TreeHouse Foods Inc (THS) 2008 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to the Treehouse Foods investor relations conference call for the second quarter of 2008. 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 to 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 are subject to known and unknown risks, uncertainties, and other factors that may cause the Company's or its industry's actual results, level 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 31, 2007 and subsequent quarterly reports, discuss some of the factors that could contribute to these differences. You're 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 information, 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 expectation with regard thereto, or any other change in events, conditions or circumstances on which any statement is made. This call is being recorded.

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

Thank you. Good afternoon all and welcome back to our Treehouse. Our mid-year report is of one of steady financial performance, great strategic progress and broad operational improvement. It is also a tale of volatility and energy costs, and their immediate but transitory effect on margins. Finally, it is one of consumer confidence and behavior that in the face of economic uncertainty, favors private label products.

David Vermylen, Dennis Riordan, and I will address each of these issues in turn so that all of you can more fully appreciate both the icing opportunities, daunting challenges that lie before us, the Treehouse. Today's headlines include the following; operating cash flow adjusted EBITDA increased 17% to $35 million in the second quarter, thanks to strong sales growth and operating economies of scale, both further enhanced by acquisitions. At mid-year, first half EBITDA was up 26%, despite extraordinary inflation, volatility and input costs. Gross margins were depressed in the second quarter, albeit temporarily, as the spike in crude oil triggered a series of secondary cost increases that preceded pricing scheduled for July.

Sales revenues grew more than 6.5%, before acquisitions as strategically critical product categories benefited from private labels strong second quarter showing across a broad array of shelf stable dry food categories. Our strategic investments to broaden and diversify our grocery products portfolio via acquisition paid handsomely in the quarter. Food, salsa and salad dressing all demonstrated top line strength.

The E.D. Smith acquisition performed especially well as margins improved more than 400 basis points over the first quarter. Measured on an LTM basis, adjusted gross margins at E.D. Smith have kicked up in 7 of the 8 months since its acquisition last October. That margins are improving even as cross border sales post double-digit growth, speaks loudly and unequivocally of the strategic values portable salad dressing in our product portfolio.

While we have made much of our opportunities in difficult times, these are still difficult times. Specifically, direct input inflation of commodities and energy is now expected to increase more than 17% this year. This escalation has been accompanied by greater volatility, especially in the agricultural and energy markets, making conventional hedging strategies both more expensive and problematic. According to the bureau of labor statistics, food and beverage inflation are now twice that of the core consumer price index which excludes food and energy.

At Treehouse, this year's cost inflation will require pricing of 7.5% of annual revenues, twice that of last year and three times that of 2006, just to break even in terms of absolute dollar profitability. In parallel with pricing designed to maintain dollar margins, productivity and procurement programs must be expanded to increase cash flow from operations. At mid-year, our six-month progress can be measured as follows. Operating learning has improved as SG&A expenses have fallen 110 basis points. Project right side productivity savings now total $44 million, . Purchasing techniques have been adapted to dampen the inflationary effects of embedded energy costs. And lastly, finished goods inventories up in nominal terms, are actually down 1.2 million cases in physical terms.

As I take stock at mid-year, I am satisfied that most, but not all, is in good order at our Treehouse. With the exception of USA margins in the second quarter which were principally a timing issue, we have seized the opportunities and met the challenges presented under the most difficult conditions that the packaged foods industry has faced in the past three decades. In a hostile environment, we have continued to make substantial and sustained progress operationally, financially and strategically. David and Dennis will now provide you with more detail and color commentary on both our performance and prevailing market conditions.

Thank you, Sam. Good afternoon, everyone. As is my norm, I will focus on first, the top line performance of the business, second, cost and pricing, and third, what we see in the market place in terms of how private label is doing and what is happening in the pricing arena.

Top line performance was very strong. Total revenue was up 43.5%, due primarily to acquisition revenue. Organic non-acquisition revenue was up 6.6%.

If acquisitions were included in last year's numbers, revenue would have been up 9.3% as we are generating great top line growth of last year's acquisitions of San Antonio Farms and and E.D. Smith. I'll focus the rest of my top line comments as if revenue for recent acquisitions were in last year's results in order to compare apples to apples. While this will not match up with the segment data in the 10-Q, it is our best way of measuring how we as a business are performing.

