TreeHouse Foods Inc (THS) 2009 Q3 法說會逐字稿

Welcome to the TreeHouse Foods investor relations conference call for the third quarter of 2009. This call is being recorded. At this time, I would like to turn the call over to TreeHouse Foods for the reading of the Safe Harbor Statement.

Good afternoon, everyone. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

The outcome of the events described in the forward-looking statements are 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's Form 10-K for the period ending December 31, 2008 and subsequent reports on Form 10-Q 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. At this time, I would like to turn the call over to the Chairman and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed.

Good afternoon, everyone, and welcome to back to our TreeHouse. As winter sets in, David Vermylen, Dennis Riordan and I invite you to join us in a quarterly tour of our private label, food service and industrial household. We hope that you'll enjoy the hospitality and shelter of our TreeHouse that especially in these uncertain times, it's the right place with the right stuff at the right time.

As an introduction, I will offer an overview of the past quarter and the current year end before David and Dennis delve deeper into strategic operational and financial matters. In the third quarter, we once again did it the old-fashioned way that I first described in our midyear call in August.

Operating cash flow increased 20% to a record $48 million. As retail grocery revenues measured in local currency grew 9% and direct operating income of our business units increased 24% as margins expanded 270 basis points, thus allowing outstanding debt to be paid down to 2.7 times leverage.

Once again, our TreeHouse has generated real top line growth in our core private label business accompanied by a high quality of earnings. Despite macroeconomic gains in the gross domestic product and branded claims to the contrary, private label is neither dead, wounded, nor in retreat.

Our grocery customers and their consumers continue to demand value without compromise. They know whether times are good or bad, sure or uncertain, that our grocery customers house brands no longer require trade-off in quality, assortment or convenience vis a vis the advertised national brands.

As David will shortly demonstrate, our portfolio continues to grow even as the economy recovers and branded marketers trumpet their return. Across our broad portfolio, TreeHouse continues to gain share in our core product categories and in doing so, outperformed both the leading national brands and private label competition.

Turning from the past quarter to the end of the current year, you can expect to see more of the same performance from our TreeHouse. Direct operating income of each of our three business units has steadily improved throughout the year.

North American Retail Grocery, our private label engine, has posted eight consecutive quarters of year-over-year gains. Profit margins in our big six, the large categories that are the mainstays of our retail portfolio, have increased 32% over last year to date.

This group which includes pickles, powder, soup, salsa, salad dressing and E.D. Smith jams and spreads constitutes the core product line that drives our private label growth across supermarket club, mass discount and other retail grocery channels. Given the relative calm in the commodity and energy markets, this growth in core product profitability bodes well not only for the remainder of this year, but 2010 as well.

As I'm sure you will note, we are rightfully proud of both this year's performance as well as greatly excited with the coming year's prospects. I'll have more on 2010 later. It promises to be another year marked by internal growth and external expansion. Now, here is David with his strategic view of market conditions and his analysis of our operational performance.

Thank you, Sam; and good afternoon, everyone. As usual, I will cover the top line and overall performance of the business, plus provide my perspective on the state of the private level market. As I discuss revenue, I will define it in terms of local currency given that 13% of our business is done in Canada.

Overall, the third quarter was even better than our second quarter which I characterized back in August as being excellent. Let me provide the headlines.

Net sales were up 2.1% despite contractual price declines in our industrial powder business and significant revenue decline in our low-margin co-pack business. North American Retail revenue grew 9%, matching the growth rate in the second quarter.

Despite very tough industry conditions, revenue in our Food Away From Home business grew 2.4% with volume comparable to year ago. All channels showed improvement in direct operating income with increased margins versus both last year and the first half of 2009.

I'll now review the results by channel. North American Retail sales were up 9% with volume up 2.5%. Excluding infant feeding, revenue was up over 11% with volume up over 4%.

Drivers of this revenue growth were soup, salad dressing, salsa, jams and spreads, sauces and pickles. As we indicated on prior calls, we anticipated that our pickle business would have a strong third quarter as we brought on new business that met the criteria we established last year when we completed our strategic and EVA review of the business.

Third-quarter retail pickle volume was up 8%, revenue up 11% and margins were well above last year. North American Retail direct operating income increased 28.5% and margins increased 250 basis points. When I discuss the state of the private label industry, I will cover performance of our key categories.

