TreeHouse Foods Inc (THS) 2009 Q4 法說會逐字稿

Welcome to the TreeHouse Foods Investor Relations Conference Call for the fourth quarter of 2009. This call is being recorded.

At this time, I will turn the call over to TreeHouse Foods for the reading of the Safe Harbor statement.

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, expect, seeks to, anticipates, plans, believes, estimates, intends, predict, 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 10K for the period ending December 31, 2008 discusses 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 statements 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. Please go ahead.

Thank you, Loretta. Good morning, all, and welcome back to our Treehouse. We are gathered today to look back on 2009, the best ever year at TreeHouse and also to look forward to 2010 which, in its early days, promises to be even better.

In doing so David Vermylen, Dennis Riordan, and I will assess our recent progress as well as our strategic prospects as our portfolio expands to encompass powdered beverages and hot cereal.

First, a look back. Our TreeHouse generated operating cash flow last year of $191 million, an increase of 21% as volumes increased, especially in private-label grocery, and margins expanded, thanks to productivity and procurement savings as David and Dennis will explain in detail. We capitalized upon the growing demand for value without compromise in customer brands and custom products that continues to surge forward. Private-label sales has tracked and measured channels over a broad array of categories, continuing to lead the grocery industry in growth even as the economy begins to recover.

The reasons for this growth are straightforward if not simple. [The set] by unemployment and uncertainty, consumers have returned to thrift and frugality and are demanding more for less.

In parallel, grocers -- eager to retain customer loyalty and regain lost profits -- have embraced their customer brands as strategic marketing tools. Only private-label can address these needs of both food consumers and grocery customers for value, quality and distinction.

TreeHouse has responded to this demand in the old-fashioned way, as I described at our midyear analyst and investor call. We have met consumer and customer demands with a steady supply of products and programs to enhance the value of customer brands without compromising the quality of our products or the integrity of our service.

In doing so, we have differentiated TreeHouse from the welter of subscale competitors who lack our product portfolio and economies of scale. Our topline growth, margin expansion and profit improvement are all derived from our singular devotion to the fundamental premise that we will deliver value without compromise and do so with unmatched efficiency and effectiveness. Next, a look ahead.

2010 promises to be another excellent year as our TreeHouse expands its private-label portfolio, generates organic growth in its base business, expands gross margins and budgets double digit increases in operating cash flow and net earnings. We'll continue to demonstrate great progress in the four critical factors which form the foundation of our growth platform.

These cornerstones include strategy. The acquisition of Sturm Foods will propel TreeHouse into two private-label mega categories that will open new markets and offer a new technology to our dry grocery portfolio. Not only will TreeHouse extend its private-label leadership to eight major grocery categories four times our original base, but we will also do so with a 50% increase in operating cash flow to fund continued innovation, productivity and expansion.

Next, tactics. Our go-to-market initiatives and supply-chain execution are directed by the dual disciplines of our portfolio strategy and the EVA analysis. From pickles -- once the bane of our portfolio -- to [pourable] salad dressings, the jewel in the crown of E.D. Smith, our strategically critical categories have thrived over the past year. This trend will continue into the new year as our Bay Valley, E.D. Smith, and Sturm Foods operating teams will drive volume increases, share gains and marketing spreads over the eight major private-label categories in which we are the market leader.

Thirdly, operations. Our unrelenting drive to capture productivity gains and procurement economies will not only make us more efficient but also more competitive, especially if input costs reverse last year's decline. That competitive edge will translate into more volume opportunities, thus furthering our economies of scale. The steady improvement in TreeHouse margins at 100 basis points or better annually will continue unabated.

And finally, finance. Our capital structure, post the Sturm transaction, will be a well-balanced combination of prudent leverage to service debt, and available capacity to fund further expansion. We regard our capital structure and sources of capital as strategic assets, essential to the business -- TreeHouse business model. Our policy will be to deploy capital prudently for strategic expansion just as we have done since the inception of TreeHouse.

Now let me turn the mic to David and then to Dennis who are eager to provide more detail and color commentary on our TreeHouse story.

Thank you, Sam, and good morning. What I will do is cover Q4 results, provide a perspective on the year just concluded, and highlight some of our key initiatives for 2010.

In terms of the fourth quarter, we finished the year in stellar fashion, sequentially building on the momentum we established early in the year. Every channel showed sequential year-over-year volume improvement highlighted by Food Away From Home, up almost 2% in the quarter in a sector that is suffering a mid-single-digit decline.

Total Company unit volume was up 1.4% with revenue up 1.7%. Total adjusted operating income increased 39% and gross margins increased 320 basis points.

For all of 2009, revenue was up 0.7%, adjusted operating income up 31%, and gross margins increased 210 basis points to 21.6%. I will now highlight key segment data.

North American Retail had an outstanding quarter with volume up 3% and up 4%, excluding branded income beating. That growth was consistent with the third quarter, leading the growth for pickles and salsa, both up over 10%.

Despite a disappointing Q4 soup market, we were up over 3.5% in volume. Salad dressing and non-dairy creamer were also above year ago.

With one exception, Q4 Nielsen data indicates a clean sweep for Bay Valley with all five key legacy categories showing both case and dollar share increases. This is with price gaps in the quarter comparable to last year. The exception was salad dressing case share, which was equal to a year ago, but salad dressing case dollar share was above a year ago.

Also noteworthy was that, with the exception of soup, all key Bay Valley retail categories showed healthy growth rates in the quarter with volume up 2.5 to 4%. These trends held true for the full year which is an exception to the CPG rule, but most volume growth is taking place outside of measured channels.

For the quarter, North American Retail operating income was up 30% with margins up 330 basis points. For the year, operating income was up 33% with margins up 320 basis points.

North American Retail had a great year. The categories we compete and are generally healthy, we are gaining share and doing so without narrowing price gaps.

Before I cover our other channels, let me briefly comment on the state of the private-label industry. IRI data for 92 categories indicates that storebrand case volume was up 4.6% in the fourth quarter, on top of 8.5% in the fourth quarter of 2008. That is very healthy growth on top of extraordinary year-ago growth.

