TreeHouse Foods Inc (THS) 2011 Q2 法說會逐字稿

Welcome to the TreeHouse Foods' Conference Call. 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, seeks to, anticipates, plans, believes, estimates, approximately, nearly, 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, 2010 and subsequent Form 10-Q discuss some of the factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented during this conference call.

The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in its expectations with regard thereto or any other change in events, conditions, or circumstances on which any statement is based.

At this time, I would like to turn the call over to the Chairman and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed.

Thank you, [Piay].

Good morning, all, and welcome back to our TreeHouse. Dennis and I will quickly review the past quarter and then address our outlook for the second half and early 2012.

Six weeks ago, we alerted you to an earnings shortfall principally due to a lag in pricing to recover higher commodity and energy costs.

On that call, we noted that the pricing issue was essentially one of timing and that we expected to correct it in short order. As subsequent events have shown, we at TreeHouse were not alone in dealing with an unexpected jolt to input markets.

Today, we're pleased to advise you that the issues regarding margins, performance, and forecasting are being quickly and thoroughly addressed without lasting effect on our business model or growth trajectory. We are well along the road to full recovery at our TreeHouse. Just as we led others in identifying the problem, we now intend to lead others in its resolution.

First, allow me to summarize the key developments through midyear.

Core private label grocery grew 5% in unit volume during the second quarter, pro forma for the Sturm and S.T. Specialty acquisitions.

This growth follows a first-quarter increase of 4% as we continue to generate substantial gains in the dry dinners, side dishes, hot cereal, soup, and salad dressing categories.

Margins suffered as pricing lagged input costs by $13 million in the first half as dairy, energy, and packaging costs escalated sharply and without sufficient warning. This margin deficit will soon be reversed as virtually all of our round-two pricing was put into effect before the end of July and without material disruption or loss of business.

On a mark-to-market basis, our input costs are now expected to rise an annualized $152 million in comparison to our first quarter estimate of $160 million. This small variance, when coupled with extended forward coverage, will enable us to fully return to normative margins in the third and fourth quarters.

Our big wins program of new products and distribution gains, last noted in June at $120 million, has continued to expand as products in our star categories, those with higher growth prospects and margin structure, gained new distribution through our newly integrated sales and marketing teams.

Price gaps between brands and private label across the portfolio of our major grocery categories remained stable at 27%. We expect these two gaps to remain relatively constant as recent private label pricing will be offset by fewer national brand promotions.

Our distribution system fulfilled customer orders at a 98%-plus service rate, and thanks to greater load utilization, began to offset higher fuel costs.

Our business practices and pricing, purchasing, and distribution have been revised to accommodate longer lead times, direct hedging of fuel, and other offsets to input volatility.

Finally, with regard to the second quarter results and comparisons to next year, our tactical performance suffered, but our strategic position improved as we abandoned marginal non-strategic portions of our portfolio and branded infant feeding, commodity food service pickles, and contract (inaudible) manufacturing of legacy soup, gravy, and broth products.

While one quarter's performance in line with revised guidance does not a recovery make, it does mark our first sure and steady steps on the road to recovery. While there remains much ground to regain, I am highly confident, based on preliminary July sales data and recent changes in our procedures, that the proverbial tide to mixed metaphors has been turned.

Before David -- before Dennis provides a far more detailed review of past performance and future prospects, we should all note that David Vermylen, our companion on these calls since day one, has now dialed in. Welcome, David. But please be aware that although yours is the first name registered in the queue for Q&A, we will probably take calls from analysts and portfolio managers first, but be patient. We'll eventually get to you.

Dennis?

Thanks, Sam.

As most of you had seen in our press release this morning, the results for the quarter came in right on the revised estimates we shared with you on June 23.

Our top-line sales grew significantly when compared to last year. However, the second quarter margins took a bit hit because we were not able to implement pricing quickly enough to cover rising input costs.

Since the number-one issue for us was pricing, I want to start with that topic first.

On our June call, we said we had about 95% of the planned pricing actions in place with realization beginning July 1. We are now in the first week of August, and we can comfortably state that we have implemented nearly all of the planned pricing and we are already seeing the merits of those pricing actions.

A few days ago, our July sales and margin results came in, and we can see that our margins for the month are right in line with the revised expectations and guidance.

In our private world label of costs and pricing, just as we found out in the second quarter how difficult it is when pricing lags, we will also see an immediate improvement when the pricing is realized. We expect to see back-half margins that are significantly improved based on the leveling of overall input costs and the recently implemented pricing programs. As Sam mentioned, we are well along the road to margin recovery.

In terms of our net sales, we saw good growth in most of our key categories in the second quarter. Many of you have heard me speak of our internal heat sheets, where we identify the gaps in our product distribution with key customers.

Not all of our customers take all of our products or all of our offerings within a category. The recent realignment of our go-to-market teams is really paying in dividends as we focus on those opportunities to close the gaps and product assortment within our customer base.