Our Food Away From Home business had an excellent quarter. Despite continued struggles in the food service industry, our volume was just about equal to year ago with revenue up 2.4%, direct operating income up 10% and margins up 80 basis points.

New salsa and cheese sauce business is more than offsetting fundamental declines in the industry. Our team is doing a very good job and we are very optimistic about the direction we are heading in.

Our industrial business which includes our co-packed business was light on revenue but strong on profitability. A large percent of the 19% revenue decline was due to lower selling prices for our industrial creamer business along with volume declines in our low-margin co-pack business.

Despite the revenue decline, our direct operating income increased 20% and margins 540 basis points, but admittedly off a soft year ago when input cost increases outpaced our ability to recover via pricing. In summary, it was an excellent quarter and we are very optimistic about how we will exit the year.

Now let me turn to the state of the private label industry. As background, for the last 20 years, private label volume has been growing on average about twice the rate of branded products with share growing from the low teens to the high teens.

As measured by IRI for 95 categories, recession-driven private label volume growth first accelerated back in the third quarter of 2008 when private label volume grew 6% from a normal 1 to 2%. In the most recent quarter, those same 95 private label categories again grew 6%. That 6% growth on top of last year's 6% growth is to me quite remarkable.

Last week, an analyst issued report with the headline, Evidence of Private Label Deceleration. The analysis covered 35 IRI categories and showed that private label dollar sales growth decelerated from 17% in 2008 to 9% year to date and 3% for the most recent 12 weeks, thus the headline.

Not in the headline but included in the data was that private label volume growth for these 35 categories was 9% in 2008, 8% year to date and 10% for the most recent 12 weeks. I don't consider that to be deceleration.

The pricing deceleration is being caused primarily by dairy related pricing being 15 to 20% below year ago. Now let me comment on the categories relevant to our business.

Whether you measure in volume or dollars, private label is doing very well. As measured by Nielsen, we're seeing little change in the performance of private label when we compare 12 weeks to 52 week volume share changes.

For salad dressing, soup and non-dairy creamer, private label gains for the latest 12 weeks were higher year-over-year than for the most recent 52 weeks. Private label pickle 12-week share gain was slightly below the 52-week rate but still up 1.5 share points.

Only in salsa have we seen a slowdown in private label share growth, but it was still up 0.5 share points. As measured by Nielsen, our Bay Valley private label dollar sales for the quarter showed soup up 4%, salad dressing up 17%, pickles up 9%, non-dairy creamer up 7% and salsa up 19%. Frankly since the recession began, the private label share gains we are seeing in our categories are only modestly better than we have seen in prior years.

We are very comfortable with that performance given that slow steady gains will be far more enduring than short-term spikes. An important point to remember about private label is that we have a great ally in building the business and that is our customer, the retailer.

Private label can be more profitable on a per unit basis than branded products and it allows the retailers to differentiate themselves from their competitors. As retailers build their brands and build their profitability, I don't believe they're going to cede a great deal of their share gains back to the brands. Now I know that people will ask on the Q&A about the soup market and price gap, so let me make a couple of comments.

On soup, we are encouraged by the consumer marketing we are seeing from the branded companies. It is far more positive than it was last year when the MSG wars were being taught. This is good for the category.

While it's early in the soup season, for the most recent four weeks ending October 24, the market according to Nielsen was up almost 7% in cases and we gained share. That is a great start.

In terms of price gaps, there is nothing meaningful to report a we're seeing the normal blend of quarterly increases and decreases. In addition, only in salad dressing have we noticed more aggressive promoted prices but given the strength of our business, we are more than holding our own. In summary, it was an excellent quarter and we're very comfortable with the trends we are seeing in the private-label universe. I will now turn it over to Dennis.

Thank you, David. From a financial perspective, we had another good quarter at both the top line and the bottom line. Today I will focus on reported revenues, gross margins, operating costs and our effective tax rate.

Reported revenue increased by 1.1% in the third quarter as strength in retail sales offset lower sales in the Industrial and Export segment. As has been the case for the past few quarters, our reported sales were negatively affected by currency rates in our Canadian denominated sales.

However, the effect was not quite as significant as in prior quarters. The average Canadian to US exchange rate was down 5.4% in the quarter when compared to last year, while the year-to-date average exchange rate is down 13% compared to last year. With 13% of our revenues generated in Canada, even a 5.4% reduction in rates will have a noticeable effect on reported revenues. Had the total sales been measured in local currency to exclude the translation difference, our consolidated sales would have increased by 2.1%.

