TreeHouse Foods Inc (THS) 2008 Q4 法說會逐字稿

Good afternoon and welcome to the TreeHouse Foods investor relations conference call for the fourth 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 generally be defined by the use of the words such as guidance, may, should, could, expects, speaks 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 prediction -- the 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 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.

As a reminder, this call is being recorded. At this time, I would like to turn the program over to your host, Chairman and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed.

Thank you, Courtney. Good afternoon, everyone, and welcome back to our TreeHouse. We are pleased that you have joined us once again, this time on the occasion of our third complete year as a public company.

Much has changed since our June 2005 spinoff, virtually all to the strategic operational and financial advantage of our TreeHouse. Our prospects have never been better. And we are eager to share our recent history and current outlook with you.

As usual, I am joined today by David Vermylen, our President and Chief Operating Officer, and Dennis Riordan, Senior Vice President and Chief Financial Officer. They have successfully led our company to record earnings and expansion through the last year, a time of great turmoil for the packaged goods industry. They have, as well, developed plans for continued external growth and internal improvement for the new year, a time of great uncertainty for our economy.

Before they address the most recent quarter, the year just ended, and the year to come, I would like to offer an overview of our TreeHouse as it stands today. I will later return before the Q&A session to reflect upon our future plans, opportunities, challenges, and prospects.

First, my view of TreeHouse past and present. A year ago, on a similar conference call, we set forth a six-point agenda for TreeHouse in 2008. Today, a year later, after our best-laid plans were disrupted by extraordinary input costs, inflation, and volatility, we have kept all promises made.

These were protect margins, grow the base, reform our supply chain, strengthen our platform, change with the times, and, most importantly, reaffirm our commitment to shareholders.

While realizing these strategic goals, we also generated exceptional financial and operating results that far exceeded market expectations. Specifically, earnings increased $0.30 per share. Sales exceeded $1.5 billion. Operating cash flow grew 14%, and debt was reduced $145 million.

As a consequence, the market recognized our performance as THS shares rose 18% during 2008. From every perspective, 2008 was a win, a big win for TreeHouse.

Before turning to David and Dennis, I acknowledge, in citing these results, that we did not win in 2008 simply by staying with our original game plan. Stuff happened. Commodity and cost increases were triple our original estimate, a nondairy creamer powder plant was disabled, and the Canadian dollar, the Loonie, dropped to $0.80 on the U.S. dollar.

But we did win, and we did so in tough times against long odds and often with our backs to the wall. We adapted to virulent inflation and gyrating volatility, extended E.D. Smith distribution far and wide south of our northern border, and passed through pricing to offset more than $110 million in commodity and energy inflation. Treasury and tax management was deferred, generating cash flow to reduce debt and strengthen our balance sheet, as liquidity evaporated elsewhere.

That's what winners do. That's what our team of private label, foodservice, and industrial veterans, assembled over three years and six deals, does. That's what makes us proud of our past, sure of our presents, and confident of our future. David.

Thank you, Sam, and good afternoon, everyone. Today I'll focus on two areas. First, the topline performance of the business during the fourth quarter and second, a brief recap of 2008. After Dennis reviews the financial highlights, I will provide a perspective on 2009.

First, the fourth-quarter topline. Our total sales were up 7.3%. North American retail sales, which account for just under 60% of the business, were up 8.6%. We continued to pursue our portfolio strategy that focuses on our growth initiatives on soup, salsa, salad dressing, and nondairy creamer in the U.S., along with jams, jellies, and pie fillings in Canada.

In North American retail, excluding the impact of fickle customer rationalization in infant feeding, we had a 3.5% unit growth with double-digit growth on salsa, portable and spoonable salad dressings, jams, and pie fillings, and low single-digit growth on soup.

That increase on soup came despite our having reduced our soup inventories by 29% in the third quarter. I know there was some concern on our last call that we reduced inventories due to possible fourth quarter consumption concerns, but we had a good soup season.

While our retail pickle business was well below year ago in terms of units, due to our customer rationalization strategy, operating profit was virtually equal to last year with margins up 160 basis points. North American retail grocery operating margin increased 200 basis points, due to continued improvements in our legacy Bay Valley business as we execute our portfolio strategy, as well as continued gains from our E.D. Smith business.

Our retail operating margins would've been higher, but the absorption impact from our third quarter inventory reduction flowed through our fourth quarter P&L.

While I have provided a summary of our internal retail data, let me briefly turn to syndicated data. Overall, the private-label market, as measured by Nielsen, had a strong quarter with volume up low to mid single digits. While retail customers, measured by syndicated data, account for only about 50% of our retail business, I thought I would provide a brief recap of some of how our key categories performed and our performance within those categories.

Please keep in mind that syndicated market data does not capture the volume of some of the faster-growing retailers, thus, we believe, it understates total category growth.

As measured by Nielsen, the soup category case sales were down 1% with dollars up over 5%. Our private-label soup case sales were up 1%, dollars up 11%, resulting in both unit and dollar share gains.

