TreeHouse Foods Inc (THS) 2008 Q3 法說會逐字稿

Good afternoon. Welcome to the TreeHouse Foods Investor Relations conference call for the third 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 solely to historical or current facts, and can be generally 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 10K for the period ending December 31, 2007, 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 during this conference call. 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 would like to turn the call over to the Chairman and CEO of TreeHouse Foods, Mr. Sam K. Reed. Please go ahead, sir.

Thank you, Jill. Good afternoon, everyone, and welcome back to our TreeHouse. David Vermylen, Dennis Riordan and I have great news and substantial progress to report. We have completed another quarter of strong topline sales increases, sequential margin expansion, and acquisition-fueled earnings growth. These results speak not only of our financial discipline during turbulent times, but also our dedication to a superior go-to-market strategy that is right for these times.

Highlights for the third quarter include -- Revenue growth before acquisitions of 9%, the best of the year, driven by unit volume increases in strategically attractive categories, accelerated pricing to recover higher input costs, and favorable private label trends in the retail grocery industry. Double-digit sales growth from E.D. Smith and San Antonio Farms, coupled with operating synergies, as these 2007 acquisitions expanded their distribution through the TreeHouse sales and marketing network, while enjoying the economies of scale of our supply chain.

Prudent management of our financial resources and balance sheet, as is especially befitting times of economic distress and uncertainty, that we could increase quarterly free cash flow by $68 million, versus last year, while preparing for the year-ending seasonal peaks in soup and non-dairy creamer shipments, is clear testimony to our relentless focus on operational excellence, productivity and procurement-based cost reduction programs and skillful tax and treasury management. And finally, record EBITDA of $40 million, an increase of 19%, as we slowly but surely recovered gross margin dollars lost in the commodity and energy bubble of the first half of the year.

Although below Q3 of last year, margins gained sequentially on a quarter-by-quarter basis, as realized price increases exceeded an annualized $110 million, closely approximating forecast input cost inflation for the year. While we are playing catch up south of the border, our Canadian acquisition posted a solid 240 basis-point gain in adjusted gross margin during the quarter. We now enter the fourth quarter, our seasonally strongest. While an innate sense of caution requires that we curb our enthusiasm, we face the end of this year and the beginning of next with high confidence.

Our principal problems, the built-in lag in pricing to recover input cost inflation and falling demand in Food Away From Home, are matched with even greater opportunities -- the high growth potential of our value-oriented retail grocery portfolio and the benefits derived from strategically sound acquisitions. David and Dennis will now guide you through the particulars of market conditions, our go-to-market strategy, recent performance and the outlook for the remainder of 2008. David?

Thank you, Sam, and good afternoon, everyone. Today I will focus on four areas. First, a refresher on our product portfolio strategy, so that our business results can be viewed from a strategic perspective. Second, the topline performance of the business, third, commodity costs and pricing, and how they will affect the business both short- and long-term, and fourth, an update on the private label market.

First, as we have discussed on prior calls, with our rapidly growing product line, our portfolio strategy is the tool we use to manage the business. While we are focused on topline growth, by are more focused on the quality of revenue, with quality of revenue principally determined by EVA analysis and return on capital employed. This summer, we updated our EVA analysis, including all of our 2007 acquisitions, to give us a clear path to follow.

Products such as non-dairy creamer, condensed soup, salad dressing, salsa, marinades and sauces are all high-priority businesses, and are keys to our growth. On the other hand, much of the pickle business, the branded and competing business, along with smaller product categories are not key to our growth and are being managed accordingly. Our third quarter topline results reflect continued execution of that portfolio strategy.

Total revenue was up 37.7%, due in large part to the addition of E.D. Smith. Importantly, non-acquisition revenue grew almost 9%. This compares to 6.6% in the second quarter. I'll start with North American Retail Grocery. Total revenue was up 52%, primarily due to the addition of E.D. Smith. Excluding E.D. Smith, non-acquisition revenue was up 3.3%.

From a portfolio strategy perspective, we had double-digit revenue growth in non-dairy creamer, soup, and salsa. That growth more than offset expected declines in pickles, due to planned, low margin customer rationalization and a loss of a large infant feeding customer late last year. Not in our base growth number, is a 20% growth we had in salad dressings and marinades. Along with salsa, we are getting great growth from our 2007 acquisitions, and are developing a great portfolio of retail categories.

