TreeHouse Foods Inc (THS) 2010 Q1 法說會逐字稿

Good morning and welcome to the TreeHouse Foods investorrelations conference call for the first quarter of 2010. I would now turn the call over to TreeHouse Foods

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, anticipate, plans, believes, estimates, intends, predicts, projects, potential or continue, or the negative of such terms and other comparable terminology. These staples are only predictions.

The outcome of the events described in these forward-looking statements is subject to known and unknown risk, uncertainties and other factors that may cause the Company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. TreeHouse form 10k for the period ending December 31st, 2009 discusses some of the factors that could contribute to some of 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 there to, or any other change in events, conditions or circumstances on which any statement is based.

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

Good morning, everyone. Welcome back to our TreeHouse. Our household has now grown to include Sturm Foods with its industry leading positions in two dynamic private label categories. I know that all of you, both TreeHouse investors and observers alike, will hardily welcome powdered beverages and hot cereals to our ever growing TreeHouse portfolio. As David and Dennis will shortly cover in detail, we have opened the new year just as we finished the last; not with a whipper, but with a bang.

While they represent only one quarter, and a quarter does not a year make, the numbers are truly impressive. Operating cash flow or adjusted EBITDA up 40%, powered principally by the legacy TreeHouse businesses X Sturm. Legacy revenue growth of 5% propelled by an across the board unit sales growth in private label, food service, industrial and Canadian markets. Margin gains of almost 220 basis points generated by productivity and procurement programs without the benefit of pricing. Unplanned performance of Sturm in its first month consistent with its 2010 projections of annualized revenues and EBITDA.

And lastly, pro-forma leverage of 3.3 times, lower than budgeted, driven by more profitable operations and a more favorable secondary equity offering. This outstanding start to the new year is a substantial continuation of our excellent 2009 performance. As a reminder, last year's adjusted earnings per share and operating cash flow and last year excluded acquisitions, posted gains of more than 35% and 20% respectively. Our first quarter results, again, demonstrate that our fundamental go to market and supply chain strategies are continuing to drive superior growth and value, even as markets evolve and the economy recovers.

Before turning to David and Dennis, please allow me to remind all of you of the fundamental tenants of our core customer brands and custom product strategy, as follows. Private label will lead long-term food industry growth. Our consumers are highly satisfied with customer brands and their value without compromise, proposition brand equivalent quality, variety and convenience. Our customer differentiate themselves competitively and generate greater profitability enhanced consumer loyalty in marketing their own brands. Private label gains come at the expense of the weaker secondary and regional players. Not those industry leaders committed to consumer satisfaction, innovation and advertising. The diversified portfolio of attractive private label categories promotes economies of scale and mitigates risk.

Lastly, a diversified distribution base across all channels including food service, promotes growth and reduces business cycle volatility. With that short tutorial and private label 101, as taught at TreeHouse University as a reminder of our strategic course, I'll now turn to David and Dennis to guide us through the quarter's performance and the year's outlook.

David?

Thank you, Sam and good morning. What I will do the cover is overall operating performance of the business, plus touch on our first two months post the Sturm acquisition. My comments will exclude the effect of Sturm, so that I can provide you with a good feel for the performance of the legacy business. Dennis will include the Sturm results in his comments. The headlines are as follows, In a nutshell, across the board it was our best quarter as a public company. Total revenue was up 5% and direct operating income increased 25%.

All three segments, North American retail grocery, Food Away From Home and industrial and export showed unit growth, revenue growth and profit growth versus last year. The private label volume momentum that we experienced in the second half of 2009 has continued into 2010, with very good growth in almost all of our categories. Our Food Away From Home and industrial and export segments had excellent results, as we were beginning to see the growth in the Food Away From Home industry and our out performance industry trends in 2009 continued into 2010.

Let me start with North American retail grocery, excluding branded baby food sales, revenue was up 5.6% with direct operating income up 18.5%. We did have a modest benefit for Easter with all pre-holiday shipments taking place in the first quarter of this year versus a carry over into the second year last year. The 5.6% growth is consistent with the growth we saw in the second half of 2009. What I'm really pleased with, is that we were able to achieve that volume driven 5.6% growth, despite a 3.7% decline in our soup business, which faced unprecedented price competition from the branded players.

I'll discuss the soup category in greater detail in a few minutes. We had solid growth in the rest of our portfolio, led by salad dressings, salsa and pickles. With the addition of hot cereal and sugar-free beverages, we have continued to expand our portfolio, such that every day we become less reliant on any one category to drive our performance. Five years ago we had two categories that made up 90% of our retail business. Today, with Sturm, none of our key categories make up over 20% of our retail business. With the exception of soup, all categories are doing well and private label continues to do well. The salad dressing, pickle, salsa and non-dairy creamer markets all showed unit growth in the 2% to 5% range. We held or gained share in all of the categories.

Now let me turn to soup and then I will make a few comments about the private label market in general. The soup market was down less than 1% in the quarter, but the competitive dynamics were remarkable with the brands reducing prices being increased merchandising. Branded pricing dropped between 2.5% and 6%, significant increases in percent of cases sold on promotion. Private label held share with prices equal to or slightly ahead of a year ago. In the most recent four weeks ended in mid April, branding merchandising levels were well above a year ago, prices were well below a year ago, yet branded unit sales declined. I data served a lot of categories and bread and soup pricing is far more aggressive than you see in other categories.

