TreeHouse Foods Inc (THS) 2010 Q4 法說會逐字稿

Welcome to the Treehouse Foods Investor Relations conference call for the fourth quarter of 2010. This call is being recorded. At this time, I will turn the call over to Treehouse Foods for the reading of the Safe Harbor statement.

Good morning. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as guidance, may, should, could, expects, speaks to, anticipates, plans, believes, estimates, intends, predicts, projects, potential, or continue, or the negative of such terms and other comparable terminology. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause the Company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievement expressed or implied by these forward-looking statements.

Treehouse's Form 10-K for the period ending December 31, 2009, and the Form 10-K for the period ending December 31, 2010 which will be filed shortly, discuss some of the factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements which speak only as of the date made, when evaluating the information presented during this conference call. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein, to reflect any change in it's 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 Food, Mr. Sam K. Reed.

Thank you, P.I., good morning, all, and welcome back to our Treehouse. We've just concluded our fifth year with extraordinary financial results and strategic progress of the first order. Our future prospects continue to expand and our horizons broaden, as our original strategic vision has been validated by yet another year of excellent performance. In the past year alone, our chronicled strategic progress includes the following, operating earnings per share growth of 25%, thanks to a 15% gain in legacy operating income and two highly accretive acquisitions, expansion of our product portfolio via acquisition into three attractive growth-oriented private label categories, capital market access to finance growth on favorable terms including an expanded bank credit facility, high yield offering and secondary equity issuance, launch of a fully integrated IT platform to unite all of Treehouse under a single ERP system, and development of a senior management team and executive succession plan that ensure continuity of our vision, enhance our ability to execute our fundamental strategy, and instill confidence in our prospects for continued growth.

David Vermylen, the principal architect of our core strategy, my friend and partner for two decades, will soon move to a new role, effective as of the July 1, that of Senior Advisor and Consultant, in directing our continued strategic growth. While his hours will change, David will remain the driving force behind our fundamental go-to-market strategy, its organization and execution, as well as its central role in our acquisition agenda. While our partnership will be different, he presumably will no longer e-mail me in the pre-dawn hours with an interpretation of the daily 3 AM sales report, there will be no diminution or letup in our tandem drive to generate and sustain superior shareholder value. Reserving my personal thoughts for later on this call, I now yield the floor to my friend, partner, and co-founder in our Treehouse enterprise, David Vermylen.

Thank you, Sam, and good morning. Before I give an overview on the performance of the business, let me first comment on how excited I am about my future with Treehouse after July 1. For the past six years, my job has been very focused on strategy, acquisitions, and building an organization and talent pool, capable of executing that strategy, and making Treehouse the best private-label food Company in the country. The breadth and depth of our talent pool is light-years better than it was six years ago. When I look across our entire business, from procurement through sales, each part of our operating Company is now led by an A-player. A few years ago, I needed to be deeply engaged in every part of the operating Company. Today, with the team we have in place, I don't need to do that.

But I'm not ready to retire, and frankly after being joined at the hip with Sam for the past 20 years, it would be very difficult for us to get divorced, let alone separated. My new role at Treehouse will enable me to be deeply involved in the three areas where I believe I really add value, strategy, acquisitions and marketing. These are my sweet spots, and I truly believe I will be better at them, with a mind and body that could use some rejuvenation. What I will miss is being actively involved with our investor group, but you will have to put up with me for a few more months. I'm a marketer and strategist at heart, and the opportunity to talk about Treehouse and our strategy has always been one of the best parts of my job.

Now let me provide an overview to the fourth quarter, and a perspective on 2011. Overall, fourth-quarter revenue was up 25.9%, primarily due to acquisitions, with gross margins up 150 basis points to 24.8%. Excluding acquisitions in our discontinue branded infant feeding business, our revenue is up 1.8%.

In North American Retail grocery, legacy volume was up 1.3%, excluding branded infant feeding. If you recall after a disappointing second quarter, we had a very robust third quarter with volume up 5.6%, for a combined second half of plus 3.3%. For the year, excluding infant feeding, units were up 2.9%, and revenue 2.5%. I characterize that as good solid performance, right in our target zone.

Fourth quarter soup volume came in slightly above year ago, and slightly better than I forecast on our last call. This was a very good performance in terms of soft market and aggressive competitive activity. Pickles, powder, salsa, jams and jellies, and sauces all showed modest unit growth. Food Away From Home had a good quarter, with legacy revenue up 1.7%, led by good salsa growth. We've also had some good oatmeal wins, with broad line distributors that will kick in early this year.

Our Industrial and Export segment, better known as [ICE], had revenue growth of 4.7%, driven by good growth in our Industrial powder business. We are very pleased with the performance of Food Away From Home and ICE, given how the Food Away From Home industry continues to struggle. From the data I have seen, we seem to be doing better in that segment, than many other food companies.

On a pro forma basis, Sturm revenue was slightly -- slightly below last year. Oatmeal showed good growth, but beverages which were up 16% in the third quarter showed a modest decline, due to reduction in customer inventories between the ends of the third and fourth quarters. Consumption was up, but shipments were down.

Oatmeal is continuing to do very well this quarter, and we are launching over a dozen new beverage SKUs in the first quarter of this year. We are very pleased to have recently heard that we were awarded the oatmeal business for a large Canadian retailer, and we are optimistic that other new business is soon to be won, north of the border.

On ST Specialty Foods, we closed the acquisition on October 28th, and we are off to a very good start. For the November/December stub period, ST dry dinner case sales were up 19%, and they had a great January. ST and Bay Valley are tag-teaming on a couple of potential big wins on macaroni and cheese, and we are very excited about our prospects. As we close out 2010, from an operating perspective, I would characterize it as a very good year, and one that with the additions of Sturm and ST, well positions us as we enter 2011.

Now onto 2011. While Dennis will cover our outlook, let me provide a macro overview of where I see us heading this year. Here's the question on every investor's mind, what are we going to do to grow our top line, and run the business more efficiently? First, we will be more aggressive in integrating our go-to-market organizations, and taking advantage of cross-selling opportunities with legacy Bay Valley, Sturm and ST. I think we've been a little too conservative and cautious on merging sales teams in the absence of an integrated IT platform, and this has been at the expense of cross-selling. Organizational changes are well underway, and a new structure will be completely in place by the end of this quarter.

Second, we have done an enormous amount of strategic work on how we organize our sales teams to deal with changes in the retail landscape. We are very underdeveloped in a number of high-growth channels, and this provides great growth opportunity.

For a perspective, seven of the top 25 retailers in the US operate with non-traditional food retailer formats, such as warehouse club, limited assortment, and dollar stores. Those non-traditional formats require non-traditional ways of doing business. Nine of the top 25 retailers had little, if any presence in food retailing 20 years ago. Our new structure will address these opportunities.

Third, our approach to product innovation needs to become more strategic, with a much better prioritization of our activities. In that regard, R&D is now reporting to Sharon Flanagan, our SVP of Strategy, who is working very closely with the channels and category teams, to make sure that our innovation activity is well linked to our three year category and customer strategic plans.

Fourth, with our new ERP system, we need to take our level of business and operating performance analysis up a big notch. Our business is far more complicated than our branded business, and while I think we are good operators, I know that the visibility we have had to help us execute with excellence has not been what it should be. While it will take time for us to all get familiar with the new system, I know it will be a great tool for the operators.

As Chief Operating Officer, I am very proud of how less than two weeks ago, we cut over to our new ERP system. Given the well-known challenges that many ERP projects have faced, in the middle of the worst blizzard in decades, we cut over our order-to-cash system with no effect on customer service levels. A year ago, we took 15 of our best operators from all areas of the Company, and put them on this project full-time. We made a successful implementation, a Company-wide effort. So far the phase one cut over has gone smoothly, and bodes well for integrating ST and Sturm, and rolling it out to our plants over the next year or so. My point in highlighting this is that it shows the skill set of our operating team, as well as the ability of the Company to take 15 top people off the front line, and still perform at a very high level. We could not have done this a few years ago.

