TreeHouse Foods Inc (THS) 2010 Q3 法說會逐字稿

Please standby we're about to begin. Welcome to the Treehouse Foods investor relations conference call for the third quarter of 2010. This call is repeating 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, expects, speak to, anticipates, plans, believes, estimates, intends, predicts, projects, potential, or continue, or the negative of such terms and other comparable terminology. These statements are only predictions.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause the Company or its industry's actual results, levels of that activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Treehouse's form 10-K for the period ending December 31, 2009 and subsequent reports on form 10-Q discuss some of the factors that could contribute to these differences.

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made when evaluating the information presented during this conference call. The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions any forward-looking statement contained herein to reflect any change in its expectations with regard thereto or any other change in events, conditions, or circumstances on which any statement is based. At this time I would like to turn the call over to the Chairman and Chief Executive Officer of Treehouse Foods, Mr. Sam K. Reed

Thank you, PI. Good morning all and welcome back to our Treehouse. David, Dennis and I have good news for you. The third quarter was strong. We are in excellent shape to finish the year, and the new year 2011 promises to be one of exceptional opportunity. Our story will be told in three chapters.

First, for the last four months. Q3 adjusted EBITDA increased 49%. Our private label grocery posted excellent unit volume growth. This growth in private label was widespread and led by Sturm powdered beverages, US shipments of soup, salsa and salad dressing. We closed the ST specialty acquisition, bringing and other value-added innovation driven category into our product portfolio. And we refinanced and upsized our revolver at favorable rates, terms and conditions.

Turning to the full year. We expect to finish 2010 with strong momentum as our private label volumes recovers from its mid-year doldrums. Adjusted EBITDA for all of Treehouse, including the Sturm and ST acquisitions, is forecast to increase year-over-year by more than $90 million. We will ring out the old year and ring in the new with an expanded and much improved product portfolio, top line growth prospects in core private label categories, and a solid balance sheet with capital available for future acquisitions.

Regarding 2011. Our primary challenge will be input costs, especially those of agricultural commodities, as the jobless recovery continues to squeeze consumers. However, we see even greater opportunity as the fundamental value proposition of our customer brands resonates even more strongly with consumers and customers alike as hard times are sure to continue.

I can think of no one in the packaged food world better equipped for continued growth and profits in the year to come than our treehouse. David?

Thank you, Sam, and good morning. I'll provide an overview on the operating performance of the business, plus provide some comments on the macro environment as we closed the year and look ahead to 2011. Overall it was another excellent quarter with revenue of 22.5%, gross margins of 240 basis points and adjusted operating income up over 50%. Highlight of the strong performance was strong unit growth in our legacy business and an outstanding performance at Sturm.

I'll first cover the performance of the legacy business and then highlight how Sturm did in the quarter and make a few comments on ST Specialty Foods, which we just closed out a week ago. I'll focus my comments on unit volume, given there was some skepticism on our last call due to a second quarter unit volume decline of approximately 1%. I'm very pleased to report that we turned that around in the third quarter with unit volume growth of 2.9%.

Let me start with North American retail grocery. Total unit growth was 2.6% but when you exclude the branded and competing business, which we are exiting, total units were up 5.6%. That 5.6% growth compares to second quarter growth of 0.7%. Driving this strong performance was continued good growth in pickles, salsa, pasta sauce and a solid performance in our soup business.

Soup unit sales were up in high-single-digits after being down more than 10% in the second quarter. For the last six months, soup unit sales were down about 1% better than the soup market performance. We grew our soup unit sales because some of our big wins kicked in plus we did a better job of staying away from the ready-to-serve promotion more. I don't expect that the promotion environment will improve the soup season, but I am confident that we can maintain a stable performance consistent with the last six months.

In total we are very pleased with our unit volume performance in North American retail grocery, it was the best quarterly year-over-year performance in two years. Our food-away-from-home segment had another solid quarter, despite continued softness in the food-away-from-home channel. While units were down 1.6% gross profit was up due to product mix and manufacturing improvements. Our ingredient co-pack and export business, better known as ICE, had a good quarter with units up almost up 10% principally due to volume increases in our co-pack business. Volume in our industrial powder business continues to be soft, due to its reliance on the food-away-from-home industry, but operating profits were stable year-over-year.

Now let me turn to Sturm. After a second quarter when unit sales were flat, third quarter unit sales were up 10% with hot cereal up 1% and beverages up 16%. We are very excited about the innovation efforts underway in sugar free beverages, especially with regard to energy drinks and Stevia-based products. When you combine Sturm's 10% unit growth with our North America private label growth of 5.6%, it's hard not to be pleased with our overall retail private label performance.

At the end of the quarter, Sturm entered the coffee market with an introduction of single cup coffee cartridges, this is a rapidly growing segment of the coffee market. We are an initially introducing it as a controlled brand under the Growth Square label as we work with many retailers on leveraging their store brands. Until we make that conversion, we expect that sales will be modest. Our coffee utilizes a very innovative micro-ground technology that demonstrates Sturm's R&D strength. Sturm's R&D team is also working closely with our non-dairy creamer R&D team on additional hot and cold beverage concepts.

On ST Specialty Foods, we closed a transaction last week, so there isn't much to report. Our procurement and sales teams are working closely on synergies and we assisted with one small sales win before the deal close. The closer we have gotten to this business, the more we like it. They are already a low cost producer of dry packaged dinners, and when you combine there could manufacturing expertise with our procurement scale, we'll be in an even more advantage position to build this business.

Before I turn it over to Dennis, I'll make a few comments about what we see on the horizon for 2011. No doubt the number one issue for all food companies is escalating input costs. But we faced an even more challenging input cost environment back in late 2007, and we proved our ability to cover those input costs through fact based selling that justified our price increases. From a procurement standpoint we are far more advanced and strategic in how we source our key inputs and we are well covered entering 2011. As mentioned on prior calls, our basic procurement approach is to always be covered for at least six months on key commodities to ensure good price cost visibility.

