TreeHouse Foods Inc (THS) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to the TreeHouse Foods Investor Relations Conference Call for the Second Quarter of 2009. This conference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as guidance, may, should, could, expect, 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 achievement expressed or implied by these forward-looking statements.

TreeHouse Form 10-K for the period ending December 31, 2008 and the subsequent quarterly reports on Form 10-Q discuss some of the factors that could contribute to differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as the date made when evaluating the information presented during this conference.

The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regards thereto or any other change in events, conditions, or circumstances on which any statement is made.

This call is being recorded. At this time, I'd like to turn the call over to the Chairman and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed. Please go ahead, sir.

Thank you, Jay.

Welcome back, everyone, to our TreeHouse. While you are always welcome, this is a special occasion in that it marks the fourth anniversary of our entry into the world of private label and customer brands. Judging from the number of you on the call today, TreeHouse is clearly the right place with the right stuff at the right time. Given the high degree of interest, we may well have to add a new wing complete with guest quarters in order to accommodate all of you in future visits.

As is our custom, David Vermylen and Dennis Riordan will be your principal hosts today as they review the quarter just passed and preview the remainder of the year ahead. I will then conclude with a mid-year perspective of our past history, current conditions, and future potential as the strategic consolidator of customer brands and custom products. I have come to realize that our TreeHouse can grow to be stronger and larger than any of us present at its creation four years ago had originally envisioned.

My overview of the second quarter performance and the near-term outlook can be concisely summarized respectively as outstanding and excellent. In the second quarter, our seasonal low for shipments, we did it the old-fashioned way. Customer marketing and product innovation drove the top line, while productivity gains and purchasing economies enhanced the bottom line. The results are outstanding. Sales revenue in local currency grew 4%, operating cash flow increased 25%, and outstanding debt fell below the three times leverage ratio.

David and Dennis have the particulars, which I'm sure you will find compelling evidence of strategic progress, operational execution, and financial performance. Coupled with outstanding performance, we also envision excellent prospects for the near future. Our TreeHouse is well situated, not only to ride out the current recession, but more importantly to capitalize upon the growing consumer demand for value without compromise, whether in hard times or their aftermath.

Even as the economy recovers, four macro-trends will propel our TreeHouse forward for the next 12 to 24 months. These driving factors include -- consumer uncertainty, as measured by a lack of confidence and a return to thrift; civilian unemployment, already on the verge of a post-World World II high; credit deterioration, especially in the real estate, credit card, and local government sectors; food expenditure trends, now negative for three consecutive quarters for the first time in 20 years, and the squeeze those trends impose on the retail, grocery, and service industries.

In combination, these economic phenomena are accelerating the long-term secular shift to private label as consumers stretch their food dollars and as our customers market their house brands to build consumer loyalty. We expect these trends to carry TreeHouse forward, not only through the second half of this year, but also the next year and beyond.

I now have the privilege of calling upon one of our newly-elected members of our Board of Directors, David Vermylen, to analyze our performance-to-date as well as reflect upon food market conditions in the second half. David and I have been personal friends and business partners for the last 18 years, focused on winning in the marketplace in order to generate superior shareholder value. You all can expect more of the same from the two of us in tandem as our TreeHouse story continues.

David, congratulations on joining the TreeHouse Board. The floor is yours.

Thank you, Sam, and good afternoon, everyone.

As usual, I will cover the top line and overall performance of the business and Dennis will drill down into the financial results. As I did on the last call, I will define revenue in terms of local currency, given that about 13% of our business is done in Canada. Dennis will provide the appropriate currency effect that is reflected in our financial statement. While my approach may not be GAAP, I believe comparing revenue performance apples-to-apples is helpful for investors to understand how we are doing.

From an overall perspective, I will characterize the second quarter as excellent. Net sales grew 3.8% with 9% growth in North American Retail and much improved trends in our Food Away From Home and Industrial businesses. That compares to 2.2% growth in the first quarter. That sequential gain is even better when you consider that we executed modest price rollbacks in our non-dairy creamer in the second quarter, principally in our Industrial business.

Our direct operating income increased 33% as pricing we took last year carried over this year plus procurement and productivity savings more than offset low single-digit cost increases. Our direct operating income margin increased 350 basis points to 14.5%.

I look back at where we were a year ago and I'm very pleased with what we have accomplished. Last year, while we met all of our EPS targets, rampant input cost inflation required that we throw out our game plan and focused on cost recovery via pricing and attacking the center of the P&L. This year, while attacking the center of the P&L continues to be a focal point, instead of chasing after price increases, we are more focused on going after big sales wins.

I'll now review the results by channel. North American Retail sales were up 9% in local currency despite continued declines in infant feeding and pickles. Excluding infant feeding and pickles, volume was up 6% and revenue was up 17%. Drivers of the outstanding growth in North American Retail were soup, salad dressing, salsa, sauces, and jams and spreads, all with double-digit revenue growth.

Direct operating income increased 43% and margins 400 basis points due to volume growth, pricing, procurement savings, and a mix shift to higher margin items as we continue to execute our portfolio strategy. While Nielsen syndicated data covers only about half our retail business, we showed share gains in almost all of the key categories.

Our private label US retail dollar sales, as measured by Nielsen, were up 11% for soup versus plus 1% for the market, plus 13% for salad dressing versus plus 3% market, plus 32% for salsa versus the plus 6% growth in the salsa market, and plus 10% for pickles versus growth of 8% in the market. While our internal retail pickle sales were below year-ago due to customer rationalization, that rationalization took place outside of measured channels.