Regarding E.D. Smith, today we announced the pending closing of our Cambridge, Ontario salad dressing plant and the consolidation of its manufacturing into our two other salad dressing facilities. We are expanding capacity in our U.S. plant, which is a more efficient facility, thus wel'll be able to support continued salad dressing and marinade growth with improved margins. E.D. Smith continues to surpass all of our going-in targets, and is firing on all cylinders when it comes to topline and margin performance. Food Away From Home had a good quarter, despite the severe effect the economy is having on out-of-home eating, especially the casual dining segment.

Total revenue is up 17% due the addition of E.D. Smith, with base revenue up 6.5% due to pricing and very strong salsa growth, as we brought on new food service customers. Our industrial and export business had a solid quarter, with revenue up 25% due to higher [co-pack] volume and ingredient pricing. the topline summary for the third quarter is as follows -- good solid revenue growth from the legacy business, particularly as its relates to the execution of our portfolio strategy, and excellent growth post-integration from our 2007 acquisitions of San Antonio Farms and E.D. Smith. For the fourth quarter, we are cautiously optimistic. The soup and non-dairy creamer seasons are just beginning, and cool weather has taken hold.

Now let me turn to commodity costs and pricing. While we are very pleased to see commodity and energy costs come off their July highs, it will have very little effect on us this year, as we covered the majority of our 2008 costs from the second quarter, in order to finalize second-half pricing plans. In the fourth quarter, we will have some energy benefits as it relates to freight, but the benefits will be marginal. While our margins improved versus the second quarter, they are still well below a year ago.

As we look at next year, while we should see a decline in vegetable oil pricing versus our average buy in 2008, we expect to see pretty large increases in metal cans, corn sweeteners and fruits and vegetables. On corn sweeteners, initial quoted pricing from key suppliers is up 15% to 20%. In total, we expect that our average input costs '09 will be up in the low-to-mid single digits, versus double-digit growth in 2008. While we have taken some first half '09 commodity coverage on a couple of key inputs, the current volatility in the market has us meeting daily to gauge the right time to move in more aggressively. Strategically, our goal entering 2009 will be to have more coverage in place than when we entered 2008, in order to reduce the volatility we experienced in 2008.

We have not had any push-back on our current pricing due to the recent commodity bear market, except in terms of some pricing we expect to take in the fourth quarter. If there is push back, we are fully prepared to review customer-by-customer where costs were three years ago, where they are today, and how our pricing compares to those costs. Our goal is to begin to recapture lost margin, but we do not expect a margin windfall, as we operate in a very competitive environment. In our industrial business, where we have some cost pass-through contracts, we will adjust prices next year, but not at the expense of profitability.

Now let me turn to the private label market. On our last call, I said that in the second quarter, we were just beginning to see an acceleration in private label growth above the normal growth experienced over the last few years. That acceleration picked up in the third quarter. A Nielsen analysis of 45 categories, indicated that for the 12 weeks ending October 4, private label had aggregate volume growth of 4.9%, compared to 1.3% in the second quarter.

That is a very healthy growth rate within measured channels. Excluding infant feeding and our rationalized pickle customers, our U.S. retail volume growth was comparable to the private label market as measured by Nielsen. Most categories showed private label share gains, and that held true for all of our key categories. And our share gains came, with our price differentials to the brand, generally consistent with last year on a $0.01 per unit basis.

Now let me comment on one major initiative that took place in the third quarter, that will have a negative effect on margins in the fourth quarter, but it was a great move for the business. The initiative relates to inventory management. Input cost inflation has a significant effect on the cost of inventory and return on capital. Even if your inventory is flat in terms of cases, it could be up 20% in dollars year-over-year.

Earlier this year, we did some inventory and customer service modeling that indicated we could operate with lower inventories across many of our key businesses. Rather than reducing them over an extended period, back in May, a task force led by Dennis put in place an ambitious inventory reduction program that led to our legacy business inventory declining in units by 25% versus September 30, 2007. Yet we did it without sacrificing customer service levels. Typically, we are a user of cash in the third quarter as we build soup, pickle, and powder inventory. In his comments, Dennis will review how that changed this year. I'll now turn out over to Dennis.

Thank you, David. Since David covered the revenue growth, I will focus on other key aspects of our operating results, including gross margin improvement, controlled expenses and financing activities.

First, overall gross margins in the quarter were 19.5%, compared to 21.6% last year, a decrease of 210 basis points, as a combination of high-imbedded input costs along with higher transportation costs, were not fully recovered in the quarter from pricing actions. This has been consistent story all year. However, we did see an improvement on a sequential basis from last quarter's gross margins of 18.7%, as pricing was more fully realized in the quarter.