We are encouraged by what we are seeing in the marketplace regarding how major branded manufacturers are dealing with escalated input costs. This is very different than 2007, when the industry was slow to move on dealing with those higher input costs. I'll now turn it over to Dennis.

Thank you David. Our third quarter financial results were very good, with revenues growing 22.5% over last year. The increase was due to the addition of Sturm foods. In our legacy business, our unit sales increased by 2.9% over all, but a combination of pricing and mix resulted in overall sales being flat to last year. Total company gross margins were very good. Gross profit increased by nearly 37% over last year as legacy margins improved and we realized positive gross margin mix from the Sturm products. Gross margins in the quarter were 23.7% compared to 21.3% last year, an increase of 240 basis points. We continue to see the benefits of our operating improvement activities across our plants and distribution network.

Now I will cover our three operating segments. First our North American retail grocery segment showed sales growth of 33.6%, $319.2 million due primarily to the addition of Sturm foods this year. On a legacy basis, we showed very nice unit growth of 2.6% despite the deemphasis of our branded baby food business. Excluding Sturm, our retail revenues increased by 0.8% as the unit growth was offset by slightly lower pricing in the quarter compared to last year.

Our direct operating income in our retail segment improved very significantly despite a 2.1% decrease in pricing. Direct operating income finished the quarter at $60.9 million or 19.1% compared to 15.4% last year as the positive mix from Sturm products and our internal efficiency programs provided the additional operating income. And food-away-from-home, we saw total sales grow by 5.5% to $83.3 million as Sturm ended 6.4% to the total, while volumes were down 1.6%. Despite the lower unit sales in our legacy businesses, our direct operating income continued to do very well, finishing at 15.3% of sales in this quarter compared to 11.4% last year. A good bit of the margin improvement was due to lower than usual margins last year, as we experienced a difficult quarter last year with high scrap rates. This quarter's results were much more in line with the second quarter's direct operating income of 15.7%.

Finally, in our industrial and export segment, we saw very good unit sales growth of 9.7% but these sales were mostly in our lower-margin and lower-priced co-pack business. Volumes continue to be challenged in our base industrial segment, as these sales usually near the food-away-from-home marketplace. Sturm added 4.4% in unit sales, but a combination of slightly lower prices and the mix shift towards co-pack resulted in overall sales growing only 1.2%. Direct operating income margins decreased from 16.2% to 14% as a result of a higher mix of co-pack sales compared to industrial sales.

Total selling distribution, general and administrative expenses in the quarter were $54.3 million compared to $46.4 million last year, with the increase due primarily to the growth of our Company. As a percent of sales, these expenses improved to 11.7% a decrease from last year's 12.3%. Other operating income expense was $1.1 million of expense in the quarter compared to a gain of $14.4 million last year.

Expense this year and includes costs associated with facility restructuring to better align our businesses, while last year included a gain on fixed assets associated with last years new Hampton plant fire. The damaged assets were replaced with new equipment, and the cost of the equipment was covered under our insurance policies. The difference between the net book value of the old equipment and the new replacement equipment caused the gain.

Also, our amortization expense was $7 million in the quarter compared to $3.4 million last year due to additional amortizable and intangibles, such as customer lists and trademarks obtained during the Sturm Foods acquisition. Interest expense in the quarter totaled $12.9 million compared to $4.8 million last year. The large increase was due to the additional borrowings that were used to partially fund the Sturm Foods acquisition.

In terms of cash flow, we ended the quarter with $876.5 million in debt compared to $887.3 million at the end of the second quarter, a reduction of $10.8 million. In regard to our revolving credit facility, we announced last week that we have amended and restated our revolving credit agreement that was set to expire in August of 2011. Our new facility was completed on October 27 and has a five-year term ending on October 27, 2015. We are very pleased that we were able to upsize the facility from $600 million to $750 million, maintain an unsecured status, and still have very good interest rate that will max out at about 2.5% above LIBOR. Although the new rates are very good in today's marketplace, they will be higher than the extremely low rates we have enjoyed over the last few years. In fact, our average borrowing rate under our revolver last quarter was only .85%. The effect of the higher rates was expected and will be seen in our fourth quarter results.

Our effective tax rate for the quarter was 32.4% compared to 35.3% last year. This year's rate has been lowered due to deductible acquisition expenses associated with the Sturm foods purchase and was very consistent with a 32.9% last quarter. In total, our earnings for the quarter were $24.9 million and our reported fully diluted earnings per share was $0.68.

As we reported for the past few quarters, our reported results included two non-cash, non-operating items. The first is the mark-to-market adjustment on an interest rate swap agreement, and the second is a non-cash foreign currency adjustment of an intercompany note with our Canadian operating unit, ED Smith. These two items totaled $0.02 per share in the second quarter of 2010 and $0.05 in the third quarter last year. This quarter, we also had an additional $0.01 of acquisition related expenses associated with the ST Specialty Foods acquisition and $0.02 relating to our previously announced factory restructuring. After considering these one-time items, and the one-time items that affected our reported earnings per share last year, our adjusted earnings per share increased by 27.8% to $0.69 per fully diluted share in 2010 compared to $0.54 per fully diluted share in 2009.

In regard to the outlook, we continue to remain positive on our prospects for the upcoming quarter. As I mentioned earlier, we will see a significant increase in interest expense, beginning in our fourth quarter primarily due to the new, more market aligned interest rates in our upsized credit agreement. In fact, we estimate that interest cost will approximate $15 million in Q4 of this year compared to $4.3 million last year. As we indicated last quarter, these costs were are already factored into our previous guidance, therefore we are comfortable maintaining the guidance of $2.70 to $2.75 and adjusted earnings per share for the full year 2010. Sam I'll now turn it back to you.

Thank you Dennis. I'll now return to my earlier theme about the coming year, its opportunities and challenges. Next year's addition of the Treehouse story will make for compelling reading. We will embark upon 2011 with our product portfolio market position and acquisition capability matched by few, if any others of our peer group.