On a side note to the revenue, we were very pleased with the improvement in pickle sales. Sales in the quarter were up on a year-over-year basis for the first time in years, indicating that we have lapped last year's customer rationalization program.

With regard to gross margins, we followed up our first-half performance with another strong quarter. Overall gross margins improved from 19.5% last year to 21.3% this year, a 180 basis point improvement.

Carryover pricing from last year combined with procurement savings and production efficiencies contributed to the margin improvement. As David mentioned, retail sales increased 9% in the quarter and the strength of improved unit shipments.

In addition, retail direct operating margins improved from 12.9% to 15.4%. On a sequential basis, the retail gross margins improved 20 basis points from the second quarter as well. We continue to focus on improving margins through a combination of purchasing savings and internal efficiencies.

In the Food Away From Home segment, we were able to increase sales by 2.3% from last year, primarily due to pricing. Our unit sales were flat to last year despite the weakness in the Food Away From Home marketplace as we focus on new products and increased distribution.

Just as in retail, our purchasing programs and internal cost savings initiatives allowed us to manage costs, resulting in an increase in operating margins to 11.4% from last year's 10.6. Direct operating income in the Industrial and Export segment increased significantly from 10.8% to 16.2% of sales.

The large increase was more a function of very low margin last year as rapidly rising soybean oil and sweetener costs last year were not offset quickly enough with pricing. The margins in the quarter were nearly flat to last quarter as we have recovered our costs through pricing and now seem to be on steady state with respect to margins.

The key challenge in this category is that many of these products are directly related to the Food Away From Home market and are suffering from the downturns in that market segment. In addition, our co-pack revenues are down to to our branded customers significantly reducing their orders as they focus on working capital management.

As I noted on last quarter's call, the co-pack business is generally very low margin, so the sales decline tends to improve the overall market percentage as the sales mix shifts to higher margin products. Total selling, distribution and general and administrative expenses in the quarter were $46.4 million compared to $45 million last year, an increase of 3.1%.

The increase in spending is primarily due to higher G&A costs resulting from increases in our annual bonus accruals. As we indicated last quarter, the very strong results for the year resulted in a need to increase incentive accruals as we expect to significantly exceed our planned targets.

This is particularly evident in our guidance where we are now expecting results to be about 14% higher than our original guidance from last winter. Comparatively, last year's incentive compensation accruals have been adjusted down due to the pressure on earnings we were experiencing from very high input costs.

Other operating income totaled $14.4 million as we recorded a gain on fixed assets associated with last year's New Hampton plant fire. The damaged (inaudible) were replaced with new equipment and the cost of that equipment was covered under our insurance policies.

The difference between the net book value of the old equipment and the new replacement equipment caused the gain. Last year we had minor expense associated with the closed Portland, Oregon pickle plant.

Interest expense in the quarter totaled $4.8 million, effectively flat to last quarter but well below the $6.5 million of last year's third quarter. The decrease was due to both lower levels of debt outstanding and lower interest rates. Our incremental interest rate on debt outstanding under our revolving credit agreement was only 0.82% in the quarter.

Our effective tax rate for the quarter was 35.3% compared to 29.9% last year. Last year's rate was very low due to the very low US based income resulting from the plant closure combined with a significant deduction for intercompany interest expense. In 2009, we expect much higher US-based income and the amount of the deductible intercompany interest expense has been reduced by a weaker Canadian dollar.

The effective rate in the quarter was very much in line with the year-to-date rate of 35.5%. In total, our earnings for the quarter were $28.1 million compared to $11.1 last year. This represents fully diluted earnings of $0.85 a share in 2009 compared to $0.35 a share in the third quarter last year.

After excluding one-time items as explained in our third-quarter earnings press release, our adjusted earnings would have been $0.54 per fully diluted share compared to $0.41 per share last year. The increase in quarterly earnings of 31.7% is even more dramatic when considering that our fully diluted share count is 1.6 million shares higher this year.

Also this year's quarterly effective tax rate is 540 basis points higher than last year. We're very pleased with the quality of our earnings growth this year.

In regard to the outlook for the year, we believe that our balance of the year results will continue to show better than originally planned margins. We expect input costs and pricing to remain steady resulting in consistent margins in the fourth quarter.