North American Grocery was up 7.1% with good growth in both the US and Canada. That 7.1% growth was more than double the growth rate in the first quarter. Soup, non-dairy creamer, salsa and salad dressing, which in our portfolio strategy are our priority segments, all had strong unit and revenue growth.

We continue to make progress on new business as a vehicle for unit growth. Salsa in particular is on great growth conjectory with some major new customer wins that will affect the second half of the year. We just received final customer approval on one new is a salsa account that could be the largest new authorization we have had in the past year. As expected and communicated on our last call, our retail pickle business declined as we exited some zero to low margin retail business as part of the execution of our portfolio strategy. While the revenue declined, our margins improved.

In addition, in anticipation of this decline, in the second quarter we exited our high cost Portland, Oregon pickle plant and have now shifted production to more efficient plants. This pickle volume decline will continue through this year and into 2009.

Our branded infant feeding business also declined, given the loss of a key customer at the end of last year. From an asset utilization perspective, offsetting the decline in our branded infant business was very strong in our infant feeding co- pack business. That business is included in our industrial segment.

Despite the pickle and infant feeding declines, North American Grocery was up over 7%. E.D. Smith, which is primarily included in North American Grocery, had an outstanding quarter despite our having taken aggressive pricing on salad dressing at the beginning of the quarter. Total unit growth was in the high single digits with 11% unit growth in the US, following integration into Bay Valley Foods.

Margins have improved and we continue to see great opportunity for this business. In less than 8 months, we've transformed E.D. Smith from a struggling company into a growth vehicle. We are generating new business with new customers in both the US and Canada.

At E.D. Smith, we've broken ground on expanding our northeast Pennsylvania salad dressing plant. This is a highly efficient plant and this expansion will allow our growth in the US to be realized with higher margins. This expansion will be operational late in Q1 2009. Food Away From Home would have had top line growth of 3.4%. This is mostly due to pricing. The Food Away From Home industry is struggling, especially in the casual dining segment. A leading food service consulting firm estimates that the industry will decline by 1.7% in 2008 as the rise in the consumer index and decline in disposable personal are keeping people home.

Important for us, is that with the addition of salsa to our portfolio, we are offsetting category declines with new business. We are also developing a full specialty sauce program using E.D. Smith's Canadian sauce maker business as a new platform. Our industrial and export business had a solid quarter with revenue up 26%, due to increase this is our non-dairy creamer industrial business and co- pack revenue.

Let me now turn to costs and pricing. Cost pressures continue to escalate. On our call in May, we estimated year-over-year cost increases of $100 million which was up approximately $20 million from when we developed our plan in November of ' 07. Those cost increases were primarily commodity driven.

We now estimate that costs will be up an additional $14 million, principally due to escalating energy costs and how those energy costs affect key cost elements, such as processing, packaging and freight. While energy costs have come down from their mid-Q2 high, we are still well above a year ago, well above our original budget and still above where they were three months ago. I certainly like the current trends, but as we have all seen they can go back up just as fast as they come down.

Let me provide one simple example of how energy and global supply problems are driving total costs in ways we haven't seen before. In our non-dairy creamer business, we use an ingredient that helps cut the acidity in coffee. This ingredient is a phosphate. It's a minor ingredient in our non-dairy creamer. Yet as of May, we face a 300% cost increase which translates to over $3 million in higher costs. Dennis will provide specific commentary on how cost escalation affected the second quarter and our coverage the remainder of the year.

While we took a great deal of pricing in January, based on our plan assumption of approximately $80 million in cost increases, it was not enough to cover what we are now seeing as being $114 million year-over-year cost increases. Thus our margins suffered in the second quarter. On our last conference call I mentioned that when commodity markets are volatile, pricing will lag cost increases and that when costs are volatile, you cannot manage your margins month to month, let alone quarter to quarter. We took additional pricing effective in early July on most key product lines. If necessary, we will take additional pricing in the fall to protect our profit dollars. We have consistently shown our determination to recover these cost increases through pricing and productivity, and we continue to do so today.