As a result, we have seen overall private label sales growth that has outpaced both the brands and other private label companies.

On a consolidated basis, our total net sales in the quarter increased from 446.2 million in 2010 to 492.6 million in 2011, an increase of 10.4%. While the acquisition of S.T. Specialty Foods played a key part of the total increase, the fundamentals of private label continue to be very good.

Our retail unit sales growth was the strongest quarterly growth in our history, fueled by the expanded distribution we are seeing in both legacy and recently acquired businesses.

Even our Food Away From Home business is performing better than we thought when the year started as we leverage our increasing product array into new business opportunities despite the consumer headwinds this food segment continues to face. Our issues and challenges with profitability in the quarter can be tied directly to our lack of price realization.

In regard to our consolidated gross margins, we finished the quarter at 22.2% compared to 23.8% last year. The margin decrease of 160 basis points was due to the high input of freight costs that were not fully offset within the quarter with pricing. As I indicated earlier, we are already seeing the benefits from the latest round of pricing, and as such, we'll see these margins recover in the third quarter.

Now, let's look at our segments.

In our North American retail grocery segment, we had another very good quarter. We continue to see strong sales growth in the unmeasured channels of retail food, while in the traditional grocery segment, our price gaps are remaining very consistent and with a very slight increase in GAAP since last quarter. As a result, we had organic volume growth of 3.6% in total, and excluding our discontinued branded infant feeding business, organic unit sales increased 5%.

Some of our key product categories saw double-digit unit increases, including soup and hot cereal, while macaroni and cheese was also up double digits from last year on a pro forma basis.

At S.T. Specialty, we are just about to begin shipping mac and cheese to two of the largest retailers in North America due to both our legacy relationships with those customers and our ability to mix loads for even greater efficiency.

Even our retail pickle category saw modest growth in units as we increased our points of distribution with sales into Canada.

The only significant decline came in powdered beverages. Our unit shipments were down low double digits as a combination of cool weather early in the quarter and aggressive branded promotions caused the year-over-year decrease. Since the middle of June, though, we have seen much stronger point-of-sales data and expect that our Q3 shipments will be back on track.

Our gross profit in retail grocery suffered, as did in all of our segments. Retail gross profit finished at 23.4% compared to 24.6% last year, a decrease of 120 basis points. The decrease resulted from less than 1% of price realization in the quarter despite much higher input costs compared to last year.

In our Food Away From Home segment, our unit sales decreased by 7.3% compared to last year. However, the decrease was due almost entirely to discontinuing very low margin processed pickles. As we announced in the first quarter of this year, we plan to exit that business and close our Springfield, Missouri pickle plant, where a substantial portion of that business was manufactured.

Excluding pickles, the Food Away From Home segment was actually very good, with unit sales increasing 3.3% in all other categories combined. New distribution of salad dressings, Mexican sauces, and hot cereal drove the increase. Gross margins, however, were down 270 basis points as our roughly 0.4% in new pricing was much lower than the increase in our input costs.

In terms of big wins, we will see expanded sales of pickles and cheese sauce that will begin shipping in the third quarter.

And, finally, sales in our Industrial and Export segment increased by 7.2% as a combination of contractual pricing and mix more than offset a unit decline of 5.7%. The lower unit sales were caused by a decline in co-pack sales of soup and salad dressings.

Our Industrial Powder business, which is the key product in this channel, was very strong in terms of unit sales, growing by 8.7% compared to last year.

Our challenge, however, was staying in front of the rise in input costs in this channel. Even though we did manage to secure some pricing, we were not able to fully realize all of that pricing in the quarter, resulting in our gross margins falling from 22.2% last year to 19.5% in this quarter.

Moving on to expenses --

Selling and distribution expenses in the quarter increased to 35.6 million compared to 30.9 million in 2010 due primarily to the growth in total revenues.

As a percent of sales, the distribution costs were 7.2% of sales, a slight increase from the high of 7.3% in the first quarter but still well above the 6.9% rate we had in the second quarter of last year.

We expect that freight costs will stay steady and have begun entering into diesel hedges in order to minimize any risk with fuel prices in the back half of the year.

General and administrative costs, as reported in our income statements, increased to 30.6 million, or 6.2% of net sales, from 25.1 million, or 5.6% of net sales last year. The increase in spending was primarily rate related to the new ongoing new systems project we have been implementing this year, along with the growth of our company in light of the acquisitions made last year.

In the quarter, our incremental spending in G&A for new systems was approximately 3 million compared to last year. This increase in spending was considered in our budgets and guidance and is on track with our estimates for the year.

Excluding the incremental IT costs in both years, G&A spending is staying level at about 5.2% of net sales.

Other operating expense was 1.3 million in the quarter, compared to 2 million last year. This expense this year relates primarily to the cost to close our Springfield, Missouri pickle plant and one-time costs associated with the closing of certain distribution centers. Last year's expense was primarily the cost associated with discontinuing our branded infant feeding business.

