'll comment on the revenue performance of the business, including both our base Bay Valley Business and E.D. Smith. When you adjust for all of our 2007 acquisitions on a pro forma basis, net sales grew 6.3%. Basically, what we are seeing confirms our acquisition strategy in that we are seeing both the new sales opportunities and cost synergies that our broader portfolio strategy is creating.

Second, I will discuss how we're successfully dealing with the volatility in both energy and commodity prices. This is a big challenge for the food industry. And, in terms of margin performance, I am pleased that we've been able to handle it better than most companies.

As you know, we have changed our segment reporting from product segments to channel of distribution. Thus, my comments will reflect that change with a sprinkling of product data. We made the segment change, because we are now organized around channels of distribution, not products; and our business plans and sales incentive systems are built around North American retail grocery, food-away-from-home, and industrial and export sales.

Total Bay Valley net sales were up 39%, primarily due to the addition of E.D. Smith and San Antonio Farms. Within that 39% increase, two numbers stand out --Organic Bay Valley growth and pro forma E.D. Smith growth.

First, before acquisitions, Bay Valley had a 4.7% net sales increase. While the majority of this growth was from pricing, our volume on key categories held up, despite our expected volume losses in infant feeding.

North American retail grocery sales were up almost 50%. E.D. Smith contributed to all of this growth as an expected decline in infant feeding and some soup softness, due to programming, timing, offset modest pickle growth, and very strong powder growth.

Food-away-from-home sales were up 28.5% with organic growth of 4%. Industrial and export sales were up 22.5%, due to higher non-dairy creamer sales and higher cold-pack volume.

From a product standpoint, growth in pickles, powder, and other products more than offset declines in infant feeding and soup. We are very pleased with the performance of our powder business, given the mid-February fire that resulted in temporarily shutting down our New Hampton, Iowa plant. By shifting production to our other two powder plants and a network of cold-packers, we've been able to meet demand. The plant will reopen in the fall.

Second, while E.D. Smith revenue is included in our channel data, on a pro forma basis, E.D. Smith net sales are up over 14% with strong volume growth in both Canada and the United States.

As I mentioned on our last conference call, E.D. Smith gives us a leading North American presence in salad dressings and opens up Canada to Bay Valley Products. Canada's leading retailer has already accepted condensed soup and salsa programs with initial sales starting this summer. We are in discussions with numerous retailers on programs focused on our high-priority segments, and we believe we have just scratched the surface.

E.D. Smith is meeting all of our expectations, and we are very pleased with the progress we have made. Next, we had Bay Valley organic growth of 4.7% and E.D. Smith organic growth of 14%. On a pro forma basis, net sales in total were up 6.3%.

We have also secured about $25 million in annualized new business that relates to the execution of our portfolio strategy that I commented on during our last call. We have had great account wins on salsa, non-dairy creamer, and condensed soup, both in the United States and Canada and in retail and food-away-from-home.

Our sales incentive plans are designed around driving top-line growth, through our highest priority segments, with sales emphasis on customers who focus on building a private label program through quality and service, not just the lowest price.

At the same time, later this year, we will be exiting some pickle business where we have not been able to achieve acceptable margins. I discussed our pickle strategy on the last call, highlighting the closing of our Portland plant in our Customer Rationalization Strategy.

Now let me turn to energy and commodity costs and how we are dealing with them. I thought last year was the most challenging I've ever faced from a cost perspective in my 34 years in the food industry. But this year, the environment is even more challenging.

Let me give you a few examples of the challenges we have faced, how we have successfully coped with these challenges through the first quarter, and how we plan to weather this period of volatility going forward.

In the first quarter, we experienced the following increases versus the first quarter of 2007. Casein was up 87%,; various oils, up 39%; corn, syrup, and sweeteners, up 12%; glass packaging, up 15%; and plastic containers, up 20%. Yet, we had minimal margin erosion to our pricing and productivity programs.

Since December, we have seen crude oil and natural gas increase between 30% and 40%. Those energy increases drive higher freight, processing and packaging costs. One analyst wrote that input costs for the large packaged goods companies could increase 15% this year, versus over 8% last year. We don't disagree with that assessment.