One very interesting Nielsen finding is that during the quarter, many of our price gaps to branded products narrowed in the quarter, yet we continued to gain share. While the price gaps have narrowed moderately, retailers continue to merchandise and feature their store brands at higher levels. While we have seen more aggressive price promotion on the part of the brands, it has not had an effect on our share.

Retailers' support of their store brands continues and the consumers are seeing that trading down is trading smart. They are getting national brand quality, or better, at a lower price. The recession is creating trial with product quality and value driving repeat purchase.

Now as we turn to our Food Away From Home and Industrial segment, they are both affected by continued softness in the food service industry. Technomic, a leading food serve consulting firm, forecasts a 5% real decline in total food service food and non-alcoholic beverage sales in 2009 with full-service restaurant down 9.8%. While the food service industry continues to struggle, our Food Away From Home revenue was equal to year-ago versus down 4% in the first quarter.

New cheese sauce and salsa business kicked in to offset modest declines in other product categories. Margins declined slightly due to some customer mix changes. We are really pleased with our Food Away From Home team's performance despite a very challenging environment.

Our Industrial and Export segment, which is also very dependent on the food service industry, had its first quarter 18% revenue decline to 9% in the second quarter with a solid gain in gross margin.

While we don't report data on specific product categories, I would like to comment on the pickle business. Entering the third quarter, we have now [lapped] the year-ago period when we exited a lot of unprofitable retail business. Year-to-date, our pickle operating profit is up 18% with adjusted gross margins of 340 basis points.

As I mentioned on the last call, we have been focused on generating new business that meets the criteria we established last year when we performed a complete strategic and EVA review of the pickle business. These sales efforts should continue to bear fruit through the end of the year. There are parts of the pickle business that still need refining, thus our optimization program will continue as we enter 2010.

We are also finding that pickle customers, who in the past few years sought lower-cost alternatives to our program, are showing renewed interest given the struggles they have faced with their suppliers. Our own review of the business highlighted the complexities of crop sourcing, crop balancing, and quality control and a number of customers are finding that those behind-the-scenes intangibles have real value. The pickle business will never be one for the faint of heart, but in two years we've taken it from being unloved to being user-friendly.

Three other areas I'd like to comment on are our continued efforts to attack the center of the P&L, investing for growth, and recent [top-to-top] visits. No matter how much new business we get, with private label margins we must be highly focused on taking cost out of the business.

Applying our procurement skills and leverage to the E.D. Smith business has resulted in outstanding cost savings, which played a key role in our second quarter margin improvement, especially in our North American Retail business. E.D. Smith has been a home-run for us driven by volume growth, procurement and productivity savings.

In terms of investing for growth, we completed the expansion of our North East, Pennsylvania salad dressing plant with the addition of a new state-of-the-art, high-speed processing line. We are thrilled to have this up-and-running given the growth we are seeing in the business.

Finally, during the quarter we spent a great deal of time in top-to-top meetings with key customers in both the US and Canada. Two things are very clear. Private label, or store brand, growth will continue regardless of when the recession ends. These retailers clearly understand both the profitability of the business as well as how it allows them to differentiate themselves from their competition.

Second, TreeHouse is a real solution to a customer problem. One major retailer told me they are currently dealing with 800 private label suppliers and want to cut it down to 500, and that our breadth of categories -- R&D, manufacturing capabilities, and category management skills -- make us an ideal partner.

Looking forward to the second half of the year, I am very optimistic. Our top line forecasts show continued momentum, our cost and pricing are well defined and stable, and the organization is excited about what continued success means for them and our shareholders.

I'll now turn it over to Dennis.

Thank you, David. Since David covered our revenue in local currency, I will focus on other key aspects of our operating results, including reported earnings, gross margin improvement, operating costs, and our effective tax rate.

Reported revenue increased by 1.4% in the second quarter as strengthened retail sales offset the lower sales in Food Away From Home and bulk industrial segments. Please note that the sales increase was muted by the effects of [our] currency on our Canadian-denominated sales. As David mentioned, we currently have approximately 13% of our revenues generated in Canada.

Last year, the average exchange rate for the Canadian dollar to US dollar was nearly one for one. During the second quarter of 2009, however, the average Canadian exchange rate was approximately CAD0.06 to the US dollar. This change in rates means our Canadian-denominated sales will experience a 14% drop when comparing the translated sales of 2009 versus 2008. Had the total sales been measured in local currency to exclude the translation difference, our consolidated sales would have increased by 3.8%.

With regard to gross margins, we followed up our first quarter performance with another strong quarter. Overall, gross margins improved from 18.7% last year to 21.4% this year, a 275 basis point improvement. Carryover pricing from last year, combined with procurement savings and production efficiency, contributed to the margin improvement. Our retail direct operating margins improved from 11.2% to 15.2%.

On a sequential basis, the retail gross margins improved 30 basis points from the first quarter as well. We continue to focus on improving margins through a combination of purchasing savings and internal efficiencies. Pickle margins continue to improve nicely, finishing up nearly 500 basis points compared to last year's second quarter. Overall, we saw year-over-year margin improvements in nearly every one of our product categories.

In the Food Away From Home segment, we continue to see weakness in overall unit sales due to the shift in consumer buying habits towards food at home. Margins continue to be challenged as the competitive environment remains tight due to softness in the overall market. Overall direct operating income finished at 10.8%, compared to 11.2% last year. Although the key categories of pickles, aseptic and refrigerated products showed year-over-year improvements in margins, our investments in new business resulted in slightly decreased margins.

Direct operating income in the bulk and industrial segment increased significantly from 10% to 16.1% of sales. This large increase was more a function of very low margins last year as rapidly rising soybean oil and sweetener costs last year were not offset quickly enough with pricing. This year, the margin cap improved because pricing and input costs are much more balanced. In addition, cold pack revenues, that generally carry a very low margin, declined. This results in a favorable mix shift on overall segment margins.