Amortization expense increased to 8.3 million compared to 7.3 million last year directly as a result of the S.T. Specialty acquisition in the fourth quarter of 2010.

Interest expense for the quarter also increased significantly to 13.5 million from 11.8 million due to an increase in our outstanding borrowings as a result of the S.T. acquisition last year.

In addition, we do have higher interest rates resulting from the refinancing of our revolving line of credit towards the end of last year.

Last year's second quarter benefited from rates that were well below market due to the timing of our prior credit agreement. The average interest rates on our revolving line of credit during the quarter was 2.13%, a very good rate, but well above the 1.1% we had in 2010.

A gain on currency exchange of 0.9 million in 2011 and 2.2 million in 2010 relates primarily to transaction gains and losses on foreign currency transactions at our Canadian subsidiary as we fix currency rates to match with our purchases of US-produced fruits.

With regard to taxes, our effective tax rate for the quarter was 32.5%, very much in line with last year's rate of 32.9% and slightly below the year-to-date run rate of 33.3%, due to lower US-generated net income in the quarter.

Net income in the quarter was 14.3 million, compared to 21.7 million last year. This equates to fully diluted earnings per share of $0.39, compared to $0.60 last year, before considering unusual items.

Our reported results for 2011 and 2010 include non-recurring, non-operating items that should be considered when analyzing our reported results.

In the second quarter of 2011, we had approximately $0.04 in one-time costs associated with the previously discussed pickle plant closing, along with some minor costs associated with streamlining our warehouse and distribution network.

In addition, we had a non-cash gain of $0.01, resulting from marking to market our interest rate swap, offset by costs to integrate the sales activities of Sturm and S.T. into a single go-to-market sales team.

2010, we had one-time items associated with Sturm Foods acquisition and a charge of $0.09 to write down certain assets associated with our branded baby food business as we adjusted our cost structure and asset base to better align with the lower sales volume of that business.

We also had an interest rate swap gain and intercompany loan revaluation gain that totaled $0.03 in adjustments.

After adjusting for these items in 2011 and 2010, adjusted earnings per fully diluted share for the quarter was $0.43 in 2011 and $0.70 in 2010. The results for 2011 are down significantly from last year due to the lower gross margins we experienced in the quarter.

In regard to our outlook for 2011, on June 23, about six weeks ago, we gave an updated guidance range for full-year adjusted earnings per share of $2.90 to $3.00 and third quarter adjusted EPS of between $0.80 and $0.85 a share. These estimates require strong back half-of-the-year performance. Some of you have expressed skepticism in our ability to recover the first-half margin shortfall so quickly and rightly so given our significant miss to date.

But I can tell you that based on our July results, we are already seeing the gross margin improvements upon which those second-half estimates are based.

As I stated earlier, we have completed all of our pricing actions, so we are now very well set on that front. Also, we continue to see new business coming online. As Sam said, we have continued to add to the big wins tally, and that will drive the incremental sales volume. Those sales, combined with our already achieved pricing, will result in a much-improved second half of the year.

Now, I'll turn it back to Sam.

Thanks, Dennis.

As I convert our earnings guidance for the second half to operating cash flow, I calculate that the EPS range translates to an 18% to 22% increase in adjusted EBITDA over the next six months.

Even with a minor pro forma adjustment for the S.T. Specialty acquisition, that level of growth represents a rapid and virtually complete recovery of our core business.

This forecasted recovery implies we have effective measures both to correct our first-half errors, as well as prevent their recurrence.

As we confer today, we have reported that, one, we have achieved our revised second quarter earnings; two, our pricing to recover margins is now fully in effect; three, preliminary July margins are on plan; four, big wins momentum is gathering in the marketplace; five, forward coverage of the troublesome inputs has been extended; six, our distribution system is returning to normal; and, seven, that we are well prepared should a further round-three price increase be required later in this year.

It is these fundamentals, as much as the financials, that assure me, as a veteran operator, that our TreeHouse has stabilized.

Turning to the year ahead, I'd like to preview 2012 in the context of the basic tenets of the TreeHouse investment pieces and of the macro fundamentals of our private label marketplace.

First, private label has maintained its record of superior sustained long-term growth through boom and bust recovery and recession alike. This trend is most pronounced in the faster growing retail grocery store formats that offer a new and attractive alternative to those traditional supermarkets which remain tethered to national brand high/low promotion cycles.

Third (sic), as the millennial generation establishes households, consumer expectations of store brands have evolved far beyond their parents' expectations of a conventional national brand-equivalent model to a multi-tiered product range representing not only value but also quality, variety, and convenience.

The ongoing consolidation of the private label supplier base constitutes an ideal environment for an acquirer like TreeHouse with a strategic vision and investment capital. We will continue to build and upgrade our portfolio through strategic acquisitions in categories that offer both excellent growth prospects and economies of scale.

Next, our portfolio strategy and acquisition filter are proven reliable guides to navigate a strategically superior and financially sound course to sustain growth and shareholder value.

