TreeHouse Foods Inc (THS) 2011 Q3 法說會逐字稿

Welcome to the Treehouse Foods conference call. This call is being recorded. At this time, I would like to 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 Forms 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, President and Chief Executive Officer of Treehouse Foods, Mr. Sam K. Reed.

Thanks, P.I. Good morning, everyone, and welcome back to our Treehouse. With a ghostly Halloween and a ghastly first half behind us, Dennis and I invite you all back into our home with our usual warm hospitality. We are pleased to welcome you with the news that Treehouse has achieved all of the financial, operational, and strategic objectives we set out for the quarter. Further, we expect more of the same in the fourth quarter. Accordingly, with 2 weeks to go, we foresee a full and complete recovery by year's end. So, with our house modeling project largely completed, come on in.

While the exterior of our Treehouse is still the same, much has changed inside. Specifically, third-quarter operating cash flow, adjusted EBITDA, has increased 16% over last year to a record high of $83 million. Sequentially, the quarter marked a $21 million increase over second quarter's performance. We now expect EBITDA of nearly $100 million in the fourth quarter. These 2 back-to-back record quarters will thus generate cash at a 35% sequential growth rate over the first half.

Sales revenues also set a new high, as legacy revenue growth of 6% more than double the first quarter, second quarter, run rate was further boosted by the ST acquisition. Fueled principally by pricing enacted since midyear, the big wins program, and cross-selling of ST and Sturm products, we now expect topline growth to accelerate even faster through year's end. Core private label sales revenues increased 7% on a pro forma basis, inclusive of ST's revenues. Our retail units posted strong showings in salad dressings, mac and cheese, hot cereals, salsa and pasta sauce, non-dairy creamer, and E.D. Smith jams and spreads. Again, this rate of core private label sales growth is forecast to accelerate even faster in the fourth quarter.

While revenues surged, grocery unit volume slowed this quarter due largely to 2 one-time anomalies. Soup and broth slipped against an extraordinary 8.5% comp that we posted in the third quarter of last year. Likewise, beverages recorded a small decline versus last year's double-digit jump in sugar-free shipments. As consumption data and price gaps between brands and private label have not deviated from the norm, we see the past quarters' fluctuations as background noise to the long-term trends. Gross margins increased by 160 basis points sequentially over the preceding Q2 run rate due largely to pricing. Fourth-quarter margins should return to our originally budgeted levels in the 25% range as pricing continues and product mix improves through the big wins program.

Our non-regional segments, food away from home, and industrial contract and export, which account for nearly one-third of our revenues increased their quarterly year-over-year margins by 210 and 430 basis points, respectively. Although rarely in the headlines, these channels of distribution are consistent, stalwart performers in our Treehouse.

Before turning to Dennis, I'll offer a few comments regarding the condition of our Treehouse, a balance sheet of sorts as a companion to the usual P&L-based analysis of our performance. Our qualitative Treehouse equity accounts include the following. A private label portfolio poised for organic growth and margin expansion, especially in attractive growth categories. A customer strategy and go-to-market team dedicated not to one-size-fits-all approach, but instead focused on growth opportunities and value added customer brands. A program of product innovation and customer marketing that has combined to generate big wins revenues at an annualized run rate well north of $120 million. A supply chain and operations and infrastructure that has weathered input inflation of more than $150 million on a mark-to-market basis. A manufacturing and distribution network that produces and delivers the equivalent of 1,000 truckloads of grocery staples across North America every week.

And as of Monday, October 3, six years after the founding of Treehouse as a public entity, for the first time a consolidated daily sales report that provides a panoramic view of all shipments, open orders and inventories, as well as prices, standard costs and margins across all customers and food channels of distribution nationally.

Dennis, thank you and the SAP team. Brothers and sisters, hallelujah, amen.

Thanks, Sam. Sam shared with you the overall highlights of the quarter, so I'll dive into more of the specifics. In particular, I want to cover pricing and our quick recovery in margins. Last quarter we talked at great lengths about the dynamics of pricing in private label. Our results showed how a margin contraction of only 160 basis points from the prior year can have an immediate and very negative effect on our earnings.