Treehouse is the North American leader in six major private label categories and a solid number one in the premium segment of another three categories. Our portfolio is one of staples, stocked in virtually all household pantries across the continent. Beyond broad distribution and frequent use, most of our food basket consists of categories fueled by national brand innovation and advertising to generate growth opportunities for private label, it's segmentation and profitability. Our portfolio strategy, supported by superb customer service, a highly flexible and efficient network of 19 food processing plants, should continue to direct us along the path of progress, whatever the state of economy or mood of the consumer.

There will also be an element of drama in next year's Treehouse story as well. Our challenge will be escalating commodity costs, especially in the grains and dairy complex. An index of packaged foods at industry cost that I follow closely has revised its latest annual projection upward by 560 basis points. On a mark-to-market basis we now anticipate total input inflation of more than 6% across the entire Treehouse product line. Just as it was in years past, our plan is to recover or offset those costs through a combination of pricing, productivity and purchasing initiatives.

Pricing will prove to be the principal issue as consumer uncertainty and sustained underemployment have made this economic recovery a joyless one in the grocery and food service industries we serve. Nevertheless, our experience has consistently demonstrated that the best policy is to offset commodity and energy cost with pricing, while simultaneously working with our private label customers to provide consumer value through innovation, productivity and economies of scale. All in all commodity price inflation will present a challenge across a broad away of food stuffs. As David described earlier, we are both well experienced and well prepared.

Conversely, we welcome even greater opportunity in the year ahead. Our legacy product portfolio has been greatly enhanced through acquisition. Pickles, once fully one half of revenues, now account for only one of every six dollars of Treehouse sales. Capital investments will include production capacity expansion in 2011 to accommodate organic growth in premium salsa, pourable salad dressing and sugar-free powdered beverages.

As Sturm and ST acquisitions open expanded business for us and both new distribution and product innovation and categories noted for national brand leadership, single serve convenience, modern technology and economies of scale. The quantitative data support my enthusiasm. Our portfolio strategy is driving both high-margin and high-growth opportunities, such that less than 15% of our retail grocery portfolio now resides in the low-margin, low-growth quadrant.

Our 2011 addition will also feature more adventure tales from the familiar land of M&A. As strategic acquire wars, we are well equipped with our portfolio strategy, acquisition filter, stable cash flow and prudent leverage. While none of us can be sure of our exact itinerary or timing, all of us can rest assured that we will be actively exploring the M&A a landscape for valuable treasure.

In reviewing the early drafts of our 2011 addition, I am reminded that the tales of Treehouse compromise an ongoing saga like few others in the small-cap section of the food and beverage library. I recommend it for your reading pleasure. Thank you. Loren, we'll now open the line for comments questions.

Thank you sir. Today's question and answer session will be conducted electronically. (Operator Instructions) We'll take our first question from Jonathan Feeney with Janney. Please go ahead.

Good morning, thanks very much

Good morning, John

I wanted to dig into the organic growth rate in your store brand businesses. It looks like -- I mean take away volume take away for food has to be about population growth and it just seems -- on one hand it does seem the brands have made some inroads against private label in general. But take away for everybody seems to be worse than expected. Do you think -- what's going on in the marketplace that is causing you to apparently lose some stomach share here with your private label products? Or is it an inventory adjustment? I mean, what do you think?

Know I think it's really the quality of our programming. We had early in the year some big wins that began to kick in and I noted that on my comments in relation to soup. And again a lot of our business is outside those measured channels and we're getting consistent good performance in that area.

And would you say that the marginal pressure from brands is easing? You bring up soup as an example today, there's been we do channel checking, theres been an incredible amount of promotional activity, both in the measured and outside measured channels in soups and really low price points that appear to be very effective and are locked in through soup season. I'm surprised that that particular business actually hasn't suffered more. And I look at some of the other businesses, if you consider that positive impact and wondered maybe are some of those suffering right now from brands continuing to sort of, have yet to raise prices or to discount and take share away from private label? I mean do you think people -- is private label gaining share, is your product gaining share?

Our product label and the categories that we compete in private label, private label is doing well. But one category clearly where there is a lot of promotion activity continues to be soup. And the majority of that promotion activity is in the ready to serve. I think you have to look at really are how our soup business has done across the last six months and year-to-date. We had a very soft second quarter and that was principally due to very soft business in the month of April. And I really look at trends that are more than just one month or even three months. So for the six months our unit sales were down for soup were down 1% and as I said in my comments, we expect our business will continue -- the soup business will continue to track at that rate, not at the rate that we saw in the third quarter alone. But that's the one category where there is tremendous promotion activity. When we look at salad dressing and salsa, pickles, non-dairy creamer, it tends to be running at the normal promotion rate. But soup is very, very intense.

And just finally tying that back into what you're now saying about Q4. I mean obviously some nice out performance this quarter not raising the outlook. Is that part of what's reflected there is caution about soup? What drives that thought process?

John, Dennis here. Two items, primarily not operating. One, as I mentioned interest costs, we re-did the credit facility and if you look at last year's fourth-quarter our average effective rate under our revolver was under 1% and that rate for Q4 is going to be up just in at that 2.5% range, so we're going to see almost triple the rate. And the tax rate, I'm expecting, will be slightly up in Q4 as well. We've averaged 32.4% in Q3. Last year's Q4 was also 32.4% but I think we're going to be just a little bit higher as we go through the last of the big acquisition related costs that helps drive that down.

But just correct me if I'm wrong, Dennis, but you would have known about those things coming into the year? Did I just kind of have the linearity between Q3 and Q4 wrong? Let me put it this way, was Q3 on plan or ahead of plan? That's what I'm trying to wonder.

We were on our plan

Okay

And when I gave the guidance last quarter of 270 to 275, that anticipated the higher interest. So we're on track

Great. Thank you.

And our next question comes from Ken Goldman with JPMorgan.

Good morning. Could you give us a little bit of sense of the Sterm seasonality? I think initially you may have guided, if I'm not incorrect, toward sort of flat sales from quarter-to-quarter. But were seeing maybe a little more lumpiness than that. And obviously third quarter the sales were higher. Maybe you could help us to understand whether Sturm just did better in the third quarter, or whether it was seasonality that led to that?