The salad dressing market unit sales were down 4% with dollar sales up over 3%. Our private-label salad dressing unit sales were up over 12%, with dollar sales up almost 25%, resulting in excellent unit and dollar share growth.

The powdered nondairy creamer market was down 3% in unit sales, but our unit sales were slightly better than that. Nondairy creamer commodity costs soared this year, resulting in much higher pricing, which has had an effect on market growth. While we gained both unit and dollar share, we need to reinvigorate the market.

While the pickle market was down 4% in units, our unit sales were up almost 1%, dollar sales up 8%, and we gained both unit and dollar share. The disconnect between our pickle performance, as measured by Nielsen, and our internal shipments is that the unprofitable business we exited last year was principally outside of measured channels.

While the salsa category was flat in units, we were up 12% with dollar sales up over 20%, and we gained both unit and dollar share. Outside of the measured channels, we had excellent growth in soup, salad dressing, and salsa.

Finally, on the retail side, we did see a reduction in customer warehouse inventories that's been reported by other manufacturers. While difficult to estimate across the board, our data points to about a half-a-week inventory reduction in terms of combined warehouse and retail.

Turning to Food Away From Home, while our revenues were flat, this is the segment that is facing tough economic challenges. The decline in away-from-home eating affects both our Food Away From Home segment and our industrial business, where we sell ingredients to customers where the end use is away from home.

Across the board, we are hearing of industry declines that accelerated in November, but are continuing in 2009. In particular, the casual dining segment has been hard hit, and that's a strong channel for pickles.

However, despite the volume challenges, Food Away From Home operating margin increased 70 basis points, due to pricing and lower transportation expense.

Our industrial and export sales increased over 11%, due to both higher volume and prices. Operating margins declined due to a mix shift to lower [net] margin copack items.

I would now like to provide a brief recap of 2008. I am thrilled we were able to exceed our original guidance and see our stock price -- and see our stock price increase, despite the challenges we faced on input costs. The increase in input costs versus our original budgeting guidance had a negative $0.84 earnings per share impact versus budget. With our original guidance of $1.50 to $1.55, that was a big hole to climb out of.

While pricing was able to offset some of that hit, it also took cost savings, productivity gains, and smart business and financial management to bridge the difference.

While the input cost volatility required enormous time commitment on the part of the organization, we were also able to integrate the $300 million-plus E.D. Smith business into our company and increase its pro forma operating income 50%, despite facing input cost turbulence. E.D. Smith has been a great success for us and we exceeded every operating metric we established at the time of the acquisition.

And we have not yet fully tapped all of our cross-border opportunities, given how our priorities shifted last year. We will escalate this activity in 2009. I'll now turn it over to Dennis.

Since David covered the revenue growth, I will focus on other key aspects of our operating results, including gross margin improvement over quarter three, well-controlled operating costs, and working capital programs that performed very well.

In addition, we had three unusual items in the quarter -- a non-cash mark to market on our interest rate swap agreement, a non-cash adjustment to our intercompany note to reflect current Canadian exchange rates, and the previously-disclosed costs associated with the third quarter factory production slowdown. I'll describe these unusual items in more detail as I walk you through our fourth quarter P&L.

First, gross margins improved sequentially to 20.1%, compared to 19.5% in the third quarter, reflecting a fuller realization of previously-enacted price increases, along with lower energy costs.

The increase in margins was realized despite incurring approximately $2.5 million in unfavorable factory costs associated with the inventory reduction programs we implemented last quarter. Excluding this onetime cost, our fourth quarter margins would've been 20.7%. This compares to last year's fourth quarter margins of 20.5%, so you can see that we have turned the corner on margins during the quarter.

In terms of specific categories, we were especially pleased to see our total pickle margins improve by 100 basis points compared to last year. In addition, all of the E.D. Smith product categories improved as well.

Selling and distribution expenses actually decreased from last year, due to a combination of lower energy costs and slightly lower unit sales. Total selling and distribution costs wound up being 7.3% of sales in the quarter, compared to 8.1% last year. A drop in diesel fuel cost during the quarter was the principal reason for the lower total cost.

General and administrative costs increased only slightly in the quarter as normal annual cost increases were partially offset by lower acquisition and integration costs incurred last year as part of the E.D. Smith acquisition. Still, with the increase in total revenues, G&A costs decreased again to 3.7% of net sales, compared to 3.9% last year.

Other operating expense was $1.3 million in the quarter, compared to a minimal credit in 2007. The expense in 2008 relates primarily to costs associated with our closed Portland, Oregon, pickle plant.

Amortization expense in the quarter showed a very small decrease from last year, due to the normal amortization of intangibles associated with last year's acquisitions.

The loss on foreign exchange in the quarter relates primarily to the revaluation of a Canadian intercompany note. We had to revalue the note based on a much lower Canadian exchange rate at the end of December, compared to exchange rates at the end of the third quarter. This is a non-cash adjustment.

In 2007, we had a currency gain, when we forward purchased the Canadian dollars used to complete the E.D. Smith acquisition.