Where we felt the biggest impact on soup pricing, was with one very large retailer, not measured by Neilson or IRI, or prior to Easter, we saw some branded soup prices below private label. I'm not sure how the math works on that. The good news is, that pricing ended -- that pricing ended just after Easter. In terms of the industry, private label continues to do well. Based on the data we have for 92 categories, we estimate that private label volume was up about 3% in the first quarter on top of 10% growth in the first quarter of last year.

There is definitely been an increase in branded cases sold on promotion, but price gaps are pretty flat and private label shares are stable. I suspect that the losers are the tertiary brands that are being squeezed between the market leaders and private label. We are also very encouraged by the growth of non-measured retailers who are very focused on building their own brand such as Aldi and Costco. Over 50% of our retail business is done with customers who are not measured by Neilson and IRI, and many of these nontraditional retailers are very focused on their own brands. A disproportionate share of volume growth is from these non-measured customers.

I know that the brands are championing that they are back and that private labels run us over. But as I said many times, our model is based on private label growing at twice the rate of brands, which it's been doing for 20 years. What's important is that the level of satisfaction with private label is at an all-time high. One reason and well publicized study, indicated that 80% of consumers believe that store brands are as good as or better than national brands. If brands really want to regain their share and have it stick, they need to do it through innovation and advertising. Deep discounting never pays off long-term.

I remember 30 years ago when as a young marketer at General Foods my boss told me, David, if you have nothing relevant to say, you will end up giving it away. I don't think things have changed in 30 years. Our Food Away From Home channel had a very solid quarter, with revenue up 8.1 opinion and direct operating income up 34.5%. We are very encouraged by what we are seeing in the industry. NPD data indicates that restaurant sales in March were up 1% versus year ago.

Cisco reported 1% growth in the first quarter and are looking at 3% in the second quarter. And there is a level of optimism throughout the industry that hasn't existed in almost two years. As we did last year, we are outperforming the Food Away From Home market, as we continue to increase account penetration, leveraging our expanded portfolio. This rebound in the Food Away From Home industry is also having a positive effect on our industrial and export business, where revenues were up 4.6%. We are seeing a good rebound in our ingredient powder volume, which makes up a large percent of the business, whose customer base is in the Food Away from Home Industry.

Direct operating income in this segment grew by 69%, as our input costs and pricing re-ballanced to a normalized rate versus last year. While the top line results are certainly driving operating and income growth, it is also our attack on the center of the P&L that is paying big dividends. With gross margins in the low 20s, the math is pretty simple and compelling in terms of making, attacking the center of the P&L a strategic objective versus a cost reduction effort. Last year, we invested millions in expanding our salad dressing capacity and becoming a low cost producer. This investment has enabled us to win new business and significantly improve margins.

This year, we have undertaken a major study of our entire approach to outbound freight that will allow us to reduce our freight costs by a few million dollars with no disruption in customer service. These are the kind of efforts that will allow us to expand our margins and become more competitive in terms of going after new business. Now let me turn to Sturm. While only a few weeks of results hit our books, we are very pleased with the progress we've made.

Beyond the fact that the business is meeting our expectations in terms of results, we are making great progress on integration opportunities that will begin to bear fruit as we exit 2010. Our procurement teams are working on a long list of raw material, packaging and freight opportunities and our operation and engineering teams are working on manufacturing efficiency opportunities. On the sales side, later this quarter, we will integrate all Food Away From Home selling into the bay valley organization. Sturm never had the resources to fully exploit this channel, and we have a sales team that is driving over $300 million worth of business.

On the retail side, while we have separate go to market teams, we are working together in Canada and with select U.S. customers where Sturm does not do business. As I mentioned on a number of occasion, the selling process in both retail and Food Away From Home is sometime painfully long, thus we can't expect any big wins that will affect this year, but we are very confidence in our prospects for 2011.

I'll now turn it over to Dennis.

Thank you, David. As David covered the legacy business, my summary of operating results will focus on the consolidated results, including the benefit of Sturm Foods to our results during the month of March. As many of you are aware, we completed the Sturm Foods acquisition on March 2, so our results include a little less than a full month of their operating results, the vast majority of which are included in the North American retail grocery segment. Revenues increased 11.7% compared to last year as sales in the legacy business grew by 5% and Sturm Foods added 6.7%. As David indicated, we saw legacy unit sales growth in all three of our operating segments.

Gross margin were very strong in the quarter improving to 22.4% compared to 20.2% last year. As legacy margins improve due to a favorable sales mix and operating efficiencies. Our retail direct operating margin improved from 14.9% to 16.1%, due to continued improvement in soup and salad dressing margins as a result of operating improvements. In the Food Away From Home segment, we saw sales and margin improvements in our legacy business as well. We are starting to see a comeback in the Food Away From Home market and we are taking advantage of the cross selling opportunities in salad dressings and salsa.

The Sturm Foods acquisition added 1.9% of growth, bringing the total segment growth to 10%, compared to last year's first quarter. Direct operating margins of 12.9% rebounded nicely from the decrease we saw in the first quarter last year. Pickle margins are the primary reason for the increase, along with improved margins in our cheese business. Direct operating income in the industrial and export segment increased from 11.5% to 18.8%, as the combination of higher sales, resulting from improvements in the Food Away From Home market place that many of our industrial customers participate in, and stabilized pricing and input costs compared to last year, led to improvement in margins.