That momentum continued into January where private-label case volume was up 4.8% on top of last January's 9.9% growth rate. In terms of private-label pricing, with the exception of dairy meat and oils, private-label pricing is quite stable. As I mentioned, in our key categories, our price gaps in the fourth quarter were virtually identical to the fourth quarter of '08.

Food Away From Home had an excellent quarter with volume up 1.8%, despite an industry which was down over 5%. Segment operating income in the quarter was up 53%, due to both volume growth and the flow-through of all of our pickled productivity initiatives.

Pickles are a large part of our Food Away From Home business, thus the channel really benefited from our pickle restructuring efforts. Our Ingredient Co-Pack and Export business referred to internally as ICE had a very good quarter, with volume down only 4% versus a nine-month trend of minus 18%.

The key to this business is ingredient sales of non-dairy creamer, whose primary customer base is the Food Away From Home industry. We are optimistic that going forward we will see a further recovery in the running rates. Despite the volume decline, segment operating income was up 8%.

While there are many highlights in 2009, I would like to comment on four. First, the massive analytic and strategic efforts we undertook on pickles in 2008 really paid off for us in 2009. Operating profit increased 37%, margins increased 520 basis points, and we exited the year with volume momentum. While we benefited from a good crop year, it was secondary to the strategic changes and tough decisions we made.

Second, E.D. Smith had another outstanding year, both in Canada where it operates stand-alone and in the US where it is fully integrated into our US sales channels. Topline growth has been very strong and our productivity initiatives have generated stellar results.

Third, our procurement team had an outstanding year and is really leading the charge on attacking the center of the P&L. Private label is a low-margin business and no matter what added value we bring to our customers, cost will always be a key driver.

Fourth, our focus on generating big sales wins early in the year paid off for us with our year-over-year volume performance improving by 590 basis points in the second half of the year versus the first. That momentum is continuing into this year.

Now let me briefly turn to 2010. Our focus is very simple. First, topline growth led by our EVA driven portfolio strategy that focuses on products and customers where we can grow profitably. Growth for the sake of growth is not our strategy.

Second, continue to attack the center of the P&L. By the end of next week, Harry Walsh, President of Bay Valley and his leadership team will have visited all 16 plants and every distribution center with those meetings entirely focused on achieving our very aggressive productivity targets. As our guidance indicates, we are very optimistic about the outlook for 2010.

I will now turn it over to Dennis.

Thank you, David. Since David covered the revenue growth, I will focus on other key aspects of our operating results, including gross margins, operating costs and our effective tax rate.

In addition, we had unusual items in the quarter that in total decreased reported income but were not related to our normal operations. These included a non-cash charge to write down the value of a branded trademark, cost relating to the acquisition of Sturm Foods, a non-cash mark to market adjustment of an interest rate swap agreement, an adjustment to our intercompany note to reflect current Canadian exchange rates and residual costs associated with the Portland pickle plant that we closed last year.

I will describe these unusual items in more detail as I walk you through our fourth-quarter P&L.

First, gross margins improved sequentially to 23.3%, compared to 21.3% last year as both our retail and Food Away From Home segments showed strong direct operating income margin improvement. Retail margins were especially strong in both pickles and soup as a result of operational improvements and a good crop season for cucumbers.

Food Away From Home margin improvement was driven by better cucumber costs and lower costs in our refrigerated business. Margins in our Bulk and Industrial segment improved to 14.3% from 11.7% as improvement was realized across most categories and low margin Co-Pack sales were smaller percentage of total category sales.

Although revenue was lower this quarter compared to last year, direct operating income in the segment grew to $10.6 million from $8.9 million. Selling and distribution expenses continued to see year-over-year decreases as lower fuel costs, combined with more efficient transportation programs, have lowered the cost of moving product from our factory and warehouses to customer locations. Total selling and distribution costs were down $1.1 million from last year and now represent just 6.9% of net sales.

General and administrative costs increased $3.3 million from the third quarter of 2009 and increased $9.3 million from last year. The increase in spending from last quarter was driven by approximately $1.8 million in costs associated with the Sturm Foods transaction along with a final adjustment of 2009 incentive costs.

Compared to last year's fourth quarter, total G&A expenses were up $9.3 million due to much higher incentive costs, reflecting the strong results of 2009, the Sturm Foods deal costs, and slightly higher salaries and benefit costs as we invest in new positions to better manage our growth and staff of our previously announced ERP project.

Other operating expense was $7.7 million in the quarter, compared to $1.3 million in last year's fourth quarter. Nearly all of the expense relates to the write-down of the value of our Nature's Goodness trademark, as we deemphasize our branded offerings and focus on private-label products.

The $1.3 million in expense in the fourth quarter of 2008 related to costs associated with a pickle plant closing last year. Amortization expense was slightly higher in the quarter compared to last year and the third quarter of 2009, as we adjusted certain amortization periods to better match future useful lives.

Interest expense for the quarter dropped significantly from $5.8 million last year to $4.3 million this year, due to a combination of lower average interest rates and a significantly lower level of debt. Our outstanding borrowings were reduced by $74.5 million from last year, reflecting very strong cash flow from operations.

A gain on currency exchange in the quarter relates primarily to the revaluation of a Canadian intercompany note. Last year as Canadian exchange rates dropped, we had to take a non-cash mark to market write-down on this note. This year, the Canadian dollar has strengthened, relative to the US dollar, resulting in a non-cash write-off. We consider these fluctuations to be non-operating items because they have no affect on the cash flow of the Company and they will eventually balance out over time.

Our non-operating income and expense included $0.8 million in non-cash gain to mark to market our interest rate swap agreement. This adjustment to reflect current LIBOR rates but does not have any effect on the future interest payments. This adjustment is in contrast to the $7.4 million non-cash loss recorded last year as LIBOR rates dropped dramatically at the end of 2008. Last year's charge will continue to reverse as a non-cash gain over the remaining life of the swap agreement netting out to zero by August 31, 2011.

Regarding taxes. Our effective tax rate for the quarter was very low at 27.1% compared to the run rate of 35.5% through the third quarter of this year. The much lower rate in the quarter reflects the favorable impact of a Canadian tax rate reduction, enacted during the quarter as well as an increased benefit from intercompany interest due to higher Canadian exchange rates.