This is Dennis. We had more seasonality than what we had originally anticipated and as we said last quarter there was a softness in the hot cereal business in the summer. And this quarter, if you take the Sturm numbers you'll get to a run rate based on this quarter alone of right around that $340 million range, which was last year's. And with some early year pricing that affected that comp.

I think this quarter's much more indicative, but the seasonality is turning out to be a little more winter than we had originally put in our first assumption. As we've talked about roughly 20% of their business is the other than hot cereal and other than powdered beverage. And it's that 20% is weighted more towards the winter than what we had originally planned out.

Okay. And then we talked a little bit, or you talked a little about promotional levels in soup. What are you seeing in cereal? In colds cereal? I know that was an issue for your hot cereal a little earlier. And also in salad dressings, because Kraft had said on their previous conference call talked about refusing to lose share there anymore. But I haven't seen, at least in the Nielsen data a whole lot of uptick in promotional activity in that category. Just hoping for a little color on those two.

Yes this is David. We haven't seen an uptick in promotion activity in salad dressing at all, it's really been quite stable. We don't get all of the ready-to-eat cereal data. So our information comes from many different sources. But what we are seeing is and hearing about is a reduction in some of their promotion activity. I think the hot cereal category again in the third quarter is pretty much a low season. And the hot cereal category was down to 2% to 3% for the quarter and our unit sales were up 1%.

Okay thanks very much

And our next question comes from Heather Jones with BB&T Capital Markets

Good morning

Good morning

Just a little detail-ish question first. Could you give us a sense, given the $15 million runway you're pointing to for Q4 interest expense, should we be looking at $60 million, $65 million for 2011?

No, because our cash flow is pretty positive. I think it's too high just to extrapolate our Q4. And in terms of more detailed guidance, we'll actually give that in our February earnings call. But just factoring in the cash flow, I don't think that will be the case.

Okay and then moving on to food service. You talked about in your food-away-from-home just seeing continued weakness there. As you move through the quarter, have you seen any pick up in that channel?

Not on a month to month basis. What we are seeing data from -- there's a consulting firm called Technomic that really does a lot of analysis of the food-away-from-home market. I think they are projecting pretty stable business through the end of this year and maybe a 1% to 1.5% increase in the food-away-from-home channel for 2011.

But if I remember a year ago I think everyone was -- there were signs of optimism at the end of 2009, entering 2010. We're seeing that same sign of optimism, but it didn't really come through in 2009, but we are hopeful for 2010

Okay and then finally on soup. Just wondering if you could give us a sense-- I don't know if you could break this out -- but you mentioned the new wins, excluding the new wins, what kind of volume growth did you see in existing accounts?

I really I don't have that data available to me. But the majority of our soup sales were the -- majority of the growth would have been organic growth.

The majority of growth in soup would have been organic?

Yes. I mean the big wins contributed some, I'm not sure, but the rest of the business did pretty well.

So is it -- and you may have said earlier and I may have missed it, so I apologize if I did . So is it fair to assume -- maybe not 8.5% roughly growth in Q4, but still pretty strong volume growth for soup for

In my comments I said that for the last six months our soup unit sales were down 1% and that we expect our soup business to be stable during this coming soup season.

And I apologize if I'm being dense here. But given the strength in Q3's volume for soup, and you're saying most of its organic, I don't understand why it would slow down to flattish in Q4

I'll give you a perfect example. In the months of March and April, our soup business may have been down 20%. We came back to pretty flat trends in the months of May and June. And again, I can't just looking at it month-to-month or quarter-to-quarter, to me I really look at an enduring running rates in terms of how we forecast the business. And that relates customer by customer. I think that we had a great performance in the quarter. We had a terrible performance in the second quarter on soup and it averaged out to be right where we expected to be in total, which is very stable in a very, very tough, competitive market.

Okay, all right. Thank you, good quarter.

Thank you.

Our next question comes from Bill Chappell with SunTrust.

Good morning. First on the pricing. As we look towards 2011, based on what you're hearing from the branded players, do you think they will lead the way for the most part? Or are you prepared to kind of lead the way on pricing if they don't in the next 3 to 6 months?

Bill this is Sam. I think that as David indicated, we have removed the bottoms in terms of following the brands. We will move to cover our costs and we'll go independently and not wait.

More of a question, do you think you need to? Or is a better environment than we saw a couple years ago where had to lead?

I think we've found that that's the better policy for us. To provide to our customers a sense of certainty early in the year and then that gives both our customer and our sales and marketing teams a better opportunity to build and merchandising promotion, new authorizations, et cetera.

Got it. And then maybe kind of looking back at both soup and hot cereal, in terms of the reversal of trends from one quarter to the next. As you look back do you think it was really consumer pantry de-loading, or is it just retailers ordering closer to the winter months, closer to the start of the season than they have sort of historically done?

You know that's -- I think on hot cereal in the second quarter we were down, I can't remember exactly, 2% to 3% and were up 1% now. So I don't think that switch is dramatic. And with soup, I think we had with some customers some better merchandising in the third quarter than we had a year ago. And those were outside, tended to be outside the measured channels. But again, as I look at soup, we really are looking at for this coming soup season which obviously were into right now, as being a stable business for us. Again, reflective of the last six months running rate.

Got it. And then just one last one. Dennis, is there any way to break out on the gross margin improvement how much of that came from Sturm versus how much came from the legacy business?

No not really. As I think you know from following us, we try to break up other revenue and that'll be -- the components will be in the 10-Q that gets filed today. But we don't break out product margins.

Okay. Thank you so much

Okay

Our next question comes from Mike Kaplan with Bank of America

Good morning guys.

Good morning.

Just on the integration, could you just talk about on the ST implementation, kind of where you stand for that? And is the plan for ST to still kind of wait a little bit into next year to really kind of ramp that aspect up?

Yes this is Dennis. The plan the SAP program is on track and we're getting into nearing the final stages for February turn-on, I should say. And with all that activity we continue to hold off on ST and Sturm being fully integrated until we get that up and running. And then we'll take the next steps that's after SAT's up and running, sometime in 2011.