Let me comment on market conditions. As a private label company, I would like to share some thoughts as to what we are seeing in the marketplace as it relates to how consumers are dealing with food inflation. First on our last conference call in May, I said I believe that food prices have a long way to go to catch up with input cost increases. In the month of June, food prices were up 8% annualized which is about double the annualized rate a from a few months ago. I believe we will continue to see it at that rate for the foreseeable future. In our categories, we are seeing retail prices up 6% to 14%.

Second, while Nielson syndicated data only covers part of the retail universe, in all of our key categories, we saw private label share growth. And analysts report private label share growth across a very large percent of the food industry. In one analysis, 38 of 45 food categories showed private label growth for the latest 12 weeks with aggregate volume of 1.9% and pricing of 10.4%. A separate analysis of 11 branded food companies showed their aggregate unit volume down 3.2% with pricing up 6.2% for the same 12-week period. Private label pricing of 10.4% and branded pricing of 6.2% should translate to comparable penny-per-unit pricing.

Third, in our internal sales, we did see above average growth in those retailers that I would define as being deep discounters, such as the limited assortment of dollar store type formats. This could indicate that there was a customer migration taking place. Finally, from a pricing standpoint, while we have had to be aggressive in our pricing, our price gaps are generally in line with where we were a year ago on a penny-per-unit basis. Thus, the share gains we are seeing are not the result of widening price gaps.

While it was a good quarter, a bulk plan cost escalation kept it from being a great quarter. Despite the margin softness, I'm really pleased with the top line progress we are making in total and in particular, with San Antonio Farms and E.D. Smith results. I'm also very pleased with our continued commitment of our sales teams to achieve the required pricing. Unlike branded companies who issue national price lists, we have to negotiate customer by customer which is a far more daunting task.

In terms of our outlook for the second half of the year, I'm cautiously optimistic. We've got good revenue momentum. We are covered on the majority of our key commodities. And we are moving forward to achieve the pricing we need to offset our latest estimated cost increases. Our biggest risk is energy related. While we are covered on natural gas through the end of the year, petroleum and its related costs could still be volatile. I will 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 reductions, two, controlled expenses and three, the financing and tax savings. First, overall gross margins were 18.7% for the quarter, compared to 20.9% last year, a decrease of 220 basis points as a combination of high embedded costs along with higher transportation costs were not fully recovered in the quarter from pricing actions.

The biggest issue we had in the quarter was with energy costs. We entered the quarter with crude oil at $100 a barrel, and ended it at $145. In addition, diesel was $3.50 a gallon at the end of March, and $4.70 at the end of June. These increases affected nearly all aspects of our business, and the suddenness and magnitude of the changes made recovery through pricing nearly impossible in the quarter. As David mentioned, we have since gone back for additional pricing to cover these higher costs.

In regard to the other direct input costs, we believe we are well-situated in terms of coverage for our key inputs. We are nearly 100% covered for the balance of the year on soybean oil, corn syrup, casing and metal cans, and substantially covered on our internal natural gas natural needs. And so far, the cucumber crops appear to be doing fine.

At E.D. Smith, we initiated many of our price increases early in the quarter, resulting in their margins improving 410 basis points in the second quarter. For our legacy business, price increases were presented and accepted in the second quarter, but many were not effective until July 1. As a result, our legacy margins decreased by 240 basis points in the second quarter from the first quarter. David earlier mentioned the actions that were taken, and our belief that we will see a reversal of the lower margin trends in Q3.

One of the positives in the quarter related to pickles, where a combination of pricing and pruning unprofitable customers resulted in an improvement of 110 basis points in their AGM. In regard to operating expenses, selling, general, and administrative expenses increased from $33.6 million in 2007 to $44.7 in the second quarter of 2008, due to the overall growth in the Company.