We also said on our August call that we had put our pricing programs in place, and the realization of that pricing would have the same immediate but positive effect on margins. In fact, that is exactly what happened. By the end of the third quarter, we were in full price realization mode, and as a result, our sequential gross margins improved 160 basis points from 22.2% in the second quarter to 23.8% at the end of the third quarter.

And in terms of earnings, the margin improvement represents nearly $0.15 in earnings per share, a key part of our earnings improvement in the quarter, to $0.85 in adjusted EPS from last quarter's $0.43. With our pricing in place, we expect our margins to remain healthy in the fourth quarter as well. Although our pricing is substantially in place, our industry continues to see a bit of a roller coaster with input prices. We are maintaining a very diligent eye towards the markets, especially the grain-based inputs to ensure we match increases in costs with prudent and timely pricing.

Besides the successful implementation of pricing, as Sam pointed out, we continue to have great success with the implementation of our new SAP system. We now have all of our order-to-cash functions in the USA on our system, and have begun the process of rolling it out to our manufacturing plants. To date, we have converted 3 of our 18 production facilities to SAP, with a 4th plant coming online December 1. We have a great team of people dedicated to the rollouts, and continue to have excellent order fulfillment rates and on-time deliveries throughout this transition.

Another major project for us is our distribution system consolidation. We now have 3 major distribution centers up and running -- one in the Midwest, one in the Northeast, and one in the Southeast. All 3 could receive and ship products from any of our plants to best manage freight lanes and load weights. This is an important milestone in our ability to offer a broader array of products to more customers because we can maximize the savings associated with full truckload shipments, but do so with a variety of products. In fact, this was instrumental in us landing a new mac and cheese account on the West Coast by consolidating that business with other products being shipped to that customer.

Now, let me focus on sales. Overall, we had a very good quarter of topline growth, with sales of $528.1 million, an increase of 13.7% over last year. Part of this was due to the acquisition of ST Specialty Foods in the fourth quarter of last year. However, the legacy business was very strong, with topline sales growth over last year's third quarter of 6.2% before acquisitions.

In regard to our segments, our North American retail grocery business had good topline growth combined with margin recovery from our pricing initiatives. As a result, sales increased 15.8%, from $319.2 million last year to $369.5 million this quarter. Even excluding acquisitions, the sales growth was 4.9%. Unit sales growth in the quarter was generally good, but sales of both soup and powdered beverages showed declines from last year due to very strong prior year sales. In the third quarter of 2010, we had exceptionally good unit sales of soup, finishing in the high-single digits. In the third quarter of this year, our soup unit sales were down approximately 5% off that difficult comparison. Still, our year-to-date soup unit sales are up 4.1% compared to last year when our year-to-date shipments were down 3%.

The latest measured channel share data continues to show that private label has added share compared to last year, with share gains in both condensed and ready-to-serve. This should bode well for our fourth quarter soup sales.

In powdered beverages, we had a similar situation as soup. Last year, our beverage sales showed a 16% increase compared to the prior year on a pro forma basis. This year, we are off approximately 2% from last year's big sales quarter. However, we have very different fundamentals in the powdered beverage business this year. First, last year's third quarter included a lot of pipeline fill, which drove up the unit sales. This actually caused last year's fourth quarter unit sales to be flat, primarily due to the overly heavy inventories resulting from that 16% sales increase. So, even though our powdered beverage unit sales were down 2% from last year's big quarter, we're still pleased with the overall sales.

The second change in volume was due to a mix shift from sugar-based beverages to single-serve hot beverages. This mix shift is exactly what we want to see, as the commodity-like sugar-based drink mixes are less attractive than the single-serve hot beverages. As a result, our overall unit sales are down about 2% compared to last year, but our dollar sales are up 2% with very little pricing.

As we look at the other key categories of retail, we saw very good volume performance. In particular, we had low to mid single-digit unit sales increases in non-dairy creamers, pasta sauces and salsa, while our dressing business continued to perform extremely well with unit sales up over 9%, and hot cereals up nearly 8%. And finally, although not in the organic numbers, our dry dinner business had an exceptional quarter with unit volume growth of nearly 16% on a pro forma basis. These very healthy volume increases show that private label continues to gain momentum with consumers.