I see, okay. And then just kind of on the pricing issue, I know you touched upon this. But with the price gaps -- there's been no pricing take already,are you seeing any of that by the branded guys? Obviously, everything seems to be focused towards next year. Can you just talk about that and kind of the price gaps you saw through the quarter, if they were pretty stable?

I think we track probably two dozen items, and I think in general the price gaps were pretty consistent year-over-year, again with the exception of soup principally in the ready-to-serve segment where the gaps really narrowed. But that's been a fact of life for the last six to nine months.

I see, okay. And then Dennis, I know you talked about a pro forma leverage number on acquisition call. With a little bit stronger results here, is 3.5 still a good number, or did that come down a bit?

That did come down. We ended the quarter before the ST acquisition in the range of 3.1 to 3.2.

And with ST is that 3.5 or is that going to be -- ?

It's going to be under 3.5

But right around that area?

A little lower. The next time we report on leverage will be at the end of the year and I think we'll be up above our 3.1 will definitely be below 3.5

So there's no extra coupon on the private?

That's correct

Okay, great. That's all I had, thank you.

Our next question comes from Farha Aslam with Stephens Inc. Please go ahead.

Hi good morning.

Good morning.

Sam, after the ST acquisition and with the restructuring, how much firepower do you think you have in your balance sheet to do an incremental acquisition?

The forecast that we have for the coming year indicates that any and all of the categories where we see attractive, strategic targets are available to us and that all of the cases I'm looking at closely, we would be able to finance those off of our own balance sheet.

Helpful. And I believe you guys have just on a thorough review of your manufacturing facilities to look for incremental cost savings opportunities, but have not announced sort of a number or a restructuring program. Could you update us on where that stands?

Two things. One, there is an ongoing effort, that we call project right side, to generate productivity gains and purchasing initiatives as well. And those programs have run at the same rate now for close to five years, and in each new acquisition we're able to bring to it procurement economies of scale and internal efficiencies and manufacturing and distribution and will bring those to both Sturm and to ST. With regard to any type of reorganization, it may be thinking about the announcement we made a quarter ago to scale back our infant feeding business and move away from brands. But that was a minor effect with regard to all the assets employed.

And then lastly as I announced our undertaking capital expense capital investment programs to expand capacity in three high-growth, high-margin categories that have responded well to the portfolio strategy that David has put into place. And those are premium salsa, powdered beverages and pourable salad dressings.

Thank you. And David, my final question is you have looked for a $50 million in incremental sales in the back half of 2010. Are you on track with that? And maybe if you could tell us how much of that you captured in the fiscal third quarter?

I think let me just clarify one point. What we talked about was big wins of $50 million and the effect of those big wins would begin in the fourth quarter. So we didn't -- we weren't implying that fourth quarter revenues would be up by $50 million.

Yes the $50 million was really the annualized running rate and some of that kicked in for us. Certainly both the second third and fourth quarters. But it's the annualized running rate rather than just for one quarter

Wait, so you're fully lapped in the fiscal first quarter of 2011?

Probably not fully lapped until maybe the second quarter.

Okay, great. Thank you very much

And our next question comes from Reza Vahabzadeh with Barclays Capital.

Good morning. You talked about the input costs pressures for next year. Did you mention an estimated cost inflation or cost inflation for 2011?

This is Sam. What I indicated is it that we currently see a 6% increase when you take all commodities, packaging and energy across all of the businesses, including the new acquisitions.

This is for raw materials or this is for total cost itself?

The aggregate of all the inputs that I listed

Okay. And do you have visibility on this? Are you now fully locked? Do have high confidence in that number?

This is David. Yes, we're not fully locked on every input cost. But as I mentioned on my comments, on our key commodity where we can forward buy, our strategy is to always be covered on those key commodities out at least six months in order that we have very good price and cost visibility.

Got it. And then what kind of a pricing -- net pricing realization do you need to achieve to offset this?

We haven't worked through -- we are working through all of that detail right now, because it really will differ by -- there will be certainly some categories where these input cost increases will have a greater effect and some where it will be less. But we will be in a position to offset those input cost increases.

Okay and then lastly on the M&A environment, do you see many targets that are of interest to you and appropriately priced? How would you characterize the target pool of potential acquisitions?

This is Sam. If I go back more than a year, in several quarterly statements progressed through the acquisition filter, I indicated I think last time that we had gotten our bakers dozen down to roughly half that number. And saw very attractive strategic opportunities. Since that time we've acquired the number one and number two items on our list, Sturm Foods and ST especially. The other categories, none of those category- leaders as prospective targets have moved through an M&A transaction. And we will resume our acquisition for with those in mind and update those based on current market conditions.

With regard to the M&A market conditions, I think really we are in such fine condition with our cash flow and our balance sheet. Particularly now that the refinancing is completed. That we will be prepared and actively engaged, regardless of greater market capital market conditions.

Got it thank you

And our next question comes from David Driscoll with Citi Investment Research

Thanks a lot good morning everyone.

Good morning, David.

I want to go back to the pricing question. In the quarter, I believe that your US retail business had pricing down 2.2%. Dennis, do I have that number correct?

Yes I believe so. Let me just double check, one moment. 2.1%, yes.

Very good. So if pricing is down that much, yet were talking about inflation, I feel as if the quarter is not really a good guideline to what the price volume elasticity will be going forward, so here's the questions. Why is the pricing down so much? Other companies, Kraft the last night was telling us about how there pricing was up significantly more than they had otherwise expected during the quarter, because of the quote unquote spike in commodity prices. So there's some divergence here on comments from different companies. Can you can just tell us what you're pricing was so negative?

Sure this is David. I think some of that pricing would relate to for example our non-dairy creamer business. And you have to look at that year-over-year, where we back in 2008 we took very significant price increases as commodity costs soared, and as those commodity cost down at the end of last year and through the beginning of this year, our policy with the retailers is we need their support when it's going up and when input costs come down were going to reflect that in our pricing to them. So that's really the case. Clearly now we are seeing over the horizon an escalation in input costs and we will deal with that as we did in 2007 and 2008.