Our nonoperating income and expense included a $7 million non-cash expense to mark to market our interest rate swap agreement. The adjustment is to reflect current LIBOR rates, but does not have any effect on our future interest payments. This charge will be reversed as a non-cash gain over the remaining life of the swap agreement.

Interest expense for the quarter dropped significantly from $9.2 million last year to $5.8 million this year, due to a combination of lower average interest rates and a significantly lower level of debt.

Here we see one of the more visible benefits of our working capital improvement programs. We were able to generate enough free cash flow to reduce our outstanding debt by $76 million, or nearly 14% in the quarter, bringing our year-end debt to $476 million.

For the year, we managed to reduce our total debt load by $145 million. We ended the year with $224 million in capacity under our existing credit facilities. So although we did incur an incremental $2.5 million in unfavorable factory costs in the quarter, we believe the benefits of our cash flow focus far outweighed the onetime costs.

One final note on our debt is that the revolving credit facility does not expire until 2011 and our senior notes are not due until 2013. We, therefore, have no near-term issue with refinancing.

Regarding taxes, our effective tax rate for the quarter was very low at 20.5% compared to 35.8% last year. The much lower tax rate was due to Canadian sourced income that carries a much lower effective tax rate, along with deductible interest costs on our Canadian intercompany note. More significantly for the quarter, the non-cash mark to market adjustments are deductible at our marginal tax rate of approximately 38%.

These deductions further decreased our total taxable income, resulting in the lower-than-normal effective rate in the quarter.

Income from continuing operations in the fourth quarter was $7.1 million, compared to $14.3 million. Excluding the unusual items I highlighted above, and consistent with the reconciliation in our earnings press release issued today, our adjusted earnings for the quarter totaled $0.55 per share, compared to $0.45 per share last year.

In light of the very difficult times we've faced, we are very pleased to show a 22% improvement in adjusted earnings in the quarter.

We believe we made substantial progress in many aspects of our business, led by the success of our pricing to input cost balancing, working capital management, and continued success with our treasury and tax management activities.

Now, for the full-year 2008, earnings per diluted share from continuing operations are reported as $0.91, compared to $1.33 for last year. Excluding the unusual items and other operating expense that I discussed earlier, adjusted earnings per share would've been $1.62 this year. That's a 23% increase over last year's $1.32 and above our original guidance for the year.

We were able to finish the year on a strong note, gaining back margin through pricing programs and lower energy costs, and maintaining our always vigilant attention to operating costs. As I mentioned earlier, we took aggressive actions to reduce working capital and saw the benefits in lowered debt and related interest costs.

For the full year, gross margins finished at 19.5%, down from 20.8% last year due to the very low margins earlier this year as we struggled to implement new pricing to combat the sudden surges in input costs. We gradually achieved the pricing we needed and, by the fourth quarter, we were back on track with last year's margins.

Selling, distribution, general, and administrative expenses increased from $148.6 million in 2007 to $177.5 million in 2008, reflecting the growth of our business from acquisitions. Despite the dollar increase, our selling, distribution, general, and administrative expenses improved to 11.8% of revenue in 2008, compared to 12.8% in 2007.

Interest expense in 2008 rose significantly to 27.6 percent -- $27.6 million, compared to $22 million in 2007 because a substantial portion of our debt was incurred in late 2007 to purchase E.D. Smith. As a result, average debt levels were actually higher in 2008 compared to 2007, even though we made significant reductions in debt over the course of the year.

Regarding our taxes, our effective tax rate for the year was 27.6%, compared to 37.4% last year. The much lower tax rate was due to the Canadian sourced income that carries a lower effective tax rate, the deductible interest costs in our Canadian intercompany note, and the large non-cash mark to market expenses in the fourth quarter.

Overall, we're very pleased that we were able to outperform our original expectations for 2008, despite the whipsawing we saw with input costs and pricing. Back to David.

As we look ahead to 2009, we see a very different environment that creates its own set of challenges and opportunities. From a topline perspective, we are forecasting only slight revenue growth.

Let me walk you through how we see the year unfolding. First, we will continue to execute our portfolio strategy, especially in North American retail. As in the past, this dampens total topline growth due to our de-emphasizing low return businesses, but improves margins, profits, and our competitive position as we grow our high-priority businesses.

Chasing no margin private-label business to grow the topline is a real mistake in private label, as it can erode your total pricing integrity, leading to long-term erosion. We are much better off managing these businesses for cash, focusing on our winners, and acquiring new businesses, a la E.D. Smith, that add categories with excellent growth potential.

Second, on some products, there will be price givebacks, either because of cost-plus contracts or where a key commodity, such as soybean oil, has come way down off its high and our customers are well aware of it. The key for us is maintaining or increasing our dollar profit per unit as we work through input deflation.

Third, we will continue to be challenged in the Food Away From Home arena. Our goal here is to offset the underlying trends on legacy items such as pickles, with new salsa, sauce, and cheese sauce business.