As a percent of sales, SG&A costs finished the quarter at 12.2% compared to 13.1% in the last year's second quarter, a significant improvement due to the efficiencies of adding new business later in 2007 and aggressively pursuing integration cost savings. Partially off setting the improvement was an increase in the non-cash amortization expense. The increase in amortization expense from $1.2 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 $900,000, nearly all of that being shut down costs associated with the previously announced closing of our Portland, Oregon pickle plant. Interest expense increased from $4 million in 2007 to $7.6 million in 2008, due to the additional bank borrowings used for acquisitions in 2007. Our effective tax rate for the quarter was very low as 30.2%, compared to 38.2% last year. The much lower tax rate was due to Canadian sourced income that carries a much lower effective tax rate. We expect the effective tax rate to remain low for the balance of the year. although higher US generated income should bring the rate up somewhat up from year-to-date effective rate 29.5%.

Reported net income finished at $0.26 per share compared to $0.30 per share last year. But we did have three unusual items in the quarter. First, we had additional costs associated with the closed Portland plant that lowered net income by about $0.02 in the second quarter. Secondly, we had integration costs of $0.01 associated with the integration of the US-based E.D. Smith operations into our Bay Valley Foods operating company. And finally, we had an adjustment to the carry-in value of a pickle licensing agreement that resulted in a non-cash charge to interest expense in the quarter equal to about $0.02 a share. After adjusting for these three one-time items, our adjusted earnings would have been $0.31 a share. This is a 6.9% improvement, compared to last year's second quarter of $0.29 per share after adjusting for a $0.01 gain from the sale of assets at closed locations last year.

To recap the second quarter, we saw strong top line sales growth, coming primarily from new acquisitions, complimented by a combination of pricing and volume increases at our legacy businesses. We finally saw a small improvement in our pickle margins, and very good unit growth from many of the product lines manufactured by E.D. Smith. And finally, input costs were significant with energy-related costs being the primary driver behind our margin decline. Despite the weaknesses we saw in margins, we did a full court press on all other areas of the business in order to make up the shortfall. We showed again that we can manage our operating cost structure, provide value through tax and treasury management, resulting in both earnings opportunities and real cash savings.

I will now cover the outlook for 2008. As we stated last quarter and again this quarter, the seasonality of our business is such that our revenues pickup in the third quarter due to the start of the soup and powder shipping season. We should see improvements in our margins, due to both pricing and higher sales volume. We expect the third quarter will have a nice earnings increase to a range of $0.37 to $0.40 per share.

With regard to the balance of the year, we are comfortable with our previously issued guidance of being in the high end of a range of $1.50 to $1.55 in earnings per share for 2008. Just as we did this quarter, we believe we can manage our way through difficult times over the balance of 2008, and we'll be ready to take advantage of any respites that come our way. Sam, I will now turn it back to you.

Thank you, Dennis. A little over a month ago, we recognized the third anniversary of Treehouse Foods as a public company. In our short history, we have transformed what had been a dormant, pickle-dominated product line into a vibrant growth category-oriented portfolio. Expansion into soup, salsa, salad dressing has generated economies of scale as well as enhanced our standing with key private label grocery customers. The mid-point of our EPS guidance implies a second half growth rate of EBITDA of approximately 15%. San Antonio Farms and E.D. Smith are both in last year's base, the latter for ten weeks only. Price increases scheduled for July are all in place as planned, and we are closely monitoring input markets to take more pricing if and as needed.

Second half commodities, packaging costs, and natural gas are covered while indirect energy costs for example, freight charges, surcharges tied to net diesel fuel represent an uncovered risk. Again, principally as a timing and pass-through issue. Our upside opportunities and downside risks are well-balanced for the remainder of the year.

Recent innovation and distribution gains in salsa and salad dressings favor continued growth, especially in the North American Retail Grocery segment. Just as we have already done with pickles and low margin customers, more pruning of the marginal components of our portfolio will be forthcoming in the second half, in order to improve our long-term prospects for growth and profitability. It is also worth noting that we have already completed a mark-to-market analysis of 2009 commodity and energy requirements and have begun to enact productivity, technology and procurement programs to contain those costs.

Finally, we continue to take a strategic approach to acquisitions by pursuing those product categories that offer growth, economies of scale, compatibility in the context of our portfolio strategy. While our immediate agenda is focused on the maintenance of absolute dollar margins to offset input inflation and also the integration of E.D. Smith into a solid North American platform, we are also actively engaged in expanding the Treehouse presence into additional product categories in broader channels of distribution.