Fifth, we need to deal with escalating input costs. On a mark-to-market basis, we expect input costs including energy, to increase by $110 million or over 5%. We are well-covered on the majority of our input costs, and are confident in our ability to deal with the issue through our procurement strategies, productivity, and pricing. On procurement, we have traditionally been covered for at least six months on key commodities. Beginning in mid-Q4 2010, we began to lean forward on our coverage, extending our normal six month time frame to nine months or longer. While the run-up in commodities is a challenge, we believe that we are in a good position, relative to many other food companies.

On pricing we will see some lag between rising costs and pricing, given that category seasonality plays an important role in the timing of price increases. We faced a far more severe input cost environment in 2008, and managed our way through it with excellent results. In terms of private label versus branded pricing, everyone is feeling the effects of input cost increases, and over time we expect that price gaps will remain at normal levels as they did during the run-ups in 2008.

Finally, as I've said each of the past two years, we need to continue to attack the center of the P&L. We've made great progress in certain areas such as procurement and inventory management, but we need to raise the bar on our day-to-day plant operating performance. Companies traditionally measure their performance based on manufacturing standards, which assumes yield, loss, downtime, etc. Last year, Harry Walsh, the President of Bay Valley and a great general manager, identified enormous savings based on theoretical excellence. When we roll out our ERP system to our plants late this year, we will be in a much better position to measure our performance, in terms of excellence, versus just standards. I will now turn it over to Dennis.

Thank you, David. In regard to our operating results, I will focus on the following key areas of our fourth quarter results, gross margins, operating costs, and our effective tax rate. First, gross margins improved by 150 basis points to 24.8% compared to 22.3% last year, as both our Retail and Industrial and Export segments showed strong direct operating income margin improvement.

Retail margins improved in our legacy businesses, as we managed to control input costs with moderate pricing and internal cost savings. In addition, the Retail channel benefited from a favorable mix of new products from our Sturm and ST acquisitions. Food Away From Home operating income margins were steady compared to last year, as input costs were fairly stable and minimal pricing was taken in the quarter. Margins in our Industrial and Export segment improved from 14.3% last year to 18.4%, due to a combination of pricing in our Industrial business, and a better sales mix in our co-pack business.

Selling and distribution expenses in the quarter increased to $33.7 million, compared to $28 million in 2009 due to the growth in total revenues. As a percent of sales, these expenses decreased to 6.6%, compared to 6.9% last year. The improvement is related to distribution efficiencies, as we migrate to centralized distribution centers.

General and administrative costs increased $3.9 million or 16.3% from the fourth quarter of 2009, as a result of the growth of our Company. As a percent of net sales, these expenses decreased to a rate of 5.5% compared to 5.9% last year, as we were able to obtain some leverage on operating costs as we grew through acquisitions. Other operating expense was minimal in the quarter, compared to $7.7 million in last year's fourth quarter. Nearly all of the expense in 2009 relates to the write-down of the value of our Nature's Goodness baby food trademark, as we de-emphasize our branded offerings, and continue to focus on private label products.

Amortization expense increased to $7.6 million compared to $3.4 million last year, directly as a result of the acquisitions of Sturm Foods and ST Specialty. Interest expense for the quarter also increased significantly due to an increase in our outstanding borrowings, as a result of the acquisitions we made last year. In addition, we do have higher interest rates resulting from the issuance of high yield bonds earlier in 2010, that carry interest at the rate of 7.75%, and the refinancing of our revolving line of credit during the most recent quarter.

Last year, we benefited from interest rates that were well below market, due to the timing of our prior credit agreement. The average interest rate on our revolving line of credit is now 2.23%, a very good rate, but well above the 0.91% we had in 2009.

In regard to our debt, during the fourth quarter we completed the acquisition of ST for approximately $180 million, all of which was funded by borrowings under our amended revolving credit agreement. However, we did have very strong cash flow in the fourth quarter, as we continued to manage our inventories down, while maintaining very good order fill rates. As a result, our debt increased by only $101 million in the quarter, and our pro forma debt to EBITDA leverage ratio now stands at 3.26 times. Between the up-sized credit agreements, and our ability to leverage up to four times debt to EBITDA -- to pro forma EBITDA, we have plenty of capacity to make strategic acquisitions.

The loss on currency exchange in the quarter relates primarily to the revaluation of a Canadian inter-company note. As Canadian exchange rates increased in the quarter, we had to take a non-cash mark-to-market write-down on this note. Last year, the Canadian dollar was weaker relative to the US dollar, resulting in a large non-cash write-up. We consider these fluctuations to be non-operating items, because the inter-company notes have no effect on the cash flow of the Company, and they will eventually balance out over time. Our non-operating income and expense included the $900,000 non-cash gain to mark-to-market our interest rate swap agreement, and was very consistent with the adjustment made last year. This adjustment is to reflect current LIBOR rates, but does not have any effect on our future interest payments.

With regard to taxes, our effective tax rate for the quarter was 34.3%, up just slightly from the full-year run rate of 33.3%. Last year's very low rate in the quarter reflects the favorable impact of a Canadian tax rate reduction enacted during that quarter, as well as an increased benefit from the inter-company interest, due to the higher Canadian exchange rates.

Income from continuing operations in the fourth quarter was $28.1 million, compared to $22.1 million in last year's fourth-quarter. This equates to fully diluted earnings per share of $0.77 in the quarter, compared to $0.66 last year before considering unusual items.

Our reported results for 2010 and 2009 include non-recurring non-operating items, that should be considered when analyzing our reported results. In the fourth quarter of 2010, we had approximately $0.06 in one-time costs associated with the Sturm and ST acquisitions and integrations, including such items as advisory fees, inventory revaluations and other integration costs. In addition, we had a non-cash gain of $0.03, resulting from marking to market our swap agreements, and a non-cash loss of $0.01 resulting from the revaluation of the inter-company loan agreement. We also had a $0.01 gain for an adjustment to infant feeding charge previously disclosed.

In 2009, we had a variety of items that negatively affected reported earnings, including the trademark adjustment I referred to earlier, along with the Sturm acquisition costs, and various non-cash mark-to-market adjustments on our interest rate swap, and inter-company note. These items are illustrated in the press release we issued this morning, and total $0.12 per fully diluted share. After adjusting for these items in 2010 and 2009, our adjusted earnings per fully diluted share would have been $0.80 in the fourth quarter of 2010, and $0.78 in the fourth quarter of 2009. The relatively small increase in the quarter was due to much higher borrowing costs in 2010, and a more normalized tax rate.

As we look at 2010, our full-year results showed top line growth driven primarily from acquisitions, but very good margin growth in both our core businesses, and from the favorable mix of new products that came with last year's acquisitions. In fact, all three of our operating segments showed very good, direct operating income improvements. Our reported results -- our reported earnings per fully diluted share from continuing operations was $2.51 for the full-year 2010, compared to $2.48 last year. Excluding the unusual items outlined in our press release, adjusted earnings per share would have been $2.78 this year. This is a 24.7% increase over last year's $2.23, which included a sizable non-operating gain in the 2009, resulting from an insurance settlement from a plant fire, and it was well above our expectations for the year.

Now let me cover the outlook for 2011. First, let me say that 2010 was an exceptional year for us. We invested over $840 million to buy Sturm Foods and ST Specialty Foods. We completed our first secondary offering, became a first-time issuer in the public bond markets, and embarked on a new information system project that will become the core of our consolidated operations.

As we enter 2011, we will continue to refine and expand the systems implementation while also enjoying a full-year of operations from last year's acquisitions. While we continue to look for more opportunities to expand our Treehouse through strategic acquisitions, our guidance as is our practice, will focus only on our business today. We only provide acquisition guidance after we announce a transaction.