Margin improvement from the second quarter was realized in nearly every product category and channel, with the exception of our Food Away From Home business, where lower volumes and a difficult economic environment caused a consumer shift towards food at home rather than meals away. In regard to operating expenses, selling, distribution, general and administrative expenses increased from $35.2 million in 2007 to $45 million in the third quarter of 2008 due to the overall growth in the Company. As a percent of sales, SG&A costs finished the quarter at 12%, compared to 12.9% in last year's third quarter, as we realized synergies from the businesses acquired in 2007. Partially offsetting the improvement, was an increase in non-cash amortization expense.

The increase in amortization expense from $1.6 million in 2007 to $3.3 million in 2008, was due to an increase of amortizable, intangible assets such as trademarks, trade names and customer lists associated with the E.D. Smith acquisition in 2007. Our other operating expenses totaled $700,000, nearly all of that being shut-down costs associated with the previously-announced closing of our Portland, Oregon pickle plant.

Interest expense increased from $5 million in 2007, to $6.5 million in 2008 due to additional bank borrowings used for acquisitions in 2007. However, interest expense was reduced on sequential basis from last quarter, due to an aggressive program to reduce working capital and generate additional cash flow. These programs were successful in driving down our finished goods inventory units and our legacy businesses by 25%, compared to September 30, 2007. We were also able to improve our already -low day sales outstanding ratio to 21.5 days at the end of the quarter. These working capital plans resulted in significant positive cash flow in the quarter, even though we historically have negative cash flow in the third quarter.

The third quarter was the seasonal build period for soup, non-dairy creamer and reserves of cucumbers for winter processing. However, this year we actually reduced outstanding debt in the quarter by nearly $36 million, to $551.8 million at September 30. This compares to last year's third quarter, when inventories rose and our outstanding debt increased by $32 million. This change in debt is the free cash flow of $68 million Sam referred to earlier.

In light of the volatile interest rate environment, we have also been very focused on treasury management. As many of you know, we have two primary sources of funds -- senior notes that carry a coupon rate of 6.03%, and a revolving credit agreement that has a variable rate based on LIBOR plus a credit spread. We were very successful in managing interest rates this year, as evidenced by the all [in interest] costs on over $480 million in revolving debt of only 3.54% in the second quarter. Although rates have been erratic in the third quarter, our average borrowing rate in the third quarter was only 4.05%.

To help ensure we minimize our exposure to significant swings in interest rates in the future, we entered into an amortizing interest rate swap agreement that will be effective beginning November 19, 2008. Under this swap, we will have a fixed LIBOR base rate of 2.9% for two years on $200 million in principal. This swap agreement will then amortize down to $50 million, also at 2.9% interest, for an additional nine months. This will coincide with the expiration of our current revolving credit agreement.

This swap agreement will result in us having a maximum interest rate of 3.8% on the underlying principle, based on our maximum credit spread of 90 basis points. This maximum credit spread can decrease as our debt levels decrease. We believe this very advantageous agreement will allow us to continue to continue to take advantage of short-term rate opportunities on a portion of our debt, to lock in a very low fixed rate on the majority of our revolving debt.

Regarding taxes, our effective tax rate for the quarter was 29.9%, compared to 37.6% last year. The much lower tax rate was due to Canadian sourced income, that carries a much lower effective tax rate, along with a deductible interest cost on a Canadian inter-company note. This quarter's tax rate is consistent with the year-to-date rate of 29.7%.

Reported net income finished at $0.35 per share, compared to $0.34 per share last year. However, 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 per share in the quarter. Second, we had integration costs of $0.01 associated with the integration of the U.S.-based E.D. Smith operations [and our] Bay Valley Foods Operating Company. And finally, we had a non-cash re-valuation loss on the inter-company note of approximately $0.03 cents per share. After adjusting for these three one-time items, our adjusted earnings per share would have been $0.41 per share. This is a 20.6% improvement compared to last year's third quarter of $0.34 per share.

To recap the third quarter, we began to see improvements in our gross margins as price increases were more fully realized, and softening in the energy markets started to take some pressure off certain key inputs. We also saw very nice unit sales growth in most of our product categories. Finally, we took aggressive actions to better manage our working capital and drive incremental cash flow.