Overall we believe that full-year adjusted EPS will now be in a range of $2.07 to $2.09. This is roughly a 14% increase to our original guidance and would result in full-year earnings growth of over 28% compared to last year. Now I will turn it over to Sam.

Thanks, Dennis. I will conclude our prepared remarks with some thoughts on our internal capabilities, external opportunities and their interplay in 2010 and beyond. Internally, we have steadfastly employed our portfolio strategy model to enhance our go to market presence and supply-chain proficiency.

Our latest analysis of the portfolio indicates progress on all fronts. Most importantly, our mega star segments, those with the highest growth, higher profit profiles, now account for 48% of the entire portfolio. We have come a long, long way from our original reliance on pickles and powder.

A series of acquisitions has expanded our portfolio, enhanced our growth prospects, raised our stature with customers, extended our geography and doubled our operating cash flow. As each new business is integrated into our TreeHouse, new avenues of growth, profit and synergies are open to us.

This track record of growth has only whetted our appetite for more. Externally, we see great opportunity for further strategic expansion of our tree house through acquisition in the coming coming months and the new year.

The bottoming of the recession has aroused sellers, who seeing that the worst may have passed have left the sidelines and returned to the field of play. Capital markets have also begun to reopen as panic ebbs and confidence grows.

Buyers, be they strategic or financial, now have a clear line of sight to an eventual recovery and resumption of growth in consumer demand, especially for staples and non-capital goods. The baker's dozen of Canada as I mentioned in August has been reduced by approximately half to those that fit our TreeHouse criteria for expansion. We are actively pursuing several of these prospects that hold great promise for the new year ahead.

For us at TreeHouse, the primary issues to address in another expansion are category size, strategic fit, financial opportunity and integration risk. Our ideal candidates have an established presence in $1 billion plus categories, enhance our dry grocery portfolio, offer both growth and cost synergies; and lastly, are readily adaptable to our business model, values and culture. We are among the fortunate few with the strategy, resources and capital required to undertake large scale expansion under current market conditions.

The interplay of these internal capabilities and external opportunities will be acted out over the next year in an economic environment that continues to be pro TreeHouse. Economic uncertainty, thrift and unemployment will favor the value without compromise proposition that only private label can offer.

Retail grocers and food service operators will rely even more upon value oriented customer brands, custom products to build traffic and reward consumer loyalty. The revival in branded marketing will most threaten those without scale or scope, especially undermarketed regional and secondary brands. Commodity and energy input costs will increase only marginally, limiting either price increases or concessions to individual categories.

In this environment, you can expect us at TreeHouse to undertake the following agenda. First to generate double-digit earnings and operating cash flow on our base business. Secondly, to expand via acquisition into strategically attractive categories with strong private label presence and accretive synergies.

Next, to increase volume share in revenue and our core private label grocery strategy categories. Also to improve margins through productivity and purchasing programs with less reliance on passthrough pricing. And finally, to maintain a capital structure that promotes rather than limits subsequent growth.

This agenda for the new year constitutes a tall order for all of TreeHouse. We undertake it in the context of the vision I expressed during our last call in August, that our future is even brighter than our recent past and the present. We will continue to generate superior shareholder value through a program of strategic expansion, operational prowess and financial acumen. After all, as I noted earlier, TreeHouse is the right place with the right stuff at the right time.

Keith, please open the lines for questions and comments.

(Operator Instructions) Ken Goldman, JPMorgan.

Sam, as usual, your most interesting statements were left for the end. You talked about promoting a capital -- or maintaining a capital structure that promotes growth rather than restrains it, if those are your correct words.

Can you talk about how happy you are with your current capital structure? Your debt to EBITDA is still probably a little bit above may be where you would like it on a long-term basis. Is it possible that you will do a secondary to issue or to pay down some debt? How should we think about that statement and whether it was meant in any way beyond just the generality of it?

Ken, thanks for calling in. First of all, we regard capital structure as a strategic asset. And as such, it needs to support our dual program of cash generation and capital expenditures for internal improvement of the businesses that we own; and then secondly, to be able to finance on an ongoing basis strategic expansion by acquisition.

And the specific point that I was making was really referring not so much to our current structure as what I anticipate as we grow over the near term. And that is that as we entertain acquisitions, that we need to be able to do so in such a way that one, gives us the best profile with regard to the cost of that capital and the risk around it; and then secondly, to always have an eye on the next step so that while we may be out of the M&A market for periods of time, that those will be intermittent and things that we can plan reasonably going forward. So that was the intent and, Dennis, there are other comments you would make about either our current structure or what you see in the marketplace?