From my personal vantage point, I see the coming year to 18 months is a period of substantial growth opportunity, both through internal innovation and external expansion.

We at TreeHouse must now adapt this model to an era of structural input inflation, petrol-political volatility, and consumer uncertainty. While politicians and pundits may reclaim -- proclaim that soon happy days are here again, we must plan for an era when these macro forces will favor our fundamental go-to-market proposition of value without compromise but only if we have the foresight and courage to change now before, not after, events overwhelm our good intentions.

TreeHouse for one has taken the lessons of the last six months to heart and made those changes. We will not repeat this episode again.

Having stumbled in the first half, now is neither the time nor here the place to do anything other than fully apply those harsh lessons learned in full measure so that we can soon revert to the TreeHouse norm of sustained double-digit growth.

David, you may open the phone lines for Q&A.

Thank you. (Operator instructions)

And we'll take our first question from Farah Aslam with Stephens.

A few questions. Sam, you mentioned consumer uncertainty, and I know weak economic environments tend to favor private label. However, you also have a food service and industrial business that might be more economically sensitive. Would you be able to kind of shape for us the pros and cons of your portfolio versus the economy?

Well, good morning, and firstly, what we have here is a portfolio that we manage across different channels of distribution, as well as different product categories.

And one of the principles of this is to make sure that we maintain the diversity that allows us to smooth out difficult times in one sector or another.

It's clear that the food-away-from-home industry has suffered as consumers have tightened their belts, become more frugal, but as Dennis pointed out, our business here has done really quite well in a difficult market and that we've continued to take the fruit of our acquisitions that are focused on the retail grocery trade and expand the product line and the other channels of distribution, as well, primarily food away from home and also the industrial and contract export business.

That's helpful. And then just one quick follow-up. In terms of external opportunities, could you share with us what the M&A landscape looks like for TreeHouse right now?

Yes, I can. As a general matter, there is a favorable landscape. The costs of financing these matters are really still favorable, and the expectations of price have not run away from us.

There is, given the financing markets, really much less in the way of public auction activity than we would have guessed maybe a year ago, but we're continuing to see things develop where we have internally promulgated our own investment thesis and then used our portfolio strategy model and our acquisition filter to engage into individual companies on a one-off basis, and we continue to have a steady flow of those opportunities.

Great. Thank you very much.

Chris Growe, Stifel Nicolaus.

This is actually [Dan Steven] on for Chris.

We have two quick questions, I guess the first one being kind of the outlook and expectation for incentive compensation and kind of what is built into your algorithm. Is there any leeway there, or are you pretty set?

In terms of incentive compensation, yes, the stock option numbers tend to be long-term numbers and don't change a lot even on results, but in terms of the incentive compensation, I've got to tell you that the last couple of years, we've talked about how our operating expenses were affected by higher compensation expense with the strong earnings, and this year, we've taken our earnings down.

So I think you'll see -- you won't see the big compensation number for incentive that we had in the past, but if you're looking at the stock option line, that should stay pretty steady.

Okay, thanks. And then kind of moving on to -- back to M&A, I guess we're curious if kind of the conditions that you and others endured in the second quarter in kind of the challenges with pricing, it would seem that it would be exacerbated somewhat with smaller competitors, and we were wondering if that at all speeds up or enhances the willingness of sellers or if you see anything along those lines or if that logic is flawed?

This is Sam. It has a marginal effect, and it's muted by the fact that the costs of operating now in terms of working capital and long-term debt are such that people are -- smaller companies are not being squeezed to have to refinance in onerous terms.

I will tell you that the costs have affected all of us regardless of size and complexity, and there are small businesses that do very well in that environment because they're well run, and those are the ones that we look to to be our primary acquisition candidates, and they're the least effective in the short term.

Okay. Thank you very much.

Thilo Wrede, Jefferies.

This is actually [Russ Yako] filling in for Thilo.

I just have a couple questions. The first one is the branded manufacturers have shifted more marketing spending towards advertising away from kind of trade promotions, and if brand environment will become really more driven again to accommodate the [pinch] consumers, how do you really do it that this is going to impact the P&L going forward?

Well, I think one of the things we did see is lower promotions from the brands. Price gaps stayed pretty consistent, but we did see some of that benefit, and I think what, at least in our opinion, if you look at what happened last year, where there was extensive branded promotions and volumes didn't change, and I think this year the branded focus is back to innovation and new products and consumer marketing, as opposed to two-for-one coupons, and I think it will stay that way for a while.

We saw that in the summer, and I think that bodes well. There's no doubt that when promotions get extensive on the couponing basis, it can affect private label, but so far, that hasn't been the case for us.

Okay, thank you. And just the one quick follow-up. How's the coffee trial going, and what is the medium to long-term outlook?

This is Sam. We have publicly announced that via trade advertising that we will bring to market late in 2012 a single-serve roast coffee in a private label format. That is a long way off, and I will only comment that the project is one that greatly excites us about its market opportunity, and we've got a fine team on the project to bring it to market.