Total selling, distribution, general, and administrative expenses in the quarter were $48.4 million compared to $44.7 million last year, an increase of 8.3%. The increase in spending is primarily due to higher G&A costs resulting from increases in our annual bonus accruals. Last year's incentive compensation accruals had been adjusted down due to the profit pressures that high input costs had on our first-half results. This year, however, we have increased the management bonus estimates to reflect both the strong start to the year and our expectations that 2009 will finish much better than our original plans and external guidance.

Other operating expense decreased significantly from last year, as this line item is primarily costs associated with our closed Portland, Oregon pickle plant. In 2009, we had only minor costs in the quarter associated with the ongoing maintenance of that closed facility.

Interest expense in the quarter totaled $4.8 million, compared to $7.6 million last year. The large decrease was due to a combination of lower average debt outstanding and lower interest rates. This year's average floating interest rate under our revolver was only 1%, compared 3.5% last year.

Our effective tax rate for the quarter was 34.6%, compared to 30.2% last year. Last year's rate was very low due to the very low US-based income resulting from the plant closure, combined with the significant deduction for inter-company interest expense. In 2009, we expect much higher US-based income and the amount of deductible inter-company interest expense is reduced by the weaker Canadian dollar.

On a sequential basis, the effective tax rate decreased from the first quarter rate of 37% because the Canadian dollar strengthened in the second quarter, resulting in higher US dollar value of interest expense deductions compared to quarter one. We expect the full-year tax rate to approximate 36%.

In total, our earnings for the quarter were $18.4 million, compared to $8.3 million last year. This represented fully diluted earnings of $0.58 a share in 2009, compared to $0.26 a share in the second quarter of last year. These reported figures, however, contain one-time items that affect year-to-year comparability.

In the second quarter of 2009, we had two unusual items, both of which resulted in gains. The first was a non-cash gain of $0.03 a share resulting from a partial reversal from a mark-to-market loss from last year on an interest rate swap agreement. The second item was a non-cash gain of $0.05 per share resulting from the revaluation of an inter-company note with our Canadian subsidiary. After excluding these one-time gains, our adjusted earnings would have been $0.50 per fully diluted share.

Last year's reported earnings in the quarter included $0.05 per share of one-time items primarily associated with the pickle plant closing and a non-cash adjustment to a trade license. Excluding these unusual costs from last year's second quarter, adjusted earnings would have been $0.31 a share.

Therefore, after eliminating unusual items from the second quarter results of both 2009 and 2008, our earnings per share increased just over 61%, from $0.31 to $0.50 in the second quarter. On a year-to-date basis, our six-month adjusted earnings are now at $0.91 per share, compared to $0.65 a share last year, an improvement of 40%.

In regard to the outlook for the year, we believe that the second half results will continue to show better-than-originally-planned margins and, as David pointed out, good prospects for sales growth later in the year. While we do not expect to see increases in our pricing, we believe that most of our input costs will stay relatively stable, resulting in consistent margins over the back half of the year.

Overall, with a strong start to the first half of the year, we believe that full year adjusted EPS will now be in a range of $2.03 to $2.07. This is roughly a 12% increase to our original guidance and would result in full year earnings growth of over 25% compared to last year.

And finally, on a strategic front, we have recently begun the early stages of assessing our information technology platform. We currently operate with a mixed set of software applications. And although these have performed well enough to get us to our fourth anniversary, we believe the Company will be best served by investing in a full-scale ERP platform.

We expect that the balance of 2009 will be a time of software review, selection, and internal planning and training. Our 2009 outlook includes minor costs associated with these pre-implementation activities. We expect to start an implementation program in early 2010 and will provide updates on the systems project during subsequent calls.

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

Thanks, Dennis.

Just to add to Dennis' commentary, I know that investing and installing an ERP system caused the hair to rise on the back of people's necks given challenges other companies have faced, we all know about the big hiccups despite the fact there have been many successful installations.

We have a lot of experience in this area. At Keebler, we were successful in implementing a very large ERP system. At TreeHouse, as we've made acquisitions, we have had to integrate different systems, which requires many of the same skill sets as installing an ERP system. None of this is easy and there are always challenges in problem solving.

Our experience proves that the key to successful implementation is for the project to be viewed by the organization as a business project -- not just an IT project. The project will be run by business people supported by our IT. From the internal work we've done over the last 18 months, we know that the organization wants the system installed and that they will embrace the change.

Many of our best business people will be on this project full time and every manager in the Company will have a successful implementation as part of their objectives. Successful implementation will be both a Company objective and an individual objective.

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

Thanks, David.

Before opening the call to Q&A, I'd like to offer a few forward-looking statements regarding the second half outlook, the currently M&A landscape, and our strategic course of growth based upon portfolio strategy, EVA, and acquisitions.

Number one -- I earlier characterized our second quarter performance as doing it the old-fashioned way, after seeing more of the same through the second half and well into the next year. Just what is the old-fashioned way? First and foremost, it is the active engagement in the marketplace with consumers, customers, and competitors in order to get more than our fair share.

Next, it is the hands-on operation of our supplier chain to be marginally better in every aspect of the system, from productivity through quality, than its design specifications. Lastly, it is a combination of superior strategic insight and irrational dedication that forms a collective mindset that overcomes adversity.

The past quarter marks the first time in our four-year lifetime that we have achieved the old-fashioned standard in every regard. With a winning streak of one, we intend to repeat in the third quarter and three-peat in the fourth quarter. When we do, our shareholders will consistently enjoy the hospitality of a far better TreeHouse than its initial construction.