So with that in mind, we expect our 2011 total revenues will grow by 12% to 13%, driven primarily by having a full-year of revenues from Sturm and ST. Looking at North American Retail grocery in particular, we expect unit sales to increase between 2% and 2.5%, excluding the branded baby food business that we exited last year. We will lap the baby food comparisons during the third quarter of 2011.

In terms of gross margins, we will continue to see improvements next year, driven in part by our legacy businesses and a better sales mix, along with our continued push to drive value from the center of the P&L. Our expectations are that gross margins will rise by 100 basis points next year, on top of this year's 215 basis point improvement.

As we look at operating expenses, we have benefited in past years from good cost management, and the efficiencies we get as we acquire new companies. We have consistently seen operating expenses as a percent of sales decline. In 2011, however, we will see operating expenses increase as a percent of sales, as we continue with the roll-out of our new system to our plants and operating units. This continuing investment will cause operating expenses to increase by up to 30 basis points as a percent of sales.

Another area of increased cost will be interest expense. We expect interest expense to be $55 million in 2011, due to having the 2010 acquisition debt outstanding for a full-year, and because our revolving line of credit was renewed and reset to market rates. As I indicated a few minutes ago, we loved having borrowing rates at less than 1%, but we knew that goose was not going to lay golden eggs forever. In regard to taxes, we expect to maintain a tax rate of 35%, up slightly from 2010 because part of our tax benefit comes from acquisition costs. And as I stated earlier, we do not forecast acquisitions in our guidance.

As to matters of cash flow, we expect to increase our capital spending program in 2011, as we focus on productivity and capacity enhancements. We are targeting up to $85 million in spending, including $10 million in continued investments in the new ERP system. We are investing more heavily in 2011, because we want to take advantage of our very low borrowing rates and tax incentives for capital spending, as we increase production capacity in our salad dressing, dry dinners, and salsa businesses, and focus on productivity enhancements in our powdered beverage business. We do not expect this rate of investment to be repeated in future years, and should return to a more typical run rate of 2.5% of net sales in the out years.

In terms of depreciation and amortization, we will see an increase in amortization due to the 2010 acquisitions. In total, depreciation and amortization should approximate $80 million. Our other significant non-cash expense is stock options, which we expect will increase to $18 million, as we include new management from our Sturm and ST acquisitions into our equity incentive programs.

After considering the above items, most notably our continued investment in ERP systems, we expect our fully diluted earnings per share to increase by a range of 12% to 14%, or from $2.78 as reported in 2010 to a range of $3.10 to $3.18 per share. In arriving at these estimates, we've used an average of about 37.5 million shares outstanding. Now I will turn it back to Sam.

Thanks, Dennis. As usual, you and David have analyzed our past results, and outlined our future plans with great clarity. It is evident to all, that while we have accomplished so much, we have even greater opportunity in the coming year. On behalf of our executive team, I'd like to thank all of you in our Treehouse, for your individual and collective efforts that have made 2010 such an extraordinary year. Whether employee or family member, customer or supplier, advisor or partner, investor or lender, you are an important member of the Treehouse community, and one that has contributed to our winning as one.

Before moving to QA, I will offer a strategic perspective of the year ahead of Treehouse, in the context of our initial five years as a public Company. First, the acquisitions of Sturm and ST Specialty, with their leadership positions in three growing, profitable private label categories, has energized all of us at our Treehouse. These expansions validate our portfolio strategy, as the guiding light leading us to construct, not only a larger Treehouse, but also a better one.

We have subsequently united and reformed our retail, grocery sales and marketing teams to pursue top line growth, as well as bottom line profits, in our customers' store brands. This change in strategic emphasis will better link our private label product categories to individual grocery customers. The ultimate effect of which will be to improve customer service, and in doing so hone our competitive advantage.

Next, our food service industrial sales operations and supply chain teams have once again combined to generate an annual margin gain in our legacy business of 125 basis points before the effect of acquisitions. As our new IT platform, launched without incident this month, is rolled out over the next two years, the proficiency and productivity of these teams will only continue to improve. In turn, that operational prowess will allow us to expand our market presence even further.

Thirdly, the resurgence in export prices for the Midwest grain complex and crude oil will also impose great cost pressures on all food manufacturers. Sell-side analysts now predict grocery inflation of as much as 13%, while the leading national brands respond with defensive measures to preserve their market presence. Our response will, again, will be more of the same, that we have successfully employed in the past. The formula is straightforward, active engagement in purchasing in forward markets, an unceasing drive for productivity, close cooperation with major customers. And lastly, enough pricing to close any remaining gap.

Next, the new year and following will portend well for the M&A markets. Corporate coffers are awash with cash. Expansion credit is plentiful, and private equity is stirring once again. We at Treehouse will continue to be actively engaged as a strategic acquirer, evaluating an ample stable of candidates in a fragmented field. We will also extend the private -- we will extend the reach of our private label portfolio strategy into attractive, adjacent categories in the dry grocery sector.

We have dusted off our 2009 bakers dozen list of strategically attractive candidates, and found that most are still available. Our cash acquisitions capacity should allow us to replicate our largest deal to date, again in the new year. As always, the critical evaluation for criteria for us will be strategy first, followed by category and competitive dynamics, go-to-market and operational synergies, and lastly, cultural fit. Our pursuit of these new opportunities is confirmation of our continued faith and confidence in our original mission.

Lastly, as of mid-year and in the ensuing years, our management team will venture forth with David in our strategic ranks, although no longer on the tactical front. Our executive succession plan and management development program will ensure that Vermylen DNA continues to course through our Treehouse veins. To that end, we have also announced that today, the promotion of three industry veterans and proven leaders, Dennis Riordan, Harry Walsh, and Tom O'Neil, to the newly established position of Executive Vice President, also effective July 1.

Concurrently, I will assume the role of Company President, and in that capacity reallocate the executive capabil --responsibilities and authorities among this team, David as a Senior Adviser, and myself. Further, I have also affirmed with our Board my intention to remain with the Company in my present capacity for at least another three years.

I'd like to conclude with two personal comments. First, to all of those whom have confided their trust in our Treehouse, our executive team will be even more committed, and no less effective in this pursuit of superior shareholder value, as our friend and partner focuses fully on strategic issues, go-to-market engagement of our customers and our consumers, as well as strategic implications for large-scale acquisitions. Second, to David, as your partner of the last two decades, I would of course still expect preferential tee times in Naples, if not strokes, when Chicago confronts the depths of winter. Strategic planning, after all, has always been a team sport. And Audra, with that, we will now open the lines for Q&A.

(Operator Instructions).

We will go first to Ken Goldman at JPMorgan.

Good morning.

Good morning, Ken.

So Dave, will you lower your current exposure to the Treehouse stock in any way? I think one of the reasons, besides some perceptions of guidance that the stock may be down a little bit is just a fear that, okay, you are an insider and maybe you see the peak coming or something like that, and now it's time to get out? But I don't think in your position, maybe you are selling any stock or doing think anything like that. I just wanted to clarify.

No, I'm definitely not doing that.

Okay. And then, I want to get a better sense of the quarterly margins in the general sense, for your non-grocery divisions. The margins have bounced around a bit from quarter to quarter, so it's not necessarily easy from our perspective to get a sense of the pacing going forward -- averaging the last four years, Food Away From Home has been strong in 4Q for example. Can you give us some sense going forward, of Food Away From Home and Industrial and Exports, when and which quarters we should expect better margins, and when we should expect maybe a little bit of a softer one?

Let me take that, Ken. The Food Away From Home margins as you saw were good, they were very steady, but generally good. Where we get some bouncing around typically is in that Industrial Export segment. And it is due in part to how some of the pass-through contracts work. And when we pass through costs both the numerator and the denominator of price and cost can move around, and that can affect it a little bit. And the other piece is in the co-pack business, and the co-pack business is very low margin. And we don't control the volumes in that, and frankly, when the volumes go down, the margins go up in that category, because of the significant mix change. And that's been an area that bounces around. I think if you go back into history, we've had margins as high as 19% in that category, and we've had it as low as 10% and 11%. So luckily, it is the smallest of our segments, but it is the one that has the most volatility.