At this point have you guys actually announced any price increases to the trade?

We can talk about the specifics related to our pricing.

Well I'm not asking forward, I'm asking if you've announced publicly to your retail partner price increases?

We don't do public pricing announcement. Everything we do is on a one-for-one basis, David.

Okay. So you can't give any hints here on whether this is near-term or whether this is -- ? That's all I'm really trying to get at, I mean are we looking for something in the near-term, or are looking for something three to six months down the

Hey David this is Sam. If I were you, I'd go out and buy soup, and powder and non-dairy creamer right now.

I will do exactly that. Sam, you mentioned in your comments about the offsets to input cost inflation. You had three buckets, pricing, productivity and purchasing initiatives. Can you talk about that last bucket? What's the magnitude on this piece? Is this a percent, or is it significantly more than that in terms of favorability expected going forward?

Every year we budget purchasing initiatives in the low eight-digits. And every year we've made or exceeded that number. And it all comes from the economies of scale that we have. And we are close to a $2 billion business. If you were to price our revenues at the branded equivalents, we have the pounds here that are equivalent to a business that is much, much larger than our $2 billion one. Secondly, we are actively engaged on a forward basis, and forward and future markets in ingredients and in the underlying materials and packaging

And then thirdly we have an active dialogue with our customers and will go to them in anticipation of cost increases and suggest that what we do together is we'll lock in the cost and they'll commit to the volume. And so we're engaged on several fronts here. And very significantly, each time a new acquisition comes in, it is our procurement team that leads the charge with regard to synergies and cost reductions.

Let me add one just a little bit of commentary on how we go after this. This coming Monday, Dennis and I along with Jeff Hayes the Bay Valley Senior VP of procurement, we'll be up in Manawa, Wisconsin, at Sturm with their procurement team, along with the ST procurement team to really go after how do we -- the three companies -- really come together and drive procurement costs? Whether it relates to packaging raw materials or freight. And this is a process that we go through with all of the acquisitions. And through Harry Walsh and his team in Bay Valley, it's just an ongoing effort

I really appreciate all the detail on that point. If I could sneak one last question in. I'm really curious about what your comments are about the back-to-school period of time, how is promotional activities and I believe that you have the jams and jellies business both branded and private label in their and that's a key period for that particular business. Any comments you could provide would be helpful

You know our business has been was fine during the back-to-school period. Most of our jam and jelly business is Canadian-based and I think that business did fine.

Okay, great. Thank you a lot. Good quarter, thank you.

Our next question comes from auctioning Akshay Jagdale with KeyBanc Capital Markets

Good morning.

Good morning.

Sam quick question on the inflation. Can you help with that 6% number in perspective? What was it in 2008? I know it was $110 million, but I'm trying to get a sense of percentages so I can make a comparison?

You'd have to go back to our earlier statements and the public record to see both the exact dollars and the percentages. I believe that we were in one year at budgeted $45 million and it turned out to be $110 million or $115 million. And so we had there a run up of about three times our estimate. The dollar amounts and the percentages in the coming years are substantial fraction of that. But nowhere near that number itself. And the primary difference is in the energy markets, compared to several years ago.

I also mentioned that the real focus here is on the grain complex. It's grains and oil to a certain expect dairy that we are concerned with. I think David on an earlier question indicated that we're targeting specific categories as a result of the inputs to those individual categories.

As I mentioned in my comments, a huge difference now versus three years ago as just to how we approach this. I may get a little granular here, but every week we have a procurement call that Dennis and I are on, Harry Walsh of our procurement team and all the sales channel leads to really go through our commodity positions, our pricing and what we need to do. We did not have that in place for years ago. So what we are facing now is significantly less input costs inflation. At the same time, we have a much better business process in place to deal with it, so our comfort level as we are exiting this year and entering next year is significantly higher than at this point 3 years ago.

That's helpful. And I know you don't want to be too specific on this. But when you're managing commodities versus pricing are you're targeting gross profit growth or gross margin or maintaining margins?

It basically maintaining margins. As David said, when costs go up we expect to pass input costs on, and if costs go down, we anticipate there will be some give back on that. The margin enhancement we do is the program Sam talked about, the productivity improvements and purchasing improvements.

And just based on my own calculations for this quarter, excluding Sturm it seems like the based business EBIT was flat. Am I way off on that? If I'm right, I'm just wondering why we are not seeing any margin expansion? I know you had guided for about roughly 50 basis points of gross margin expansion, so there's probably a lot of noise in there. But I'm just trying to understand directionally if you're still on track to see that kind of margin expansion on the based business?

This is Dennis again. We don't break out the margins on products and the segments. So I can't comment on that. I would say that we are clearly on track with our plans. If you just look at where we started the year versus where we're ending the year, compared to last year, we've had very nice margin improvement and I mentioned that in the call today as well. Definitely we're on track, but I can't comment on legacy versus consolidated.

Okay.

I will offer the opinion that David and I will take 10% growth at Sturm and 5.6% growth at our core private label every quarter.

One last one on growth and this is more longer term. If you look at -- just if you take Kraft's North American business as a proxy for branded growth, and compare it to yours this quarter -- I know one quarter doesn't make a trend. But you said that private label and you expect your portfolio growth to be at least two times that of branded. We haven't seen that yet. When do you expect that to come through? With the ST acquisition and you talked about pickles now being only one-sixth of your sales or less. Can you help us understand when we can think of Treehouse's top line growth algarythm as being two times that of branded food companies?

Well the way we look at it is -- we're not going to look at it in just the individual branded food companies. It is really what food at home consumption grows at, and the brands have typically grown at that rate. Which is approximately 1%. That's the long-term trend, and our model is really based on private label growing at twice that rate. So from an organic growth perspective, we've always been focused in on that twice that rate. And so were really looking at 2% plus

Okay, thank you. I'll pass it on.

Our next question comes from Chris Growe with Stifel Nicolaus.

Hi good morning guys.

Hi Chris.