We are seeing total input cost increases, including energy, of approximately $100 million in 2008; and that's up over $20 million since we put our plan together a few months ago.

Let me give you one example of the remarkable volatility we are seeing. In the first quarter of 2006, soybean oil cost about $0.21 per pound. By the end of 2007, it had doubled to around $0.42 a pound. It doubled in less than two years. Then, between December 1, 2007 and March 1, 2008, in just three months, it increased to $0.72 per pound. Think about it. That $0.30 increase in three months was 50% greater than the absolute price of soybean oil just two years earlier.

While soybean oil has come off that $0.72 high, it is still over 35% higher than it was in December. We are dealing with it, and we are very optimistic that we will weather the storm, just as we did in 2007. But, as I mentioned on the February call, when the commodity markets are volatile, you will often hit periods when pricing lags cost increases.

Based on the commodity and energy assumptions we made last fall on the coverage we took, we implemented significant price increases at the beginning of the first quarter; and we are prepared to do so at the beginning of the third quarter. We'll be making a new round of increases at that time, but our cost in the second quarter will be somewhat higher than we budgeted, principally energy-related costs. In the categories and channels we participate in, it is very difficult to impose more than two price increases a year.

We plan to ultimately recover cost increases through pricing and productivity; but as I said in February, it won't be a smooth line that is manageable month-to-month, let alone quarter-to-quarter.

Dennis will provide more detail. Fortunately, we have a sales organization fully committed to executing these pricing programs through strong leadership and fact-based selling. They understand that the alternative to not being on top of the cost curve is long-term margin and business erosion.

An obvious question is do we see a shifting from brands to national brand equivalents or private label? In most categories, private label is gaining share; but that's been true the past few years. But, the most recent syndicated data that I have seen, plus comments from retailers, leaves me to believe that private label is doing well; and that is certainly reflected in our business.

Private label IRI data I reviewed last week indicated that for 100 categories measured, private label weighted average implied price was up over 11% with volume stable. I also believe that retail food prices still have a long way to go to catch up with the input cost increases that took off during the middle of last year.

Most companies will admit that they got behind the cost curve and that they are playing catch-up. That catch-up will continue through, at least, the end of 2008.

Meanwhile, we are continuing to execute against our established growth plan, the smooth integration of our 2007 acquisitions and making the most of opportunities for both new sales and cost savings.

I'll now turn it over to Dennis.

Thank you, David. Since David covered the revenue growth, I will focus on other key aspects of our operating results, including one, gross margins were down only 17 basis points before acquisitions and down 60 points in total, due to sales mix. Operating costs continue to be well-controlled. And three, tax planning activities have contributed to a lower tax rate.

In regard to our gross margins, we showed a small decrease in year-over-year margins, dropping 60 basis points on a consolidated level. However, when looking at our business before the acquisitions of San Antonio Farms and E.D. Smith in 2007, gross margins decreased only 17 basis points, despite escalation in nearly all of our key input costs.

The additional 43 basis point decrease in total margins was due primarily to the acquisition of E.D. Smith. E.D. Smith products have lower gross margins than the composite rate of our legacy businesses. Although E.D. Smith margins were flat compared to a year ago, we have already implemented price increases to eliminate the margin gap.

Selling, General, and Administrative expenses increased from $35 million in 2007 to $43.9 million in the first quarter of 2008, due to the overall growth of the Company. As a percent of sales, SG&A costs finished the quarter at 12.2%, compared to 13.5% in last year's first quarter--a significant improvement, due to the efficiencies of adding new business later in 2007 and aggressively pursuing integration cost savings.

Partially offsetting the improvement was an increase in non-cash amortization expense. The increase in amortization from $1.1 million in 2007 to $3.5 million in 2008 was due to an increase in amortizable, intangible assets, such as trademarks, trade names, and customer lists associated with the new acquisitions in 2007.

Our other operating expenses totaled $10.9 million, nearly all of that being a charge associated with the previously announced closing of our Portland, Oregon, pickle plant. Declining pickle sales have led to excess manufacturing capacity. The Portland plant was our highest cost pickle plant, so it was the logical plant to close. We expect to realize savings of about $5.7 million on an annualized basis, once the plant is fully closed, later in the third quarter.