And is there any way from us on the outside, to look at indicators that would suggest higher or lower margin in any particular period?

It tends not to be issue of seasonality, Ken. It seems to run on a quarter-to-quarter basis, as some of our customers who we co-pack for manage their inventory levels, and we get surprised as well. So it's something we live with, as well as the outside world.

And then one more. Sam, can you give us just a little more depth, in terms of which day-to-day duties will be taken on by which managers, just some sense of who's going to be expanding their roles, in which direction?

Well, Ken, as usual at Treehouse, it will be a team effort. I think that Harry Walsh, as Executive Vice President, and Sharon Flanagan, will -- who are deeply involved in the go-to-market strategies now, will take an even greater role. Dennis, as part of this reorganization will have the M&A work now, will directly report to him, as well as strategic planning for operations and supply chain. And Tom O'Neil will expand his role as Chief Administrative Officer to focus on the integration of Sturm and ST, as well. And I will pick up -- I will fill in the gaps, and pick up the pieces.

Thanks very much.

And next we will move to Akshay Jagdale at KeyBanc Capital Markets.

Good morning.

Good morning, Akshay.

I wanted to focus a little bit more on the commodity side and gross margins. Are you able to tell us, what your expectations are for the base business in 2011? It seems as though from my numbers, that you are still, despite the 5% increase in commodity inflation, you are still expecting 50 to 60 basis points of gross margin expansion in the base business, excluding Sturm and ST. Can you help me with that?

Well, I haven't given out the specifics on the legacy. One of the challenges as we start integrating these businesses, and I think David talked about the businesses of the oatmeal being sold north of the border and others, we start to lose track of what was legacy business. But in total, with the 100 basis points-- I think your numbers are reasonably close. In terms of input costs, that 5%, it is a big number. And it will be north of $100 million in total input cost exposure, and we have had big numbers before, and we are quite confident we are going to be able to recover those. And at the same time continue with the center of the P&L efficiencies, that Harry Walsh and his team have been so focused on the last two years. Despite the challenges that may be out there with commodity costs, we are still very confident in our ability to increase margins.

That's helpful. And can you -- just along those lines, can you help us with your view on the food basket and spending, as it relates to if there is going to be any trade down or trade up, as prices for food move up? So anything that you can help us understand, because you've already started taking pricing up, and there's a big debate out there, as to who fares better, is it the manufacturers -- the branded manufacturers or private label? And we would love just to get your take on that particular topic.

Sure, Akshay. It's David, I will take that. I think what we saw back in 2008 was an acceleration of private label share in total, but I think there were two forces operating there. One, was the -- a combined significant increase in input costs for all food manufacturers, as well as the turn of the economy into the recession. I think what we have this time is input cost increases, but an improving economy, albeit with still high unemployment rates. So I think the forces will be favorable for private label, maybe not as favorable as they were two years ago, but we are very optimistic that we are in a sweet spot. I think over time what we will see is that those price gaps between private label and branded products will be maintained. There could be some lumpiness as those prices roll out, because we don't sit and wait for brands to move on pricing. We really operate independent of that, to deal with our own input cost increases. But I think the bottom line is that this will be more favorable for private label, and we will be well-positioned for that.

And one last one, you talked a lot about earnings growth, et cetera, as it relates to acquisitions and your strategy both on base business as well as M&A, can you just sort of remind us of the focus on return on invested capital, and how you're looking at it as we sit here today?

As always, that's a key part of our internal activities. And Akshay, we've got an EVA we work off, and in fact have put that into the bonus programs with our category teams. Despite that though, when we do make an acquisition, obviously the initial return will always look low due to the intangibles and such. But if you go back, you will see that for the past four years we have consistently increased our return on invested capital, and that will still be a focus as we move forward.

Okay. Thanks a lot. I'll pass it along.

Next we move to Farha Aslam at Stephens Research.

Hi, good morning.

Good morning.

Sam, you'd mentioned you are continuing to look for acquisitions. Last quarter you mentioned about $200 million in capacity to do acquisitions without tapping the capital markets. Could you just update us on that number?

Good morning. Our 2011 plan, where Dennis has given guidance, when we look at the free cash flow implications of that, after the higher capital spending to improve productivity, we see that by the end of the year, that our budget and our forecast gives us a cash acquisitions capacity greater than that of the total cost of our largest acquisition to date. And I believe my earlier reference to around $200 million was for the year just ended. We do expect in addition to the increased size of the business, that the rate of profitability will improve, both on the core business and as we get the full-year benefits of Sturm and ST. We are greatly pleased with the management of both of those acquisitions and the three categories, and that will enable us, David included, to look at an array of strategic M&A opportunities.

I think those will come in two general categories. The first as I'd indicated was, we went back to the old bakers dozen, many of you will remember that first reference. And the -- for the largest part, those businesses other than what we acquired, are still independent and still available. Secondly, we will look at strategic premises of even larger large-scale possibilities, that could in -- through a transaction extend our portfolio far more broadly in one move, than a series of small moves. And the financing and the market reception to our Sturm Foods deal give me great confidence that, should we find that opportunity that would be beyond the cash means alone, that we could pursue it with the confidence that -- provided that we got as we always do, a strategically sound deal with excellent accretion and good economics, that the capital markets would receive us again favorably.

And the focus geographically remains US and Canada, or are you expanding beyond that at all?

North America is the focus, and will continue to be so for the coming year.

Great, thank you. And one other question, David, you had mentioned an increased strategic focus, particularly with innovation and channel expansion. If you had to establish annual kind of growth targets for these five buckets, could you just kind of give us a range? One would be what you are looking for, in terms of base volume annually, what you're targeting when you think about mix improvement for your base business, when you talk about cross-selling opportunities, and how much that's going to add to the top line, innovation and new products, when you think about that, how that adds to your top line? And then, where this channel expansion opportunity, and how much that can kind of net out to the top line?

The answers are two -- six.

I totally understand that (inaudible) --

I was scribbling down -- we -- I will be perfectly frank, we don't break it out with that level of sophistication. I think one of the things we do look for, what we are refer to as our big wins. And each year, we are really looking for about $50 million in big wins, which are good size new pieces of business with either current or for new customers, and we did that last year. And I think we did it the prior year, and I know we will be marching towards that this year. In terms of cross-selling, I think we have done a good job, but we know we can do a much better job by integrating the sales teams. When -- we just have not yet been able to create that cross-selling relationship with new customers, when we have different systems in place, different people calling on those customers. We are integrating those organizations this quarter, and I'm very optimistic that we will see an acceleration in that growth.

So as it relates to new products, the new products are really part of those big wins and the selling efforts. So I would say we are really looking for each year to be adding about $50 million in new business. And we are very focused on how that new business can improve the overall product mix. We are very attracted in categories, such as salsa, salad dressings, where through product innovation and positioning you can operate at that -- the premium segment of those categories. It's more profitable for the retailer, and it could be more profitable for us. So hopefully that provides somewhat of an answer to your very detailed question.

Thank you for the additional color.

Next we will go to Andrew Lazar at Barclays Capital.

Good morning.

Hi, Andrew.

You had talked about -- in your ability to sort of offset some of the oncoming inflation, procurement and productivity, and pricing is sort of filling in -- closing any remaining gap. I guess I am trying to get a sense of if, if that is any different or not than sort of how you handled things in 2008, where I think all of those things clearly played a role? But it just strikes me that in general in the group, food companies were feeling a lot more of the inflation piece with pricing at that stage, once they got it through, and maybe some of the productivity could fall to the bottom line. And this time around maybe -- just kind of perhaps because of the consumer or the unemployment environment as you've talked about, maybe companies are leaning just harder, because they need to, on internal sort of productivity and such. And I'm just curious if -- maybe get your perspective on that to start?