In our food-away-from-home segment, we can clearly see how our strategy of pruning the tree can result in a smaller but better growth opportunity. Last quarter I discussed our rationalization of low margin processed pickles, and the need to close our Springfield, Missouri pickle plant that was the primary producer for those products. As a result of exiting that business, our overall sales in food away from home declined 4.7%, and our unit sales dropped by 9.4%. Offsetting our decision to de-emphasize the processed pickles, we are seeing very good cross-selling realization in the food-away-from-home segment. Excluding the pickles, our segment unit sales actually increased almost 3% in the quarter, driven by sales of hot cereal and salad dressings, 2 products that we historically did not sell through this channel. We will continue to push for cross-selling opportunities as a way of offsetting the ongoing malaise affecting the restaurant world.

And finally, sales in our industrial and export segment increased by 28%. This very large sales increase was due to gaining new export business as we were able to take advantage of a weaker US dollar, and utilize available capacity at our powder plants. This type of business is opportunistic and relatively low margin, but a good business when conditions are right.

So in total, we saw very good topline sales growth, with pricing coming through and driving our gross margins up 160 basis points from our second quarter. This puts us just slightly ahead of the margins we had in the third quarter of 2010, showing that we have managed to very quickly turn around the margin shortfall that caused havoc in the first half of the year.

Moving on to expenses, selling and distribution expenses in the quarter increased to $34.9 million, compared to $28.7 million in 2010, due primarily to the growth in total revenues. As a percent of sales, the distribution costs improved to 6.6% of sales compared to 7.2% in the second quarter of this year. This is still above the 6.2% we averaged in the third quarter of last year, but that is expected with the significantly higher diesel costs we have experienced. As I indicated last quarter, we ventured into diesel hedges to mitigate the wild fluctuations in prices we saw in the first 6 months, and that's helping to level total fuel costs.

General and administrative costs, as reported in their income statements, increased to $27.4 million or 5.2% of net sales, from $25.6 million or 4.5% of net sales last year. Our systems implementation costs are up nearly $3 million compared to the prior year, now that we've completed the back office systems, and focus exclusively on our plants and distribution centers. Since we last spoke, we've now consolidated all customers into a single order-to-cash system, and realizing the benefits of 1 truck, 1 invoice. For instance, all customer orders now go through 1 order processing center, and our invoicing and cash application activities are also done at that 1 location. While not significant to the bottom line in terms of dollar savings, it does allow us to more consistently serve our customers. Offsetting the increase in systems implementation costs in the quarter was a decrease in incentive compensation and acquisition-related costs.

Other operating expense was $1.7 million in the quarter compared to $1.1 million last year. Expense this year relates primarily to the cost to close our Springfield, Missouri pickle plant and 1-time costs associated with the consolidation of our distribution centers. Last year's expense was primarily the costs associated with discontinuing our branded infant feeding business. Amortization expense increased to $8.8 million compared to $7 million last year, due to the ST Specialty acquisition in the fourth quarter of 2010, and the amortization of capitalized SAP system costs. Interest expense for the quarter was down slightly from last year despite the higher borrowings relating to our 2010 acquisition of ST Specialty Foods. The decrease is due to lower interest rates as a result of a higher than market interest rate swap agreement that expired during the quarter. This dropped our average borrowing rate in the quarter from approximately 5.8% to 5.2%.

Total debt in the quarter increased from $941.6 million last year to $992.7 million this quarter, due primarily to higher input costs that increase the per unit value of inventory. Average days on hand of inventory are actually down slightly from last year. Remember that the end of September is our seasonally highest working capital requirement due to the purchase of fresh cucumbers and fruits for the winter production, and our soup and powder plants gearing up for the winter season shipments. We will see significant reductions in debt by December 31 as the fourth quarter is our largest sales quarter, and generates our seasonally highest cash flow.