After our recent experiences with SAF and EDS, we should soon be ready to add further to our alphabet soup of businesses. Thank you. Jamie, we will now take questions and comments.

Thank you, sir. If you would like to ask a question at this time, please press your star key followed by 1 on your touch tone phone. (OPERATOR INSTRUCTIONS.) We will take our first question from Ken Goldman with JPMorgan.

Good afternoon.

Good afternoon, Ken.

Gentlemen, can you talk a little bit about -- maybe you did address this and I missed it, but your tax rate coming down so much compared to perhaps where you were a little earlier in the year. Yet your guidance stays flat. What is the implication there for perhaps what is negative in the above-the-line operations that would prevent you from raising guidance, given the lower tax rate?

This is Dennis. The lower tax rate has been a very nice positive for us, but it is also driven by the strength of E.D. Smith business right now, and the margin shortfall and how the income is splitting up. We would hope there could be some upside there and we would use that as a -- if you would, a partial caution. As we have found in the second quarter, commodity prices could spike and it be hard and difficult to react to. As we look at the business overall, that would be one of the items that would help us to offset that.

It is fair to say though you are not incrementally more negative on operations than you were a quarter ago. You are just maintaining a conservative stance?

I think that's a fair assessment.

A question -- I never thought I would see the day where I'm asking about input costs coming down and how that may affect your pricing. Given what we have seen today and in the last week with corn and oil and all the major inputs and how they all affect each other, how are you guys thinking about maybe pricing that hasn't come through yet? Are you getting a little more push back from some retailers where it hasn't gone through where it wasn't expected? Or is it a little too early to tell what the reaction will be?

Ken, this is David. It is still too early to tell. Even though they have come down, they are still far above where they were a year ago. For example, when we were buying soybean oil -- taking covers on soybean oil back in November, it was $0.42 a pound. Right now, as of early this afternoon, you could be looking at $0.55 to $0.57 a pound. It has come down, but it is still well north of where we were.

I think with the customers, we are -- we really do fact based presentation. We show them what we are buying at and what we are covered at. I think right now if they continue to come down, there likely will be more push back. As I said in my comments, we have a hurricane blowing through and things could start heading north again.

It has been so incredibly volatile. You can go from [si young to signora] in a moment when it comes to what you've bought your commodities for. I think our customers are getting used to having to deal with that.

I'm sure it is a nice problem to have. If you can't get pricing, because your cost are coming down so much, I'm sure you'll take that.

I would just like to catch my breath for a while.

Yes. That would be nice.

We'll take our next question from Robert Moscow with Credit Suisse.

Si young to signora, that's a new one. Thank you for that, David. I wanted to understand the freight charges a little bit. You call it an uncovered risk. But you also said in the same sentence that you were taking pricing to offset higher freight which is -- the surcharges will be tied to crude. Getting back to Ken's question, does that mean that if the crude prices are coming down, does that mean the surcharges are coming down and does your price have to come down, too?

This is Sam. As a general matter, these price increases lag on the way up. And then one it hopeful that they stick on the way down. The experience of the second quarter indicated to us -- the truism that David stated in his text that in highly volatile times, one cannot price quarter to quarter with great precision, nor month to month. I wanted to exercise a note of caution, mainly in terms of if there is another spike like there was in the second quarter, that we should realize that it takes a little bit of time to catch up with it. And then as I indicated, we are hopeful that it sticks on the way back down.

But it is not penny for penny, day by day that you are able to adjust in either way. Also consider in the great context that I think of the several hundreds of millions of dollars of these direct input costs that were covered, that the fact that our greatest single exposure is in this small, but volatile component indicates that there is great deal of assurity going forward that we have covered costs. And covered those input costs in the context of pricing that is already in the marketplace.

And then maybe for Dennis, just a little clarity. I think the back half implies 15% EBITDA growth and you tried to give us an apples to apples there. But I think it is still included some of the benefit from the acquisitions. Is there any way to determine whether -- what pace of growth you expect, excluding those acquisitions all together?