Interest expense increased from $3.9 million in 2007 to $7.7 million in 2008, due to additional bank borrowings used for acquisitions in 2007.

And finally, we did have a foreign currency loss of $1.9 million relating to a re-valued inter-company loan. Revaluation resulted from a decrease in the value of the Canadian dollar. This was a non-cash transaction.

Our effective tax rate for the quarter was very low at 26.3%, compared to 38.9% last year. The low rate in the first quarter was due to the Portland plant closure expenses that significantly reduced U.S.-sourced income. Canadian-sourced income carries a lower effective tax rate.

In addition, we expect ongoing tax savings from the E.D. Smith transaction starting this year. We should experience an improvement in our effective income tax rates down to a range of 35% to 36%.

One-time reported net income finished at $0.07 a share, compared to $0.24 per share last year. But, we had two unusual items in the quarter. First, we had the plant shutdown expenses that lowered net income by $0.24 per share. And secondly, we had the revaluation loss on the inter-company note of approximately $0.03 a share. After adjusting for these two items, our adjusted earnings would have been $0.34 a share. This represents a 41.7% improvement over the $0.24 per share reported last year.

To recap the first quarter--we saw very strong sales growth with only minimal margin erosion, despite the increase in input costs. We were able to offset the margin shortfall through operating expense containment. In addition, the E.D. Smith purchase will lead to year-over-year improvements in our effective tax rate. All in all, it was a very good start to what we know will be a challenging year in the food industry.

With regard to the balance of the year, we previously gave guidance of $1.50 to $1.55 in earnings per share for 2008. While we did exceed our expectations for the first quarter, we have seen continued volatility in many of our key inputs. Our success in passing on cost increases, combined with an expectation that or effective tax rate will trend below last year, give us added confidence in our ability to achieve the high end of our previously announced guidance range.

I would also like to comment briefly on the second quarter, because the addition of the three acquisitions last year can make seasonal comparisons difficult. We believe the second quarter results will be in the range of $0.29 to $0.32 per share, as our lower tax rate will help to mitigate our input cost exposure. This range is in line with the current consensus estimate of our covering analysts.

We will see the benefits of our newest round of pricing programs, primarily in the third and fourth quarters, similar to last year, as many of our new pricing programs will be effective on July 1.

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

Thank you, Dennis. You and David have provided a detailed quantitative analysis and excellent qualitative insight to the inner workings of TreeHouse and our prospects for the near-term. In anticipation of questions on two closely related issues, let me offer the following.

First, just as the portfolio strategy and EVA analysis direct us to invest in the high potential segments, they also identified those of scant strategic value or financial benefit. Our aggregate revenues may be affected as we rationalize certain segments, for example, pickles, and downsize or exit others. Any resultant decline in revenue will be strategic in nature. These actions will also be couple with concurrent growth and innovation initiatives in other strategically central highly profitable segments.

Secondly, we will continue to be actively engaged in the M&A market as a strategic acquirer. We regard the current condition of the credit markets to be a temporary phenomenon and will make good use of the respite.

In the interim, we will pay down debt, shed non-strategic assets, and pursue strategic prospects outside the conventional auction process. When the next strategic opportunity arises, we'll be ready to strike.

Before opening the call to Q&A, I'd like to reflect for a moment on our longer-term strategy and the impact of recent events, especially commodity and energy inflation on that strategy.

As I described in our February 14th conference call, the TreeHouse story that delineates our strategic, operational, and financial agenda, for the current year and beyond, can best be told in six chapters. These include number one, protect margins; number two, grow the base; number three, reform our supply chain; number four, strengthen our platform; number five, change for the times; and number six, reaffirm our commitment. These chapter-by-chapter headings constitute our TreeHouse story, and we're sticking to it.

To reiterate my Valentine's Day message, we will reaffirm our commitment to our investors and employees alike. The TreeHouse remains fully devoted to strategic expansion, internal improvement, workplace opportunity, and most emphatically, shareholder value.

At the core of this commitment is the original strategic vision, a steadfast constant in a time of erratic volatility of creating superior shareholder value. This vision is guided by the twin beacons of our portfolio strategy and EVA analysis, which light the way to both internal improvement and external expansion of our TreeHouse.