The gain on currency exchange of $5.6 million in 2011 relates primarily to gains on the translation of intercompany loans, and the unrealized gain on foreign currency hedge, while our tax rate has been consistent all year. Net income in the quarter was $30.4 million compared to $24.9 million last year. This equates to fully diluted earnings per share of $0.82 compared to $0.68 last year, before considering unusual items. Our reported results for 2011 and 2010 include unusual non-operating items that should be considered when analyzing our reported results. In the third quarter of 2011, we had approximately $0.06 in 1-time costs associated with the previously discussed pickle plant closing, along with some minor costs associated with streamlining our warehouse and distribution network, and acquisition costs.

In addition, we had non-cash gains of $0.03 resulting from marking to market our interest rates swap, and intercompany note with our Canadian subsidiary. In 2010, we had 1-time items associated with the Sturm Foods acquisition, facility closing costs and an interest rate swap gain, and intercompany loan revaluation gain that totaled $0.01 in net adjustments. After considering these items in 2011 and 2010, adjusted earnings per share for the quarter finished at $0.85 compared to $0.69 in 2010. The results for 2011 improved significantly due to the increase in sales in the quarter. In regard to our outlook for 2011, we're very pleased that our third-quarter results came in at the higher end of our expectations. We continue to believe that we will see a very good fourth quarter, and as such, we are reaffirming our previously issued guidance of $2.90 to $3 in full-year adjusted earnings per share.

Now I'll turn it back to Sam.

Thanks, Dennis. You traced a clear path from our difficult start through our full recovery to the year's end and jumping-off point for 2012. Suffice it for me to add that the record speaks for itself -- our Treehouse is back.

As I consider our future, I'm reminded that our private label industry has recently surpassed 3 significant milestones. Shipments of private label food and beverages now exceed $100 billion annually. Customer brands now command a market share of more than 20% across all grocery channels. Three-fourths of consumers now purchase private label in 30 or more categories, and 9 of 10 say they will not switch back to national brands. The proverbial writing on the wall is clear -- value without compromise, the promise of customer brands and quality, variety, convenience, and cost is here to stay. The rise in private label continues as the megatrend of our food and beverage industry.

Now let's turn to 2012 and the years ahead to illustrate our readiness and plans for the journey ahead. First, while chagrined by our earlier misadventures, we at Treehouse have mended our ways going forward. Simply put, we are a better and more focused operating company than before our streak of 20 consecutive winning quarters was snapped. We are now back on track.

As the food industry's leading practitioner of value without compromise, we at Treehouse are the best equipped to pursue this path to progress, via an integrated portfolio and acquisition strategy. We expect the new year will be one of strategic growth driven internally by big wins and externally by acquisitions.

Internally, reorganization of our go-to-market infrastructure to establish and upgrade specific category, channel, and customer teams, will hone our competitive advantage to a sharp edge. And the vanguard of this campaign will be our commitments to product innovation, distribution gains, and lowest cost producer status in beverages, salad dressing, salsa and pasta sauce, dry dinners, side dishes and refrigerated pickles.

Regarding commodity and energy cost inflation, the futures markets portend a more benign escalation of input costs in the latter half of 2012. We would welcome such a relative lull in contrast to this past year's gyrations, in that we can devote our energies to innovation and marketing rather than the mind-numbing exercise of successive price increases.

Next, our portfolio strategy also mandates that we shed non-strategic businesses in order to stay on course. Accordingly, we are well down the road of shedding 100 million pounds-plus of branded infant feeding, commodity processed pickles, and legacy co-manufacturer of branded soup and broth. Although we will miss the volume, which represents 5% of our tonnage, we will not rue the loss of these non-strategic distractions.

Externally, the same portfolio strategy leads us through an acquisition filter along to a road to expansion via M&A. We expect that sellers will return to the deal market as capital conditions for small-cap and private label properties improve. As the new year beckons, our deal team is actively engaged in pursuit of our next round of large-scale strategic acquisitions.

Lastly, we will enter the new year with gathering momentum and organizational solidarity. As we hit the trail in 2012, we will have fully recovered our earning power, integrated 2 acquisitions, refinanced bank debt, rolled out SAP, redefined customer strategy, consolidated USA distribution, and made win-as-one the rally cry of a team 4,000 strong.