Hi, just a couple questions for you. For Sam or for David, I have a question for you about pricing. As we look ahead and clearly the industries moving towards much more aggressive levels of pricing and summer moving earlier as we heard from Kraft last night and has a negative effect on their volumes. But I just want to get a sense on where you think the consumer is today? And what it would mean for your business as you price up? Are you worried about the negative volume implications? Or is it more about does private label gain a little share as you price up to this input cost inflation?

I don't think that kind of pricing that were going to be seeing -- I don't think it's going to be significant. I think when back in 2008, I think industry wide pricing may have been in the 6% to 7% and we're certainly not going to be looking at that dynamic this year. And I think that listening to what the other manufacturers are saying and what the other retailers are saying, I think people are expecting to pass those increases through and they think they will be absorbed by the consumer.

Okay and then just a couple of quick questions beyond that, just two more. First one, is the run rate of corporate expense going forward, maybe Dennis, are we at a good level to kind of annualize? I know there's always variations in that number quarter-to-quarter. Do you have a good number for this year maybe, at least?

Yes I think our run rate for this year and this quarter has been pretty good and consistent. So I think the 2010 numbers are on a pretty level run rate. For next year though, when we give the guidance I'll just reiterate that our new system will be turned on and that will result in higher depreciation and amortization in the G&A category and the offsets will begin to be manifested up in the margin line ,so you will start to see a shift next year and we'll talk more about that in February when we get the 2011 guidance. But as you look forward I think it's going to be difficult to get much lower than where we're at, given the size of our Company to have a less than 12% total SG&A.

Okay that's helpful. And then my last question would be a question regarding ST and you've made a point when you announced the acquisition about how their customer base is quite different from yours. Now I'm just curious and you try to attack that and really get after some of those revenue synergies, are their costs on your part to try to and maybe build out? Whether it sales, or it's some back office part of the business? Are these things that just become incremental opportunities for Treehouse going forward?

They really become incremental opportunities for us. And we are working on those aggressively right now. In fact, the day we closed the deal last Thursday, I was up at ST sampling enough drive package dinners that I really did not have to eat for three days afterwards. But part of that sampling was really going after targeted customers and how we want to achieve success. It'll take time, but we are well underway.

Okay great thank you

And our next question comes from Bryan Spillane with Bank of America Merrill Lynch

Hi good morning guys

Good morning

Just one question on the coffee cartridges. David, if you could talk a little bit about what you're seeing -- just what the early returns are? Is a product out there? How it's been positioned relative to the branded products? And also you've got now a competitor who has challenged your product legally. Is that at all affected the retailer appetite to try this product?

I'll comment on the business to date and all I'll lett Dennis handled the issue with the competitor. Sales so far sales have been modest today. We are initially launching it under a controlled brand and the real opportunity for us -- and we know it with the retailers -- we have a lot of retailers that are very excited about it. They really see the opportunity to put under their own brand and developing their packaging and everything else for those brands takes a lot of time. So I would say right now we don't have much of a consumer read because the sales have been modest so far. Dennis you want to?

Yes adjust in regard, you mentioned the lawsuit. The product was just introduced in September. And in early October Keurig did sue Sturm. As a result of this litigation, our comments have to be pretty limited, but I would say we believe very firmly that Sturm's coffee product is not infringing on any of Keurig's intellectual property and we don't consider the litigation or defense cost to be material. And of course we will vigorously defend both the product and ourselves. So given the nature of the pending litigation, that's about all I can say on that topic right now.

And just as a follow-up. That has not -- has it affected at all consumers willingness, or your customers willing this to want to experiment with the product or try the product at all? Has it been an impediment?

I certainly haven't heard anything about a negative reaction on the part of our customers

And then David just as a follow-up . As you've made the -- Sturm has made the decision to produce this product and sort of looked at the I guess with the ultimate revenue opportunity is. Could you just give your views on how big that single cup market could be of the total coffee market? And you still think there's room for large growth there? Just some idea of how big you think this opportunity could actually

I have not -- we really haven't tried to completely model this thing out. I mean I guess the more machines that get sold the more coffee that gets sold. We see it as a very attractive opportunity for us to leverage the imagination and R&D creativity of Sturm. And to leverage our manufacturing capabilities and packaging capabilities. As I said, the sales of this point under the control brand are modest and we'll see how big we can make it.

Bryan, this is Sam. I think if you go back and read David's comments, he indicated that the R&D group --- they're working with the R&D group at Treehouse pursuing an array of cold and hot beverage concepts, and that's the big headline here. And we can take our industrial might and their ingenuity and in fact move into a number of beverage related categories.

Okay, great, thank you.

(Operator Instructions) We'll take our next question from Andrew Lazar with Barclays Capital

Good morning everyone

Good morning

Just a couple very quick ones. One on the recent ST acquisition, Dennis, how are you thinking about accretion from that business? Flowing through and I guess you've got it for two months in this year? The last time you gave guidance, which you stuck to today, you hadn't actually announced that deal yet? So does SG affect earnings in a positive way this year? And if so, why hasn't that flowed through into guidance?

What we said prior is that ST would add between $0.11 and $0.13 in annualized earnings. So you're looking in the range of about $0.01 per month. One of the challenges we always have with acquisitions and the early announcement to the final is the whole allocation of amortizable good will. And that has not been completed. So we'll adjusted if we need to. But between the upfront acquisition costs and some of the integration activities, along with just that $0.01 a month on average, frankly we don't expect it to have much of any real impact on the 2010 results

Got you . Then you'll give obviously more guidance around 2011 later. As you think about the margin opportunity, you had a great run on margins for the business, both based business and what the acquisitions have brought. Is it fair to say -- do you feel there's still an ample opportunity on the legacy business? From a margin potential going into next year? Or is much more of the margin going to be far more based on what you can deliver around synergies, let's say, on the cost side from Sturm and

Andrew this is Sam. I think we will have the largest single year yet of the base businesses cost synergies. And some part of that will be derived from the new ERP system. But the bulk of it is going to be continuation of productivity and procurement programs that the Bay Valley team has put into place and have just been very steady in their ability to produce more every year, year in and year out.