In regard to the balance of the year outlook, we are now in the key soup and non-dairy creamer shipping season, and we'll see seasonal growth in our topline in the fourth quarter. In addition, we expect to see continued standard gross margin improvement in the business, but those improved margins will be offset by higher one-time, unfavorable factory variances associated with the third quarter inventory reduction program. Those unfavorable production variances will roll into the fourth quarter results. We estimate these non-recurring variances will have a negative effect on the fourth quarter results of $0.05 per share. Excluding these one-time variances, adjusted earnings per share for the quarter are expected to be $0.48 to $0.50, bringing the full year adjusted earnings per share to a range of $1.55 to $1.57. Sam, I will now turn it back to you.

Thanks, Dennis. Last February, in what now seems to be an entirely different world, we set forth six critical elements for the Treehouse plans for 2008. These included -- Number one, protect margins, number two, grow the base, number three, reform our supply chain, number four, strengthen our platform, number five, change with the times, and number six, reaffirm our commitment. Nine months later, in spite of the world being turned on its head, we can report that even under the most hostile and volatile of market conditions, we have made substantial progress on all of these strategic fronts.

Importantly, we also exceeded our original financial expectations, even after commodity and energy inflation across the packaged goods industry was almost triple that of preceding years. Next, our portfolio of product categories marketed across three business units has been strategically strengthened by the addition of salsa and salad dressing, as well as access to the Canadian market. Lastly, our infrastructure, be it our supply chain or balance sheet, has shown great resiliency and adapted well to these new and difficult times.

As the new year dawns, we see 2009 as a year of great promise for TreeHouse. Specifically, the economy, while weak in general, will favor those who can deliver great value to consumers and superior service, including affordable innovation to customers. Input inflation will have slowed to low single digits, allowing us to close the remaining price cost gap caused by the lag following the commodity and oil bubble. Pressure for price rollbacks should narrowly focus on only certain product categories, not the entire portfolio.

Next, EVA analysis and portfolio strategy will lead us to real growth, better margins, and competitive advantage as we invest in the weak -- invest in the strong and winnow the weak. It is worthy of note that our present portfolio is far more weighted toward growth categories, whether large or small, than our original legacy base. Internal improvement will enhance our margins through productivity, procurement and innovation. Our supply chain will benefit from consolidated -- from consolidation of under-utilized manufacturing capacity, as well as the expansion of our distribution network.

Lastly, external expansion will allow us to enlarge and upgrade TreeHouse portfolio by the addition of new growth opportunities. Sellers will again return to the M&A marketplace as uncertainty and volatility recede, and more financing, although with less leverage, becomes available. The TreeHouse reputation for strategic expansion, certainty of closing, adroit integration, and prudent cash management, will stand us in good stead, far ahead of our competition for acquisitions when the economy and capital markets inevitably turn for the better.

In summary, while we must continue to confront operational issues and cope with significant risks in the marketplace, we at TreeHouse are confident of our future and the outlook, not only for the remainder of this year, but more importantly, the next. Jill, we will now open the phone lines for questions and comments.

(OPERATOR INSTRUCTIONS). Our first question today is from Bill Chappell, with Suntrust Robinson Humphrey.

Good afternoon.

Good afternoon, Bill.

Could you talk a little bit about -- I guess on the price increases versus the commodity cost increases going into next year, do you expect gross margins to get back to the levels of a couple of years ago? Will they be up year-over-year? How are you looking at it from that standpoint?

Bill, this is David. I think they'll be -- We haven't completed all of our planning for next year, but we believe we'll continue so see this sequential improvement as we have had over the last few quarters. We would love to get back to where we were a couple of years ago, but know that we can't -- we're not going to be able to get there in one fell swoop, but we will make meaningful progress.

Okay, and then in terms of acquisitions, I guess -- it sounds like it's been pushed from the end of this year to the first part of next year. With financing, with credit markets, with what have you, do you see something in the first half of next year, or is it probably pushed to the second half?

Bill, this is Sam Reed. I won't comment on a particular timing or specific category, but what we do see is that, on an internal basis, we have reached that point where we are fully capable of taking on another large-scale and strategically meaningful acquisition. We've got a number of candidates in mind, and are focused on -- less on the matter of exact timing than in fact , the strategic value of what it is that

Okay. Great. And then two last questions. Just on a go-forward basis, what are you projecting? I mean, should we project 30% tax rate and similar in terms of currency impact on maybe the fourth quarter results?

Bill, Dennis here. Yes, I think at this point, based on the full-year rate coming in at just about 30, I think that's a fair assumption for Q4. On on the exchange rates, boy, I wish I knew. We went from, what, 97 to 77 in about two and a half weeks and then back up to about 83, 84, so I think we're just going to be watching it like everybody else.