Last year's fourth-quarter effective rate was also low due to tax deductions associated with the large mark to market expenses.

Also affecting the effect of tax rates this quarter was an acceleration of Canadian tax deductions resulting from the closure of our Cambridge salad dressing plant and the transfer of a portion of its production to our expanded US salad dressing plant.

Income from continuing operations in the fourth quarter was $22.1 million compared to $7.1 million in last year's fourth quarter. This equates to fully diluted earnings per share of $0.66 in the quarter compared to $0.22 last year.

Excluding the unusual items I highlighted above, and consistent with the reconciliation in our earnings press release issued today, our adjusted earnings for the quarter totaled $0.78 per share compared to $0.55 last year. A significant improvement in operating results was directly attributable to the improved unit sales and our focus on the center of the P&L to drive efficiencies, along with the favorable [inflective] tax rate.

Now for the full year of 2009, reported earnings per diluted share from continuing operations was $2.48 compared to $0.91 last year. Excluding the unusual items I discussed previously, adjusted earnings per share would have been $2.23 this year. This is a 38% increase over last year's $1.62 and above our original expectations for the year.

Our full-year results showed topline growth despite the challenges in both our Food Away From Home and Bulk and Industrial segments. We were especially pleased with the 5.9% increase in retail sales. Margins for the Company improved in all three segments when comparing full-year 2009 to 2008.

Although operating expenses increased on a year-over-year basis, due to both incentive compensation programs and deal-related costs, we still significantly increased operating income. We clearly finished with a lot of momentum heading into the new year.

Now let me cover the outlook for 2010. Last year, I started off by saying we viewed 2009 as being a year of opportunity for TreeHouse. And as the results show, it certainly was. For 2010 we still see opportunity, both on our baseline business and with the future addition of Sturm Foods to our product array.

For 2010 guidance I will focus on TreeHouse, excluding the acquisition of Sturm. We expect the topline revenues to increase in the range of 2% in 2010 as growth into retail business offsets expected softness in the Food Away From Home category. We do not expect much in price increases in 2010 but will react as needed to any significant changes in our input costs.

In terms of gross margins, we expect that the very good margins we experienced in the fourth quarter of 2009 will continue into 2010, resulting in full-year margins that should be over 100 basis points better than the full year of 2009. This margin improvement will be the result of internal efficiencies.

In terms of expenses, our operating costs will continue to be well-controlled. We expect to have normalized levels of operating costs next year, but we'll see some increases in staffing as we grow the business through acquisitions.

In addition, as we progress with our new systems implementation project, we expect to incur an incremental $3.5 million to $4 million in project-related expenses. Excluding the ERP-related expenses, we expect operating costs to be very consistent with the 2009 operating expense ratio of 13.4% to net sales.

Now let me cover a few other items that are considered in our full-year outlook. First, interest expense will be relatively flat to the 2009 total of $18.4 million. Much of the balance of our outstanding debt is effectively at a fixed rate due to our prior interest rate swap.

In addition, we expect to see an increase in US interest rates over the course of 2010 and this will affect the remaining balance of floating rate loans outstanding under our revolving credit agreement. The higher rates will offset lower debt levels resulting from normal operating cash flow.

Our effective tax rate should stay close to 36% in 2010, very much in line with the effective rate of 2009 excluding the fourth-quarter unusual items. In terms of capital investments, we are forecasting that operating capital spending levels in 2010 will be at a typical level of $35 million to $40 million. This is in line with the 2009 capital spending of $37 million.

In addition we are allocating an incremental $20 million to $25 million in ERP-related capitalization. Therefore we expect total capital spending to be in the range of $58 million to $62 million.

Non-cash items for 2010 include depreciation and amortization which will show a very moderate increase from 2009 levels. Stock option expense is expected to rise to approximately $15 million from the $13.3 million in 2009 as we increase the participant pool for the increased staffing levels and assume an increase for new acquisitions.

In regards to shares outstanding, we have assumed fully diluted shares outstanding to be approximately 34.4 million before considering the equity issuance relating to the Sturm financing.

So in total we see our base TreeHouse earnings-per-share growing to a range of $2.32 to $2.37 per share in 2010. Please note that this improvement in earnings is inclusive of the incremental ERP costs; and it reflects the higher and normalized effective tax rate for next year and also assumes an increase in the shares outstanding in 2010.

All considered, we see 2010 as another year of solid earnings growth for TreeHouse.

In regard to the Sturm acquisition, we are progressing as planned with the acquisition. We still expect the transaction to close late in the first quarter so we will see the full effect of Sturm in our results, beginning with our second quarter. Still, these estimates are dependent on a variety of factors including the timing of the transaction closing, valuation estimates and market conditions at the time of closing. We will update the acquisition guidance after the transaction closes.

At this time, I will recap our previously disclosed estimates relating to Sturm. First, we expect their full-year results to be accretive by $0.38 to $0.40 per fully diluted share so our unadjusted results would be increased by about $0.27 to $0.30 based on a late first-quarter closing.

This is before considering the normal gross margin adjustment that results from writing up acquired inventories to fair value. This write-up effectively eliminates gross profit until those acquired inventories are sold.

We expect this accounting adjustment will negatively affect the accretion by $0.08 to $0.12 in EPS depending on the level of inventories at the time of closing. This inventory adjustment will only affect the first two months of results because it is based on how the inventories turn over. The later months will not be affected by this adjustment.

Further, most of the transaction costs will be expense as incurred under the new accounting rules. We expect these costs will be in the range of $0.20 to $0.22 per share and include legal, accounting, investment banking, valuation and certain financing costs. These costs will be expensed mostly in the month we close, with some minor costs expected to spill into the first two months after the transaction closes.

In summary, the transaction should add $0.38 to $.40 in accretive earnings per share on a full-year basis and $0.27 to $0.30 for the partial year under our ownership. Those results will be further reduced this year by the one-time inventory adjustments and transaction costs of $0.29 to $.32 a share, resulting in close to breakeven on total reported earnings in calendar year 2010. Now I'll turn it back to Sam.