What I would is as you mentioned about the leverage and what we are very happy with and it's a function of our business is that our leverage is at 2.7 times and that means we have delevered in the range of a full 0.9 months. So to the extent 2.7, is that too high? With the cash flow we generate, we generated quickly, we don't feel 2.7 is too high at all for a company like us.

Going back to -- we talked about pricing and volume a little bit. Clearly you're not going to be able to get the same kind of pricing in 2010 that you got in 2009. How should we think about ongoing volume numbers?

Clearly your goal is to get that volume above population growth and above where the branded players are growing. But are we thinking 3%, 4%, 6%? Is there any number you can give us that helps us understand the way you guys are thinking about volume absent pricing? I'm really talking about North American Retail Grocery.

I think one, most pricing -- we've taken very little pricing this year. Most of the pricing was in second and third quarters and the beginning of the fourth quarter of 2008. And right now in North American Retail, excluding baby food, I think our volume was up 4% for the quarter.

I think if we can continue to move our volume in that 3 to 4% -- and importantly it's not just the total percent, it is a mix of business that we are driving. So that we have a say 3% volume growth but we're moving it towards the higher value added products, I think at the end of the day that's a very good profile for North American Retail.

When do we see that 4% as opposed to the 2.5% or so, whatever it was this quarter (multiple speakers) I know it's effective what you're doing in terms of taking out unprofitable SKUs, but does that ever and or is that an ongoing process?

I think as part of our strategy, it's not going process to -- the only one I'm excluding right now is infant feeding and that is a business that we have been deemphasizing for quite some time. But you look at everything else but infant feeding, we're up 4%. I think if we can be in the 2, 3 or 4% and improve the mix over time, that will be very good. At some point in time down the road, we won't be talking about infant feeding.

Got it. Thank you.

Bill Chappell, SunTrust.

Good afternoon. I guess first on the food service, Food Away From Home, did trends worsen intraquarter or are we just seeing tougher comparisons? Kind of what is your outlook as we look over the next quarter or two for that business?

The business improved -- for us, it improved quarter to quarter. While the industry trends tend to be in the minus 5 to 10%, we saw our physical volume just about equal to year ago and our revenue up almost 2.5%. And we like to see -- we want to continue to outpace the industry and over time as the industry comes back, we feel we will be in a very advantaged position. But I think the momentum we're seeing on the business right now, we will be able to sustain. As the Food Away From Home industry improves, we will grow a little bit more.

Is that difference just share gains or is it just categories you're in are a little less -- a little more sheltered?

We have really been able to -- with our acquisitions, we have been able to move more categories into Food Away From Home. A big part of our growth this quarter in Food Away From Home was in new salsa business which came from our acquisition a couple years ago of San Antonio Farms. In our cheese sauce business, we continue to make very good progress on and pickles actually had a good quarter as well.

Just following up a little bit on our pricing as we look forward, and clearly you're seeing some of the commodities pop back up in the past few months, how do you look at pricing? But more importantly, how do you look at commodity cost pressures for 2010 versus 2009?

I think we are encouraged by what we are seeing. As you track the changes in commodities and some of them have gone up recently, you can look at soybean oil has gone up say $0.03 or $0.04 a pound over the last few months. But it really comes down to the kind of coverage we have and how far out we are. We are moving towards coverage for the first half of next year and right now, we feel that we are in an advantage position.

Sam, I know you're asking for patience on the acquisition front, but it seems like we are almost there every quarter and we keep getting closer and closer. Is this something that we're talking about sometime during 2010 or would you see something in the next few months?

Well I've been as specific as I can. I think that there are two observations. One is that the market for M&A transactions of the size and type that are of interest to us has substantially improved of late and most importantly, that there are sellers coming to the fore, even in the absence of a kind of robust industrywide auction process.

Secondly, we are actively engaged and these matters have taken a long time to take a thorough strategic look at the possibilities across a wide array of categories and we have kept you posted as from a wide screen, we've reduced the scope of our interest at a one point, I indicated a Baker's dozen and now even fewer than that. I think we identified with a great deal of specificity the attributes of the businesses that we look for and how they would fit into our portfolio structure and our -- our portfolio strategy adn our capital structure.