In the meantime, we have launched an array of non-coffee products under the [Grove Square] line, and these include hot chocolate, tea, and other hot beverages other than coffee itself, and the reception to that expansion of Grove Park -- Grove Square -- pardon me -- Grove Square has been really exceptional among our grocery trade, and we will see a positive effect of that in the fourth quarter of this year and the first quarter of next year.

And, lastly, I think that illustrates the great benefits of a program like big wins, where we have earlier recorded -- noted that there was $120 million in that program, and it's gathering strength and momentum every week.

Thank you very much.

Ken Goldman, J.P. Morgan.

A couple questions. Number one, where are you -- and if you touched on this, I may have missed it -- in terms of hedging? Have you started locking in product for 2012 yet? Are you hedging further out than usual in order to potentially mitigate the possibility of repeating this year's events? I guess I'm asking because you say you're well prepared in case of another round of pricing needs to be taken. How can we really gain confidence behind that statement?

Well, let us both touch on it. I'll start, Ken.

First of all, with regard to hedging per se, one of the factors that affected us negatively was the real run-up in energy costs, and we have begun to hedge our diesel fuel and find that in the present market, the costs of that hedge are quite advantageous. And so now we have eliminated a very substantial factor in the uncertainty, the volatility going forward.

Secondly, when we looked back at the complex that hit us in the first quarter -- first half of the year, beyond energy, the effects were also in the dairy industry, dairy complex, following the embargo of casein exports from India, and also in the plastic packaging portion of our portfolio, which is driven indirectly by petroleum and natural gas.

And as we look at the second half of the year in those specific areas I've mentioned, we've already covered 84% of our requirements through the end of the year, and those portions that are uncovered, we're monitoring very carefully and with a longer-term view than we had in the first half.

I'll ask Dennis to comment about '12 after indicating that now is the critical time for agricultural products, commodities, and doing forward replacements and purchasing is well upon us, and we're deeply engaged in that. That was a portion of the business that in '11 have worked quite well, and we will extend the same techniques into a broader array of our inputs. Dennis?

Yes, and Ken, in terms of 2012, we are taking some coverage into 2012, but I think the key difference now is we've got a much better handle on the additional costs that go along with the hedged commodities, the bases, the transportation back and forth, and its connection to pricing. We, frankly, were a little bit more disconnected than we should have been between the purchasing side and the pricing, and when we got on it, the pricing activities took longer than they should. We've made some organizational changes internally. We have senior-level management now focused on specifically coordinating that activity.

So I think we've fixed the inside piece, and it was a little less about how long we went but how well we coordinated what we had.

As Sam indicated and I mentioned in my discussion, we are now going after diesel futures, which we didn't have, so we got hit with that exposure, so we've got that covered. But, overall, it's a coordination effort that is much more important for us and was a bigger issue than the length of the forward buy.

And this is what happens when your team wins the Super Bowl, Dennis. You take your eye off the ball.

Yes, well, it took a while to stop celebrating.

Exactly.

One more question. You guys just went through an experience where retailers pushed back on pricing. Now, that's an event perhaps less likely to happen to a larger manufacturer that maybe can push its prices with more force. At the same time, [Royal] Corp. really just mentioned its desire to spin off its branded cereal business, and I think in the past, you've mentioned you weren't interested in Royal Corp. perhaps in part because they did have -- or a merging with Royal Corp., or whatever combination, because they did have that branded business, and that makes sense.

But if a spin happens and if Royal Corp. again becomes a pure private label play, does that make a TreeHouse/Royal Corp. combination become more likely?

I'm not asking whether it will happen. I know you can't comment on that, but just in terms of the possibility of something taking place, is it more likely now than, say, a year ago? Or how should we think about that?

Well, this is Sam. Let me answer -- I think you had several questions combined there.

One, with regard to price increases and retailer pushback, I mean this was a change in -- not in kind but in a matter of degree, and the suddenness with which the cost increases affected not only us but other companies also affected a lot of our customers, and there was the need for a better education, and we had to be the ones to deliver that, and it took us a while to advance our fact-based selling beyond what had historically been the requirement.

And as Dennis had indicated on your earlier question, we now have a team that's dedicated only to go-to-market pricing and the rollout of the big wins program, both of which are in good shape.

With regard to our -- one of our primary competitors in the private label field, that's a company we greatly respect. We know them well. I don't recall specifically talking about whether we were interested in a company or not. I do specifically recall that we have time and time again indicated that our business is customer brands and custom products and not national brands owned by manufacturers, and that is still the case.

And with regard to their announced plans, we're going to watch with kind of the same curiosity that everybody does, and whether you're in St. Louis, Chicago, or Omaha, we'll stay tuned.

Again, I won't characterize our interest about any particular company but so much as to kind of focus on a clear statement of our strategy.

Thank you.

Bill Chappell, SunTrust.