We are determined to follow that strategy course that will direct TreeHouse to superior and sustainable shareholder value, no matter the quarterly ups and downs, the input cost volatility, the pricing lags to match cost, the internal improvements required, or the uncertainty of credit markets. That is our commitment to one and all.

Cynthia, this concludes our prepared remarks. You may now open the lines for Q&A. Thank you.

Thank you, Mr. Reed. (OPERATOR INSTRUCTIONS)

We'll take our first question from Robert Moskow with Credit Suisse.

I thank you. Good morning.

Good morning, Robert.

Good morning.

In your guidance here--your maintaining guidance--granted you're guiding to the higher end of it, but incrementally, over the past three months, do you feel more or less confident about the business conditions that you're facing? You've mentioned $100 million of inflation here, and you've talked about all those problems, and the tax rate is clearly what's giving you the confidence here on the--to move to the high end.

So, can we call it a net neutral, that you're happy with the progress you've made with your core operations and that's enough to offset the inflationary environment? Or, is it just a tougher environment than what you expected?

Robert, this is David. Let me comment on the operating side of the business in terms of what we see going forward. And then, I'll let Dennis comment on the tax side. From an operating perspective, we're really looking, again, at input cost inflation of $100 million, about $20 million more than we had forecast. From a coverage standpoint, in terms of grain-based coverage, we're in good shape now--pretty-well covered on most of those commodities through the end of the year.

The one variable that is still out there will really be energy-related--energy as it relates--that flows through packaging costs--energy that relates to natural gas processing--energy that relates to freight rate. So, that's still got some volatility in it.

And two, we're going to be marching forward. We're doing it right now on the pricing that will go into place starting in early July. And there--we have a very strong program, great sales leadership out there, great fact-based selling tools to go forward with. But, there is no sure thing that we can get to the dollar, the pricing that we are going after.

So, I think from a--while we are holding to our guidance, we see opportunity. But, there's still a steep hill ahead of us. We've got the confidence; but until we are able to realize that pricing and really see where the energy markets are going to shake out, there's still volatility in front of us. But, we're feeling good about where we are right now.

Hey, David, if you strip out the contribution of the acquisition on the EBITDA line, can you confidently say that the core business, in terms of EBITDA or even operating income, grew?

I would say it was equal to or modestly above a year ago.

Okay.

And, the way I would look at it, just in terms of some of the core categories from an AGM perspective, pickles were good; powder was good; we had some--a little bit of slippage, I think, on the soup and infant feeding side. But, the core business performed really very well.

Okay, so that would imply that E.D. Smith--that the EBITDA margin there might be closer to 5% right now, compared to the goal of, I think, around 10--

Well, I'm not sure what--I'll let Dennis comment on the percentage. We knew going in with E.D. Smith that it was lower than our core business, because the E.D. Smith had not taken any pricing in either 2006 and a little bit at the end of 2007. All of that pricing is in effect now. And, I think we will see a much better margin performance out of E.D. Smith going forward.

As I said on the February call, we were almost taking two years' worth of pricing in one fell swoop on E.D. Smith. And, we have gotten that pricing and the business is doing, as I said, very well.

Yes. And then, lastly, for Sam, you say, Sam--you said that the credit markets are kind of a temporary phenomenon. Have these credit markets--can you give us a little more color on how this has hindered, perhaps, your ability to do M&A? Or, do you think it really hasn't hindered your ability?

Well, clearly, deal terms are quite different than they were just a few months ago. With regard to our individual case, the timing of this has not been a problem for us. We had secured quite favorable credit lines last year when we did a total of four transactions, I think, within 60 days. And, we--our agenda right now is focused on primarily the integration of those acquisitions into the business, as well as based on the portfolio strategy, deciding which of our businesses need greater investment and those that--where we should scale down.

And so, with regard to our particular situation, it has, if anything, been a respite that we can make favorable use of. In terms of going forward, we can't predict a time at which those markets will change. It's most significant effect will be that those sellers who want to--who are unwilling to come forward now, but when they see a return to normal times, we'd expect that there will be more out there. And, we will be in very good condition. We've modeled forward quarter-by-quarter the pay-down of our debt and the capacity that we'll have to go forward. And, those models indicate that we should be able to do another strategic expansion like the largest we've done to date in the discernible future.