With regard to the specific timing, all I can tell you is it's like hitting a hole on one playing golf. I've done it in the past, I'm going to do it again. I'm just not quite sure whether it's that next swing or the one after that. But we fully expect to expand the business in the near term and to do it in a strategic way and on a large scale basis.

Got it. Well I'll stay tuned.

(inaudible) Keybanc.

Congratulations and good quarter. Just to follow up on some of the questions, you did talk about expectations for organic volume growth of about 3, 4%. Can you also talk about margins, your expectations for margins excluding -- you can leave baby food out and -- or infant feeding out and just talk about what you expect for margins or expansions for the base business excluding acquisitions.

I think the way to look at it is we are at a point where the commodity costs are relatively level or at least they are manageable and pricing and commodity costs should stay in balance. So the way we will get margin improvement will be through internal efficiencies.

And just as we targeted this year 100 basis point improvement, we've obviously surpassed that. I think for the foreseeable future, we will continue to look at the range of 100 basis point improvement as we continue focus on what David calls the center of the P&L and looking at a big block of costs that fall between net sales and gross profit.

That's helpful. This may be a bit of -- a question that's a bit early to ask. But in terms of -- if you look at your revolver, it's not due until August I believe of 2011. But in your view, if you were to refinance it today, what kind of rates would you be expecting?

That's hard to say. I think the market is still in fluctuation. There's all different avenues that take place. I think one key thing as I mentioned earlier is that we started the year with a leverage ratio that was in the range of a full turn higher than where we are at, so we delevered quickly.

That will come into play when we do a refinance. And certainly Sam has talked about the acquisition side. So it's awfully difficult to predict where they would be at this point. There's a lot of variables.

But I would say that given the roughly 8.2% interest rate we had in the quarter, we will be very careful in how we approach the refinancing and we don't want to be too early in that given that rate. At the same time of course, we don't plan on letting it go until the very end either.

That's helpful. Just one on housekeeping. I know there are some changes, etc. But what was the adjusted operating margin this quarter and the corporate expense number? Can you share that with us or we can do that offline too.

I will walk you through that a little more offline and tomorrow afternoon after the market closes, the 10-Q will be released actually and that will provide more of that segment information I think you're looking for.

Jonathan Feeney, Janney Montgomery Scott. (Operator Instructions) John Anderson, William Blair.

I was just wondering, a little bit of a bigger picture question. In terms of the 3 to 4% range for volume growth, thinking about the drivers of that, are we talking about growth kind of with the category plus share gains? Are there opportunities to add new customers? I think you are doing business with the vast majority of the top 25 retail groceries today in the US. And/or fill-in opportunities that you may have within your existing customer base. I'm just trying to get a sense of how important each one of these could be to that objective.

Those are all very important. In terms of the fill-in, yes, we are doing business with just that every customer. But at some customers, we have a full portfolio; and some large customers, we may be in two of six or seven key categories.

So I think a big opportunity for us is to continue to fill in those gaps and we actually have a grid of all the customers in all the categories and it's sort of green, yellow, red and green is where we have got the business. Yellow is where we have got a little bit of the category and red is where we've got a big opportunity.

On that basis alone, we have got a lot of growth potential, both in the US and in Canada. So our approach is not just to hope that the categories grow with 3 to 4% or 2 to 3% and we gain a little share, but it is continue to grow share in the categories and accelerate that growth through customer penetration.

And the mix piece of that, it sound like you're expecting mix to be kind of accretive to the top line, to the volume number. Is that again predicated on shift to more premium oriented private label products?

Yes, for example, premium salsas will operate at a higher margin than normal pickles. So as we were able to expand the ACB distribution of our premium salsa business, that will over time improve the gross margins of the whole North American Retail portfolio.

Sam, I guess you mentioned that the baker's dozen has been kind of reduced by half at this point and I'm just curious to get your perspective on is that you have kind of in the evaluation process winnowed that down or that there may have been some of those that were kind of [pulled] in an external fashion.

It's the former. It's been our process that's narrowed the focus. Some of those other doughnuts are still on the shelf.

(Operator Instructions) It appears we have no further questions.

Okay, thank you. And to everyone, thanks very much for calling in. As usual, we greatly appreciate your interest in our TreeHouse. And David and Dennis and I look forward to seeing many of you at the Private Label Manufacturers Association convention in Chicago later this month. Thank you.

Ladies and gentlemen, we do appreciate your participation. This does conclude today's discussion.