Can you just maybe get -- help us understand kind of the sales trends you're seeing in the traditional versus the nontraditional channels, and if there's a big divergence in the current quarter? And then, also, kind of how that reflects on the 120 million plus of big wins, whether that's being weighted towards one or the other?

Yes, this is Dennis. The 120 million of big wins is across all channels, and just as North American retail is our biggest channel, that is where the larger amount of the big wins are.

As we look at our customer base, we continue to see very strong growth in the non-measured channels, and more of our activity and growth has been in those channels. And I think that is consistent with what you see in the marketplace as you look at traditional grocers and their results and their sales. It's not dissimilar to how our business is.

We've said in the past that over 50% of our retail -- North American retail sales are in the unmeasured channels, and that continues to be the case.

But I mean the focus is still to get on some of those unmeasured channels or to try to gain some share there?

Well, yes, we're opportunistic there, but it's not that we've turned our backs to traditional grocery. We're still actively growing there and the heat sheets, as I've indicated, show opportunity in traditional grocery, as well.

Yes, Bill, the big issue is whether the retailer is committed to its own brand as a part of its imagery as a shopping experience, as a part of its profitability, as a part of building its customer loyalty. And there are in each of these various retail formats, including traditional supermarkets, those that have committed themselves to developing their store brand, and that is the key distinguishing factor that drives not only our business opportunity, but on an increasing basis, you're seeing a drive of the performance of the chain itself. And we're delighted to have the opportunity to sell to both.

Great. And just two quick follow-ups. Can you kind of give us an idea on the food away from home, and excluding the pickle business, is that running in line with expectations, or are you still seeing sluggishness in the end markets? Or how shall we look at that?

And then, Dennis, on the SAP and IT costs, how should they flow in the back half? Is it pretty evenly in 3Q or 4Q, or will you be all done with that in 3Q?

Okay, let me go on the system first. The system costs were more weighted to the first quarter, but we're now starting to level out, and the system project will continue into 2012, so it won't be going away, Bill, so you'll need to keep modeling that out over the back half of the year.

The first question again?

Just understanding kind of how we should look at the food away from home, the trends you had in the quarter, is that more indicative of the channel or, I know, excluding kind of the pickle business?

I think excluding the pickle, the results are consistent with what the overall channel looks like, where we continue to have a strong presence with the quick-serve restaurants and have done well not only with the base business but with new distribution, and some of the larger distributor business has been soft, and I think you may have seen that in some of the distributor results that have come out recently. So we tend to mirror that.

Thanks.

Heather Jones, BB&T Capital Markets.

How about a clarification question on pricing. I'm still just a little unclear.

It seems that the pricing actions you've taken that fully caught up in July to cover the input cost inflation of this year, based upon your previous commentary, it seemed like you came into 2012 with some favorable positions on some of your input costs.

Is it fair to assume that as you roll, that those hedges roll off and you put on new coverage for 2012, that your input costs are going to rise again in 2012? And if so, when will you be -- when do you plan to revisit retailers for that round of price increases?

This is Sam. As those favorable positions roll off and we will replace those, it is our expectation that our costs will rise. I think as I'd indicated that from a structural perspective what we have to plan on is inflation in both the commodity and the energy markets, and we're acting accordingly.

We have put in place the internal plans to return to the market this year if and as needed, and the decision on that will be made in the coming weeks depending on what we see as our strategy for taking coverage in 2012. It is completely flushed out and put into place.

So our expectation, Heather, is that we will need more and we will do it in a way that applies the lessons that we've learned the last time.

Okay, well, this leads me to my next question. Your guidance for the full year implies fairly significant year-on-year margin expansion in Q3 and Q4, and so you gave a preview of 2012 earlier, but as we looked at 2012, if this margin expansion is based on the pricing that you put in place for just 2011, and if you plan to recapture through price any cost inflation for 2012, is there any reason why this margin expansion that you're projecting in the back half of 2011 shouldn't continue into at least the first half of 2012?

Well, you're going to get an answer from both of us in that, and conceptually, what we will do -- what we said we would always do is attempt to price to offset the dollar amount of the increases in costs that we've experienced, and secondly, that we would in every way possible hedge forward to offset -- to take some of the volatility out. That will still be the case.

The other factor here that's vitally important is that as our portfolio has moved toward a bias toward greater growth and higher-margin categories, like the several that we recently acquired with Sturm and S.T., we're backing up that strategic shift with substantial investments in our operations and supply chain to get us to a greater productivity and low-cost-producer status.

So in 2011, we will complete projects that give us far greater advantage in salsa with a plant expansion there, in portable salad dressings with another high-speed line in our [North Coast] plant. We're making investments in both cereal and beverages at Sturm. And in each one of those cases, what we will do is establish a manufacturing capability to do things cheaper and to have a greater versatility in those product lines, particularly in their packaging, as the marketplace changes, and I would expect we'll benefit both in increased margins and in better volumes in those categories.