Turning to my second point -- The deal market for TreeHouse-like properties is beginning to show early signs of revival. We recently tallied more than a baker's dozen perspective acquisition targets which we expect to materialize in the form of an auction or other sales process in the next six to 12 months. The candidates are noteworthy in that they are no longer confined to the broken and distressed with few, if any, options other than reorganization.

And parallel, the capital markets most relative to our circumstance have begun to show signs of life after TARP. As I mentioned before, we are ready for another round of expansion and are actively engaged in the marketplace. Please note that we have sufficient capital at the ready for a substantial transaction to expand our portfolio into another attractive product category with great growth prospects and accretive synergies.

For us at TreeHouse, the primary issues are not financial, but rather strategic. Specifically, category attractive, strategic fit, and access to new markets. When -- not if -- the next E.D. Smith appears, we will be in the first echelon of strategically-focused, financially-disciplined acquirors.

And lastly on my third point, I'd also like to offer a few thoughts on our strategic course, its origin, past accomplishments, current condition, and future prospects. Four years ago, we established TreeHouse to seize the opportunity offered by a coming consolidation among the cottage industry of private label suppliers. With a $2 billion revenue goal in mind, we sought to develop a large-scale portfolio with quality products and strategic services that would generate superior shareholder returns through the development of customer brands and custom products.

Since making our first strategic acquisition in April of 2006, we have enjoyed great success in the pursuit of this original vision of TreeHouse. The business has more than doubled in size as we have closed six M&A transactions and expanded our portfolio to more than a dozen dry grocery categories.

In most instances, we are the private label leader in most categories. In the three years -- specifically, 12 quarters -- since carving out Del Monte soup and infant feeding business, TreeHouse has posted compound annual growth rates measured on an LPM basis of 25% in revenues, 27% in operating cash flow, and 36% in adjusted earnings per share.

It is also worth noting that this expansion in our income statement has been accompanied by a strong balance sheet and accomplished through the prudent use of leveraged debt under competitively-advantaged terms. This growth has transformed our TreeHouse into one of only a handful of $1 billion plus CPG companies principally dedicated to customer brands in their development, marketing, manufacture, and distribution. As such, we are a strategic supplier with few equals in private label.

Our advantage in supply chain economics' economies of scale is matched by our strategic assessment of growth opportunities and our ready access to expansion capital. Our commitment to continued growth and expansion is best evidenced by our decision to upgrade our homegrown IT platform to one equal to the food industry's best.

Turning to our future prospects, I now regard our initial goal of $2 billion in revenues as an interim milestone rather than an ultimate goal. My assessment of our internal capabilities and external opportunities, which have steadily improved with each new acquisition, has undergone a metamorphosis of late. Our TreeHouse can grow to be far larger and stronger than any of us present at its creation, including myself, had originally envisioned.

My revisionist thinking is as follows -- The harsh lessons of this recession will not be lost on consumers. Value is back to stay. Grocery executives site the development of private label as their number one opportunity. Store labels are no longer national brand wannabes; they are now brands in their own right.

Our portfolio strategy and EVA model have consistently directed us to profitable growth. Our ability to generate cash flow provides great access to the expansion capital needed to fuel growth. TreeHouse operates in only two of seven major sectors of shelf stable, dry grocery private label. We occupy only 30% of the space in our declared target market.

And finally, the E.D. Smith and San Antonio Farms acquisitions have reminded me that all things are possible provided that we aim high enough. In summary, from the top of our TreeHouse I see a broad horizon of opportunity, that over our next three years as a strategic acquiror should yield even greater growth than the last three years. We at TreeHouse invite you to come on up; the view from here is great.

Jay will now take questions and comments from participants on the call.

Yes, sir.

(Operator Instructions)

We'll go first to Robert Moskow with Credit Suisse.

Mr. Moskow, your line is open.

Well, we've evidently left Rob speechless.

We'll go next to Ken Goldman with JPMorgan.

Good afternoon.

Hey, Ken.

Hi, Ken.

Sam, I just want to hear, or make sure I heard you correctly. You said you believe the next three years should grow even faster than the last three years, is that correct?

That's correct.

Okay. I had a question on --. First of all, it's hard to even ask questions after such a positive quarter, but one thing I did want to find out about is, if the retailers are getting squeezed, and as you said, they are and all evidence seems to point to that, why wouldn't they lower prices, or at least one of them act irrationally to lower prices to drive traffic?

I know in the past your answer has been a rational one that, "Well, if they lower prices, they're really hurting their top line and they don't want to compete against their own store brands by driving volume away from there." And that's a good answer, but doesn't it become more likely that the retailers will act irrationally the worst that they do?

Ken, this is David.

I think the answer that we provided before stays the same. I think that the large retailers, I cannot envision them trying to initiate a price war. I think that never helps anybody. You look at -- I won't name specific retailers, but there are quite a few who are doing very, very well. Their mix of programs, how they're building their private label program, how they're managing their brand, I just don't see a very large retailer wanting to set off a price war.

Okay, so you're not seeing any signs of that so far?

No. We look at our categories that we compete in and the price gaps. We've seen a little more aggressive promoted pricing on the basis of the national brands.

But at the same time, what we are seeing is an increase in merchandising support for the store brands that is more than offsetting it. They're not having to take their store brand prices down and taking their margins down on store brand at all.

Okay. And then a couple of more narrow questions. To me, anyway, your industrial and export margin really surprised to the up-side -- I think it was 16% or so. How sustainable is that going forward? How should we think about that margin?

I know it's not the business we always focus on, but it certainly can contribute to some of your bottom line.

Ken, Dennis here. If you recall, back in the day when we were in a product disclosure, most of our [powder] business was average about 19% in the margins. So this has historically been a better margin area, so our belief is that this is more sustainable and fits in with the comment I made about consistency of margins over the back half of the year.