Andrew, I'll start quickly. I think that one of the major differences we have this time around is that the input cost increase has not been as steep a curve as it was in 2008 and 2009 when things went crazy in a matter of about three quarters. Costs are going up, but they aren't jumping as fast. So typically -- we are hearing numbers of 5% to 10% on average, and I think that's a pretty fair number. And it allows us to be -- to react in a variety of ways, as opposed to having just jump immediately on the pricing wagon that we did in 2008. So I think that's the number one difference that we have this year.

And then, in the North American retail piece that you talked about in your release, 2% to 2.5% planned sort of organic volume growth, how would we think about -- potentially what type of either mix, and more importantly pricing, to think about adding onto that, to come up with what we think about total revenue growth? In other words, how much of a role do you think pricing ultimately plays this year relative to last year?

It plays a bigger role. As we bring out the numbers, you will see that pricing in the quarter was minimal, and Food Away From Home, it was about 0.5% in the retail side, so pricing will tick up a bit. But it's -- typically, we try to minimize the effect of pricing in our revenue numbers, with the assumption that it's recovering costs. So pricing is neutral to margins, and we generally will not predict big price numbers, and let that just roll with costs. We don't have a lot of pricing necessarily built in that top side number.

Okay. And then last thing, just perhaps an update on the -- I guess expected EPS accretion that you are expecting from Sturm and ST, any changes there either way, that we should think about?

No fundamental changes -- and because of the way we integrate the activities and the financing all rolls together. We don't actually track accretion post-acquisition by individual unit, especially as we have really refinanced the debts and they all grow under a Treehouse corporate. But I think overall, we are comfortable with the numbers. And I think as you look at our guidance they are pretty much spot on, where the numbers would imply from the guidance we gave last March.

Great. Actually, I will ask just one last quick one. From a M&A perspective, Sam, I am curious when you think about smaller-sized deals or deals that are focused on a specific category versus those that might be multi-category type players within private label, is the latter category -- are there enough of those out there, and they are harder to pry loose? Or do -- how many of those exist? I am assuming obviously in the former there's obviously tons, and you have just got to be really strategic and disciplined about which ones make sense for you, but are there also tons of those that are across a whole bunch of different categories, or are those sort of tougher to find and pry loose?

Well, there are an array of those that are multiple categories. The issue that one runs into is that what you want to do is to find ones like Sturm, that are well-developed in two attractive--two or more attractive categories. Or ones like ST Specialty that -- having established rate strength within a sub segment of dry dinners, then have launched growth initiatives into other segments. I will tell you that my bias is that, if there's a business out there that has one very fine category, and another one that is in desperate straits, my tendency would be to -- I would rather buy two single category businesses that show great promise, as opposed to a single deal that had that difficulty to it, where one bought the good category, in the context of a bigger business. I think that is the learning experience that we have had.

And, Andrew if I could take a minute, I'd also like to amplify on a couple of earlier thoughts with regard to the change in the inflation in commodity and energy. Dennis accurately described the center of it, but in addition to that, we are far better prepared. And I think David indicated in his remarks how we had begun to lean forward to take coverage out to nine months, before the big run-up came. And that's indicative of many different efforts like that. And I would also say a large amount, other than the ERP system, a significant amount of this capital we have committed in a large stroke, is devoted to expanded capacity and productivity in those categories that we regard as the star categories, that have both great growth and superior profit opportunities. Thank you.

Thanks for your perspective.

And next we'll move to Micah Kaplan with Bank of America.

Good morning, guys. Just to get back to the price gaps -- I know you touched upon that. But I guess, David, I think you mentioned that you guys to the extent that you need to go ahead and take pricing, you will, and you're not waiting for the branded players. Is that -- are there any categories where that has actually kind of happened at this point, without a response yet by the branded guy? And if so, kind of talk about the volume elasticity in those categories?

We really haven't. I mean we are just moving through some of our pricing now, and really the price gaps from the data that we have through -- say the month of December, very consistent with a year ago, so there really hasn't been any change. And again, our expectation is input costs, all boats rise pretty much to the same degree, and that over time those gaps will be maintained.

I see. I mean, even in the past when you have moved first, the extent that that's kind of -- the gap has kind of gone back to where it was previously, just based on if the branded guy hasn't moved to that point, it's a relatively quick shift?

Yes it is. The brands can make a pretty good--pretty quick shift just by reducing their promotion spending. And that's a way for them to start recovering some of those input cost increases. For us, given that most of our pricing is EDLP or net pricing, we have to go with a list price, versus adjusting our trade spend.

Okay. And then I know you guys mentioned kind of the credit market right now. Just from a multiple standpoint, I mean is what you're seeing on a M&A front, are multiples getting to levels that you guys I guess are not comfortable with right now? Kind of how would you characterize the competition, for stuff that you are looking at?

This is Dennis. I don't think we are seeing anything unusual in the multiple side. We just closed ST and Sturm last year. And they were in that 7.5 to 8 times, and for very good, well-margined companies. So at this point, it doesn't seem to be a pricing issue. It just continues to be the right company at the right time, is the most important thing.

Thank you.

Next we'll go to Heather Jones with BB&T Capital Markets.

Good morning.

Hi, Heather.

I wanted to go back to the pricing question, because it seems like -- you said $110 million in cost inflation?

Total cost inflation, that's our estimate.

So close to like 6% or so. So to offset that you would need I guess, 4% or 4.5% in pricing, but you're talking about productivity improvements. Are you unwilling to provide a sense of how much you plan to offset with pricing versus productivity improvements?

That starts to get a little more granular than we are comfortable giving right now.

Okay. Could you give us a sense, you talked about you expect price gaps to be sustained over time versus the branded players? And I believe you just said they were pretty consistent in Q4 and to date in Q1, but do you have expectations as far as lumpiness going through the year, with regards to your volume expectations? I guess do you have expectations as far as price gaps, that may cause the volume gains to be lumpy through the year?

No, not really. And really so much of that is based on the experience we had back in the end of 2007 and the first half of 2008, where we were very aggressive on moving forward with our pricing, because is Dennis pointed out, there was just an incredible acceleration and input cost increases. And frankly, we didn't see any real short-term changes in our volume. I mean the business did fine during those periods of time. So whether it's -- we are not so sophisticated that we are measuring elasticity of every item with every customer, but at the end of the day, we are pretty comfortable that the pricing that we take will be modest at best. It doesn't all take place at the same point in time, unlike branded increases tend to go on one day. Ours we have to do it customer, week after week, and month after month. We just don't expect to see any fluctuations.

And in fact, as we look at the quarterly numbers, and we go back to 2007 where we look at our products, and compared to the brand match, the biggest swing I can recall is dropping to a gap of about 23.5% to 24% on a promoted basis. The average is 26% to 26.5%, we've seen maybe 27%. The point is, as you look at these through these seasons, even with the high input costs, the price gap change on a composite basis has been very small, even when we've had the huge run-up at costs in 2008. And I'm not expecting that in 2011 that we will see much change.

And is it a fair assumption that your determination, as far as how much pricing to take, is going to be category specific, more challenging categories you may try to offset it more with productivity, or is that thinking too hard about that?

Well, it tends to be category-specific, just because of the different inflation rates on inputs for those categories. Where those that are grain-based or oil-based, we may have to go more -- those that are not -- if we have to take any we might, but it really will be category specific.

I guess on that category specific end, as far as how much you will might try to offset with pricing versus productivity -- is that a category specific strategy?

I don't think we look at it -- the productivity is across-the-board in all of our categories. And is frankly not quite related to pricing. We are just focus on every day, trying to make that improvement. And then we will use the pricing to fill in the gaps, but we won't shift our productivity programs, based on input cost or pricing abilities.