Total selling distribution, general administrative expenses in the quarter were $55.3 million compared to $41.6 million last year, with the increase due primarily to $6.5 million in transaction costs associated with the Sturm Foods acquisition. Excluding the transaction cost, total expenses would have been $48.8 million this year, a 17.3% increase from last year. The increase is almost entirely due to the growth of the Company as total SDG&A , as a percent of sales, increased slightly to 12.2% of net sales compared to 11.7% of net sales last year.

Other operating income expense was a credit in the quarter, as we transferred the post retirement benefit obligations from one of our manufacturing facilities to a Union supported multi-employer plan. This move resulted in a one-time non-cash gain of approximately $2.4 million for the reduction of our benefit obligation. Interest expense in the quarter totalled $6.8 million compared to $4.5 million last year. The large increase was due entirely to the new high yield bonds and additional revolving borrowings, that were used to partially fund the Sturm Foods acquisition. This resulted in our quarter ending debt, increasing to $922.3 million compared to $402.5 million at December 31, 2009. Our effective tax rate for the quarter was 33.7% compared to 37% last year.

This year's rate was low in the quarter, due to lower taxable income resulting from transaction costs associated with the Sturm Foods acquisition. In addition we had a small true up to tax expense, resulting from the final audit of our 2007 tax returns. Last year's effective rate was slightly higher due to a foreign exchange tax charge that was not incurred this year. In total, our earnings for the quarter were $16.3 million compared to $12.7 million last year. With our average fully diluted share count increasing to 34.6 million shares as a result of the secondary offering we completed in the first quarter, our fully diluted earnings were $0.47 a share compared to $0.39 a share in the first quarter last year.

After considering the one-time items associated with the Sturm Foods transaction, the non-cash gain on the settlement of certain post retirement benefit obligations and other items as discussed in our press release issued earlier today, our adjusted earnings per share increased by 43.9% to $0.59 per fully diluted share in 2010 compared to $0.41 per fully diluted share in 2009.

In regard to the outlook for the balance of the year, I'd like to give you some updated figures now that we have the Sturm Foods acquisition completed an our purchase accounting adjustments have been finalized. The major adjustment to the underlying guidance numbers is in regard to amortization expense. We have increased the amount of amortization expense, because we have more goodwill being allocated to intangibles, that was originally estimated. We now expect consolidated amortization expense to be in the range of $24 million to $25 million for the year.

Second, we expect total depreciation to increase to a range of $44 million to $45 million for the full year, to reflect the addition of Sturm Foods and to also reflect the reevaluation of their fixed assets to fair value at the time of the acquisition. In regard to interest expense, we expect full year interest expense to be approximately $50 million. This takes into account the funding of the Sturm transaction on March 2, and our expectation of higher interest rates in the back half of 2010. As I noted earlier, we are expecting our full year effective tax rate to be in the range of 36%. This reflects the negative effect of higher U.S. sourced income, but also net of additional tax deductions resulting from the transaction costs.

Finally, our very successful secondary offering was made an average share price of approximately $43 per share, compared to our original estimates at $37.50. This results in fewer shares being issued than we had planned. For the full year, we expect our average fully diluted shares outstanding to be 36.2 million shares. That is the basis for our full year EPS estimates. Terms of the full year guidance, we are very confident that 2010 will be another good year for TreeHouse.

Despite the increase in depreciation and amortization beyond our original expectations, we believe the very good results in the first quarter bode well for the year. As such, we are raising our full year guidance from our original estimate of $2.66 per share to $2.65 to $2.70 per share. Again, note this increase takes into account the higher than planned depreciation and amortization expenses associated with the Sturm Food transaction and therefore reflects our view of continued improvements in our underlying business.

Sam, I'll now turn it back to

Thank you, Dennis. As all of you can tell, we are quite bullish on our prospects for 2010. Even as the economy begins to recover and input costs start to creep up. Our fundamental strategies are well aligned with a macro trends of the food and beverage sector. Our go to market strategy is simultaneously expanding, upgrading and diversifying our portfolio of product categories and distribution channels.

Our supply chain strategy is expanding margins to compliment top line growth. Our tactical execution in the market place and manufacturing distribution infrastructure is steadily improving. Lastly, our cash flow capability and capital structure support continued growth via acquisition. On this last point, we've recently conducted a thorough review of our acquisition strategy and context of the economic recovery and reopening of capital markets. After sifting through reams of data and various forecasts, we have concluded that conditions are ripe for the further expansion of our TreeHouse.

Externally, the M and A market for midsize CPG deals, has revived with both sellers and capital readily available. Internally, we are performing well, with a keen eye on input costs, the center of the P&L and Sturm's rapid progress as a TreeHouse unit. Accordingly, I'll reiterate my earlier comments, that it is our objective to expand again into yet another highly attractive value-added dry products category. We have the where with all and capital resources to conclude another transaction of at least $200 million by year's end.

Our acquisition filter and operating experience with value added private label categories point the way to the next high growth companion of premium salsa, salad dressings and other high profit, high growth categories. While we must avoid any particulars about describing the targets, the specific targets that are within our sights, which you should know, that we are once again on the hunt.

We'll now open the lines for questions and comments.

(Operator instructions). We'll take our first question from Jonathan Feeney with Janney Montgomery Scott.

Good morning, thank you very much.

Good morning, John.