That's helpful. And then very last thing. This is really this is -- kind of thinking much further out, Sam . But do you in your discussions with your key retail customers, part of what you're bringing to them with your M&A strategy is covering a broader set of categories. Thus far kind of center of the store, broader categories, to be a larger supplier to them from a private label standpoint across multiple categories. And I assume that's part of what the benefit they get from dealing with the Treehouse as opposed to other smaller, regional private label suppliers. So maybe the more categories you can cover ultimately the better. Do you get pushed at all or asked about from your retail customers, 'hey why wouldn't you guys just do a transaction that would double, or more than double sort of the categories that ultimately can be brought to the retail customer'? You know what I'm saying? I'm just trying to get a sense of

I do

If there's value there, why not amp it up?

David and I really get that question a lot more from Stacy and Vickie when we're at home than from our customers. And with the customers, there's incidental discussions from time to time. I will tell you though Andrew, that we have found that once one gets into the acquisition filter model and starts to look at specific categories. We used to look only at scan data and what we've learned in the last couple years is we've got to look at large customer performance in those categories. And to the extent that you can see among our top 25 retail customers real emphasis on categories at the margin that will lead us to mark the attractiveness of that category, either up or down, based on what the big customers are doing. And with their private label, particularly when they get beyond the opening price point and start to get into two and three tiers and not only the national brand equivalent but the premium sectors. So we pay very careful attention to what those large customers are doing, whether it's in the scan data or outside of that and whether they talk about it to us or not.

Thank you

And our next question comes from Jon Anderson with William Blair's

Thanks good morning everyone

Good morning John

Guys, there seems to have been so much focus on transactions versus kind of innovation and merchandising at the retail level. To what degree have you seen this mindset changing, more recently?

You mean in terms of the retailers just focus on price versus innovation?

Yes exactly. More of a focus on price promotion versus good focus on innovation and merchandising of the shelf . Have you see that mindset beginning to shift among the retailers that you speak

No I don't think. Again, it really it differs by retailer. And one of the things we've been doing over the last three to six months -- I think are quite familiar with our category or product portfolio strategy. We've really done the same thing in terms of a customer portfolio strategy and it really has been able to start segmenting customers on the basis of those that are transaction negotiation oriented versus those who are innovation oriented. And I don't think that we've seen customers who have gone from highly innovative to switching to being transactional, or from transactional to be highly innovative, so it's customer by customer

Within the measured versus non-measured channels, it sounds like there's been some variation of performance. I think your business has been particularly strong in non-measured channels. Is that just the relative emphasis that the non-measured channels are putting on private label? Or is it a particular area of focus for you? And how you see that playing out over the next 12 to 24 months?

Well many of the non-measured channels retailers have a sort of a disproportionately strong focus on private label. Be it either in the limited assortment stores or in warehouse club. And that emphasis on building their brands -- they're really very focused on innovation and that plays right to our sweet spot.

One quick follow up on the commodity side. It would seem to me that productivity is going to be as important as it ever has in 2011, in light of some of the commentary around higher input costs. What are some of the bigger driver's of productivity for you in 2011? Is it to ERP? Is it salsa expansion? If you could just put a little more color around that, that would be helpful. Thank you a lot for your comments

Jon, it's Sam. I mentioned that there are three major capital programs going on to expand the production capacity of three very attractive and high-growth, high-margin categories. And each one of those capital programs we are incrementally improving technology, throughputs, productivity across each one of those.

In addition to that, we've got an ongoing program at every plant and every category of procurement, where we set numerical, quantitative targets at the beginning of the year for cost reductions that do not compromise product quality. And I'd say that the prime driver here is that ongoing program, that over the years used to be a handful of the people at the corporate office and now has dozens of plant personnel, warehouse personnel, purchasing personnel across the whole of the business.

And then lastly, our sales and marketing teams are deeply involved and make not only assist us in the purchasing timing and requirements that they think will affect best their market places. But in terms of formulation changes, packaging changes, transportation changes, we have engaged the sales and marketing teams. I remember two or three calls ago, David told the story about if one customer, by moving their shipments into mixing-center, consolidation point, that we had taken -- what was it David 25 trucks off the road at any time?

Yes

And that just demonstrates hey how the entire organization has become focused on those types of internal improvements and on and a continuous basis.

Thanks for the comments.

And we have a follow-up question from David Driscoll with Citi Investment Research.

Thanks for taking the follow up, I'll make it quick. It just goes back to soup and the comments, David, on the six month results. If we're entering into a period of inflation, and if generally the soup category -- basically it's my understanding that soup category sets its prices during the summertime for the upcoming soup season. So if I can assume that's soup prices are going to be flat to the original expectation set during the summertime, just about everything else in the grocery store will be seeing rising prices. It feels as if the volume expectations of minus 1%, which is I think what you said would be kind of the run rate going forward. That feels a little too negative. Can you make some comments around what I've said?

In terms of pricing, as we highlighted, the majority of the year-over-year input cost increases tend to be focused in on the grain complex, and so that really doesn't have much of an effect on soup. So we're not expecting much action on that front during the soup season.

Let me just try it slightly differently. Campbells make this argument all the time about simple meals and that other simple meals directly affect the soup category itself. My argument is simply that if the soup category has a relative price advantage over other simple meals, wouldn't have bode well for volumes for the category? And thus be somewhat more positive than perhaps your experience thus far?

I hope you're absolutely right.

All right, I had to try.

Thank you David

This concludes today's question-and-answer session. At this time, Mr. Reed, I'll turn the conference back over to you for any additional or closing remarks, Sir.

Thank you Lauren. We look forward to our year-end call with you, tentatively scheduled for mid to late February. Also for all of you who plan to attend the PLMA convention in mid-November, please stop by our booth. We almost have an entire isle by ourselves now. With Bay Valley Foods, ED Smith, Sturm Foods and ST Specialty, all in array with Treehouse corporate group. Come by to sample the bounty of our burgeoning portfolio of private label and consumer brand products. We are as our corporate model states winning as one. Thank you.

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