Okay. And my final question is just a couple of the larger sounding wins you mentioned earlier in the call, are those going to be new businesses for those customers, or are these wins from other producers? I think it was mac and cheese and oatmeal?

It's really both. Some customers we are dealing with would not have a -- and this would be some -- sort of more of the say, limited assortment customers, who may not have had private label offerings in certain categories, and that will be a new category, private label category for them and new business for us. And then there are those accounts, where we are replacing a current supplier because we are able to come in and offer better program, including a product innovation and category management capabilities.

Okay. All right. Thank you for the color.

Next we'll go to Vincent Andrews at Morgan Stanley.

Thank you, and good morning, everyone. What I just wanted to dig in a little deeper into, is just on the inflation side, and understand sort of the bigger picture implications. It does sound like from what you said a couple times, that you are better protected. And you threw out 5% number. Would you care to offer what the unhedged rate of inflation would be? So I guess what I'm really trying to understand is, it seems like you're in a good position for 2011. But if you believe the status quo from a commodities perspective is going to persist, it could mean that it's kind of a tougher putt, as we get into 2012?

First, in terms of our hedge position, we are actually longer than we have typically been. I think historically we've been out about six months fully covered. We've got a good bit of 2011 under our belts. If input cost stay up, then of course in 2012 when those start rolling off, yes, we will be back looking at the pricing. But given where things have gone, our number one focus at the moment is 2011. And as we move through the year we will be evaluating as we do every week, our commodity positions and if necessary we will be rolling out into 2012. But that's not top of mind right now.

Okay. And you don't want to give any sense of, what the whole sort of big picture cash inflation would be, as we stand today?

Other than, as we talked about the gross number of 110, that's the best we can do right now.

Is that -- that includes your hedge positions, correct?

That's on a gross basis.

Oh, so that's not hedged? Okay, perfect, all right. Thanks very much. I'll pass it along.

Next we will go to Chris Growe with Stifel Nicolaus.

Hello, good morning.

Good morning.

I had a question for you, I guess for Sam, regarding acquisitions and the discussion of being able to do a larger scale acquisition. Would that take you into new categories, and I mean more so beyond center of the store kind of dry grocery? Would that -- are you at that stage yet, or is that still further out in the future?

Our focus will continue to be dry groceries, center of the store shelf stable. And as we talked about it in the past, while there has been substantial growth at Treehouse in that regard, and there has been inquiries about what's left, I look at that business, and that sector of the store with David, and I think that we identified seven or eight large sectors. And we are now in half of those, and there are some very attractive businesses that are currently beyond our portfolio. And the obvious reason to support that other half plus of the center of the store, is that the economies of scale are immediately available, and that affects the accretion of the deal. And in the long-term it affects our ability to leverage the strategy through the sales and marketing teams, and the research and development. So we will be treading those center isles for quite a while to come.

Okay, and I had a question for you in relation to ST. You had initially called out some accretion from that transaction. I think it was $0.14, and obviously you had some very strong sales this quarter. And I just wanted to be -- curious if you could talk about the accretion, if that has changed at all, either given the sales or given the new debt structure for the business?

This is Dennis, we gave guidance in the range of about $0.12 if I recall. So we are still comfortable with that, but as David pointed out, we are aggressively going after new business. And we certainly hope to take advantage of their product lines, and our new consolidated sales operations and go-to-market strategies to grow that beyond that number. We are never satisfied with the number we gave. We are always going to go higher, but as I indicated earlier as we start consolidating the debt, and how we finance the groups, we lose track of individual company accretions.

Okay. I just want to follow up on a question from Vincent regarding input cost inflation. If I heard correctly, did you say that the $110 million would be like a market rate of inflation, and that you would be something less than that? Did I hear correctly?

That is correct.

So would you be willing to talk about the actual number, or is that going too far?

That would be going too far.

Okay. And one final one would just be -- the SAP in 2011 -- is that cost neutral, or there any benefits coming through in relation to the cost? Or could you just talk generally about that?

Well, first terms, in terms of the cost neutral, and that's a good question, and I wanted to make sure I was clear when I gave my numbers. We are actually expecting on the operating expense side, that there will be an investment next year. So when I talked about the extra 30 basis points of operating expense as a percent of sales, with the guidance we gave on the top line, that implies north of $6 million in incremental year-over-year expense, and all of that is driven by the new system. So that's a number I think you need to keep in mind. When you see the benefits of that, we are doing cost savings to cover that internally as best we can, which is what our guidance numbers are still pretty much in the range of what everybody -- and generally what the street expected. But the real benefits will come in late 2011 and mostly 2012, as we roll this out to the plants. And that is where we see the opportunities to leverage the information we get from it.

Okay. Thanks a lot.

And we will go next to Bryan Spillane at Bank of America Merrill Lynch.

Hi, good morning.

Good morning, Bryan.

Just two questions. First, David, in terms of the kind of restructuring the sales force, is there -- is your customer list going to grow -- are you going to -- is--will Treehouse going to have the ability to call on more customers, will - with the new structure than it was -- as it was structured previously?

Yes, we will be able to do that. And I think more importantly we will be able to call on those new customers with a lot more expertise. There are certain channels that are really expanding their food programs, such as the drug channel. And the way you do business with the drug channel, is very different than with a traditional retail grocer. Where a Walgreens may have 10,000 Walgreens, yet the velocity of food through Walgreens will be a much lower rate than in a supermarket channel, and therefore how you set up your supply chain and your logistics for that is very different. So I think for us is, there will be new customers, but it will be a really new way of our doing business with those customers.

If you were able to index it somehow, if the average packaged food company is 100%, would you say your reach is currently 60% percent and going to 80% percent, or is it 80% going to 90%? Just trying to get a sense for indexing, how much of the gap you're going to close.

I haven't really thought about like that. I would say that we have good penetration. We are not doing any business, for example, in convenience stores. We are doing a modest amount of business in drugstores. I think it is -- if you are looking for a number, we are probably in the 80% to 90% range. I mean we have tremendous penetration in traditional supermarkets, mass merchandisers, but we are underdeveloped in some of the limited assortment dollar stores, warehouse club, C stores and drugstores.

Okay. And just one last one, any early color that you can give on how you've done with your entry into the coffee market?

It is modest business at this point. What is really going on, is we are working with the retailers on getting their branded packaging all developed. Most of our sales right now, which again are modest, are under a control brand called that is called [Growth Square], so we are really in that packaging development program with quite a few large retailers.

Okay. Great. Thank you.

And next we will go to Robert Moskow with Credit Suisse.

Hi, guys. Just a couple quick questions. David and Sam, David, you are young man.

Thank you.

I think your only like 39 years old or something. But my perception of Treehouse is that -- a great Company, but maybe a little top heavy in the executive offices. I was wondering if this decision had anything to do with -- we do have -- we have to keep a leaner organization because, look, costs are risings, margins are -- margins might get tight? Or is this really just a personal decision?

This is really a personal decision. And I'm quite sure that our Board of Directors and everybody -- and hopefully everyone else and my partners here, would have preferred that I continued as president and CEO, and continued to do what I've always done. But this is really a -- a personal decision for me. This is not a -- crushing burden of G&A issue.

Got it.

Rob, this is Sam. With regard to top heavy -- I would like to tell you that since you and I last toured with investors, that I've lost 14 pounds. And Rob, I am not top-heavy, but I'm bottom heavy.

I thought that would spark a few comments. But another question for you, different. Sturm has much been more volatile than I expected, right off the bat. Oatmeal was weak, and then it kind of came back, but now you have an issue with customers deloading inventory in beverage. I don't think anyone has asked -- why the inventory deload in beverage, and how are you dealing with what has been probably a more volatile business than you expected? Maybe the accretion is no different, but it is more volatile business than I thought. What do you think?