Thanks, Dennis. I will close our introductory remarks with a summary of our progress on the Sturm acquisition and our plans for the upcoming debt and equity roadshows.

Regarding Sturm, the business continues to perform very well with topline growth and bottom-line margins consistent with past performance and our acquisition model. We are on track to close the transaction in March.

The high yield and secondary equity markets appear to be highly receptive to our anticipated $500 million offering. Although we budgeted no year one synergies, we have unearthed promising near-term sales and savings opportunities.

Our TreeHouse and Sturm teams are highly compatible and collaborating openly on a shared agenda of expanded distribution of powdered beverages and hot cereal.

We expect to close the transaction next month and will update you on our plans thereafter to expand the Sturm base of business to all branches of our TreeHouse. Stay tuned. This chapter of the TreeHouse story should be very special indeed.

On a closing note, we will shortly undertake a roadshow to market TreeHouse securities to be issued to finance the Sturm Foods acquisition. For those of you who will miss our presentations, our message is clear. TreeHouse, which has posted 25% compounded growth in earnings and operating cash flow since its inception, is expanding into two mega categories of private-label foods.

Sturm Foods, which has combined private-label category leadership in two $1 billion plus categories with unrivaled technology and innovation, is the ideal partner for TreeHouse. The combination of TreeHouse's scale and Sturm's growth will increase our cash flow by one half, add double-digit accretion to our earnings, expand and diversify our investor base, all the while maintaining prudent leverage and coverage ratios. Hell, even I could sell this deal.

Lauren, we will now open the lines for Q&A.

(Operator Instructions). Bill Chappell with SunTrust.

Good morning. Just first on business for 2010. Just trying to understand, you talked about Food Away From Home being weak. Maybe you could give a little more color. You are coming off a pretty decent number in the fourth quarter. Obviously the foodservice business has had a pretty tough year so I think the comparisons get a little bit easier. How bad should it be or are you seeing any signs of recovery there?

We are seeing signs of recovery. You know I think -- and as we were building the 2010 plan for Food Away From Home which was -- we were building it early in the fourth quarter, I think we are probably more optimistic about Food Away From Home now than when we constructed the plan. So while the numbers are -- we are cautious about the state of the industry, but we are optimistic about what our potential is for this year.

And just again on that same vein, I can't say I have a great idea how to model Industrial and Ingredient business because it is so lumpy. How should we look at that coming off of the fourth-quarter number?

Lumpy. It's a tough -- and I will let Dennis comment. It is a tough business model because in it, it's not -- while the largest component is our powder ingredient business, there is a lot of Co-Pack business in there that we really don't control the sales of, and that creates a lumpiness.

On the other side, the profit operating income contribution of that co-business is modest at best. Dennis, do you want to --?

Yes. And Bill, as the Industrial side is one highly tied to Food Away From Home in the Powder side -- and that is the segment that has a lot of pass-through contracts on input costs so you see volatility in the topline as well, which tends not to go to the bottom line because, again, it is pass-through. So we can maintain the margins, but we see that lumpy topline.

So as David said that contributes to the up and down. As we found this year, though, really focused on our margins we did quite well there. And with the drop in Co-Pack business, that actually resulted in a richer mix of Industrial sales which certainly helped the overall margin percent.

Great and then just one last one. I just want to make sure I understand that when you are talking about this term accretion for this year, both the $0.27 to $0.30 of actual and then $0.38 to $0.40 on pro forma, is that including the $0.20 to $0.22 of investment banking and other fees and maybe $0.10 of inventory writeout?

No. Those would be the run rate numbers and the other items represent roughly $0.29 in one-time costs. So on a full-year basis, we would expect the EPS to be basically zero for the addition this year, all because of those first-quarter costs, those one-time costs that will lead up the nine months' pro forma accretion.

And then on ERP, I think I got the number that you're going to capitalize this year. Did you say what you were going to expense this year for the ERP implementation?

Yes. We expect it to be in the range of $3.5 million to $4 million which is basically eating about $0.07 in EPS.

Great. Congratulations on the quarter.

[Andrew Lazar] with Barclays Capital.

Good morning, everyone. So just a couple of things. One from an overall industry perspective.

I think you talked about topline in 2010 around 2% or so, obviously better in, I guess, retail and also a little bit by industrial. But what are your thoughts around your expectations around the topline for US retail? Because I am trying to get a sense of, if you continue to think you will outperform from a private-label perspective, where your sights are from an overall grocery industry growth perspective for the year?

I think we are looking at about 3 to 4% topline. There's very little, if any, pricing assumed in that. And we will see, we are having good momentum on pickles because of the restructuring and our focus on what we refer to as strategic customers.

Salsa continues to do well and I think salad dressing continues to do well. So I think it is good growth across the majority of the portfolio.

Then in the quarter, obviously, volume overall or volume in US retail accelerated sequentially a bit. But you had, in the third quarter you had something like 8% pricing and then in this quarter it looked like pricing was down a bit. And you did get the 1% volume acceleration sequentially.

But I'm wondering if you thought that trade-off you know what pricing sort of came down by, relative to the last quarter and what volume accelerated by was what you were looking for or if it was not as great as it could have been?

Yes. The actual pricing at retail for the quarter is going to come in at under 1%. So we were basically lapping all the pricing that was taken in 2008. So it's really -- what you're seeing there is predominantly volume and some positive mix.

I guess I'm just getting a sense of -- and I know the whole industry is dealing with this, but as the industry and as you guys have lapped a lot of the pricing, did you necessarily expect the consumer to react more positively from a buying perspective? Or is that just being somewhat nave on my part, given where the consumer is at right now?

Andrew, I would never accuse you of being nave. But I think it's just we went through that period of incredible price inflation. It is stable now. And what we're seeing is the consumer continuing to respond very well to private label.

As I pointed out in the fourth quarter for those 92 categories, [physical] volume was up north of 4.5% on top of 8 plus something percent a year ago. The category continues to do very, very well. And we like the price environment we are in right now. That stability really allows us to focus on going after sales wins, as I highlighted.