Sam, I wanted to follow up on the $200 million number you threw out there. Are we talking about, I guess, is that number calculated based on potential borrowing capacity IE intending to do any further acquisitions that you thought were appropriate solely with debt? Or is that keeping the secondary you just did and that availability in mind?

That number, Jonathan, is based upon the existing revolver agreement and what we see as available capacity based on our internal forecast for cash flow over the next three quarters. Clearly we could do a larger deal than that with more borrowing, but that reference point is for an all-cash deal, all-debt financed within the existing capacity. Within the existing facility.

Earlier in the call I think David mentioned, price gaps being relatively flat despite increased branded promotions. I'm kind of interested, because it looks like you had a positive net price across the business. Is it the case that -- is that a mix factor within the retail business and that price came down a little bit for you guys? Could you just give me some more detail there, David?

Sure. Jonathan, our pricing year over year in retail was basically flat.

Okay. So that gap between the two units you told us in the sales is mixed then, I guess?

Yes.

Okay. Perfect. That's very helpful. And finally, could you just give us a little update on the future of the infant feeding business? How long -- how much further before you get to a base that's, if any, that you think is acceptable? I mean, it looks otherwise the unit growth in your other retail categories is quite impressive.

The branded infant feeding business has been declining for a few years, but we have a very large co-packing infant feeding business for a major organic brand that is doing well and growing nicely for us.

And so it's the branded piece that's just being deemphasized?

Yes.

Will that deemphasis, I mean eventually, take you to the point where there isn't a branded business? What's the plan for that?

I think if the rate continues to go the way it is, at some point we will face a decision on it. But not at this point in time.

Great. Thank you all very much.

We'll take our next question from Heather Jones with BB&T Capital Markets.

Good morning, gentlemen. This is actually Brett Hundley standing in for Heather. How is everyone.

It does not sound like Heather.

I guess my first question -- clearly there's a more bullish outlook here as a function of many reasons mentioned on this call due to the guidance increase, Food Away From Home, industrial and export, and Sturm and private label holding ground, etc. So I'm wondering if we can kind of split the P&L between sales and margins, and if you guys can talk a little bit about where you see more opportunity as we move forward, top line or the cost side margins?

Well, I think we are very pleased with the rebounding that the -- the rebound that we are seeing in the Food Away From Home industry and the effect that it has on our Food Away From Home business, as well as our industrial business. So we are anticipating slow steady growth there and consistent low single digit growth in our retail business. And we continue to focus in on what I refer to as attacking the center of the P&L. So it really is that, slow steady top line growth continuing to drive improvements in the cost structure and at the end of the day when you combine the two of those you get above average performance. So there's nothing -- there's nothing that stands out as being the key driver. It was good performance across the board.

Okay. And then if I guess speaking of -- if I recall correctly, I think you guys had initially laid out volume growth target for retail around 2% to 3%, if I'm right. This quarter looks like volume at retail was at plus 2.8%. I think you said it benefited modestly from Easter. Was it just really modest and thus you're still in that range? Or do you have an updated volume guidance for that segment?

No. I think that's pretty consistent. Again, that volume growth of almost 3% included the decline in the units associated with infant feeding. But that kind of growth is what we targeted for going into the year and that we are targeting for the rest of the year.

Okay. And then one last one, if I may, just staying with retail. You talked about the growth there, ex-infant feeding and soup being down, sort of the segment's picking up pickles, dressings and salsa I was just wondering if any one area was stronger than the other there, if any one area gained new distribution? If you could just speak to that a little bit.

I'd say that those other segments all grew very well, I think salsa may have led the charge. I don't have the exact year over year growth in front of me. And it's a combination of both, better sales with a customer base than we have and certainly some new distribution. I can't talk about the specific customers, new customers that we are doing business with, but it certainly has had an effect on both pickles, salsa and salad dressing, in terms of generating new business.

Yep. Okay. Well, thanks for your time.

Thank you.

Thank, Brett.

We'll take our next question from Akshay Jagdale with Keybanc.

Good morning. Congratulations on the quarter.

Thanks, Akshay.

Couple questions regarding the base business, if I may. In my estimate, Sturm added about $0.04. I didn't break that out specifically. But can you just tell me what's going on with the base business this quarter and what your outlook is on the margin side, how you did and where those productivity initiatives are coming in relative to what you've said, you were able to and will be able to do going forward?

Yeah. The first, we don't break out the Sturm on an EPS, Akshay. Once it's been integrated, it's very difficult to pull out all of the components from an EPS side. But in terms of the base business, we talked about 100 basis point margin improvement. Obviously, we did very well this quarter. The comps were better. We've continued sequentially some nice growth. And that focus, as David mentioned, is all on really operating improvements, pricing was basically near zero in terms of year over year comparison to last year. So that margin improvement isn't a price issue. It's really the focus, David, in the operating teams have put on our center of the P&L manufacturing in a particular flight.

That's helpful. And can you, in a sense, you've been integrating Sturm. Can you talk about the categories that Sturm is in and what you've learned and maybe give us a sense of what's going on in terms of pricing and promos, etc, in those two segments that they're in?

Both categories are doing well. I'd say that powdered beverages are doing better. I think that is because the brand leader, Kraft Crystal Light, is spending a lot of money in innovation and advertising which I mentioned in my comments, those are the things that really drive a category and really drive branded share. So that category is doing well. And the private label is doing very well on that category. Hot cereal category, I'd say the volume is stable. There has been a tremendous amount of marketing activity in the ready to eat. And I think that's kind of held the growth rate of hot cereal to flat or slightly above a year ago when you look at the combination of measured channels and non-measured channel and private label continues to do well. We're not seeing in either hot cereal or powdered beverages significant changes in year over year promotion activity or pricing. Certainly nowhere what we are seeing in the soup category.