Fourth, we will have a foreign exchange effect from our Canadian business.

Despite the lack of forecasted revenue growth, we expect a solid year, as indicated by our guidance. Please keep in mind that, unlike the branded world, where managing your volume and marketing spending are key earnings drivers, in our world, volume mix and attacking the center of the P&L are what really drive earnings growth. Reducing our cost of sales by 3% generates about the same net income as $60 million to $70 million in incremental sales.

At the same time, we are far more focused on volume growth than we were this time last year, when input costs were soaring and we were focused on pricing. I know that I have personally spent more time in the first six weeks of 2009 on key customer and new product initiative discussions than I spent in the first six months of last year. Hopefully, my engagement will be viewed as a positive by the organization.

Finally, from an organizational perspective, we are well positioned to take on new acquisitions this year. With the integrations of San Antonio Farm and E.D. Smith behind us, and both businesses on growth trajectories, we've got the internal capabilities to add a new, large branch to TreeHouse. I'll now turn it back to Dennis.

I'll now cover the outlook for 2009. Unlike most companies, even many in the food industry, we believe 2009 will be a year of opportunity for TreeHouse. We also know it will be a year that requires even more focus on the operational aspects of our business.

We see growth in private label because of the value it provides to both consumers and our retail customers. We also know that we need to continue our focus on profitable growth, and that pricing will not be the key driver of margin expansion. We will need to keep pruning our low-margin customers and SKUs, while driving internal costs down so that we can pursue new customer business at the right margin levels.

Overall, we expect the topline revenue to increase only 1% in 2009, due to the carryover from our pickle rationalization program and our expectation that retailers will continue to manage down their inventories to preserve cash flow.

Our outlook also considers the negative effects of the Canadian exchange rate on topline revenue, compared to average exchange rates in 2008.

While many of the constraints on sales are outside of our control, we can manage our cost structures in response to external economic forces. We will redouble our efforts on margin improvement and it's expected our full-year margins will increase by at least 100 basis points, compared to 2008.

The margin improvement will take place primarily in the second half of the year, as forward contracts expire and lower input costs are fully realized.

In terms of expenses, our operating costs will continue to be well controlled. We see no unusual items on the horizon that would affect our year-over-year spending levels.

Overall, we expect to increase our earnings per share on a fully-diluted basis by 11% to 14%, and finish between $1.80 and $1.85 in earnings per share in 2009.

Now let me cover a few other items that are considered in our full-year outlook. First, interest expense will be quite a bit lower on a year-over-year basis, due to the lower debt levels entering into 2009. Although we are enjoying very low interest rates today, we saw the wild swings that occurred in 2008 and we believe it's best to be conservative with rates in 2009.

We have reduced our exposure to interest rate volatility through our senior notes that carry interest at about 6.3% and our swap of floating rate debt to fixed rates that should not exceed 3.8% on $200 million of our debt in 2009. The balance of our debt will be floating rate with LIBOR and will likely have lower average rates than what we experienced in 2008.

We expect total interest costs to be in the range of $22 million to $23 million next year.

Our effective tax rate will increase from 2008 because the unusually low rates associated with the mark to market adjustments this year are not expected next year. As I stated earlier, the swap mark to market adjustments that contributed to the low tax rates in Q4 will partially reverse as income during the next year at a 38% tax rate.

As a result, we expect to have an estimated tax rate in the range of 34% in 2009.

In terms of capital investments, we are planning to scale back our capital spending levels in 2009 to a more typical level of $30 million to $35 million. We made significant new investments in 2008 for water and energy improvements in our soup business and expansion of our U.S. salad dressing manufacturing footprint, and these items will not recur in 2009.

Non-cash items for the year include depreciation and amortization, which will be relatively flat to 2009. Stock option expense will show only a small increase in 2009 as we enter a more normalized level of expense, since the initial [spend] grants became fully amortized.

We do expect that our average shares outstanding will increase during the year, as equity grants vest, with the full-year average outstanding shares to be approximately 32.5 million shares.

Regarding the first quarter of 2009, we will still have high input costs due to the timing of our forward purchase contracts. In addition, our salad plant expansion and Midwest distribution center will be coming online and there may be some incremental startup costs.

As such, we expect EPS will be in the range of $0.35 to $0.37, a small improvement over the $0.34 in the first quarter of 2008. Beginning in the second quarter, we expect to increase quarter-over-quarter earnings, culminating in the full-year guidance of $1.80 to $1.85.

In conclusion, we have shown that, whether headwinds or tailwinds, recession or depression, we have the right strategy and teams in place to navigate successfully. We see more uncertainty coming in 2009, but with success comes confidence, and we have a confident attitude for the new year. While we may not always take the original course we plan on, we do believe we are capable of making the course corrections necessary to achieve our goals. Now I'll turn it back to Sam.

As you all have just heard, once again, we have an ambitious plan and aggressive goals for another new year. The plan is based upon our outlook on the economy, the food industry, and the consumer, all facing the twin specters of recession and economic uncertainty.