Rob, I think it's -- what we really have to look at, and we are doing it now, is really tracking the Sturm business on the basis of consumption versus just shipments. Because that's -- when you're looking at four-week shipment trends, and the customer base for Sturm especially in beverages, I think it's quite concentrated. And therefore, we have to look at consumption and measure our performance that way, versus quarterly year-over-year shipments. I will take some of the blame in the third quarter, our beverage results for Sturm were just fantastic. But I was probably so enthusiastic about it, that I didn't get into the underlying consumption trend to really see what was going on. So it's just, we have to better understand day in and day out, the consumption rhythm of that business, versus just looking at shipments.

Okay. Do the customers take some of the blame for that too, for not recognizing that their inventories were building up? And did they come back to you and say, wait a minute, we've got too much, or was it something you had identified?

I don't think we can blame the customers. They have been very much tied to promotion programs that we had with large customers. It's more -- frankly on our watch, in terms of how we measure performance.

Okay. Thank you, guys, and David, good luck. Look forward to talking to you.

Thank you.

Next we will go to Jon Feeney at Janney Montgomery Scott.

Hi, good morning, guys. Thank you.

Good morning, Jon.

Just a couple quick follow-ups. First, conversations with retailers, specifically around consumer reaction to price increases. You have seen it across staples a -- and I know what the intentions are, and I know what your intentions are, but it seems like their reaction is different in a couple of spots. And it's only been a couple of spots so far, but it seems like a little more move to dollar stores, and trade down behavior, just frugality overall, that wasn't there in the last commodity upswing. Does that concern you at all? And what do you think -- between price stickiness and value preference, where does private-label shakeout, if that is true?

I think that -- at least what we are seeing with our customers is that, with the significant increase in input cost increases, they are accepting of the increases. And the key for us as we learned back in 2007 and 2008, is the fact based selling, where we really go in and take apart the product, and really show them, by commodity and by input where the inflation is, and what were trying to do. And generally the acceptance has been good. And so we are not -- there is always push back, that's the nature of the business. But we have shown our -- objectivity to those customers, and they are accepting of the increases.

You will see some customers -- there has been a certain shift to the dollar stores. And you're seeing some retailers try to develop opening price point programs, that will allow them to compete a little more against those dollar stores. And we are participating, in terms of some of that product development in terms of those opening price points.

Thanks. And just one follow-up on you -- the comments about private equity activity, I think Dennis made -- the -- I haven't seen a lot of news and headlines about that I mean, but I know the credit environment has changed radically. Do you have -- is there increased private equity activity? Have you seen that the last three, six months in small private label deals? And do you expect more, and what does that mean for your ability to close those deals?

John, this is Sam, and I'm the one that diluted to private equity, and I was not talking about food or midsize deals.

I'm sorry, Sam, at least I didn't call the organization top heavy.

And by the way, never fear, John. This is the last time in the Q&A queue, you will ever be behind Rob.

The two red-headed stepchildren.

But I was offering a general commentary, and it was meant to be more macro economic. It will work its way into consumer packaged goods, and you see what consortium did with Del Monte. And I welcomed the activity, and I welcome the markets improving in that regard. And as usual, we will do well.

And one other one I just thought of one, a follow-up on Growth Square. What's the reception been like among retailers? You're talking about formulating private brands and getting packaging right with store brands. But there's been quite a bit of turbulence and uncertainty around single-serve coffee market with the Kraft Starbucks war going on. What's the feedback been on these particular cups right now?

The feedback has been good. One of the things I've said many times is that, in the world of private label, moving new products in the system, and making it through the retailer's quality control and all of their packaging development, etcetera, is kind of like watching a glacier move.

Okay. And order of magnitude, like how many customers are you talking about right now, about this packaging? Are you talking about around five, or around ten?

It's a pretty good number. I don't have the number available, but it's a pretty good number though.

Okay. All right. Thank you very much.

Thanks, Jon.

We will move next to David Driscoll at Citi investment research.

Great, thanks a lot, good morning, everyone.

Good morning, David.

Congratulations on a good 2010. Sam, David and Dennis, and certainly, David, it's been a pleasure to talk to you, and learn from you. So good luck with your next endeavors.

Well, I will be very -- continue to be very involved in Treehouse, so I see Treehouse continuing to be my big endeavor.

Okay, I'll come back to that in a minute. I do have some questions for you, but I want to focus in on two particular points. You guys have said in the past that productivity savings, is roughly expected to be 3% the year, is that still your guidance?

David, this is Sam. Thank you for your compliments. And I do not recall that we've recently talked about a particular number. And as Dennis alluded earlier, we will not separate out the various elements of either the cost or the pricing equations. I will tell you that our operational prowess and capabilities are steadily increasing. And as we not only bring a new businesses, but better learn those that we currently have, I can see that the opportunity for internal improvement is -- it is not diminishing as we accomplish more each year. And David talked about Harry and his team, looking at theoretical throughput rates as excellence now, is a fine indication of that. And this is not an instance where the low-hanging fruit has been plucked, and then you got to start a totally different activity to do better, after a long, long wait.

Well, I appreciate that. I would say that most companies in this space to talk about productivity savings. And maybe if you're sensitive because of pricing, even on a long-term basis it would -- and maybe I would ask you guys at some point to reconsider that, because it's very helpful on how we would structure the models over the long course of time. Moving onto synergies, I don't believe you guys ever commented on ST and the synergies that were expected. But also in 2010, you had the two big acquisitions, usually the synergy capture is the greatest in the second year following the acquisitions. Can you comment on what the magnitude of those synergies that you expect?

When we did both Sturm and ST, we talked about -- we didn't model synergies into the numbers. And the main two reasons for that, one is that we were not going to proceed with the integration, while we are working through implementing the SAP systems that we just turned on about two weeks ago. So that wasn't in the numbers. And the second piece that made it more difficult to come up with synergies, was that their product categories were so significantly different than the majority of what Treehouse had. They didn't deal with canned goods, glass goods, or plastic bottles and that tends to be where the number one synergies are.

As we continued with the rollout with SAP, then we will start to see synergies, we will be able to consolidate distribution activities, and that is where we will really get some big benefits. We have not projected that into the 2011, because we don't expect to see that consolidation take place. So we will have very minimal synergy opportunities even for 2011. 2012 though, I think we will start to see the benefits of the new system, and how all of the operating units can be placed on that, and we will start to get the savings and synergies that I think you would expect to see, but again, not to 2012.

I appreciate the color there. In North American grocery, I believe you commented that pricing was down slightly, volume was up 1.3% of the quarter. That's a little bit worse than we what saw in the prior quarter, but better than I think the volumes were negative in the second quarter. David, correct me if I am wrong on that stuff. You gave guidance then, for volume growth of 2% to 2.5%. And that would look like an acceleration of organic volume growth in 2011. And just given the difficult consumer pricing that needs to be taken, just help me walk through your logic on why volume growth would improve in 2011, from where we were in 2010? David, do you want to start off there, and I am sure he has comments as well?

I think our volume growth--I don't have the number right in front of me -- for North American grocery was somewhere around 2.5% in 2010 -- and I can't remember the exact number --

-- excluding the infant feeding.

-- excluding the branded infant feeding -- that is our -- we really set that for expectation for this year as well.

Okay, and so -- maybe that's what the problem is, it's excluding the infant feeding, the number comes out. And you are saying it's basically similar in 2011?

Yes.

All right. And final point here -- I'm just trying to bring this stuff together. So you gave 100 basis point expansion, and I think that the confusion that a lot of people have had -- because I have heard this question now asked about 25 times on your call -- what's your inflation, what's all this other stuff -- you gave gross inflation, but that number is not meaningful to what your plans are. It sounds to me like you guys will be significantly below that 5% rate of gross inflation because of the hedges. That would then imply that with some reasonable amount productivity you would be staring at a position, where you don't need to raise prices nearly at all, because you would have internal sources to offset it. And that is what I would guess is why you didn't actually give any guidance, related to pricing. To me then, the hard part here is to say, why would we get our standard 100 basis points of improvement? And maybe I'm simply missing the mix effect of what happens, from a full-year's worth of acquisitions. Dennis, can you help me here?