And I think, Ken, as Dennis pointed out in his comments, the second quarter of last year, that segment of the business from a margin standpoint really got hammered because it was so commodity-driven and you just can't get your pricing back that fast. So I think we're back to more of the normalized rate on that segment versus us having significantly increased it, which creates risk of pull-back.

Thank you. And one last question, if I can. Have you guys provided --? I think you said percent of sales from Canada is 13%. Have you ever divided that by segment or given a more specific percent by segment?

No, we haven't, Ken. We've just left the segments in total and I think we've discussed previously that Canada is primarily in the retail grocery business.

Okay. Thanks very much.

We'll go next to Bill Chappell of SunTrust.

Good afternoon.

Hi, Bill.

I guess one broad question. When you talk about the competitive nature and the price gaps shrinking a little bit as you're continuing to hold share, how should we look at that? The price gaps shrinking aren't affecting you yet or the consumers are less cognizant of the price gaps than they were in a normal economy or the retailers are just pushing private label so much that it's more than offsetting it?

As I look at it, the private label share growth continues, even though those gaps have narrowed. But what we do see is more merchandising support on the part of the retailers.

So are things going to change in months ahead? The retailers are committed to growing their private label programs and I cannot see the retailers giving back the share that they have achieved, especially retailers who have a two tier or three tier program where their mix of private label has moved to the higher margin items. To give back that share would really be giving back a lot of profitability.

So would you expect the gaps to shrink even more as we go to the back half or do they look like most of the damages or most of the move has been done?

It's definitely hard to forecast. What we're not hearing from our organization is an expectation over the horizon of price wars or anything like that. What we are seeing is what we expected. With some of the reductions in commodities, the national brands, they're not taking their list prices down, but they're being more aggressive on the promotion and marketing front. And that was expected by us as we were developing this year's plan, so it's pretty much unfolding the way we expected.

And then very quickly on the pickle business. We finally lapped against the first real rationalization and the you said you actually sound like customers may be coming back to you. Do you expect over the next 12 months that business can actually grow on a reported sales basis?

I would --. I love to be able to say yes, I'm very encouraged by what we are seeing. As I mentioned in my comments, there are parts of the business that we are still studying very hard in terms of its profitability and its return on invested capital, and if we were to make some rationalization decisions there, that would have a negative effect on the top line, but would ultimately improve the return.

As I said a couple of years ago, this was a business that did not put a smile on my face, but now it is user-friendly and I'm a lot more optimistic about it.

And then two quick -- for Dennis. On the SG&A line, I understand compensation expenses, kind of the accruals popped it up this quarter. Was that a catch-up from the other two quarters and so it's a little bit bigger this quarter, or is it just getting to the normal rate for your current expectations?

It may have a bit of a catch-up, Bill, in that it was the second strong quarter and obviously the quarter was quite strong. It has us looking more to the top of the range; we weren't at the top of the range in Q1. But our guidance over the course of the year includes what we think will be now a normalized operating cost for that.

And can you give us what the cash and debt levels were at quarter end?

Cash will always be at a very low point. The long-term debt finished at about just over $480 million.

Great. Thanks so much.

We'll go next to Akshay Jagdale with KeyBanc.

Good afternoon.

Hello, Akshay.

Hey. Congratulations on a really solid quarter. Just wanted to start off with -- your gross profit was up quite a bit and obviously that led to most of the up-side relative to all our expectations. Can you give us a little bit more color on the commodity side?

The last time you gave guidance was in 3Q '08 where you said the commodity basket will be up, I believe, mid single-digits. Last year, I think it was up $110 million on my numbers. Starting in 2Q, it could be down as much as $40 million. Can you just help us with that and just comment on why you stopped giving the quarterly numbers on the commodities? And then I have a follow-up.

Akshay, this is David. I think on the commodities, our input costs in total for the quarter were probably at low single-digits. I think that the real reason for the margin improvement -- one, we had the effect of the catch-up pricing that took place the second half of last year, but this quarter, what we had was everything worked well.

The top line was a little stronger than we had expected. Our plant operations ran better than we had expected. Our mix was a little better than expected. Everything did a little better than expected and it was sort of the reverse of the perfect storm. And what we really got was when the whole business operates well, these are the kind of results that we can get. And so it was really a basket of good news that carried us above what we originally thought.

That's helpful. And just a little bit on the M&A front. You keep mentioning -- you mention it all the time about EVA analysis, but then you don't give us much in terms of numbers that you find there. All we can look at is ROIC trends. But maybe you could help us understand what you meant by a substantial acquisition. Anything that you could tell us to help us understand what kind of size in terms of acquisitions you're looking at, etc. That would be very helpful.

This is Sam, Akshay. I think the starting point is that as an internal matter, we are ready at the TreeHouse to take on another substantial acquisition. And by substantial I mean of the type and size that we've done in the past, specifically, soup and infant feeding or E.D. Smith. With regard to our readiness, we have completely integrated the businesses that were acquired in the last round. We have a strong balance sheet and not only cash flow, but cash flows we see as quite consistent.

And then thirdly, our go-to-market team and our supply chain teams have gotten to that point where they are still encountering issues and have to deal with problems, but they've mastered what we've put in front of them.

So with regard to going forward, I think that the proof of the EVA analysis, which we do not disclose in detail -- you've got to remember we're competitors with others for the same properties -- but I think the proof is in our financial results where you see a combination of improving profitability, improving cash flow, and in this quarter in our large private label grocery businesses, substantial growth rates in excess of what we have typically enjoyed.