While there are substantial risks, they are a far cry from the runaway inflation and extreme volatility of our recent past. As a marketer of customer brands, our products will be sought out by those seeking better value in hard times.

Further, our plan is anchored by that which we control -- our supply chain, where productivity and procurement programs generate economies of scale and efficiencies throughout our manufacturing and distribution system.

Lastly, our plan is based on topline growth in strategically important product categories, as determined in the disciplined context of an approach to portfolio strategy and economic value added, rather than a tactical pursuit of volume for volume's sake.

All in all, I like our chances for another big win in 2009, whatever the state of the economy, stimulus plan, or bailout. This is particularly the case when, in looking back to our inception, and forward to this year's end, I can trace a trendline in both earnings and cash flow growth at a compounded rate of 22% annually from 2005 results through 2009 guidance.

Let me repeat. Over our four-year lifetime, TreeHouse will have posted sustained growth of greater than 20% in both profits and cash flow from our start-up four years ago through this coming year end. Few in our industry can match this record, especially when one considers the TreeHouse has doubled its size and more than tripled its category presence in only three short years.

Our outlook for 2009 and beyond is no less bright than our recent past. Our past track record, present circumstance, and future prospects should merit great investor confidence in our TreeHouse.

Finally, allow me to provide some insight into the TreeHouse approach to further expansion via acquisition in the coming year. Total M&A deal flow is down substantially in all sectors of the economy, due to a post-bubble trifecta of credit crisis, recession, and the lag in sellers' expectations.

These factors especially dominate those sectors where global demand, private equity, financial engineering, and cyclicality have driven M&A markets.

The new year has also exposed all, regardless of industry or sector, in need of capital to difficult if not impossible credit markets. In stark contrast to many other prospective acquirers, TreeHouse is in excellent condition to expand via acquisition.

Notably, we have fully and successfully integrated E.D. Smith and San Antonio Farms into our shelf-stable dry products platform, again, confirming our skill and expanding the TreeHouse portfolio. Our private-label grocery customers recognize the value of our portfolio strategy to their businesses and welcome its continued expansion, especially when times are tough. We have evolved from an untested upstart to a trusted partner.

Our lines of credit are sufficient to expand into another large-scale product category, establish another industry-leading presence in private label, and do so with substantial synergies and a competitively-advantaged cost of capital.

And finally, our team, fully capable of creating our own opportunities, are hungry for the next challenge. While I can predict neither the precise timing nor the exact category, I am sure that, when the time is right, TreeHouse will be in the vanguard of the next wave of expansion and consolidation in our industry.

Having weathered the storms of the past, our TreeHouse is structurally sound and equipped with all the construction permits required for further expansion. Having doubled revenues with soup, salsa, and salad dressing, we are both eager and ready to resume our strategic expansion into new product categories and new markets.

We will now take questions and comments from analysts and investors on the call.

(Operator Instructions). Jonathan Feeney, Janney Montgomery Scott.

Actually, this is John San Marco on behalf of Jon Feeney. Congratulations on a good quarter. I guess, first, we've seen several media reports, as well as comments from retailers, about how branded food companies are -- I should branded consumer goods companies, more generally, are getting fired by retailers for being too slow to give back some of the pricing.

And most recently, we sort of hear their private-label relationships is their key bargaining tool. In that respect, do you view this sort of rhetoric between brands and retailers as a positive, in that there may be a volume opportunity there, or should we be more fearful of the risk that, as a whole, pricing can collapse to the extent your branded competitors start getting beaten up a little too badly?

It's hard to comment because I haven't been listening to what all the branded people have been saying. But we have been addressing this issue with our customers since the fourth quarter when we started talking to them about commodities coming down, and that when key commodities come down, we will come back to them, and we laid out for them how long we had coverage, and the timing on when we will come back and talk to them about the pricing.

We used very disciplined fact-based selling when we took those price increases, and we will use similar data as the commodities are coming down. So we have a very good relationship with the retailers. We don't see them as putting a gun to our head. We are in an industry where there are bids, and that can get challenging because people will be looking at market prices.

But we do not see it as being a highly inflammatory environment right now. So our approach is very long term, very direct, very straight with the customers, and do it on the basis of facts and not emotion.

Thank you. On that same point, then, in the 1% revenue growth guidance, you talked about sort of the to-be-expected impact on industrial. I guess, directionally, if that's the best you can do, what are your assumptions for pricing across the rest of your portfolio, retail specifically?

I don't have a breakout by channel, but we estimate that we're looking in the area of about, say, $20 million to $30 million in revenue effect from the give-backs. But as I pointed out on my comments, our objective is to maintain or increase our profit per unit so that, from a bottom-line perspective and earnings-per-share perspective, that revenue decline doesn't have an effect on the business.

Thank you. Just switching gears for one last one, the comments you made -- around acquisitions and -- your capability to do a deal and, apparently, your willingness to do a deal in another large-scale product category. You specifically mentioned private label. Was it deliberate that you said private label and not, you know, industrial foodservice, and I guess, really even branded, for that matter? Or would you be willing to do a deal outside your wheelhouse, both in category and perhaps even a big brand or something like that?