That's great. And one last one just more qualitatively. Again, related to Sturm, I mean, I know you guys have done a ton of due diligence before you bought the business, so you were very familiar with it, but have you learned anything that's impressed you and also anything that you learned that's sort of not been as good as you thought?

I think what we have learned is that we have a -- we have a better management team in place at Sturm than I think we envisioned from the beginning. Both from the CEO, the CFO and the head of Operations are very smart. What I refer to as disciplined entrepreneurs. And they are collaborating and communicating extremely well with us an our -- we are learning from them many things, especially in the area of lean manufacturing a lot of the efforts that the put into place at Sturm. I would say from a category and business side, the business is panning out the way we forecasted based on our due diligence. But our feelings about the management team continue to grow. So we're very pleased.

Great. Thank you. I'll pass it along.

Ok.

We'll take our next question from Ken Goldman with JPMorgan.

Good morning.

Morning.

So, EPS guidance for the year still includes no Synergies from Sturm, is that correct?

That's correct. The Synergies that David indicated that we're working on, we hope to see some of that potentially into the fourth quarter. It takes a little time. You mention those are operating items but they're not significant enough to be driving an EPS impact at this point.

So if these Synergies do come through logically growth in 2011 would be all else equal higher than normal because of these coming on line, is that fair?

That's correct. But again, keep in mind that a lot of what we've talked about here in the freight and transportation side, our businesses have been substantially involved in glass, plastic and tin can products, and they are not in any of those. So we don't see the type of Synergy opportunities we saw, for instance, with E.D. Smith, where there was a lot of overlap and we were able to make some great strides on the purchasing and input pricing. It's quite a bit different here, so we're working. They'll be there but, Ken, they're not going to be those big magnitudes we've seen in prior acquisitions.

Right. That doesn't mention the top line Synergies which should exist, too, correct?

They definitely will exist, but as I have said many times, that selling process and retail and Food Away From Home is painfully slow and, no matter how hard you push, you are in the stream of the customer and those streams tend to move quite slowly.

Okay. And you may have broken this out, and I possibly missed this. Could you give us the EBID or EPS impact of the amortization and non-cash amortization from Sturm, both the total amount and the amount compared to where you first thought it would be?

I don't have where we first thought. What we talked about the TreeHouse numbers, they would be very consistent with what we had in 2009. So as we look at the numbers for this year, I have got to flip back to my page, Ken. But we talked about it, I recall, $24 million to $25 million combined, that difference, or roughly $12 million would be due to Sturm.

Okay.

Last year it was roughly $13 million in amortization.

$12 million incremental from Sturm, is that right?

That's correct.

Okay. One last one. AC Neilson data, I know it's not a huge part of your business. Not terrific for the categories that you're in for private label. Can you give us some sense for how the business is performing in North America grocery in the start of the second quarter?

Well, I think using that data, you know, our businesses, I think, are doing -- you have a bit of a year over year timing difference, just because of Easter. But the only category that we saw in that four week data -- and, again, the Neilson data that we get. We're on a different schedule than a lot of the information, Ken, that you're seeing. So I don't have all of the -- I don't have all of our specific data. But it really was in soup where we saw the biggest challenge, both from a category perspective, as well as how private label did. I mean, the category, the amount of spending in the category where you had over that, the most recent four weeks, where you had pricing down between 5% and 10% for the two major brands, and their volume, both being down low to mid single digits and their total dollar sales in retail both down on average about 10%. That certainly is going to affect private label soup in the private label soup's pricings, pretty much consistent year-over-year.

Thanks very much.

And again, Ken, it's very important to remember that so much of our business in retail and so much of our growth in retail is outside those customers that are measured by either IRI or Neilson.

Okay. Thank you.

We'll take our next question from Bill Chappell with Suntrust.

This is Mike Schwartz filling in for Bill.

Hey, Mike.

Real quick question. With regards to the Food Away From Home business, can you give us some more color around that? Is that coming just on easy comps or are you getting to see some real demand pickup? And then the how is the quarter progressing were we see currently in the Away From Home business?

On Food Away From Home, we are seeing from the core business, which Food Away From Home for us a few years ago was just pretty much pickles and cheese sauce. What we are seeing in our Food Away From Home business is a good rebound in those segments, but most of our growth that we are seeing in food away from home are from expanding account penetration products such as salad dressings and salsas from the acquisitions that we made over the last couple of years. But, we are seeing a good momentum year -- year-over-year the trends are improving in the core segments that we operate in.

Okay, great. Thanks for the color. Then one final question with regards to the retail side. Could you give us more color what you're see there, obviously coming off a very strong 2009 and there's concerns that growth will slow. Are you seeing the same amount of focus from retailers in your -- or across your categories?

I'm sorry. It kind of was static on the opening part of that second question.

I'm sorry. Coming off a strong 2009, there's concerns that growth in the retail side is slowing. Are you seeing the same amount of focus from retailers across your categories?