In 2008, we spent all of our time chasing pricing and in 2009 we were able to put a lot of effort on going after the big sales wins. And those sales wins started coming in, in the -- really strong for us -- in the second half of the year, such that our fiscal volume year over year in the second half was up north of 500 basis points versus the first half. We are very encouraged by that.

Great. And then, the overall North American Retail Grocery EBIT margin, at least for the year, was starting to approach sort of 16% or so in '09 and, obviously, you are looking for some expansion on that going into 2010. I guess, just from an absolute perspective, that's kind of in and around where some branding manufacturers' margins might be on the EBIT line.

So I'm just curious, just your commentary around that and sustainability at that level?

Yes, Andrew. One of the things we've got going for us is obviously, despite the margins being nice there, we still have a significant room to improve on gross margins. We're in that 23% which, obviously, we see opportunities so we will continue to focus on that.

Overall, though, the -- what we continue to see is the opportunity for margin enhancement, not just through efficiency, but through mix as more and more retailers are focusing on more premium offerings, which are not only more margin for them, but more margin for us. So as the category dynamics change, we see opportunity.

Thanks. Last quick thing, Dennis? Did you say that your core underlying TreeHouse guidance, X Sturm, includes the higher share count that you will have because of Sturm?

Yes, it includes the higher share count. It includes the roughly 36% tax rate, which is an increase from this year and includes the $3.5 million to $4 million in ERP expenses.

Thanks very much.

Akshay Jagdale with KeyBanc Capital Markets.

Good morning. Congratulations on the quarter. Just regarding guidance for 2010, you had a pretty good 4Q. I think it beat most people's expectations even on the operating line.

Could you just talk about why you didn't raise guidance and maybe even talk to the range that you have? I mean, when I look at 100 basis points margin expansion, 2% topline growth, clearly we get to the top end of your guidance range. So just trying to get a sense of variability there, what you are worried about when you go into 2010 that could make you feel not so comfortable about the top end of that range?

I think it's too early in the year for us to make any changes and I think if -- we will be back with you in May as we see how the first quarter shakes out. How we are looking with Sturm, how the whole business comes together.

You know as I pointed out, Harry Walsh and his team have been out literally touring -- I refer to it as the Where's Waldo Tour, visiting every plant. And I think at the end of this quarter we will have a better sense for where we are.

We are -- the way the fourth quarter finished, there wasn't one thing that stood out in terms of either topline or by a segment or a channel. Everything just a little bit did a little bit better from an operating perspective.

So there isn't that one event that we can point to that we can say is sustainable. But, again, but it's just a little too early for us to want to move on it, but we are very encouraged.

I second that. I think our history has been -- even the last two years we've had some very good first quarters and we tend not to adjust that guidance until we get into the year. Obviously, we are very happy with how the fourth quarter ended and quite comfortable with our guidance range. And as David said, would love to provide a great update in May.

And just to -- that's very helpful. To that point, can you give us a little bit more color on the operational efficiencies that are going to drive the margin expansion next year for your base business? I'm assuming some of that has to do with the systems you put in place, but if you can just give us some color on that that would be helpful.

Yes, the -- first of all on the systems, the project has kicked off, but the implementation we are expecting in the other turn on will be February 2011. So the systems won't drive that, but as David has mentioned and Harry Walsh, the President of our Bay Valley Foods Operations, have focused on is that center of the P&L.

And we are really looking at factory efficiencies. We are looking at a big event -- is purchasing and not in terms of just commodity cost changes, but we have really stepped up our purchasing team for it and I think David can talk more about that.

Yes. Those are the three -- there are three big areas. Procurement we have on both raw materials and packaging. We have a much better team in place now to go after these opportunities. And we've really identified and are well into the implementation of significant packaging and raw material savings.

As I pointed out, Harry and his team have been traveling all over the place, really driving through plant by plant, line by line on how we improve our conversion rates. And very important for us is our inventory management and reducing our levels of unsellable finished goods, etc.

So it is a very aggressive program. When you look at it as a percentage of cost of goods sold, it is north of 3%, when you look at our cost of goods sold for 2009, so it is an aggressive program. And it is really internally within the Bay Valley organization probably the number one initiative for this year.

That's helpful and one -- just last one on just overall trends within retail as it relates to pricing, etc. I mean I think Andrew talked a little bit about elasticity and things of that sort, but can you just talk a little bit about the environment you see at retail from a private label perspective, given the backdrop that we have on the consumer side? And just talk a little bit about how it was going to 4Q and then what you see into 2010 and if you could focus on pricing that would be great.

Sure. What we saw in the fourth quarter when we looked at our legacy Bay Valley, there were five major categories that we track through Nielsen and we looked at price gaps for the fourth quarter of '09 versus the fourth quarter of '08.

There was virtually no difference in any of those gaps. And they tended to be in that 20 to 30% range and, year over year, there might have been 100 or 120 basis points change plus or minus versus a year ago. So in fact it has been quite stable. And I think we are expecting that it will continue to be stable this year. So it's a good environment from us.

As I pointed out, in all of those categories with the exception of case share in salad dressing, where our case share was flat versus the year ago, our case share and dollar share in every category grew without a change in our price gap. So the environment is really -- continues to be in our favor.

Thank you.

Lauren, this is Sam Reed. Before the next questioner I would like to weave together some comments on the various issues that have come up.

First of all, with regard to 2010, in the eight retail private-label categories that are the core of our strategy, we are including the two Sturm categories. We are forecasting unit sales increases in all eight of those. And they range from 2.2% to 6.4% on the Bay Valley category and higher numbers at Sturm.

With regard to the overall performance, while revenues were -- grew only 1.7% on a real basis, you have to, in the fourth quarter, look at infant feeding and the Canadian dollar. I'm very pleased to see that our core private-label unit volumes for the category grew by 3.2% which was a very strong performance.

It is interesting to note that although prices have been soft in certain businesses, that the price gaps and that is the critical measure that we watch are relatively constant across the board. And with regard to price elasticity, our relative position to the brands is still quite good.