Secondly, the integration of E.D. Smith is, after all of our experience over the years, the best single example of how we can fold an acquisition in and not only get the cost synergies, but the go-to-market growth that one is hopeful every time you do a deal like that.

And, let me digress for one moment and comment on the earlier matters. If there's a single number I would take away from the first quarter here, it is that on a pro forma basis, TreeHouse grew its revenues across all segments, all categories, by 6.3%; and at the same time, as a part of that, the highest risk component that we faced needing to catch up with several years of pricing in Canada, and in salad dressing, resulted as David indicated in year-over-year growth that at E.D. Smith, across a very broad portfolio, in territory of 14%. That is the number I would keep in mind with regard to the past quarter and what our prospects are going forward. Thank you.

Very good. Thank you very much.

We'll take our next question from Andrew Lazar with Lehman Brothers.

Good morning, everyone.

Good morning, Andrew.

Just a couple of things. With respect to some of the comments earlier, I think on the last call, you had mentioned the goals to try and sort of keep the overall margin structure roughly flattish this year--obviously facing significant input cost pressure--should we take away from today that's still the goal--perhaps that's a little tougher, given the even more recent increase in commodities, yet, you've got obviously a top-line coming through with pricing--just trying to manage it from a gross margin dollar perspective, rather than a margin percentage? Is that a fair comment?

Andrew, that is a very fair comment. I think in more stable times, our objective is to use pricing to offset input cost increases--use productivity in synergies to improve our margins. But, when we're facing casein costs up 89% and oils up 39%, etc., etc., we're really here now, at this point, doing our best to maintain our margins. But, we're really more focused right now on the margin dollars and what that growth--and what that contributes to earnings per share.

Okay. And then, of the pro forma sales growth that Sam just talked about, is there a way to think about what of that or the breakout of that, with respect to pricing versus, kind of, volume? You kind of addressed a little bit before, but corporate wide, is it--are volumes basically kind of holding in while most of that is pricing so that the worry about volumes really telling off in respect to this pricing is a little bit overdone?

As we look at our portfolio, where we had growth was where we wanted the growth, especially powder, salsa was pretty good. We actually had up pickle growth--now some of that, again, was acquisition-related. The softness that we had was in infant feeding. And then, we had some softness in our private label soup that primarily related to a shift in programming, where we had programming last March that had a significant impact on the business. And, that programming took place this April.

So, in total, that revenue growth that we saw on the organic business was very much pricing driven. But, from a volume perspective, we're comfortable with where we netted out.

Got it. And then, on E.D. Smith, I guess I'm surprised, although I guess positively so, that I knew you had mentioned you're taking two years of catch-up with effective pricing, and that I thought most of that will be coming in kind of later in the year. I think you had mentioned that margins in E.D. Smith, just on its own, were flattish year-over-year anyway. I guess I thought there might be more of hit there in your term with some improvements coming later in the year. Is that just more effective pricing than you thought? Is it more effective cost management per the integration than you thought?

The margin performance for E.D. Smith in the first quarter was slightly above prior year levels, all due to productivity. The pricing really started in April. And so, it's not late in the year when the pricing comes in. That pricing will really be taking hold in the second quarter.

In the second quarter. Got it. Okay. And then, lastly, will be it's probably a little hard to view the current, sort of, environment and the volatility of earnings input cost as something that would be a positive at this stage--I can understand that it's obviously tough to manage through. If you think out a little bit, though, perhaps to a time if and when this volatility is not perhaps lessened some or moderate some, is there a way to see this sort of new environment we're in around, pricing being part of the algorithm, as maybe being helpful for you and others down the line over time? Or, is that really not a practical way to look at it?

What would you-- given your druthers, what would you really prefer? Would you prefer the last couple of years, where there was very little pricing power in the industry or today where there's quite a bit more, but obviously extreme volatility around the input cost environment making it tough?