But just on your full-year EPS, you're assuming a similar type charge in in the fourth quarter just like we saw on the third?

On an excluded basis, that doesn't impact things. We don't have guidance with the potential for the inter-company, because that's non-cash.

Got it. And then one last. Were there any additional customer wins for E.D. Smith this quarter?

This is David. We have had -- I can't -- I'm concerned about commenting on specific customer wins, because it really relates to then our relationship with the customer, and that -- revealing that kind of information. I can tell you that with both E.D. Smith and San Antonio Farms, we had, at the very -- at the end of the quarter, some significant new customer wins that, when you look at the sales growth on salsa of well into double digits, that was really driven both in retail and food service by new customer wins. And with the 20% growth in salad dressings and marinades, we also had customer wins there. So we're feeling very good about those businesses, and what they're contributing to our total results, and what Dave [Alley] has been able to do for those customers in terms of opening up customer doors.

Okay. Well, congratulations on the quarter.

Thank you.

And our second question is from Robert Moskow with Credit Suisse.

Hi, good evening everyone.

Hi Rob.

I guess my question has to do with this $0.05 charge in the fourth quarter. Maybe this is going to be more of an editorial than anything, but you made a wise choice, I guess, in reducing your working capital requirements during this seasonal build-up because you generated some cash flow. So you kind of give yourselves credit for that, but then in the fourth quarter, you're kind of breaking this one out saying it's a $0.05. charge. So are you really also saying that there's less product to sell in fourth quarter,? And if demand was really good, are you leaving some demand on the table by not having that product to sell?

Rob, this is David. Let me provide an operational perspective, and then Dennis can add in just in terms of the financial metrics. But as we have engaged the organization in EVA and return on capital employed metrics, we've expanded the operators' horizons on how we can improve shareholder value beyond just our focus on quality of revenue and operating margins. As I mentioned earlier in the year, we took a hard look at our inventory levels, especially as they related to building inventories going into those peak consumption periods. What we found that we were building too much safety stock when you looked forward inventory coverage. Now the two routes we could take would be to either do it over an extended period of time, which would minimize any short -term margin issues relating to absorption, or be aggressive and make it a high priority.

With inventory value rapidly escalating due to input cost increases, we decided to be aggressive with our program, as long as we could maintain those customer service levels. While we knew it would have a negative effect on margins in the fourth quarter, the cash flow opportunity was far too compelling to dissuade us. Now while we didn't budget for it, we determined, I think rightfully so, that was the right thing to do. We did not lose any sales opportunities associated with it, because our customer service levels have stayed at the 98% to 99% through the whole period, so we're very pleased where we have netted out. And we will continue to look at our inventories as we move through 2009 and see if there are additional opportunities on the inventory front to continue to improve cash flow. Dennis?

And, Rob, just a couple of numbers. Last year at the end of September, we had about 118 days' sales in inventory, and this year, we're down to about 83 days. And as David mentioned, no change in customer service levels, no lost orders. We just realized that as strong as our accounts receivable was, and as well as we did there, we weren't quite pulling it on the inventory side and we put a full court effort in to improve that, and the results were very strong. But there will be a bit of a cost in Q4.

So it doesn't have any impact on leaving sales on the table, or -- in the fourth quarter?

Absolutely not. We would not -- again, Robb, our whole goal here was how far down could we take it without jeopardizing the customer service levels. And there has been no disruption in that, which indicates to me that down the road there may be additional opportunity.

And then just one point of clarification on fourth quarter. You said that you're not getting any kind of push-back on the price increases that you want to take, but then you said except in terms of some actions that you wanted to do in the fourth quarter. So does that mean that there's other pricing you want to take beyond fourth quarter? Or are you not really looking at any additional pricing at all?

At this point, as we are putting together our plan, we'll look at every business and how commodity costs are going to -- input costs are going to affect each part of the portfolio. But in total, we're going to see -- our estimate, again, is that low-to-mid single digits input cost inflation, so we're not anticipating the kind of pricing anywhere near the kind of pricing that we had this year. In terms of push-back from some customers, it was very limited, some of it related to some pricing on non-dairy creamer, but nothing that was of any real significance.

And lastly, on the organic sales growth in North American Retail, if you quantify it as 3.3%, it was about 3.7%.in the second quarter. It doesn't sound -- it's not terrifically robust, but I guess the salad dressing business has been very robust. So if you took a -- if you added that in the organic sales, kind of apples to apples, then you would be a lot higher, I would imagine.