Pretty much so, in terms of levels of merchandising, support and their objectives in terms of product innovation. It's really undiminished. As I said in my comments, we saw for the 92 categories that we have data for in private label, that private label was up about 3% in terms of volume. That was on top of 10% a year ago. So the private label growth has slowed, but off a very high base. But there is no -- we are not seeing any deemphasis on the part of our retailers. As I said, we definitely have seen an increase in branded promotions support. And -- but we're seeing our categories in the industry holding or modestly gaining share. So I think we're quite comfortable with the trends that we are seeing and what we are forecasting for the rest of the year.

Okay. Wonderful. Thanks a lot.

Thank you.

And we'll take our next question from Reza Vahabzadeh with Barclays Capital.

You talked about this but I wanted to be clear on this. Are you far enough down the line on the Sturm acquisition integration to be able to tackle other acquisitions or is there a specific acquisition that you're targeting when you mention the $200 million number?

This is Sam. Let me answer that in two parts. First of all with regard to Sturm, while we have been only one month of results in the quarter, I think it's important to remember that we have been in close contact with that business for the last several years and I have gotten to know it well. And that includes the new management team that David referenced. And we are of the firm belief that business will operate in accordance with plan, and that includes developing new sales and opportunities for the 2011 and beyond. And that enables us to turn our resources internally -- externally. With regard to the M&A market, I think you can see over the laugh several months, there have been a number of transactions in our space that have been announced, and some closed. And as I'd indicated, we took a thorough look at our entire acquisition filter and strategy as we completed the Sturm deal. We saw that the economy was recovering and capital markets reopening. So there is here a target-rich environment for a private label company focused on value-added categories, and as such, we have a view that there are a number of opportunities that are coming to the market now that will fit our strategy, fit our financial capital structure and fit our culture.

Got it. Thank you much.

I'll take our next question from David Driscoll with Citi.

Great. Thanks a lot. Good morning everyone.

Hi, David.

Number of questions. Sam, can you just talk about your impressions as to the retail pricing environment? What we're seeing, of course, is Wal-Mart with the big roll-back strategy. I know that that's an important customer of TreeHouse. How does that, or -- and if you don't want to speak specifically to one retailer, and I know you don't. Just give the context overall as to how you see the pricing environment and how will it affect you? Should we be worried about negative pricing?

Now you've got dollar per case, penny per unit margins superior in many categories for the customer brands. And it is that they're going to build the business and bring in customer traffic and profitability by an even-handed focus, a balanced focus, on the national brands that can bring excitement to the categories with innovation, with advertising, with new news and the profit -- balance that with the profitability of their in-store brands where, while percentage profits have historically been better, we have as a result of the improvement on quality, the improvement in convenience, the variety of private label. What you can see here among our customers are those that -- who are really dedicated to the strategy of developing their own image, serving a specific demographics where their stores have the appeal and developing their own brands. You see a very consistent approach. Lastly, in the general operations, then I'll ask David for the particulars. That will affect the whole of the business. But the numbers indicate that those costs will begin to have -- have begun to escalate. I think we will fare better than most in that regard, in that we have been quite active and forward looking in terms of our hedging strategy and purchasing. We do see that there is the beginning of some input cost of energy cost increases that will affect the food industry this year. And as David indicated, there are unnamed retailers whose pricing strategy baffles us, but these things tend to be fairly short-lived and isolated episodes. There are clearly specific instances, categories like soup, that are real anomaly here. general matter, what we're seeing is the price gaps are relatively constant. I think probably David Vermylen can weigh in with the particulars here. As a I'll offer some generalized comments, David. And the ones they're going to squeeze out are the secondary, the tertiary, the under capitalized regional guys. Those are my general observations. David, would you like to embellish on that?

Sure. We track about 31 items in terms of pricing. And the average price gap, for the those 31 items, in the first quarter of 2009 is about 24% and the gap in the first quarter of 10, about 26%. So the gaps are very, very close. And when you take a look at those approximately 30 items, half of them will have over the last year, you'll see a slightly widening of the gap. The other half will be a narrowing of the gap so you get to that average. As I pointed out, the only place where we saw a significant change year over year was in the soup category.

David, that's relative comment on pricing between the gaps. Can you make anything on an absolute basis? Again, because it's just so visible what Wal-Mart has done with the roll-back strategy.

Well, we're not able to track all of the Wal-Mart data. We've actually seen roll-backs, they actually do roll-backs on branded products and private label as well. We're not seeing any significant change. And I commented there was one large non-measured retailer, who will go unnamed, where we actually did see some branded pricing below private label, which is very extreme.

Your model for the year has flat pricing, is that correct?

Yes.

Okay. On the industrial, your margins, I believe, were approximately 18.8%. And I think that, according to my data, is the highest margin that we've ever seen in that segment. Is this sustainable or is this really a one-time benefit because of the nature of raw materials and kind of the big reason, the movements in those things?

This is Dennis. It's at the high-end. It's clearly towards the high-end that we've been at for some time. This is one of the categories that actually did show negative pricing because of the combination of corn and soybean in this mix. But overall, we did have some positive mix. As the volume was more towards the industrial rather than the co-pack, that's continued to help us shift. So that is not necessarily a sustainable shift. I expect that to co-pack volumes will be coming back, but a favorable mix to industrial and some positive impacts of the lower input costs had a bit of an impact for us.

So great performance on the quarter. Kudos to the team, but don't model that number going forward because that's too aggressive. Correct?

That's what I would suggest, yes.