Our focus continues to be near term on private-label opportunities. We are very interested in Food Away From Home, but the dynamics of the industry right now are challenging. Of course, when a segment is challenged, that can create acquisition opportunities on its own.

But I think, internally, our priorities, we're really focused on how do we add another large leg to our private-label dry grocery portfolio, as we did with both San Antonio Farms and E.D. Smith. In many cases, when you acquire, as we did with San Antonio Farms and E.D. Smith, they have foodservice components as part of those businesses, and as we evaluate acquisition opportunities, if there is a good foodservice component to a business, we see that as a positive.

Thank you very much for your time and congratulations.

Bob Cummins, Shields & Company.

Good evening, everybody. Just following up on the discussion about acquisitions, I know you're not going to tell us what -- exactly what you're looking at, but maybe, in general terms, you could suggest some areas that you're either not in and would like to be in, product areas, I mean, or maybe somewhere you have a small position or there other types of products closely related to what you have that might offer an opportunity to grow through a further one or more acquisitions. Can you give us a broad-based view on what you're interested in?

I will. First of all, let me take a step back and say that, of those that we have already done, the last two in particular have been hugely successful. With E.D. Smith and -- bringing to us the pourable salad dressing category and all of Canada, as well as San Antonio Farms, with its entry into premiums salsa.

And their combined effect -- and David quantified it quite well -- is in growing the business. It also established us as a major and much more significant supplier to our customers across both retail grocery and foodservice channels.

And if we can do more of the same, that is our first priority. Specifically, that we will continue to look first at shelf-stable dry groceries that are in the center of the store that give us the highest degree of operating synergies. So that, from the inception of our purchasing programs through trade marketing, sales calls on our customers, distribution, and invoicing, that we're able to provide the benefits of one large organization as opposed to a splinter group of small. So that will continue to be our primary emphasis.

Again, shelf-stable dry grocery, highly compatible with what we have now, and ones where there are significant synergies.

We are also focused primarily on retail grocery private label, and would welcome, as we got in those businesses, ancillary volume in foodservice and industrial.

And then, thirdly and last, our strategic planning process is far more robust than only a few years ago. And we are beginning to look beyond that core to determine how we might grow our portfolio in a -- rather than an incremental way, in a transformative way.

But those are prospects that go beyond the nearest term, and ones that we will continue to appraise and apprise, but on a much longer term basis.

I know you have been very careful in avoiding pitfalls so far and I'm sure you'll continue to do the same in the future. I look forward to seeing you in a few weeks.

We do as well. Thank you.

Ken Goldman, JPMorgan.

Good evening. So -- when I talk to investors about TreeHouse, and I've talked to them in the last year, and obviously, I have an overweight rating despite the note I wrote this week, I am curious because one of the biggest pushbacks I get is their debt's a little bit too high for me, is some of the phrases that come back to me.

Clearly, you've paid down a lot of that, but I wonder, can you explain a little bit about how you think, when you're doing an acquisition, about maintaining that balance between gaining accretion on the bottom line and the amount of debt you have on your balance sheet?

When we -- obviously, we look for accretive deals, and one of the significant advantages we have at TreeHouse is we do have a credit facility that is a very good facility for us with excellent rates.

And I know there is some wisdom out there that says you have revolving credit facilities are for emergencies only, but, frankly, when you look at ours and our ability to borrow at LIBOR plus a spread, with LIBOR at 0.45% right now for 30 days, we consider that a huge asset and a huge source of capital at a very low cost, so we have no issues whatsoever with using our debt.

And to the extent it is available, we will use it to the max because it is such a cheap form of capital for us. And as long as we see good deals, frankly, we will want to use that source. It makes for a very attractive financing.

Do you then feel a sense of urgency to do a deal sooner before the possibility of LIBOR rising, or it doesn't really matter to you the timing there?

It really doesn't matter on the timing. It's an asset to us, but not one we feel compelled to have to use. We assess the deals on the merit of the deal, and the good news is we have good financing to back that up.

One more question, if I can. You talked about 34% effective tax rate for 2009, I believe. Does that last throughout 2010? I know visibility there is not exactly perfect, but I'm just trying to get a sense for how long that rate is going to be with you.

We haven't -- to be honest, guided out the 10 and even in our models, but one of the things that is driving that up, as I mentioned, is the mark to market on that interest rate swap. And as that reverses through next year, that will affect the rate and, depending on what happens to rates, that may evaporate a lot or a little. But that's really what will help to primarily affect that rate and takes it to the higher level, to 34% from this year's average.

Thanks very much.

(Operator Instructions). Robert Moskow, Credit Suisse.

This is actually Will Sawyer for Rob. Good evening. Just a housekeeping question. Can you give us an idea of how foreign exchange impacted the fourth quarter, and also what you're thinking for next year?