Further with regard to looking into pricing and margins in the next year, we have in a continuing drive for productivity and purchasing budgeted variable cost savings of over $46 million in improved efficiency for the coming year, much of which will hit our private-label margins. And then, lastly, in contrast to concerns and some other parts of our -- out of the greater food world, where there are now greater concerns about input prices increasing, particularly on branded foods that are affected by dairy and other matters, our current outlook for our business is that, once you consider the forward positions we have taken, our hedging programs, and our cost reduction programs and we are looking at the aggregate cost of our inputs to be relatively flat and not a threat to our margins as input cost inflation has been in the past.

And I hope that is helpful to those of you who are all asking individual questions around the central issue here. And Lauren, I will take it back to you for further Q&A.

Thank you, sir. Our next question comes from Ken Goldman with JPMorgan.

Good morning, everyone. First of all a question on the -- Dennis, the $0.08 to $0.12 that you mentioned that's nonrecurring as part of the -- I believe all non-cash cost of the acquisition. Will you call those out in detail as you do all the other non-cash items on your back page of your press releases?

I will do that. We've done that for the last few acquisitions as well and this is really the -- we are required to revalue and [acquirees] finished goods to almost net realizable value. So effectively what happens is as the finished goods is sold, you get no margin and once it leads through, typically in one to two months, then margins are back to normal.

So I will call that out as an unusual item and that's what that $0.08 to $0.12 estimate is. And it is a fairly wide range only because it's dependent on exactly what the inventory levels are at the time of acquisition. So --.

I've gotten a couple of questions this morning on what the real guidance is for next year and there's a couple of puts and takes. I imagine that, in your minds, the real guidance excludes that 8 to 12% in costs on a pro forma basis.

On a pro forma basis it would exclude that and if you put it all together including the one times, it would be roughly -- Sturm would be breakeven for the calendar year 2010. Excluding the one times, it would be accretive by about $0.27 to $0.30 for the nine-month period.

Okay, thanks. We are all lemmings on the sell side or at least I am. So when the Company suggests taking it out we often do. So I just wanted to make sure we were all thinking about that the same way.

And then, in terms of new categories, you know one thing -- one part of the story I always found attractive, Dave, was the potential. As you do more business, provide better service to retailers, those retailers will look at some of their smaller maybe less efficient manufacturers and private-label and say, "You know, TreeHouse is so good at category X, maybe TreeHouse can go into category Y for us also."

And that way, you guys could expand without having to spend on an acquisition. I think the classic example may have been going from salsa to perhaps something like tomato sauce where it's a very similar product in terms of manufacturing.

Has any of that happened yet? And if not, I'm just curious where that stands in your mind as a potential benefit going forward?

I think that's a great area and, yes, we have been able to do that. We are now in the pasta sauce business with a premier pasta sauce that we are producing at our San Antonio facility.

And I think one of the -- a way to approach it, Ken, is when we are able to show those retailers, say the supply chain benefits and then what our assets are capable of producing. You put the two together and that opens up the opportunities.

For example, with one very, very large customer over the last six months because of the opening of our Midwest -- a large Midwest distribution center, we have been able to consolidate from seven distribution centers down to one. Now are putting six product lines onto one truck. We have taken our average truck weight from 15,000 pounds to 39,000 plus. We have been able to help that very, very large customer reduce their inventory weeks of supply, improve their in-stock levels and have taken an average of 28 trucks off the highway on a per weekly basis.

Then you combine that with here are what our assets are capable of producing. And in tandem with discussions about where they are going strategically, we really think with very large customers we can launch ourselves in the new categories in a way that we don't have to use acquisitions to get there.

And then one last one if I could sneak it in. I know Harry just got back from his plant to (multiple speakers). What's that?

He's just still has a few more to go.

Oh, he's still out there? Okay.

He's actually here today. (multiple speakers).

Well, I guess I'm curious. I know it's early, maybe it's too early to ask this question, but where do you think you stand in terms of your plants? In terms of, do you need more? Are you thinking about consolidating? Where are you leaning right now so that we get a better sense of maybe some of the capacity utilization there?

I guess I'm asking a whole lot of questions in one, but I'm curious about do you need more facilities? Or do you think it's a better thing at this point to kind of consolidate them?

I think we are very comfortable with where we are now. Last year, we closed one salad dressing facility and invested in a new high-speed salad dressing line at our Northeast plant. We are at good utilization levels. We are not at a level anywhere that would require us to invest in a new plant and we will always look at opportunities to operate more efficiently.

If that leads to consolidation, you know that is one path. But it is not on the horizon, near term. So our focus right now is, how do we get more out of the facilities that we have?

Thanks very much.

David Driscoll with Citi.

Thanks a lot. Good morning, everyone. First off congratulations on '09 and the acquisition. It's fantastic stuff.

But you made a comment just a moment ago about your inflation outlook, but I just want to get you to clarify something. You said it was flat, but did you --? I think you said that that included the offsetting benefit of productivity savings.

If that is right, can you just tell me what the underlying inflation outlook is?

This is Sam. I have said that we expected on our major input costs -- and those are ingredients, commodities, packaging and energy -- that the net effect in our 2010 business plan would be plus or minus zero.

And that included not only the effect of the underlying costs where we are seeing those rights in certain sectors, but also positions that we had taken, already taken on a forward basis. Our hedging programs and the cost savings that I had indicated were $45 million.

I think -- and while the number is important, I think the much more important factor is to consider that what we -- how we have transformed a private-label business here from only several years ago if you will recall the rampant inflation that was, because of the global increase in demands for foodstuffs and energy, we now have a procurement program linked very closely to our sales and marketing effort. And David and Dennis and Harry and myself are intimately involved in both to ensure that we are always taking prudent positions on a forward-looking basis with regard to these inputs. And that, should they spike unexpectedly, that we will be able to move quite quickly and far more nimbly than we have in the past.

And you saw a lot of that result in late 2008 and early 2009.

One point of clarification on the -- when you look at input costs and our $45 million procurement program, about a third of our productivity of the $45 million would relate to procurement.

Okay. I understand. Thanks for all of that color. It is very important. A lot of companies just give the raw inflation number and then productivity is like a different bucket. Other companies have fancy acronyms, but I understand it.

When you talk about -- Andrew asked a question about volumes. I think he was looking at reported volumes.