And I go back to the first time in which we had one of these calls when pickles were, I believe, half of our total business and declining at a steady, mid-digit single percentage annually in terms of total consumption and margins were quite squeezed due to overcapacity and a lack of rationalization. So while we will not divulge the content of the detail of our analyses, I think that the proof that they're working is quite discernable.

That's helpful. Just one last one on just the private label industry sales growth and market share big 10 general. We've heard comments from a few branded players as well as retailers and a lot of comments from investors, specifically about market share gain, slowdown in private label. What have you seen in your categories? Have you seen a slowdown per se?

And then just a follow-up to that, in the event that the economy recovers, would that be -- and people start going back to brand, would that be a net negative for TreeHouse or would it be neutral?

Well, I think --. I'll deal with that in two points. First, as measured by Nielsen, our soup business was up 11, salad dressing up 13, salsa up 32. We're continuing to gain share. And I can't remember the exact same data for the first quarter, but our trends on those key businesses I think in the second quarter were comparable to the first quarter. So we're not seeing any give-back.

Second, as you go back through the history of private label over the last 20 years when there have been recessions before, yes, there is an acceleration in private label, but when the recession ends, private label continues to grow. And frankly, we have not yet hit the peak of unemployment rates, etc., and I think that we will have -- there is still a thundering herd heading to private label and it's not going to end in the short-term.

Those footsteps may soften a little bit sometime late next year, but private label will continue to grow and our objective is to continue -- not just grow with private label, but within private label to continue to gain share of the private label segment in each of the categories that we operate in.

Okay, thank you. Thanks a lot.

We'll go next to Jon Feeney with Janney.

Hi, guys. Thank you.

Hi, Jon.

Just one follow-up on the acquisition fronts, Sam, you mentioned. Could you just give us more detail on these six to 12 companies you've identified? What do you mean by that? Are you talking about just broadly or are these companies you're in active discussions with?

This is Sam, Jonathan. I believe what I said was a baker's dozen and that we expected them to --.

So I was off by somewhere between five and --.

I characterized them as coming to market through either an auction or a sales process in the near term. We're seeing two things here -- one, there is more activity in the preparatory stages that leads to a sale process; and secondly, we are now seeing good properties in the sales process.

And so there is both the leading indicator and then the concurrent indicator that shows that the activity is up. And I think of equal importance, these aren't your tired, huddled masses that have nowhere to go; these are good companies that are anticipating the return of the general economy and preparing themselves for sale, and ones that fit our general criteria.

Thanks. That's helpful. Just one follow-up on that. You mentioned about the recovery of capital markets and I thought that was interesting because it seems like you have plenty of available financing. You said acquisitions that are of the size of E.B. Smith. Would you consider something larger than that?

I think the primary -- the principal criteria that we focus on are strategic first, as I had mentioned. And secondly, we know from our own experience that what we do best is to take a leading position in a large-scale category and then improve the performance of that business.

What was new to me -- and you'll have to forgive me, I've only been here four years -- is that when we did a strategic analysis of the entire universe of shelf stable, dry grocery that there are seven sectors there. And the two that we occupy with big positions, that only accounts -- those two sectors only account for 30% of the potential market.

And that, along with the state of the economy, consumers' reaction, our customers' reaction to the current quest for value really opened my eyes with regard to what the possible horizons are here and we see a far larger opportunity, a universe of opportunities, in shelf stable, dry grocery that are good categories to be in, that they have a good strategic fit with us, and that there are plenty of synergies.

I'll digress for a moment. We won't give you specific numbers, but I wanted to ask David to comment on the view of E.D. Smith today as opposed to the day that we bought it, and that it, I think in my mind, serves as an example of what we now can learn to expect in the future.

I think with E.D. Smith when we acquired it, there was a negative reaction because one, we probably did not do a good job of explaining the strategic rationale for the business, but what we saw were that broad array of new categories for us to enter that we could leverage and applying all of our procurement and productivity expertise against that business and creating a new opportunity.

The other thing, building on Sam's point, when you look at our product profile, other than soup, we're basically in a very narrow business that I refer to as enhancers. We're in salad dressings, non-dairy creamer, pickles, salsa. When you just walk up and down the center of the dry in the dry grocery aisles and you see where we compete, which is enhancers, and where we don't complete, which is this huge universe of whether it's the main meal occasion, lunch, snack, beverages, breakfast, we really barely scratch the surface in terms of where those opportunities are.

So, as Sam pointed out, we've had a three-year very good track record. But as we analyze the center of the store shelf stable arena, the opportunity over the next three or four years is as great as we've been able to realize over the last few. And I think Sam pointed out, when we started TreeHouse four years ago, we set our goal of $2 billion. And now, thanks to a much smarter organization, we've really refined that and said that's a near-term milestone because the opportunity is just so much greater for us.

Great. Well, thanks. That's all very helpful. I appreciate it.

Thank you, Jonathan.

We'll go next to Robert Moskow with Credit Suisse.

I'm sorry if I wasn't dialed in before, but congratulations, obviously. I guess I have kind of a quick question. There's some debate about whether some of these high-end private label offerings that are premium priced have the kind of velocity that's required to keep them on shelf, and you guys have done a great job on the salad dressing aisle.

Do you find that the private label products you have that are emulations of the brand have more velocity than, say, the ones that are maybe kind of a premium price that might not compare quite as well or --?

No, that a very good question. Clearly, Rob, the velocity of the national brand equivalents will be higher. What the retailers are doing with the premium are two things -- one, the margins on those premium products. It's like specialty foods. Gourmet specialty foods will tend to have lower velocity, but make a lot of money for the retailer.