The rate is principally affecting us on the topline in some of the translation of the various P&L lines. So you will see a noticeable difference in terms of a year-over-year due to rates. For instance, the average exchange rate for Canada this year was in the range of $0.96 on the dollar, and we're looking at -- I'm sorry, $0.94 for the full-year rate, and we're looking at $0.82 is our target for next year.

So that difference is closing in on 13%. So as you take a Canadian dollar revenue this year to next year, you almost have an immediate 13% haircut on the topline.

One of the advantages we have, though, is that from a bottom-line earnings, it has a much smaller impact on us because we are naturally hedged, to a great degree, in terms of our purchases of U.S. dollar goods and our sales to U.S. customers. So although it affects the individual line items in sales and cost of sales, the bottom-line impact will not be very significant at all.

Thank you. And then, can you guys give us an update on what you're seeing competitively in soup -- from the branded side versus private label? And what you think about your price spreads to branded?

It was a good season for the soup industry. Again, within soup, you have condensed and ready to serve, and our focus is more on the condensed side. We have a very strong share of condensed and the competitive dynamics of the condensed segment are very attractive to us.

In the ready to serve, it's really where sort of the battle took place between Campbell's and Progresso, and I won't quote -- or cite their results, because it's in the public domain.

In terms of price -- our price gaps, we pretty much, on the condensed side, maintained our price gaps year over year with Campbell's. I think on ready to serve, the price gaps narrowed just because the competitive dynamics were so intense and we weren't just going to -- significantly deep-discount our ready to serve.

So I think, year over year, the bottom-line on it is it was a good season for us, the price gaps on condensed were maintained, and we are very optimistic that we will exit this year and enter next year's soup season in very good shape.

Congrats on the quarter, then.

Bill Chappell, SunTrust Robinson Humphrey.

Good afternoon. Just a quick follow-up on that currency, so -- on back of the envelope, does that mean your 1% growth for '09 would be 3% to 4%, ex-currency?

I can't comment. I haven't done that calculation. I don't have it in front of me.

And then, pickles, the rationalization. Did that hurt topline by about a percentage point this year, or is it less than that?

I think, in total, it's probably more than that.

It's definitely more than that. But I think, again, the key for us, as we pointed out, that our pickle profits are good. Our margins are improving. The EVA on the business is getting better and will continue to, as we move through this year.

I know there are a lot of one-offs, but you can kind of see it organically, ex-currency, it sounds like a mid single-digit type growth number.

For our all our key product lines, that's exactly the range.

And then, moving to gross margin, I don't know -- I might have missed it. Did you say what your total commodity hit was in '08 versus '07? I know it had been rising through the year.

As I look at the 100 basis point gross margin, I was under the impression you are expecting gross margin expansion in '09, even before the commodity recovery. How should we look at that? Is it 50-50 synergies versus prior recovery, or is it all commodity recovery or how are you looking at that?

We've got it as a combination of the two. As David said, there will be some natural improvement because of input costs, but a lot of it will be driven by our internal efficiencies.

As I said, those are areas that we control. We can't always control what happens on the external, so our number one focus, internally, is to drive the margins through our center of the P&L initiatives, as David puts it, looking at our plants and distribution centers to drive us. That's something we can count on and rely on, so that's where we focus.

We have a philosophy, which is use pricing to deal with input-cost changes and productivity improvements to be the key drivers of our margin growth. That's whether input costs are going up or input costs going down, at the end of the day we really want to improve our margins through productivity initiatives, both in the plants and in our distribution system.

So what was the -- [if I] look at '08, in terms of the margin hit from unexpected or unrecovered commodity costs, any way to look at that and what the total cost was?

We have not broken it out in that regard. What we have done is talked about input costs, year over year, being up north of $110 million and that's what we had to get back in pricing. But we haven't publicly talked about a direct match of that input cost and margin effect.

Got you. Thanks a lot. Great quarter.

(Operator Instructions). Andrew Lazar, Barclays Capital.

Just a couple things. First, and if I missed this, I'm sorry, in the fourth quarter, excluding acquisitions, can you just go through a couple of the key buckets around organic sales growth in terms of volume, pricing, and the like?

I'm just going to replay what some of my comments were. On North American retail, when you back out our pickle rationalization and infant feeding, our physical volume was up about 3.5% and I don't have the revenue calculation associated with that. I know in total we were up about 8.5 -- 8.6% for total North American retail.

And 3.6% revenue growth in the legacy business is ex-acquisitions.

On Food Away From Home, we would've had a unit decline as the casual dining segment has been affected, and I think unit sales were up in industrial, though we had a mix shift to more copack versus our ingredient business.

Got it. Dennis, your comment on that 3.6%, that was what again?

That's revenue increase from legacy businesses without the acquisitions.

For U.S. retail.

No, for total company.

Total company, okay. You didn't have pricing for the U.S. grocery piece, okay. And then, overall volume, corporately? Ex -- just for the legacy business? I'm just trying to get to kind of an overall corporate --

And you're talking about the quarter?

Correct.