I wanted to try to -- North American Retail question, just looking at the volumes ex pickles, and as I think I've written your numbers down from your conference calls, it was plus 6 in the second quarter, plus 4 in the third quarter and this quarter ex pickles I think you said just a few moments ago that it was plus 4.

I didn't actually have an ex pickle number for the first quarter, but I think it was a fairly strong number. Can you talk about -- it does seem as if the volumes have slowed a little bit. And I suppose I want to just try the question about 2010 and see is the environment -- you would characterize the environment as a good environment -- but it would be a notch slower than where we were in 2009. Is that a fair statement?

I think on the North American retail volume growth we tend to talk about an ex in branded infant feeding rather than ex pickles. And we have been pretty -- very consistent the last two or three quarters at about a 4% physical volume. And that's in the range of what we are forecasting for 2010, and consistent with the current running rates for private-label case else in the 92 categories that we're tracking.

If I could just make a suggestion, I would love it if you guys put into your press release another table in there that just showed the volumes. It is a key metric.

One more question for you. When you called out in your prepared script that you had significant margin expansion in both pickles and soup and I think you called out just those two categories, almost as if they were extra special in the margin enhancement for the quarter. Can you delve into a few of the reasons why those two categories did so well? And then there's one follow-up on soup.

Sure. On soup I think the margin improvement had -- there were certainly some productivity gains and the flow-through of some pricing that had a positive effect. But frankly a year ago, the margins on our soup business were not particularly robust and so, the year over year is affected by that.

Pickles is really where an enormous amount of effort took place. And some of the key dynamics there are we got out of business with low to negative margin customers. We closed one high-cost pickle manufacturing facility in -- over a year ago.

We were able to pick up new business, large -- with a couple of very large customers with limited SKUs with the type of pickle that helped us to balance off our cucumber crop usage. And all of those things really came together to lead to both that volume momentum in the second half of '09 and that significant improvement in our margins.

At the same time, we did have a good cucumber crop in 2009 which helped those margins as well.

Final follow-up just on soup. I think you also called this one out as the one specific category within your mix that was weak. Can you talk about the category dynamics right there? Why is it weak?

I get this question asked to me all the time. I know we've asked it of you guys in the past, but I would love to hear your thoughts, given that we are in the middle of a soup season. Why isn't this category doing better?

You know I really don't know. I think the marketing for the category has been better this year than last year. It's -- we are finally beginning now to see some marketing that relates to the value of soup as a very good meal at a very good price, rather than just taking prices down.

So I think those questions are best asked of the branded leaders. They are going to have a lot more market research and consumer insight into what is going on. We are very happy with how our business has done. The condensed segment is doing well and our business is moving along as planned.

Great job. Thanks for all the answers.

[Heather Jones] with BB&T.

Good morning. Great quarter. Couple of questions. First, detail-ish one. Going back to the shares question, your 34.4 million shares projected for 2010. That's exclu -- that's before the equity offering for the Sturm acquisition?

That is correct.

Heather Jones Okay. And is that just options and all, but there was a $33.4 million?

That takes into account two things. We typically will do our annual grants in June, and so there's an increase for that and the share price increase is expected to have more options in the money which we'll add to the fully diluted. And we'll always allocate some extra in the plan to be distributed, based on any acquisitions that take place.

So all of that takes us up to the 34.4 for the estimate for TreeHouse alone without the Sturm Foods acquisition.

Secondly did I hear you say that you expect these productivity improvements to be about $45 million in savings for 2010?

I said 46.

I said 45. [That's why I am only COO].

So given that, that you expect all these input costs -- ingredients, packaging, energy, etc. to be net, net flat so basically those are going to be up $46 million, but the net your productivity savings will be flat?

No. Because a lot of those of the productivity initiatives are not within our input cost. It is really within our manufacturing costs. It's in freight. It's in unsellable products, etc., etc.

It's a broad portfolio of the center of the P&L initiatives that are related to far beyond just input cost.

Okay. Well, are those the savings though that you were talking about offsetting some higher cost in certain areas?

Yes.

Finally I was wondering about your pricing outlook. It sounds like you don't expect much meaningful pricing pressure and on the retail side going into 2010. I was wondering what you are anticipating on the pricing side for the industrial export side? I understand your volume expectations for 2010, but wondering, given the cost pass-through agreements, given the lumpiness of the Co-Pack. And but just if you could give us some pricing expectations in Industrial?

The industrial side we expect to be relatively flat. There's a lot related there to the soybean oil with the non-dairy creamer business and we think the combination of where we see the market plus our current purchase positions should have a relatively flat input cost for 2010.

Then my final question and I don't know if I misread it somewhere but I thought I had seen somewhere in the press release about a good cucumber crop helping pickle margins. Did I see that? And if I did how -- I mean was that a significant contribution to margins?

Yes, that was -- it was a good contribution because when we have a good crop we can buy extra cucumbers and we can run our fresh pack which is obviously cheaper for us than to tank or to buy on the market. So, the combination of having a good full crop in the Upper Midwest was really a plus for us. And since going back it's the best crop season we've had since we have been here at the Company.

Great. All right, thank you. Congratulations again.

Jon Feeney with Janney.

Good morning. Wanted particularly to figure out if you are seeing a big difference in volumes and or pricing in your traditional customers, traditional food retailing customers versus some of the nontraditional -- and I just say not to name any customers specifically, but the Wal-Mart/Target type customer.

Because one thing I've noticed in my store checks -- I'll just say which is the source of the question is, I've never seen so much private-label being used as a feature item on end caps. And that is a phenomenon that is almost unique, at least in this market and the other one I checked, to those nontraditional retailers and they are doing something right because they are definitely gaining share in those territories.

So was there any difference in pricing and volume trends, trendwise anyway between the two?

Not really. You know, I -- it really comes down to the execution of the customer strategy. And when you look at someone like a SUPERVALU and continues to talk about significantly increasing their private-label share, reducing their branded SKUS by a significant amount, it's all part of their strategy of using their brands to one differentiate themselves from the retailer down the street.

And, too, when you are at that national brand equivalent or premium products, your penny profit is higher. I think it is just part of the trend that has been underway for 20 years.