And let me just add one more thing on the margin improvement. Don't forget that we will have some positive mix. We had exited the infant feeding business, which was very low margin, and that will lap in Q4. And as we talked about on the call, we've exited some very low-margin process pickle business in the food away from home category, so we are kind of ridding ourselves of some of the lowest-margin products we have, and they're being substituted with more normal margins in the new wins. So the mix is a key element, as well.

Okay, thank you.

Akshay Jagdale.

This is [Adam Josephson] in for Akshay.

I'm trying to project how you would do if the economy were to worsen from where it is today.

Now, on the one hand, private label category growth might pick up again, but you pointed out on your last call that your volume growth wasn't as substantial as the categories in the '07/'08 period because of the categories you're in.

In addition, retailers would likely remain reluctant to accept price increases given their customers' inability to pay higher prices for certain items, which would presumably affect your ability to raise prices in a timely fashion if commodities continue to go up.

So how do you think about this scenario, and how, if at all, would it affect your approach in terms of which channels you're most actively targeting?

Again -- this is Sam -- I think that our primary defense is the breadth, scope, and diversity of this company vis--vis our competitors, and we can be sure that whatever else happens, short of the apocalypse, that the American public are going to consume the -- essentially basically the same calories through times that may be thick or thin. And when -- we'll find under certain circumstances that one category or one channel's favored and another's not, and we will shift our emphasis accordingly.

I do think that even in more difficult times that there has been a long-term and subtle change in consumers' perception of private label, and I mentioned earlier, talking about the millennial generation that are now forming households, there's recent consumer research that showed that over 60% of that generation now regard customer brands as the equivalent or better than national brands across a wide array of foods, beverages, and other consumer packaged goods, and if we can continue to offer a better value proposition to consumers of that mindset, then I think that we'll fare well not only in good times but in bad times, as well.

Thanks for that. And one follow-up. Is there a common theme in terms of which type of customers you've had the most difficulty raising prices on? And how is that affecting your channel strategy?

I think that as a general proposition that those that still see private label as a non-strategic part of their business and are entirely focused on transactional matters, whether it is our costs or their own investments in their business, those are the ones where the difficulty is that these matters, no matter how carefully we present them, can be lost in translation.

And for those that see the value of the customer brands and have committed the infrastructure and the investment in their own companies, then we will have the normal difficulty in dealing with these types of changes, but that negotiation, that discussion, is something we -- and it's built into the business model. It's really -- it gets down to the strategic orientation of the customer more than anything else.

And, Adam, there's no such thing as an easy price increase.

All right. No, I understand. Well, thank you both.

Jon Andersen, William Blair.

Just wanted to start on the big wins. I apologize if you've already answered this, but I got on the call late.

Is the 120 million in annualized wins still the right number to be working with?

And could you characterize perhaps those wins in terms of channels? You know, which channels? Do they skew to one channel or another?

Also, do they skew higher price point, higher margin, or more kind of OPP? That would be helpful.

In terms of the 120, we reaffirmed the 120, and we've also said we could add somewhat to that. So it's not going down; it's going up. We did not give an exact number on that. It's always fluid.

As we look across the -- where that's coming from, frankly, it's coming from all three of our segments. It's certainly weighted towards North American retail grocery because that is our biggest segment.

And in terms of the products, it's surprisingly the -- a surprisingly wide array of products we have. We've had very good news business in the industrial business, which we're very proud of, strong retail, as we've expanded distributions.

So if you're trying to model through, I think you just have to take a composite of each of the segments and kind of weight it out. I can't say that there's one particular product that's doing better than the others, although, as Sam had said earlier and we said on our last call, the new acquisitions, we are doing a very good job of getting those products into a broader array of distribution points as we combine our go-to-market teams. So it's maybe a little bit more weighted to those, but we've had nice success in our salsas, as well, and some of the legacy categories.

And are these -- have these begun shipping? Do they begin in the third quarter? How does the -- how do they kind of roll out, I guess, over the next couple of quarters?

Yes, we've had some shipments already. We started out with new wins even in the first quarter, and certainly, it will be a little heavier in the fourth quarter, especially because that is our -- seasonally our largest quarter for sales.

So the right way to think about this is there were -- some of this was -- some of the new wins were shipped as early as Q1, but it's kind of a build as you move through the year, with a peak in the fourth quarter?

Exactly.

Okay, helpful. And just -- again, just to clarify, on the SAP and IT costs, I think you had said going into the year there was somewhere in the neighborhood of $10 million of spending against that. But then I believe you pulled forward 5 million. So is the right way to think about 2011 being about $15 million of spend around the IT implementation, number one?

And I guess the second question is, you mentioned earlier, Dennis, that that effort continues into 2012, but does it continue with reduced intensity? And what kind of spending might be required in '12 relative to '11?

Yes, your map is right on, Jon, the 10 plus the 5 for the 15 for this year as we pulled up some. The project goes actually through 2013. Now, obviously, it will be fluid because I would expect we'll have more acquisitions before 2013. It will continue next year. It won't -- it should not continue at the $15 million rate, but I'm not ready to give the details on that until we get closer to year-end and firm up our guidance for 2012. But it should be lower certainly than this year because we had the big event on February 1 when we turned on all the back office systems for our legacy business, whereas next year, we'll be rolling out plants and distribution centers, which should be less costly.