I don't actually have that off the top of my head, Rob. At this point, we would have San Antonio Farms which was bought last year along with -- they are in for the full of the second half. E.D. Smith is in there for most of Q4. I haven't taken a separate look like that. It gets difficult because our integrations have combined so much of the activities, it is hard to get a great comparison from last year.

Maybe we can focus on E.D. Smith then. The margins you said had improved from a year ago. Are they improving sequentially also from a first quarter, the E.D. Smith margins?

Yes.

They are?

Yes, this is David. We took if you recall on salad dressing in particular in the US, a very significant price increase that went into affect at the very end of the first quarter, the beginning of the second quarter That in combination with a lot of productivity programs that have been put in place at E.D. Smith really led to very strong, both year-over-year and then versus the first quarter, in terms of gross margin improvement.

And then you said that you are prepared to take more pricing if necessary. What are the conditions under which you would take more pricing? Is it again energy-related?

I think it is energy and it will really come through as all of the pricing -- things like corn sweeteners have been -- the pricing on that really takes affect or you really know where it's going to be come October. As all the crops are harvested. both in the US and globally, we will have a much better fix on where we need to be for exiting the year.

Thank you very much.

We will go next to Andrew [LaThar] with Lehman Brothers.

Good evening. In the press release, I think it said regarding the back half of the year, there would be -- I think it is worded an improvement in -- it says -- look for driving margin growth over the second half of the year. I'm trying to get a sense of whether that's on a dollar basis or percentage? Or is it sequential or year-over-year?

Andrew, this is David. Our focus is far more on dollars, both sequentially and year-over-year. I think that we are -- while we are focused on margins, we recognize that in the period of volatility that we have been going through that maintaining your margins highly challenging. Not just for us, but for everyone in the food industry. It is focused on dollar profitability, both sequentially and year-over-year.

That is helpful. David, I was hoping you could comment a little bit around the pricing environment in the soup segment, particularly. Campbell had led with pricing earlier in the year, February or so. My sense is they will probably take more. But you would have a better sense of that, before the next soup season starts. I think maybe it is General Mills or Progresso that perhaps had lagged a little bit. I'm hearing they have taken pricing. Don't know if you've have seen that come through yet. Just want to get a sense of the environment in which you see yourself in soup. Does that give you the opportunity to take pricing as well and keep gaps relatively constant?

The gaps are year-over-year very constant. For example, on tomato soup, it was $0.37 last year and it's $0.38 this year. On the ready-to-serve soups and principally there, we'll compare it to Progresso, it is very comparable. We have been very effective at maintaining our penny gaps and that will be our objective going forward. Depending on where the branded companies go, our goal will be to maintain those penny price gaps.

Thus far, have you seen the primary branded companies do their part on pricing or not to the extent you think we need to?

No. From my perspective, I think that the branded companies were very slow last year to move on pricing as input costs went up and they got behind the curve. I think that as I have watched it this year and as I pointed out in my comments, the 11 branded food companies have shown over the most recent 12 weeks pricing of about -- I think I said it was around 6% to 6.5%. I think that's where they need to be going. I think you may see it as we are exiting the year a little higher than that, as more of the pricing rolls through.

My read from listening and what the -- quarterly comments coming out from the other branded companies, I think their days of being shy and hesitant about taking price increases are over. Because they knew they got behind and they have to play catch up. The environment is very different now than it was 12 months ago.

Last thing, I think Sam you had mentioned in your opening remarks, hedging strategies have become more expensive which I understand. I think you used the word problematic. I didn't know if there was something beyond that like something has really changed or it's just hard to deal with the volatility in a general sense?

It's primarily the volatility and I think the index on corn is -- this year, the corn is triple that of the historical base. In the great bulk of soybeans -- of grains and oils, it has basically doubled. What that has done is put the price that one has to pay to hedge is a greater nominal price than has been the case in the past for the seller to cover that volatility.

What you will see out of us is that we have -- expanding our series of techniques to be able to hedge these things. Largely, we have relied only on being able to hedge those things where our suppliers were willing to take the other side. We have recently found ways to deal with embedded prices, particularly those driven by energy to find their way into packaging and into minor ingredients. Obviously, into freight and transportation. But also I think David pointed out, chemicals as well.