Andrew, that's a great question. I think if you saw how much more gray hair I have since the last time we met, I think the volatility is not the best thing for my health. I don't have a very good answer for you. I think that what will be good for the food industry is getting back into the process of actually thinking about price increases, which they haven't been doing for many years. So, I look forward to the day when we find more stability. And, I am confident that whether we are faced with volatility or stability, we will find a way to manage our way through it as good as, if not better, than others.

Yes. Great. I appreciate it. And you know what they say, if it's gray, it stays.

Thank you, Andrew.

Take care.

And, we'll take our next question from Jonathan Feeney with Wachovia Securities.

Good morning. Thank you guys.

Good morning, Jonathan.

I wanted to follow up on you've been pretty discreet in the past about your hedging strategy going forward. How confident are you about where your costs are and where you have some exposure commodity-wise in the second half of the year?

We're--this is Dennis--we're in pretty good shape. We've got all the basic input commodities covered for this year, at least out through the fourth quarter. As David indicated, the one area that has volatility is the natural gas side. Natural gas on an input side is fairly well covered, not totally through the end of the year.

But, the challenge there is how it affects our pricing on glass, PET, and other inputs where it's buried in. And, we can't hedge that; and then, combined with the transportation side and diesel costs, which again are much more difficult for us since we don't have our own fleets. We use third parties. So, it's a challenge to come up with hedging strategies that work effectively there. So--

Sure.

There is some volatility we'll have to deal with on the go-forward; but from our input cost, I think we're in pretty good shape.

And, I wanted to follow up with David -- you commented about just that you were confident that consumers are--(inaudible) confident-- your belief that consumers are starting to trade down comes from your analysis as the IRI data. Can you tell us--have you had conversations that-- with managements that deal with retailers who say, "Hey, this is really something we want to push" second half of the year beyond the data that we all see?

We've had, through our sales organization--definitely had conversations. And there are two big chains, such as Safeway and SuperValu who have really articulated that now is the time to be more aggressive with their private label programs. I really believe that what will drive private labels--private labels share-- if you look at 100 categories over the past five years, generally, 60 to 70 of those 100 categories have been showing consistent share growth.

I think what will escalate it are those retailers who decide that now is the time to really leverage their programs and bring the consumers who are faced with cost-challenges--bring them those programs. I think it requires greater merchandising on the part of the retailers to really drive that share. To assume that cost inflation alone is going to significantly escalate the share growth of private labels. I think we will benefit from it. I think that the tide will rise for private label, and we'll all benefit. But, it will really be in the hands of key retailers who can really make it a more significant part of their program. And, that's where we will see the growth.

And, I think Safeway and SuperValu are two major customers who have publicly stated that that is where they are putting their emphasis.

Thanks. And finally, for Dennis--the reduction in interest expense leads me to believe that you got a lot, if not all, of the seasonal cash flow you expected. The queue not out, but can you give us any information about what cash flow is like going forward?

Yes. Actually, cash flow is good. We'll continue to work on it. The queue will be out this afternoon, but we did reduce--

I'm an anxious guy.

Yes. We did reduce our debt significantly. And, I will give you that--that we were under $585 million in long-term debt. We took a very nice reduction from the end of the year that certainly helped on the interest expense.

And, do you expect any more positive surprises or structural, I should say, surprises on the tax rate related to E.D. Smith or anything else?

No, I think--I gave the guidance of 35% to 36%. I think what you have to be a little careful of just this quarter is that our pre-taxed income was only $2.7 million. And, the effective tax rate on such a low income--it brought it down quite a bit. So, we're much more comfortable thinking of it in that 35% to 36% range on a full-year basis, once we get rid of the unusual plant closing costs that ran through.

Great. Thank you so much.

(Operator instructions) And, we'll take our next question from Ken Goldman with Bear Stearns.

Good morning.

Good morning, Ken.

A couple of questions. One thing that was discussed in the fourth quarter call, I believe, but not so much today, was the potential benefit of global sourcing. Can you talk a little bit more about that-- where you see that, if it's still a potential benefit, and maybe how far along you are with that plan?

As we-- this is David. As we discussed on the fourth quarter call, what we're really focused on global sourcing is in our pickle business, where we have established a long-term relationship with one supplier in India, and it really takes two to three years to fully develop that relationship. And, that product--the pickle product is principally related to the Gherkins--the small pickles that are hand-harvested. So, it's not going to be a significant piece of our business, and that we will have--continue to have a major domestic crop harvesting and manufacturing presence here.