In food service, David, I think that you said overall, top line guidance plus two favorable in North American grocery, partially off set by food service. Food Away From Home in the quarter, sales are up 10%. Can you reconcile these comments versus first quarter sales growth?

Well we were up, excluding Sturm, I think it was 8.1% in terms of top line sales. It really outperformed our expectations in terms of looking out over the rest of the year, we're optimistic that we'll see growth. I certainly can't assume continued 8% growth.

When you say top line of two for the overall company, driven by retail and then offset by the food service, it sounds relatively draconian relative to what you came up in the quarter. I'm just trying to understand the numbers. 8% is quite large.

It was. It was -- we talk about the volume was just over 2%. And it was not too far off last quarter. And I talked about a combination of we're pushing more products into that segment. More emphasis on some salad dressings and salsas and also focusing on a more profitable pickle side of the business. So mix is contributing as well to that. So the combination of the volumes and mix were the key drivers there.

And, Dennis, did you say in your script -- I can't remember, but I would like to confirm. The Easter shift was a two-point contribution to North American retail?

No, I did not say that.

Can you tell me what it is?

We have not -- we have not actually calculated that yet. I think we'll be able to determine that once we have all of our April data in hand from both our internal data, as well as all of the scan data to really see what the effect was.

I appreciate all the time. One last question. The soup category. You made a number of comments here on this thing. It sounds bad. So if the category is down one promotional activity has gone insane. What's the future look like? Is there any confidence here in this category?

I think you need to talk to the category leaders about that.

All right. That doesn't sound positive. I will do exactly that.

This is Sam. It does speak to the wisdom of having a diversified portfolio, as we have. Soup is a vital part of our business, but it is one that it's one of eight major retail categories now that we track. And so we will be very attentive to it, but it is now one player on the team as opposed to the solo all-star that we had at the beginning with only two categories.

And, David, just one last comment when you think about soup. Again, you have to think about us with condensed. Condensed is the majority of our soup business. And RTS is a smaller and the lower profit point of that as well.

Did you comment then on the differences in promotion between the subsegments, was promotion more aggressive in condensed?

No, I would say that -- best way to do it is just in terms of price gaps. That the year over year price gap changed significantly between RTS and private label. There was tremendous amount of promotion activity in RTS this year.

I really appreciate it, everybody. Thanks a lot. Congratulations on the quarter.

Thank you.

We'll take our next question from John Anderson with William Blair.

Great. Thanks a lot. Good morning.

Morning, John.

Sounded like commodities stayed deflationary in the quarter, but sounds like the outlook is for some inflation there going forward. Number one, is that accurate? Two, does that inhibit your ability to kind of deliver on 100 basis point improvement in margin and legacy business?

This is Sam, John. Let me clarify my comments and then Dennis can give you more particulars. There is no risk to or diminution of our view that we will add structural improvements in this year and in the out years of at least 100 basis points of improvement. And that's due to primarily productivity gains and procurement strategies. In that regard, with regard to the 2010, what we've seen are the broader industries, a food basket of future costs in commodities, packaging, energy, beginning to creep up if one were to buy on the spot markets as one needed consumption -- as one used the products. I also indicated that we had been quite forward looking leaning in our procurement and hedging strategies. I see, as the general markets move for this year, if they do rise, there will be a diminish effect on our requirements for 2010. It was more alerting you to the possibilities for the broader market, those that are not hedged, and also the out year. Dennis.

Yeah. I'd just add that while it was for us a fairly benign quarter in terms of input costs, I will say what we see on the horizon does bode for some increases especially in the energy complex. Of course, we're continuing to keep our eye on soybean and corn markets as well. But in particular, energy, natural gas, it just won't stay this low. We're seeing petroleum is up a bit as well. And there's just a lot of volatility right now, especially with what's going on in Europe. So to Sam's point, we're covered reasonably well through the end of the year, but there are pieces we can't cover. And there could be some increases, but nothing that we feel we can't manage against quite well.

Okay thanks. That's helpful. I just have one broader question, I guess maybe for Sam. Sam, you mentioned a couple times that private label gains have come and likely will continue to come at the expense of two or three brands, regional, well capitalized brands. Where are we, do you think, in terms of the cycle of that shakeout? Retailers have been rationalizing brands, rational sizing SKUs for some time in a pretty aggressive fashion. How much more of that is to come? That would have some impact on private label share gains over the next 24 months, 36 months?

My personal view is that transition -- that change will continue at the present rate for a sustained period of time. And it has to do with one, just the relative economics to the retailer of these secondary and regional brands. I mean, they've got the lowest profit margins as a group, when you compare them to national leading brands and private label. They've got the lowest turnover and that leads to the combination of those two things by far the lowest return on their gross margin and return on investment with inventories and everything else. They'll always be a role for them. But I think that it will continue to diminish over time. And it's in the retailer's best interests to have a combination of national brands that can bring excitement and foot traffic with their own customer brands that can bring the highest degree of profitability. And all of our dealings with our customers show that they know this and their financial models are quite carefully attentive to that .

Terrific. Thanks a lot. Congratulations on a nice quarter.

Thank you.

We'll take our next question from Brian Splain with Bank of America, Merrill Lynch.

Good morning.

Good morning.

Just two follow-ups, just points of clarification. First, on the cost of goods inflation and hedging. If I heard it right, 2010 it sounds like you're relatively covered. Have you gone out at all to start locking in costs for 2011 yet, fiscal '11?