The other thing about those premium private label products is it really helps them to create an image in the store of very unique, special items that nobody else has. And as we've been going around on our top-to-tops, we really talk to them about it. And there are some retailers who, in fact, their approach to private label is they really don't want a whole long laundry list of just national brand equivalents because in limited shelf space what that is doing is actually taking away from them being able to use that shelf space to communicate something special and unique that the retailers down the street doesn't have.

So they expect that those premium private labels will have a lower velocity. But what they expect is it reinforces their brand image and they get very high margins for them.

Are you finding that in a lot of categories or just salad dressing, David?

No, quite a few different categories in Canada and the US. Canada, in particular, has category by category, whether it's salad dressing or sauces, they have just an expansive list of gourmet specialty private label products that's years ahead of where the US is and they really like those businesses because of the image that it creates for them. The velocity is good. The margins are very high, but it reinforces their brand position. And especially those who operate with that good, better, best strategy.

Okay. And then one last thing. I remember a year-and-a-half ago or so we talked about what the revenue growth model was and I think it was low single-digit at the time. Do you have any interest in updating that and thinking of like a two-year target that's higher than that given the positive trends that you're seeing?

I think in terms of unit growth I think we stick with that. And again, a key for us, Rob, is always executing the portfolio strategy where there are going to be some parts of the business that are going to have revenue declines that can be double-digit, and so we're always having to offset that. It's a strategy that Sam and I have employed for 18 years and we may have never been the leader in the pack and in terms of organic growth, but somehow the strategy has always ended up making a lot more money than just chasing everything to the same degree.

Well then, maybe the question is operating margin because operating margins used to be a lot higher on the pickles business and non-dairy creamer, too. Do you think that you could have an operating margin that's significantly higher than where you are now and that could drive -- get people really convinced that this is a double-digit EPS grower?

Well, I think our model is --. Again, as Sam pointed out, the three-year history in terms of compounded annual growth rates in terms of revenue, cash flow, EBITDA cash, EPS, etc. It's a combination of organic growth and acquisitions; it's a combination of the two that is going to continue to drive us to creating that superior value.

I think in the absence of acquisitions, we'd be a nice -- I think we'd perform better than the average food company, but that's not the mission that we are on.

This is Sam. Just to echo David. A part of the acquisitions from the very beginning has been to clearly increase the size of the business and to get economies of scale. But what we have come to realize recently in the last several years is that of equal importance is the opportunity to upgrade the portfolio and to find those categories where there is an opportunity to not only achieve synergies and economies of scale, but, in fact, start with a higher base.

And I go back to the beginning here when half of our business was in a large, stagnate category best symbolized by a bird of unknown origin that had little flight for growth and we've transformed the business. At the same time, we've had to deal with extraordinarily volatile times in terms of input costs and I would footnote our current margin history is one where we've had to deal with, and have deal with successfully, just unprecedented volatility in input costs and that has led us to a new model to be able to deal with that.

As we're able to deal with that internally and also upgrade the portfolio, I think over a period of time that we will see that margins will improve. But that's a derivative of the grand strategy.

All right. Well, congratulations and good luck to you guys. Talk to you soon.

Thanks, Rob.

Thanks, Rob.

We'll go next to David Driscoll with Citi Investment Research.

Thanks a lot. Good evening.

Hi, David.

Hi, David.

And offer my congratulations as well. Very nice quarter.

Thank you.

In the North American Retail segment, can you tell me what was the contribution to sales from pricing?

I think excluding pickles and infant feeding, I think in my comments I said that our units were up 6% and revenue year-over-year was up 17%, but that 11 points isn't just pricing because there were mix changes associated with the revenue associated with salsa and salad dressings that will operate on a unit basis higher than some of our other products.

Dennis, can you --?

And, David, on a year-over-year, the pricing contributed 10 points and that was because at this point we hadn't implemented many of the price increases; those went through in the second half of the year. Mix was actually a -3.5%. And you'll see this -- the breakouts -- on our 10-Q, which was filed just this evening.

My follow-up -- you started to answer it -- is can you give us some understanding on the pacing going forward? I did have the understanding that the pricing was actually quite substantial in that segment this quarter. How does it then pace in Q3 and Q4, roughly?

I haven't scheduled out the pacing, so I can't answer that. But on a sequential basis, we indicated that we aren't anticipating any pricing in the back half of the year, any incremental pricing. So we should be at a level field, but I don't have an answer on what that plan is versus last year.

The price increases that you announced last year, were they more weighted towards the fourth quarter or the third quarter?

The third and fourth quarter. They would have been fully operational in the fourth quarter. Most of them were rolled out late in the second quarter, so they became effective in the third. But because the fourth quarter is our seasonally largest sales quarter, it will get the bigger percentage of it implemented in that quarter.

So by my logic, it would stand to reason that we would still see some price benefit in the third quarter, but then in the fourth quarter it would go down to very little and then you'd get whatever mix benefit that you get?

That's exactly the logic.

Okay, very good. Can you say what inflation was in the quarter, the year-to-date period, and then your estimate for the year?

Which, input cost?

Yes, please.

Actually, for the quarter we had a very small negative in input costs relative to our plan and we think those have leveled out now for the back half of the year.

When you say relative to plan, can you give it to me on a year-over-year basis, because I don't know what the plan was?

I don't have a year-over-year --. I'm just trying to think, David. I can't off the top of my head come up with that on a year-over-year.

Well, can you at least tell me if it was still inflationary or was it deflationary on a year-to-year basis?

The year-over-year was slightly inflationary and it's primarily because of the costs we have on some of the dairy, but especially on the packaging because of template.

This is Sam, David. With regard to third and fourth quarter, we expect a fairly benign input cost environment or business that is shift in the third and fourth. We are turning our attention, though, to those purchases that we need to make, particularly in agricultural commodities that will then come into -- begin to materialize into 2010.