Okay. And then, one other question is on salad dressings. Looking pretty good so far, but Kraft is making--as I'm sure you know--a pretty big push on their behalf. It's early, but what changes are you seeing in the category that you can tell us so far, based on what Kraft is doing?

We have not yet seen a significant change in either category performance or any effect on private label. Private label salad dressing is doing--in the United States is doing extremely well year-over-year. And, that is certainly reflected in our numbers. We obviously watch closely what Kraft is doing in terms of their product reformulations and their packaging reformulations. And, anything that's new and innovative that helps grow the market is good for the market and will ultimately be good for us, because we will be able to match--in terms of national brand equivalents--innovation that comes out. So, as I said many times, we like it when the brand leader invests dollars in advertising and brand building, because if it's good for the category, it will be good for private label.

Thanks. I hope Vlasic gets that message too.

I send it all the time.

And, we'll take our next question from Bob Cummins with Shields & Company.

Hi. Thank you very much. Actually, my question was similar to one that was asked a few minutes ago; and that was on the impact of inflation and the economy on private label products in general. I think your answer was very cogent to the effect that it takes some support from some of the big supermarket chains. So, it was a very helpful insight, and we appreciate that. And, keep up the good work.

Thanks, Bob.

Thanks, Bob.

(Operator instructions) And, we'll take our next question from Pablo Zuanic with JPMorgan.

Good morning, everyone.

Good morning, Pablo.

Good morning.

Good morning.

Just a couple of questions. First of all, when you're giving cost inflation guidance of 15% for the year, what would you say is an assumption there in terms of what variable costs are as a percentage of total cost of sales. And, by that I mean your soft commodities, packaging, and energy which are obviously driving that number. I was actually (working my) numbers likely higher than that. And, related to this, when you're giving a 15%, I assume that's also assuming or factoring any hedges that you may have on. Any color can give on hedges will also be helpful.

Pablo, this is Sam. Good morning.

Good morning.

With regard to the industry, the 15% is a number that applies across a broad array of packaged goods companies, both branded and private label. And, we use that as a market for what the general industry is--should expect. With regard to our own costs, I'd indicated that when you adjust for the change in size of the Company and measure this as a percentage of revenues, we are up about 80% over last year's. In 2007, that increase ran at the rate of 3.7% of revenues. And, we expect that on our current revenue base that these variable costs will be in the range of 6.6% of revenues. And, that is the net effect after--it's the net effect after our hedging programs, but before productivity savings and other procurement changes.

Importantly, when we do the pricing, we mark to market going forward and are more concerned with making sure that we are addressing replacement costs than we are only historical costs.

Thanks. That's very helpful. And this year--just on the same as with hedging--Dennis can comment--are you hedged more than normal? It's normal policy? And, if you're hedged, is it normally a year out or for the duration of the contracts? What color can you give us there, Dennis?

Let me say on that one point for a moment, then have Dennis supplement it.

Uh-hum.

Our approach, first, is one of focusing on market fundamentals and for projecting out into the agricultural commodities, not only the current but the next crop year. And, we are quite disciplined in that approach and have maintained it from the beginning.

What all hedgers are seeing now is that there is increased volatility in the--primarily in the big agricultural markets that have the Midwestern grains. In grains and aggregate, the volatility has doubled in the last year. And, in the corn market, it has tripled. That has increased the cost of risk premiums and forced us to be even more careful, more thoughtful going forward, with regard to how we hedge.

The internal--so we have a different market condition. The internal advancement--and great credit should go to David and the Bay Valley Team here--is that our purchasing and procurement activities are in lock step with our sales and marketing activities, so that as we take positions, we are doing so with knowledge of what kind of pricing is required.

And, with our most progressive customers--and these are large-scale, successful entities in both retail grocery and in food service, as well as our industrial. Oftentimes, we agree prior to taking those positions, with regard to how we can hedge not only ourselves, but our customers at the same time. And, that gives us added insulation. Pardon me, Dennis, for--I wanted to get that out as background. Perhaps you can give more specifics, if you'd like.