It would have been significantly higher. And I should have calculated that out, and sooner or later, I will. But the big thing, Rob, for the -- in the third quarter, was that on the pickle business, when we were rationalizing those customers, a lot of that was really starting in the second quarter and had the full effect in the third quarter. But when you look at salsa, the whole soup business and non-dairy creamer, the topline sales on those businesses were very good. Even non-dairy creamer, where we took significant price increases this year, just because it was right in the sweet spot of all of the commodity cost increases, we had unit volume growth in the third quarter.

I'll leave it at that. Thank you.

Thanks, Rob.

And our next question today is from Jonathan Feeney with Wachovia. (OPERATOR INSTRUCTIONS).

Hi. Good evening. Thanks. How are you?

Good.

Wanted to follow up a little bit on Rob's question. More specifically, I understand the merits of reducing day sales in inventory, but it doesn't seem like the action of a Company that feels like it's on the precipice of a volume acceleration, that maybe some of the third party data, especially if you think about how retailers have to run a private label program. If they're going to accelerate, they need inventory. It seems like -- it doesn't sound like you're expecting an awfully -- any kind of acceleration in volume in the fourth quarter. So maybe if I could ask more specifically, what can you tell us about your pipeline, about the conversations you're having with retailers that might affirm or deny the growth potential that seems apparent here as private label accelerates?

When you look at -- we are expecting continued growth of the private label market, and we're optimisting about our own business. I think, as Dennis pointed out, we were sitting on levels of inventory that were significantly higher than we needed. Importantly, what was going on, was that as we were going into peak seasons on things such as soup, and you're looking at days of forward coverage, we were increasing the number of days of forward coverage rather than, say, maintaining then at normal running rates, just to have an almost obscene level of safety stock. So we've able to continue to drive the business forward, even though we've taken 25% of the inventory out of the system. Frankly, Jon, we just had way too much inventory.

Can you maybe [pars] -- are there different areas where you had more inventory, like pickles, more inventory reduction than some others?

I think soup was an area that we saw as a big opportunity.

Okay.

Soup was the biggest. And the others we had pretty much across the board in all the categories, but soup was definitely the number one area.

Okay. And let me -- I'm sorry if you told us this, Dennis, and I missed it, but could you give us an idea of the sensitivity, what the puts and takes are on an operating basis for your currency exposure? Because I know you seem to have -- I don't know if you have more Canadian dollar costs or revenues. I know it's a wide range of performance, but could you maybe give us a sensitivity analysis of what cash effect it has on the business, ignoring the non-operating asset and liability translation?

Yes, Jonathan. We are, as an entity, nearly fully covered on our puts and takes in the currency. So our combination of Canadian and U.S. dollar sources and uses in Canada come very close to 50. Fifty is actually slightly more towards a 55/45, but it's very tight. A decrease in the Canadian exchange rate will have a small negative impact on us. It goes slightly the other way. But it hasn't been a big enough number to even draw attention to so far this year, despite the currency going up and down quite a bit.

Good. And just one other detail question, Dennis. What is your current availability under that oh, so, attractive rate liquidity facility you have in place?

The revolver can go up to $600 million, and we have about, at the end of September, we had about $451 million outstanding under it.

Okay. So if you saw the deal of a lifetime tomorrow, you have $149 million to spend?

Well, I guess in theory. It practically doesn't work out quite that way, between the way the way the ratios go. But suffice it to say, there is availability under that line right now. And with our cash flow being strong, it will only increase as we move out into the latter part of this quarter, and certainly in the next year's Q1 and 2.

Okay. That's all I had. Thank you very much.

Okay. Thanks.

(OPERATOR INSTRUCTIONS.). And our next question comes from Ken Goldman with J.P. Morgan.

Good afternoon.

Hello, Ken.

A couple of questions. Just wanted to clarify a couple of things that I think were said on the call. Is inflation supposed to be low single digits to mid-single digits, or just low single digits? I think it was maybe stated a couple of ways.

It's low-to-mid single digits.

Okay. And then a similar question about guidance for the year. I think in the press release, it was stated that earnings per share will still be in the guidance range you've used throughout '08. But then if I'm reading this live transcript right, you guys said $1.55 to $1.57, which, correct me if I'm wrong, it's a little bit above where you guys were last quarter. Am I missing that, or -- ?