The legacy, because of the issues with the pickle business declines, the legacy business was down low single digits.

Dave, are you surprised -- I guess I'm a little surprised, if we take the category numbers that you cited in terms of volume for soup, and I realize this is just sort of measured channels. But it's just one of those things that you'd think condensed would be sort of right in the wheelhouse from kind of a value perspective of what consumers are trading down to? Is it just that the channel shift is so dramatic in that category that volume might be up nicely, otherwise? It's just surprising to me.

We had -- as I mentioned, we had about -- on -- as measured by Nielsen, our unit sales in soup were up about 1%. We were north of that with condensed. And south of that with ready to serve, just because of the competitive dynamics being so intense in the ready to serve.

But again, we had, outside of those measured channels, we had good growth with the dollar retailers and the Wal-Marts of the world, who are not measured there.

So again, in different categories -- I mean, in total, less than 50% of our business gets reported through the measured channels. But what I was trying to do, by providing that information, was just give you a perspective on how we were doing, probably more in terms of our share than the absolute unit growth or dollar growth reflected through those channels.

Got it. It's just the expectations, obviously, in this sort of timeframe are that -- and we see it in some of the data that across a lot of different private-label categories that -- things are accelerating pretty nicely, broadly speaking, for private label, both from a sales and volume perspective. I was -- I'm wondering if you think the data that you see internally would be consistent with that?

Yes. I think -- when we look at our private-label business, excluding -- when you back out the customers that we rationalized the pickle business with and in competing, our units were up about 3.5%, and what I am seeing in private label, when you look at all the different categories, and there is one report that shows about 100 different private-label categories, it's including things like pet food and other categories.

But when I look at the dry grocery arena, we're seeing, as measured by Nielsen or IRI, growth in the 3%, 4% to 5% real-case growth rates, and that compares to all of those categories in total being down 1% or 2% as measured by the syndicated services.

So private label across the board is continuing to gain share, and outside those syndicated-measured customers, there is a lot of growth there and we're doing quite well there.

Dave, a broader question, I'm trying to get a sense of what you make of the industry argument that, look, we've priced behind inflation for the last couple of years. So, if you look at the last couple of years cumulatively, as an industry we're not even close to kind of covering the kind of inflation that we've absorbed, and therefore, on the way down, that's sort of an argument to not take it all the way down.

Do you think there's sort of merit to that argument? I think the data would suggest that, but is there really merit to it in the real world? And in the private-label universe, does it become even less of a factor? Just because you've talked about, obviously, the bid business and the nature of your business as somewhat different.

There is no doubt that in the branded food world, there has been margin -- gross margin erosion over the last few years as input costs were not recovered through pricing until you hit sort of a cataclysmic event, starting at the end of 2007 and into 2008.

And what we have consistently done is really that fact-based selling where we build up our cost structure with the retailers to really show them what's going on, and we prove our case. That is very different than the majority of the national brands, who will generally send out price increases over a fax or an e-mail, and then go in behind it to talk to the customers about it. That's not the way we do it.

So in terms of the pressure that they are getting from retailers, it may be in response to the approaches they take versus the approaches -- the approach that we take. Was that helpful for you?

That's helpful. Two last very quick things. I guess, Dennis, if we -- if one were to look at results without the mark to market stuff in there, does that impact the tax rate that you would report -- would it have been as low as it was?

No, it wouldn't. It would have been much more in line with where the rates were through the third quarter.

That's what I thought.

So the mark to markets really drove Q4 down, unusually, and that affected the full-year rate.

So if we're going -- if one were to pull that out, because those things reverse themselves anyway, it would mean the tax rate is going to be higher here and lower, to some extent, next year, because -- if we were able to exclude them from next year's results also.

If you were to do that, that's correct. But -- the negative impact in Q4 actually will be reversing as a positive next year, so it has the opposite effect, so that's why our tax rate, we're expecting to be higher next year.

What I'm trying to get at is, again, best of my ability, sort of the underlying earnings growth that you've got, but that was one of the things that made it a lot more volatile.

And then, on that note, if we take your guidance for all the different things that you've talked about in '09, I haven't -- I admit I haven't worked through the math yet, but is there a way to sense -- what that basically gives you on an underlying kind of EBIT basis, that 182, 185, what does that work to from an underlying EBIT perspective?

If you go back to the items I talked, I tried to give you the interest rate, the tax rate, earnings, the earnings per -- and the share account. So I think you can pretty much peg it without me giving you an exact number.

Thanks very much.

There are no further questions at this time. I'll turn the conference back to you for closing or additional comments.

Thanks, all, for joining us today, and we have, as always, -- welcome you to the TreeHouse. It has been an extraordinary year for us. As I'd indicated, we've exceeded expectations in every important perspective. And as we look at the year 2009 going forward, while there are -- is substantial uncertainty, we see even greater promise, and we will undertake everything in our power to not only maintain but further earn more of your confidence. We look forward to talking to you again in May. Thank you.

That does conclude today's program. We thank you for attending, and have a great day.