I think I can give another set of generalities. As Sam indicated, we tried to do two things--match our hedges to buys relative to our budget and forward expectations; and we also match it with pricings. So, there could be some differences. But, I think as a general rule of thumb, we try to be 100% covered on items that can be hedged out six months and in the range of 75% or so, going out for three quarters. And, part of that is affected by what we see in the market; and part of it is done by pricing. But, at least in general terms, we like to be fully covered going out six months.

Well, that ties into what David had indicated that for the balance of the year, we're in pretty good shape with our commodities, with that one exception of how input costs affect third-party pricing.

Thank you, Dennis. That's very helpful. And then, just to follow up on E.D. Smith. I may have missed this, but when you said 14% organic growth in E.D. Smith, did you provide the breakdown in the volume on pricing there? And, related to that, remind us a little bit of the distribution opportunity, in terms of points of sales for E.D. Smith, can you double the base in the U.S. or triple? Just some color there would be helpful also.

Pablo, most of the growth in the first quarter was volume, because the pricing--there was a little bit of pricing that was taken at the end of last year; but the majority of the pricing affects the second quarter on through the end of the year. So, it was heavily volume-driven. There is plenty of opportunity in both Canada and the United States. While we have a very good share of private label in the United States on salad dressing, we are making a significant capital investment into our Northeast facility to increase our capacity there, because it is the lowest cost-producer of salad dressing in the country. And, once we are firmly established with that increased asset base, we believe that there will be continued growth potential just for pourable dressings.

In addition, E.D. Smith produces some very premium private label products, such as jams and jellies. And, we see those as potential opportunities for us in the United States.

And if you can just comment on that plan--when is that capacity going to be finished? And, in terms of price increase--I don't know if you mentioned--what was the percentage of a price increase are you looking at in April?

The plant will be-- addition will be completed in Q2 of next year. And, the pricing was really in effect, beginning of April.

I know, but did you say the percentage, how much was the price increase?

No, I did not.

Okay. All right. That's good. Thank you.

Thank you.

We do have a follow-up question from Robert Moskow with Credit Suisse.

Okay, Sam, just quickly--your stock is kind of languishing here since you spun out of Dean Foods. If the credit markets ever allowed you to do it, would you consider going private? And, do you have a valuation multiple in your head that would kind of be that if you dip down to that level, where going private would make sense to you?

Rob, this is Sam. We've been quite clear that we see TreeHouse as an acquisition and growth vehicle in its present form. And, we've been quite clear in delineating the strategy with regard to how to expand our product portfolio and points of distribution. I think we've got the right vehicle and the perfect entity to do that now. We are careful to make sure in our capital structure that we are able to continue to fulfill our strategic mission in whatever situation the capital markets are.

And, I think you'll find that, as those conditions change that we will work assiduously to be in very fine condition. And, for the coming--the current year, what that means is to pay down this debt and, at the same time, to look internally at our portfolio. And, where we are directed to pursue high potential opportunities to pour resources into that, and where we are overextended in situations where there is little opportunity for profit or growth, to cut that back. We'll be able to do that as a public company and with internally generated funds.

I don't see a structural change in that regard.

Is another way of saying that is that you want to grow, and having access to the public markets, the equity markets gives you that ability; and also, you don't want to be overly levered, because that would inhibit your ability to make acquisitions?

Well, again, without commenting on those particulars, we see that the current structure fits our strategic plan and fits our strategic opportunities and that we will make sure that, while we have our eye on that long-term strategic objective, that day-to-day, week-to-week, month-to-month, quarter-to-quarter, we'll continue to run our business in a fundamentally sound way that enables us to be responsive to changes in the credit markets.

Okay. Congrats on a great quarter. Thanks again.

Thank you.

And, it appears we have no further questions at this time. I would like to turn the conference back over to Mr. Reed for any additional closing remarks.

Thanks everyone for joining us again this morning. I hope we have provide you with all of the detail that you had sought, with regard to understanding our current situation and understanding why we are so confident, even in very challenging market conditions, in what the future holds for TreeHouse. We'll look forward to talking to you again and report on our mid-year results.

On behalf of David and Dennis and our team, thank you.

Thank you. That does conclude today's conference. You may disconnect at this time.