No, what the -- what we said on the call scrip, Ken, was excluding the $0.05 from that unfavorable variance, that would be the $1.55 to $1.57. And in the earnings press release, it was not specific that that was called out. So we didn't show that as a particular callout, so if you deduct a nickel from that, you would be in the $1.50 to $1.52 range. So it just depends on what your perspective is as to how to treat that $0.05.

Well, I have a buy on you guys, so I'm going to exclude it. That's my perspective. Here is my real question, now that I understand that. Okay. So if you take the mid-point, sort of that $1.55 to $1.57 compared to the previous -- the initial mid-point of guidance, you really have only raised it this year by 2% or 3% in terms of your earnings. That's not a lot, considering the economy's downturn is probably going to help your topline, considering that, at least since May, oil and gas have come down, or since the summer, lowering maybe the cost you had expected. Your tax rate is lower. Your interest rate may be lower because you paid down debt. That's a lot of tailwind. So I'm looking at your guidance. You've beaten the street six straight times. You have all these tailwinds. The question is, why wouldn't you beat it again? Why should we not assume that you're just being very conservative on 4Q guidance.

Ken, it's David. I'm looking forward to feeling those tailwinds. But we certainly have not yet. As I mentioned in my comments, in the majority of our input cost for this year, we contracted for in the second quarter in order that we could firm up our second half of the year pricing. So those commodities have come down. There's been really very little benefit to us for that. One -- also comment on the fact that we're heading to -- with your saying that the tailwinds, that our oil costs for this year, that is vegetable oil costs for this year, are approximately $20 million higher than we had originally budgeted for. And that $20 million in higher input costs versus budget, translates to about $0.40 earnings per share. So in terms of dealing with headwinds and tailwinds, just on that single commodity alone, we had a $0.40 earnings per share headwind. And adding in all of the other year-over-year -- or above-budget input costs, the fact that we are heading towards our original guidance, to me is a great testament to the resiliency and flexibility of the organization.

I would assume, then, that given where commodity costs are now, you would not look for that similar $0.40 per share increase, based on vegetable oil next year. It may even be -- I don't want to use the word tailwind, because you've sort of pooh pooed that a little bit, but that shouldn't be nearly a headwind, right?

No. I think we will see a mixed bag of input cost increases. I think that in my comments I said that we expect vegetable oil prices to be down, but corn sweetener costs will be up. Tin plate and therefore metal cans costs will be up next year, and crop, fruits, vegetables, and cucumbers will be up. But in total, we think that the input cost basket will be up in the low-to-mid single digits. Though I will say when you look at each commodity on its own, there are going to be some big increases and some big decreases that average out at that low-to-mid single digits. So, within the basket of costs, there will be a lot of volatility, but we are hopeful that in total it will be back to a more normalized running rate.

Okay. Thanks very much.

Thank you.

And our next question is from Bob Cummins from Shields and Company.

Thank you very much, and good evening everybody.

Hello, Bob.

Somebody asked earlier about your plans for acquisitions, availability of funds, etc., and I think you mentioned that you were looking at some things. Let me turn that around and ask you if there are any areas of the company that you might consider divesting. I know you mentioned some large product areas earlier that are not considered growth vehicles. Would that be something that you would consider? Or do those kinds of products play a part in the management of your business, even though they're not growing.?

Bob, this is Sam Reed. It's good to hear from you again.

Good to talk to you, Sam.

With regard to those portions of the portfolio, where the strategy indicates that there is little in the way of growth opportunity or long-term improvement, what we're really focused on is continuing to run those as a part of the portfolio.

Right.

And to date what we have done in limited instances, is close excess facilities. And I won't comment on whether there are specific plans or not with regard to divestitures, but as a general matter, these are businesses that, as we've looked at the various options, the better course, again, as a general matter, is to continue to operate them, but with a little bit of resources and very little investment. And use the positive cash flow out of those businesses to pay down debt, prepare ourselves for the future.

Right. Okay. Good. Well, another thing is I want to congratulate you on your stock price. There can barely be any stock on the New York Stock Exchange that's as close to its all-time high as yours is right now. And I just hope your stockholders appreciate how well they've done in a lousy year for the market in general. I certainly do.

Well, thank you. We very much appreciate those kind words.

Okay. Talk to you later.

Thanks, Bob.

Thank you.

And our next question comes from Donald [Bissen] from Century Capital Management.

Yes, hello. Can you give us the -- you've itemized three items that you've backed out of your earnings. Can you give us the pre-tax amounts of those items and what line items they impacted?