And I think the general message here is that we have finally caught up with costs from a year ago with pricing. It's had a huge material effect in this quarter. That effect will be muted in the third and fourth as we've lapped pricing. And the second message is that the input cost environment we see for replacement costs, again going forward is, as I said, relatively benign.

David, this is David. I don't have in front of me the input costs, but looking at our total manufacturing costs in the second quarter and year-to-date, in the second quarter, we were in the low single-digits and for the first half of the year we're a little bit above mid single-digits. So what we're seeing is an improvement in the year-over-year running rate in terms of our total costs.

Okay. And if I understand everybody's comments correct, so we're seeing a deceleration in the rate of inflation; however, you're not calling out deflation hitting the P&L. Is that correct?

That's exactly right.

Okay. Last question. This has been asked before, so I know it may be beating a dead horse a little bit, but I'd really love to just try to pursue it one more time. A number of branded companies really have said that they are seeing significant slowdowns in the private label market share gains. And your comments today, I think you said earlier -- David, I think you said it -- that your year-over-year gains were consistent in the second quarter as they were in the first quarter.

How do you reconcile --? These appear to be enormously different statements and I'm trying to figure out who's right and what's going on, so I've love to hear any additional thoughts you could offer.

Sure. One, we only operate in --. When you take all of the private label categories that are out there, we mentioned before, we only operate in a few of them. And so we don't look at --. If you're talking to one of the big food companies and they're in these mega categories, we're in a very limited number of categories. And as I look at, for example, pickles, in the first six months of the year on a Nielsen basis we were up 11% and we were up 11% in the second quarter. So that is one example.

I don't have six-month data on soup. That's the only one where I can look at the second quarter versus the first six month, but we're seeing good continued share growth for our businesses. If those companies are saying that it's slowing down; maybe in the categories they're compete in its slowing down, but we're very comfortable with the growth that we're seeing.

I think that kind of goes back to Sam's comments on why you picked those categories.

Exactly. Clearly, the portfolio strategy is working here.

Just one last question and I'll pass it along. Interest expense guidance for the year and/or back half, however you'd like to do it? Can you give us any?

We haven't given specific, but I think the rate environment has really leveled off for us and I think at least my crystal ball is that rates will stay very steady with where they're at over the course of the year. So I think if you used our average rates for the quarter, that would be a fair proxy for the balance of the year.

Super. Thanks for all the information and congratulations.

Thank you.

Thanks.

We'll go next to Jon Anderson with William Blair.

Good afternoon.

Hi, John.

I just have one quick question. I know you've said in the past that new business can take six months in some cases or more to win from initial product presentation to shipment. I was just wondering if you could talk a little bit about your current new business pipeline and how that looks with respect to contributions in the second half of 2009 and then into 2010.

Sure. I think on the -- John, on the last call I mentioned that we had had more new business success in the first four months of this year than we have had in a couple of previous years and that that new business was starting to move through in the second quarter and will continue to move through in the third and the fourth quarters.

And frankly, some of that new business is what helps our top line be a little bit above what we have internally have forecasted. Since that last call, we have continued to bring in new business. Most of that will start probably the end of the third quarter going into the fourth quarter, but we are continuing to bring in what we referred to as big wins, and those we really define as new business that will generate $0.5 million a year in new business.

And again, we operate customer by customer, so a $500,000 win or a $1 million win with one single retailer is really a very good accomplishment. We just have to get a lot of them and we do.

Sure, thanks. One more for Dennis. In the outlook, I think you indicated that your expectation is for consistent margins in the back half of the year. Should we interpret that to mean consistent gross margins on a sequential basis or what's the best way to consider that as we think about modeling?

On a sequential basis.

Terrific. Thanks and congratulations.

Thanks.

We'll go next to [Lloyd Connor] with [Connor] Capital Management.

Let me start by congratulating you on extraordinary results.

Thank you.

Thanks.

Thank you, Lloyd.

Sure. And David, congratulations on being named to the Board of Directors.

Oh, thank you.

You're welcome; I think that's great. Most of my questions have been answered. All I really have left is on acquisitions. Just kind of making sure that you're going to stick to North America, specifically the United States and Canada, or is Mexico a possibility?

Lloyd, this is Sam. Our target is focused on the North American continent and those places where we currently do business will see that we could do business on an advantage scale. And so we'll stick both to our knitting and to our home ground.

Great. Thanks a lot again. Great job. Thank you.

Thanks.

And we have a follow-up question from Akshay Jagdale with KeyBanc.

Thanks for taking the follow-up. Just wanted to follow-up on some of the questions David had about commodities. Some of the main commodities that you've mentioned in the past -- soybean oil, namely, and casein -- down 40% to 50% year-over-year, but I do know that high fructose is up and your packaging costs were up and I know glass containers sort of like a monopolized supplier market, so you don't have much leverage there.

But what are we missing in terms of why would there not be deflation in your commodity basket in the back half? Am I missing a commodity or something in there or is it just the magnitude that's off?

You can't track our commodity costs with the [CVOT] data because of our forward buying and hedges, etc. What we're looking at is the full basket as to what our current positions are today and what they look like between now and the end of the year. And as I said in my comments, what we're really looking at is very stable pricing and very stable costs. We are well covered on virtually everything through the end of this year and we really don't expect any surprises.

Okay, great. Thank you.

Thanks.

And that's all the questions we do have at this time. I'd like to turn the call back over to Mr. Sam Reed for any additional closing remarks.

Thanks again to all of you. We very much appreciate your interest in our business and its condition and its near-term prospects. We look forward to meeting you again on our third quarter call. It will be in mid-November and mark it on your calendar. We should have more good news to come. Thank you.

That does conclude today's conference. We thank you for your participation.