Yeah, Brian, Dennis here. Typically, if we can lock it in, we'd like to be fully covered six months out. And based on the market, we may go out to nine months for some pieces, almost never to a year. In that regard, a few of the inputs we've looked at a little bit longer and are starting to lock in. But most of the ag complexes just out through the end of the year now. And some of the energy has moved into first quarter of 2011.

Okay. And are you seeing, I guess the three cucumbers are one that I guess you really -- it's difficult to lock in?

Yeah. Very difficult. You do negotiate on pricing but at the end of the day you get what the ground gives you and sometimes you have to buy from markets outside of your zone. And sometimes the pricing just doesn't matter up front .

And then just glass and tin plate, are those looking inflationary as you look out in the 2011?

Yeah, my view is they will be, because of the energy complex we've had the benefit of nice, low, natural gas prices and energy is such a key input in making of glass and tin, that as that energy complex goes up, I'd expect those end products to go up as well.

Okay, great. And then David, just one follow-up on, I guess the commentary about pricing and discussion about pricing. First of all, in soup, has there also been an increase in the frequency of merchandising or promotional events or is this just simply year to year same level of -- same number of activities but just at a deeper discount?

I think it's the same amount of activity at a deeper discount. I think what they're getting, we're seeing significant increases in the percentage of promotion -- of cases sold under promotion and the amount of merchandising. So my feeling is that what we're likely getting is a higher level of spending which drives more merchandising within their normal promotion windows.

Okay. Okay. But no change in the number of activities? It's just for the deck?

I cannot profess to be an expert in the calendar-ization of promotion activity. During the soup season, promotion activity is pretty much on going, so it's -- I think it's been far more in the depth of promotion activity.

Okay. Then just along those lines, beyond soup, just more general in your categories. Has there been any -- have retailers pulled back at all? Have your customers pulled back at all in terms of how aggressive they are in merchandising or spending behind private label? Is the economy improves, the retailers a year ago seemed to be more interested in investing behind private label. Has that changed at all or -- well, I'll leave it at that?

No, we really haven't seen that. Again, with the exception of soup, all of our categories did nicely, up 2% to 5% through the measured channels and private label, either held or gained share in all of the categories. We're not seeing a big pullback in private -- in our categories in private label merchandise .

Right. Okay, great. Thank you, guys.

Thanks.

We'll take our next question from Robert Moskow with Credit Suisse .

David, very quickly, have you ever tried to quantify last year the extent to which new distribution helped your private label sales?

Rob, you broke up there. Could you repeat that, please?

Sure. Have you ever quantified in '09 the extent to which new distribution at retailers like incremental shelf space drove your sales growth at retail?

No. We haven't, though I can tell you that as we announced last year in the middle of the year that we had achieved -- what I refer to as big wins with customers last year than we had in the prior two years. That's had a positive carryover effect into this year, but no, we really haven't done that specific calculation.

Okay. Well qualitatively do you think that you're going to have more big wins this year or we're done with that, now we kind of drive the velocity with what we've got?

No. We're always out for big wins. And we've achieved a good number of them for this year. They'll start kicking in the middle of the year. So I would say that the number of big wins this year, still early in the year, is good. There were probably more at this time last year basically because we hadn't been focused on it for a couple of years. I'm feeling very good about the level of activity. Again, a lot of that, those big wins, are being achieved with retailers that are not measured by either Nielsen or IRI.

Got it. Okay. Thanks a lot.

Thanks, Rob.

We'll take our next question from Reed Kim with Bank of America, Merrill Lynch.

I just have one question on the revolver, Dennis. Any thoughts on extending that or doing any kind of adjustment, or would you just wait and enjoy the low rates until maybe you compensate another acquisition or something like that? Thank you.

Yeah, read. We continue to look at that. It expires in August of 2011. We have great rates, so we are looking at the balancing act of taking advantage of good markets sooner versus the incremental cost that would come out from that refinancing, and we'll continue to look at that, and one thing we don't have any covenants regarding short-term/long-term but that doesn't necessarily mean we're going to put that off through 2011. So we'll be opportunistic and we'll continue to monitor that internally.

Okay, great. Thanks a lot.

(Operator instructions)

We'll take our next question from Lee Giordano with Imperial Capital.

Thanks, good morning everyone. As you look at your current retail grocery product portfolio, including Sturm, thinking longer term, which of your categories are you offering the largest growth opportunities and, alternatively, what you think offer the least growth potential?

Well, I think I stated in our remarks that we've seen as sequentially acquired businesses that in the last several rounds we've been able to acquire leading positions in categories that are high growth and higher profits. And in that regard, as a general matter, I have characterized premium salsa, portable salad dressings and now hot cereals and powdered beverages. Again, I'll remind you that we're running a portfolio here. What we want to do over a period of time is move that portfolio on mass to higher growth, higher profit opportunities while we manage the volatility. There are big businesses that we have that show very little growth, but they are important cash contributors and we will continue to nurture those as well. We will have a bias, with regard to future acquisitions, though to look at the higher growth, higher profit opportunities. And that bias will be in choice of the categories that we elect to pursue.

Great. Thanks so much.

All right.

At this time, there are no more questions in queue. I'll turn the call back over to our speakers for any closing remarks.

Thank you, all. We hope to see many of you this spring and summer at investor conferences and if not then, certainly talk to you again on our next quarterly call which is tentatively scheduled for the first week of August. Thanks again.

That concludes today's conference. We appreciate your participation.