The -- typically they will show up on the third page of the detail on the back in our press release. We had the reconciliation, in that we show the loss om currency translations $1.869 million. That shows up in other expense. The acquisition integration was $234,000.

But those are after -tax numbers I'm looking at, yes, no?

Those are pre-tax numbers.

Oh, they are. Okay, that's fine. Thank you.

And our last question comes from Bill Chappell with Suntrust Robinson Humphrey.

Thanks. Just a couple of quick follow-ups. Just trying to understand the industrial ingredient category, and the growth there, and how we should look at that on a go-forward basis.

Well, I think the ingredient business, which is principally non-dairy creamer -- this year the tonnage is relatively flat compared to prior years. The revenue is up quite a bit because it has been so driven by increases in commodity costs, principally vegetable oils, [kazine] prices and corn sweeteners. The other part of that business really is really contract packing, and in general, we have pretty long-term agreements with our major customers, where we are are producing principally in the areas of soup contract agreements, as well as infant feeding contract agreements.

So it should at least continue at this revenue level for the next couple of quarters?

Well, I think the revenue -- as I mentioned on the call, some of our industrial business, the ingredient business, non-dairy creamer, has cost pass-through contracts. So there could be, early next year, some reductions in that revenue, but it will not affect the profitability of that business. It will really just be a pass-through on the reduction in the input costs, and not on our margin per pound.

Got it. And then one last one. On the Food Away From Home, did you see that business slow inter-quarter, or was it pretty steady, and kind of similar to prior quarter trends?

Pretty steady across the quarter. The good news for us there, is that with the addition of San Antonio Farms, at the -- last year, we really were able to start developing new customers for Food Away From Home salsa, and that helped us to offset some of the underlying Food Away From Home consumption declines. And with the addition of E.D. Smith and they have, in Canada, a very good sauce program, all different types of cooking sauces under what they call the sauce maker plan. We are developing that program down here, and it has been launched, but we see a lot of new customer development for that business that will take place in 2009. So as the fundamentals of Food Away From Home are negative, the addition of salsa in salad dressing and salsas will help offset the fundamental ental declines.

Great. Thanks.

(OPERATOR INSTRUCTIONS.). And our next question comes from Robert Moskow with Credit Suisse.

Just a quick follow-up. Consensus estimates are already baking in 11% EPS growth for '09, and we're going to be lapping all the acquisitions. So I was wondering, are there any benefits in '09 that you could call out today on incremental synergies, or on a cost side or even on the revenue side that make comparison a little bit easier? We already know about the cost inflation, but I was wondering if there's anything else.

Rob, this is Sam again. I think with regard to the business that we have now, that we will see a continuation of some basic trends that are favorably affecting this now. As I indicated, we expect that the economy will stay weak, and that will add to margins favor, value over luxury, and we'll get that benefit of it. With regard to lower inflation, we expect that in a couple of more quarters, we'll be able to have fully closed the gap that was created in the lag time following the huge run up in commodity and oil costs. Importantly, the combined use of the EVA analysis and the portfolio strategy have provided us not only, as David indicated, a road map, but frankly surprised us in a couple of instances of businesses that were varied within E.D. Smith in particular, that as we dug into the detail, we found that there are a few small jewels there that we believe can take -- be made better because of the extensive nature of our TreeHouse network, and the economies of scale that they get in our supply chain.

And then lastly, the internal improvements that this business cannot be over-emphasized. There is, in every corner of the business, a real drive to improve productivity, to develop more meaningful innovation that fits the needs of our customers and, in particular, as David also indicated, from a procurement standpoint, take a longer lead time and make better best with regard to what these commodity and energy prices will do over a longer lead time. So that while we are adjusting, we are not behind the 8-ball trying to catch up desperately to a situation that's running away from us. And while we have not yet -- while we have developed those programs, and we'll give you more detail in the February call, I think in their aggregate, it is our sense that those are developments that in combination will lead to significant improvement, even with the base business.

Okay. So does that kind of mean that you think that --11% growth, you probably don't normally guide that high, all else being equal. Does that mean you're kind of optimistic that '09 could be a better-than-base case type of year?

We'll put a number on it in February.

Okay. I tried. Thank you. (laughter)

We have no more questions at this time. I' like to turn the call back to Mr. Reed.

Thanks, everybody. And we very much appreciate your interest in TreeHouse. And we look forward to posting you on our full year's results, as well as providing guidance for 2009 when we next talk in the middle of February. Good night, everyone.

We thank you for your participation on today's call, and have a wonderful day.