Okay, helpful. One quick one. I know this is a ways off, but I was interested by the comment earlier that you planned to bring to market late in 2012 a single-serve roast coffee. Is this different than what you're offering today in that today I don't believe it's a roast coffee. It's more of a soluble coffee. And there are multiple, I guess, single-serve formats on the market today. Can you give us any color on which type of format you might be working towards there?

This is Sam. The difference is that the product that will be introduced late in 2012 is, in fact, roast coffee.

And with regard to the format, I can only tell you that it will be delicious.

Thank you.

Rob Moskow, Credit Suisse.

I think your stock's doing better than Kraft's today, so it must be a good conference call you guys are having.

(laughter)

You're not going to announce you're splitting up the company, are you?

(laughter)

But, really, what I wanted to hone in on here is the back half. I think Heather mentioned that -- the same thing I'm looking at -- it requires like 27% operating income growth. And I'm just wondering if I'm underestimating the impact of the pricing that you're putting through.

I don't think you've given any guidance on it, but if I look at 2008, your pricing was up around 10% for most of the year. Are we kind of in that same level of pricing now once all of your pricing goes into effect?

And is it -- and I guess if I could just get -- maybe if I look at it in a comparison to third quarter, third quarter a year ago, your pricing was actually down probably around 3%. So does that kind of bulk up the pricing comparison? Thanks.

Hey, Rob, it's Sam. And, again, this is one that I think before we break up, Dennis and I will both address it.

I believe in an earlier call, either the first quarter or the June 23 call, we indicated that the -- I believe we indicated, Dennis, that the value of the pricing was around 90 to 100. Did we give a specific number, or did we talk only in terms of percentages?

Well, we talked mostly in terms of the input costs, Sam, and what we're trying to get to, the 40 going to 100 million.

Yes.

And that's --

So the pricing is in that -- basically that $100 million to recover the changes in the costs. And then we'd also indicated, Rob, on this that on a mark-to-market basis, that the aggregate now is at 152 versus 160.

I think the key statistic that I look at on second half is that the EBITDA, the operating cash flow, at the mid point, to be up 20%, and that is in any time a substantial improvement.

The pricing will be a substantial factor there, particularly in comparison to the first quarter and second quarter of this year versus the back half.

And the difficulty with looking at the pricing data and its aggregate for our business is that this is a very big, diverse business with three major channels of distribution. We now have, I think, nine major categories and 15 in total when one looks at it from either a Nielsen or an IRI standpoint. And so you can get -- you've really got to go to the channel and the product category itself to get a sense of pricing over and with any degree of specificity or accuracy.

And having said all of that, when one thinks about the aggregate of that, those commodity and energy costs, I think they translate to something in the range of a 7 or 8% increase needed at pricing to fully recover those.

Okay.

Dennis, please not only amplify but correct whatever misstatements I made there.

No, you're right, Sam. We talked about a 90 million second half, and the 7 to 8% across the overall portfolio is right, and the challenge on that is certain categories and products have higher needs than others, but the overall numbers are in that 7 to 8%, which is a little bit lower than where we were in the '07/'08 timeframe.

Okay, okay. But, again, why does that yield such huge growth versus the prior year? What happened the prior year? Am I missing something that the prior year was maybe a little bit depressed? Were you leaving money on the table?

I think other than the pricing, the biggest thing is that when one looks at the product portfolio now in terms of product categories, and secondly, I look at our retail grocery business, there is over a one-year time a marked change.

We had, until the latest acquisitions, really been focused primarily on the industrial might of the businesses that we are buying and the generation of operating cash flow to pay down debt.

We now have put together -- and if you'll recall at the second quarter of 2010, we posted record earnings and got slapped by the market for a lack of organic growth, and in the year since this same call a year ago, we've developed a strategy that's focused on organic growth in retail grocery. We have acquired businesses that include powdered beverages, hot cereals, dry dinners, and side dishes, all categories with extraordinary growth potential. And we have put a go-to-market organization in place that is focused on this very -- specifically on customers and [arrayed] our resources to go where the biggest opportunity are.

And it's those things in combination that have created a TreeHouse that is far more capable of going to market. And I've put it side by side with the types of productivity gains I see in our manufacturing and our supply chain operations. I would expect that we should do substantially better.

Thank you very much.

And it appears we have no further questions in queue at this time. I'll now turn the call back over to our moderators.

Thank you, David.

Thanks again, everybody. We very much appreciate that so many of you came out on the call this morning, only six weeks after our last one, and with all the other big news of the day.

Dennis and I, and for that matter, David, we look forward to seeing many of you a month from now, in September, and then as well as updating you on our third quarter progress in the next call scheduled for the first week in November. Thanks again. Bye bye.

That does conclude today's conference. Thank you for your participation.