That makes sense. I guess one of the things we heard from Dean Foods yesterday, I know it's a very different business, but as one of the downsides of having a product that is becoming more popular, more important to retailers' strategy, particularly if they are using it to drive traffic on end caps and market and whatnot is the tendency becomes to look for price concessions in the manufacturer.

Are you seeing where --? In customers that have featured private label more aggressively and seeing volume go crazy, do you have any conversations where they are now coming back to you and saying they want lower prices?

No. The discussions with retailers on pricing is a fundamental component of the private-label world. You are always going through this, but we are not seeing anything right now that is out of the ordinary. And, again, as we focus in on our fact-based selling there may be pushed back but we can show them that the year-over-year costs are the same. It's not as though we are making that much more money.

Our margins have improved because we finally caught up to where we were a couple of years ago. But it is not as though there has been an enormous shift in the margin structure of the industry on the retailer and the manufacturer.

Great. Thank you very much.

Robert Moskow with Credit Suisse.

Good morning. Just a cash flow. You were very high last year. I don't think you've mentioned what it was this year. How did you finish up?

The way we -- I look at cash flow, Rob, is kind of a bottom-line net, net. And since we use our cash to pay down debt at the end of the day, we reduced outstanding debt by $74.5 million. So we actually had a very good year with cash flow.

Does that mean operating cash flow was what, Dennis? Was it $120 million, something like that?

Operating -- let me. I don't have that at the top of my fingers. Give me a moment. If you have another question I will have it in a second for you.

All right, well, I was going to ask about gross margins too. I mean when you bought the business it was in 2002, it was like a 26% gross margin business. Your gross margin now is 23% in the last quarter and rising rapidly despite the fact that pricing is decelerating.

And since then, I think you've bought a lot of businesses that are actually accretive to gross margin. So can you help us to dream the dream a little bit here on how high gross margins can go, especially now that you bought Sturm?

Our outlook is that as a general matter we expect to continue to post 100 basis points or better improvement on our core business year over year. In the last year, I believe it was 320 basis points and as we move forward, Dennis and I both indicated 100 better and then that is before the effect of Sturm which, as you have seen before, has higher margins than our average.

The key here will be to balance on the one hand the pricing, the productivity savings, the procurement savings, the decisions to enter different product categories and as we talked several times over the past year, that acquisition filtered out is largely category-driven. And what we're looking for are in their aggregate opportunities that will improve the margin structure, primarily looking at that as a -- at the bottom line rather than a gross margin.

Sam, I guess I think what you're also saying is -- are you thinking like you're 100 basis point per year for the next few years just through productivity? Like, if we assume just kind of a benign commodity environment, can you keep getting this 100 basis points per year or is that just kind of (multiple speakers) --?

I think that is the minimum.

Yes. Very good.

On the core business that we have today.

This is Dennis again. The cash from operating activities was about $105 million. We had $37 million in CapEx and then some proceeds from stock options. And that is to about the $75 million change in debt.

so I guess the question there, Dennis, is that's pretty much exactly where you were two years ago in terms of cash flow and yet the earning space here is substantially higher by like $1.00.

Should cash flow be better than this in a given year?

One of the things we had was this was a little bit of an unusual year. If you recall last year, we had a huge year in cash flow with inventories. We really cut them back and were in a more normalized year this year.

So I think you almost have to look at the '08 and '09 combined. I think we are on a nice run rate go forward, but we're a little impacted negatively in '09 because of the very strong year end cash flow in '08.

All right. I will follow up later. Thanks.

Jon Andersen with William Blair.

Thank you and good morning everybody. Couple of questions on Sturm.

Sam, I think you mentioned earlier when you were discussing volume expectations for 2010, there was a range from lower single-digit to mid-single digit with Sturm registering at the upper end of that range. I'm just wondering if you could give us some color on category dynamics there, hot cereal and powdered beverage, and/or Sturm's relative position within those categories that support that outlook?

Let me, Rob, correct one matter and then David will talk about the Sturm business. On our core private-label categories before Sturm, the six major ones that we now track we are budgeting unit increases for 2010, of 2.2% on the low end to 6.4% at the high end of that.

And again that's the existing business. I think we can expect better growth from Sturm. I will ask David to comment on that.

Sure. I don't have all of the access to the syndicated data. I do know for the fourth quarter the powdered beverage category and volume was up a couple -- again this is the major channels and in both of these categories from what we know with all of our work with Sturm is that a very large percent of the category operates outside of major channels.

But the Nielsen data would indicate that powdered beverages is up 1.5 or 2% in volume. Private-label is very strong, high single digits. And in hot cereal, the category was, I think, flat in the fourth quarter and private-label was up a little bit.

But again when we look at the Sturm business and its customer base a lot of it is outside of those major channels. But what we are modeling for Sturm is good, consistent growth for 2010.

And do the -- the outlook for pro forma full-year accretion of $0.38 to $0.40, did I hear you right? That that does not include any cost synergies although you're seeing opportunities there early on?

That's correct. We have not built in any synergies at all in that number nor have we built in any topside distribution opportunities. So that's what we believe is the baseline business.

Terrific. That's helpful. I just have one more. It is a broader question on the mix shift.

We've talked in the past about the opportunity, in private-label, to become more than opening price points and moving up into midtier and premium segments. And I'm just wondering if you could give us an update on what you are seeing there currently and whether that is having an impact on your business today and what you foresee in the future? Thank you.

Yes. It definitely is. I don't have the percentages now that product that would be in the premium segment, but I will anecdotally without saying the name of the customer, this relates to salsa where we really operate in the premium segment of the salsa market. And there's some very large customers that we do not sell any salsa to and we just found out recently that a very large customer has developed -- they're developing a premium brand of center of the store food products and they are taking on three of our premium salsas.

So it's one that takes place over time, but we can definitely see that momentum. And this is the type customer that is not normally associated with premium products.

That's very helpful. Thanks. Congratulations on a great quarter and year.

It appears there are no further questions at this time. I'd like to turn the conference back over to management for any additional or closing remarks.

Thanks again, everybody. David and I, and Dennis and I look forward to seeing many of you over the next several weeks on our road show and then later in the spring to conveying the news of the Sturm closing and our first-quarter results. Until then, thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.