Let me start out. There is a bit there -- mix clearly comes into play, so that is one element. The second element is, we are not a 100% locked in off that gross input cost, so we do have an exposure, in terms of input costs, and we will have to do pricing to offset that. We can't get it all from productivity. So this isn't just a 100% productivity play. So those items come in there. We've never broken out the details, except after the fact, and we will continue to do that. We still talked about 2008, and the $114 million we had to recover. But we don't talk about that during the course of the year, because pricing is always a sensitive issue.

Okay. But the bulk of the improvement or at least a big chunk of it is related to mix, and then the rest of it is going to be operational pricing and all the rest of it?

Mix plays an important role, as well as productivity and pricing, yes.

I really appreciate this. One last thing, David, you have been just like -- between you and Sam, I mean I feel like you guys are the face of the franchise. And David, your operational role has been instrumental, in my opinion, to making Treehouse what it is today. Why did you decide to make this decision now, and I'm really curious about the consulting role, why didn't you take a managerial role that had a funny title to it? Bill Gates to some -- the dreamer of the Company, or something like that? What is with the consulting role? I am curious about that.

If you wanted a title, it would be a Senior Adviser role. And the timing is very much dictated by the fact, that from an operational, tactical, executional standpoint -- the capabilities of the operating team are so good and so much better than they were a few years ago, that I really feel confident that I can make this move. When you have people like Harry Walsh, [Karen Kelly,], Jeff Haye over in procurement, Brian Demos over operations, Eric Beringause over Sturm and US grocery, and it is an extraordinary team. We've put a lot of effort in getting there, and one of the benefits of that is, is enabling me to do this.

Ultimately where I really add value is in strategy, acquisitions and the go-to-market. And I will continue to be completely devoted to that. And I think that the Company, and whatever I bring in those areas, the Company will continue to get the same, if not more. And again as someone said, we are top-heavy et cetera -- this is purely a personal decision, because there are a few other things that I do want to do, that I can't do right now. And I'm continuing to be a very big investor in the Company, and I have enormous confidence in the operating team to be able to continue to drive over the next few years, the same level of success that we've had now. And I will continue to be on the Board, and very engaged in not just strategy, but really on the overall operations from that perspective.

I appreciate the comments. Thank you very much. And good luck with it, David.

Thank you.

Next we move to John Baumgartner at Healthy Advisory Group.

Thanks, good morning. Thanks for taking my questions. Sam, I guess first, just curious as to your thoughts on retailers bias in 2011, if there is any. I guess just trying to understand the outlook for retailers. Can they be expected to really stand behind their private label programs in 2011, or might there be a bit of a swing back to branded, assuming some sort of the strengthening of consumer sentiment? Just how do you kind of size up retailers broader commitment to merchandising private label in 2011?

Hi, John, this is Sam, I will offer my perspective on that. There are really two coincident trends and movements here. The first one is highly tactical, and it's transactional. And no grocer in his or her right mind will turn down the opportunity to offer on a limited basis, a leading national brand, when it is offered at an extraordinary discount. Those things tend to move traffic, and on a temporary and transitory basis. Strategically in the long-term, I think the evidence is not only clear, but recent indications are that it is a movement toward customer brands, is something that our customers are even more committed to. And David raised a -- as he always does he, reduces complex matters to -- they are simple lessons. Of the top 25 grocers that we deal with in North America, I believe that in one count, there were was seven, and in another count there were nine, on the ones that are outside of the traditional grocery supermarket model. And those that offered food -- did not offer food, when he and I began this top-heavy partnership. If you look at those retailers that are succeeding in various measures, not only financially but those that are putting up new sites, and those with consumer standing the opinions are improving, and there's a consistent and a very high correlation with the commitment to customer brands and private label. Originally, to simply create a point of value, and now more than ever, it is a way to build a retailers brand. I think the lag in the job market -- under-employment data in this recovery, it will only work to reinforce that trend. And again, I would separate that long-term seismic movement from short-term tremors.

Okay, and second on the commodity front, so it sounds as though you have been pretty proactive in locking up some of your exposures here, but is there any particular imput or area of the cost basket where you may remain vulnerable over the next nine months? Does anything stand out in particular?

Yes, this is Dennis, I'm trying to think of any particular area. I think the main ones we are pretty solid on, soybean oil and corn sweeteners, where we tend to have some exposure. It's not the biggest ones, but some of the more usual oils, the palm oils, coconut oils, those tend to be open. The small bit of the dairy complex with casein. When you think of the larger grains, including oats and wheat, we are generally in pretty good shape.

Okay, great. And just lastly, just so I understand the deloading in beverage, was that more of private-label issue, or is it across the board with both branded and private label?

That was just related to private-label and our business. It was not an industry issue.

Great. Thanks for your time.

We will go next to John Anderson at William Blair & Company.

Good morning, everybody. Just a couple quick questions. I was wondering if you could give us a little more color on how you expect the timing of cost increases, pricing and productivity to kind of interplay during the course of the year? Should we be looking for kind of steady improvement in gross margin in that 100 basis point range, or is there some lag we should be thinking about accounting for, or maybe some more pressure early in the year, and more expansion later?

I think what you'll see is a little more pressure early in the year, and by mid year getting over that hump, and with most of that coming into the back half.

And Jon, as I pointed out, the timing of price increases, you have to be careful based on the seasonality of the specific category, and therefore there will be that lag effect.

Okay, thanks and just one other. David, you talked quite a bit about the integration of the go-to-market infrastructure. But I was wondering if you could talk a little bit more about the timing of that, when you think that effort or restructure will be largely completed? And is this an event that you expect to impact the business in 2011, or is it looking more beyond the current year?

No, I think this will -- the new structure will be in place by the end of this first quarter, and therefore we believe it will have a benefit for us as we are moving through the latter part of 2011.

Great. Thanks, and congratulations David, and look forward to staying in touch with you.

Thank you Jon

Next to move to Andrew Lazar at Barclays capital.

Thanks, I know this is running late, so just a quick follow-up. The $50 million target of sort of big wins that you hope to get each year, if you look at that relative to your sales, even your overall corporate sales based from last year, that it like 2%, 2.5% or so on its own. If that is built into your kind of North American grocery guidance, is it just a case of being conservative on the top line? Assuming you get that, and a little bit of base business growth it will be better than that, or are you saying you kind of expect base business growth to be flattish? Thank you.

Andrew, what we are looking -- with business, with new wins, our goal is the $50 million , because we always know that there are going to be pieces of business that you can lose. It's the nature of the private label business. So our -- when we are looking at that $50 million in new business, we really factor those units into our growth objectives for North American grocery of

Okay. That's helpful. Thank you.

Thanks, Andrew.

And that does conclude the Q&A session. At this time, I will turn it back to management for any closing remarks.

Thank you, Audra, and thank all of you who have joined this call, and stayed on for it's full duration. We will see you again -- we will talk to you again, in the first week of May. We will have first quarter of fiscal year 2011 results, and I would hope for a big turn out. We may do this on Dennis's birthday, and he would really appreciate it, given that others are the face of the franchise. We will also be around, and quite actively engaged in investor and conferences, and you will get many chances to see David and Dennis and P.I. and myself during that. And then lastly, my General Counsel is trying to restrain --constrain me, but I have to make one further observation about being top-heavy. I remember this great movie out of the depression that was called Boys Town. It starred Jackie Coogan and Spencer Tracy, and an array of those wonderful characters in the 30s. At some point, one of them looks at a look at Jackie Coogan, who is helping another one along, and asks him about the burden that he is carrying, clearly a top-heavy one, and he said, he ain't heavy, he's my brother. Goodbye, all.

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