In those instances, there has not been hedging in the past because it wasn't either direct or convenient. We are working with suppliers to be able to in the coming months and in the out years, to be much more effective in that regard. You will find us settling in on those costs with longer lead times as another way of dealing with the volatility.

Thank you.

We'll go next to Jonathan Feeney with Wachovia Securities.

This is Brian [Scadalia] pitch-hitting in for John. Good afternoon. I believe last quarter, you identified the additional revenue opportunity from cross border selling. I think around $25 million annually. Have those assumptions changed given the pickup in your categories?

This is David. I don't recall talking specifically about the $25 million. We have made great progress north of the border in salsa and soup, and are moving forward with non-dairy creamer. We are seeing a lot of opportunity there. We are certainly seeing opportunity now down here with E.D. Smith, both a combination of putting it into the Bay Valley system and leveraging E.D. Smith's innovation capabilities.

Quickly on salsa, did you guys experience any business disruption in your salsa business this quarter from the recent salmonella outbreak?

No. We did not. We were well-protected in terms of our ingredients. Again, everything that we are buying has been processed or we process at a temperature that would deal with any of those issues.

Just lastly, a quick question. Not sure how material this is, but it caught my attention this morning. The Wall Street Journal reported that McDonalds will be scaling back certain ingredients in some of their big menu items. They specifically cited replacing one slice of cheese from two on their burgers. To the best of your knowledge, this doesn't include pickles, right?

No. We haven't heard anything about them going from two pickles to one. I'm the one who is always saying that if they add a third pickle, our business will go up 50%.

That's right.

On your comment about the $25 million, that really related to -- as we were talking about on the last call, the execution of our portfolio strategy. We are focused on key segments such as salsa, soup, non-dairy creamer, and salad dressing. I was talking about not just cross border, but really the execution of the portfolio strategy, specifically.

Got you. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS.) We will pause for a moment to give everyone a chance to signal. We will take a follow-up question from Robert Moscow with Credit Suisse.

I'm trying to figure out the math here. If your sales ex-acquisitions were only up 1.5%, but non-dairy creamer was good and soup was really good, how far down was pickles? Was it down 10% or so?

The areas were soft, Rob -- were pickles. I don't believe it was that much. We also have softness in the food away-from-home has -- casual dining has been hit hard by the decline in disposable income. Across some of our industrial businesses, we had significant changes also in the mix of those businesses.

This is David. On the non-acquisition revenue was up a little -- about 6.5%. In terms of -- pickles were down mid single-digits. There was a bigger decline in the infant feeding business, because we lost a very large customer a year ago.

Okay.

I think the the 1.1% or 1.7% relates to North American Grocery. And all of the pickle decline and the infant feeding decline would have affected North American Grocery. When you took a -- if we were to step back and look at soup, salad dressing, salsa, and non-dairy creamer, they all had very strong unit and revenue growth. The kind of unit growth we have always been hoping for and now we are beginning to see moving forward.

You said expect more portfolio pruning in the second half. Does that go beyond pickles?

No, I think it will really be -- we are really focused on pickles. We are looking at that entire portfolio, not just Retail Grocery, but Food Service as well, as we are really looking at -- what is the optimum size and manufacturing footprint for us going forward.

Got it. Well hoping for si young, not signora. signora anyway.

Thank you.

That does conclude our question-and-answer session. At this time, I would like to turn the call back over to you, Mr. Reed for any additional or closing remarks..

Thank you, Jamie, and thank all of you on the call for joining us. We will next get together in November and report through the third quarter. At the risk of offering a forward-looking sentiment , I think you will find another installment of progress on an operational front, financially, and also in the most important context, strategically as we continue to expand the portfolio. Move it into more growth categories. Have a less of an emphasis on categories like pickles. And then have our supply chain become not only more effective, but more efficient as these new businesses come into the Treehouse fold.

We look forward to talking with you in a few months. If you would, keep those matters in hand and we will report on further progress in each dimension. Thank

That does conclude today's conference. We do thank you for your participation. You may now disconnect.