While the path of progress is never without its twists and turns, we at Treehouse, having fallen to the wayside once, are now back on track, and will hit the road in 2012 at full stride. We will navigate the terrain carefully, take the high road, and blaze a new trail in private label. We hope you'll join us.

Nikki, please open the phone lines for Q&A.

Thank you. (Operator Instructions) And we'll go first to Ken Goldman, with JP Morgan.

Good morning, everyone. Sam, clearly you had a better quarter than the last one, but in retail grocery, 16% topline growth only drew 6% EBIT growth out of it. So I understand your enthusiasm. Why should we as outsiders think of this as this overwhelmingly successful return when earnings in your most important business weren't actually up that much?

Well, as we explained, Ken, there is, in addition to the general movement, improvement and the expansion of the portfolio to include dry dinners. We had a couple of anomalies with regard to product mix and they have an effect on the overall profitability. And I think that, as Dennis pointed out, one in particular, the mix shift within beverages, was quite significant. And in that instance, we had a shift such -- from higher profit to lower profit products and that is, in our view, just a temporary phenomenon. The other key matter is to look at the consumption data and to look at price gaps. And we did not see in there anything that would suggest that this was more than a matter of a timing quarter. And there are going to be, over every 3 months, some puts and calls. I think you've got to look at the long-term trends, as Dennis indicated, and that long-term trend on the other portion of our business that was affected shows that soup and broth, where we lead the category with over a 70% share, has grown in units since the year, over 4%. So I think you've got to take a look at the aggregate and the greater picture at the same time that one looks at the individual details.

And, Ken, Dennis here. I just want to add one thing in terms of the math side of it. As we indicated, we got all of our pricing in, but the pricing was not necessarily 100% effective on July 1. So full price realization going out of the quarter was there. But the weighted average of the price increase did not happen 100% July 1, so what we're seeing is more opportunity for margin in Q4, as a result of having everything 100% in place by the end of the quarter.

That's helpful. I appreciate that. So it looks like fourth quarter we'll see an acceleration of your -- you generally see, I think, an acceleration in the fourth quarter, but maybe more than usual for retail grocery or is that too bullish?

I think when you look at it on a per-category basis you will see that improvement -- one of the things we always have to take into account is mix. And one of the -- for instance, in soup I indicated that our ready to serve is doing extremely well and the numbers bear out in the measured data. But as we've all discussed over the years, ready to serve is a lower margin product. And you'll see some mix shifts, but you will see on an individual basis full margins for Q4.

And then one more. Sam, you mentioned the shedding of less profitable volume. I understand it feels like -- but it feels like there's been some more rationalization in Treehouse going on than in other companies. When, if ever, do we get to a more normalized level of volume growth where you aren't letting businesses or sales go voluntary as often.

I think when we stop buying companies and switch to brands rather than private label. It's an endemic part of acquisitions in our businesses in that while there are some -- I think Sturm Foods and take ST Speciality that are entirely devoted to businesses that are in attractive categories and channels of distribution where we've got capabilities. There are others, and most of them that will come through public auctions are the ones that are of strategic -- less strategic consequence to the parents who may be entirely branded, but have built up other businesses. And, while it takes time to deal with these matters, I would point that -- with our soup and broth business, what we were not able to do was buy only those portions that you see as highly profitable and strategic. And you adjust the price accordingly and then work that out over a period of time. And in fact that goes all the way back to the Dean Legacy business as well. And so what we've tried to do in the businesses outside of our core private label retail grocery business is to run those for a financial contribution to the overall company rather than running those businesses for growth and expansion. You can expect after every one of these deals that we will reassess -- we will assess those things once we expand the portfolio and incorporate the new business.

Thank you very much.

And our next question will come from Bill Chappell with SunTrust.

Good morning. First, on the top line, trying to understand. I think in the past you talked about the $125-plus million of new business wins coming mainly in the third and fourth quarter and probably predominately fourth quarter. Is there a way you can give us an idea of what impact that had in third quarter? How much acceleration we should see in the fourth quarter, and then how much of it is pushed towards next year as that ramps up?

Typically, Bill, what I would think about is a roughly 6- to 8-month lag between the time we lock in what we call a big win and when it comes through in realization. And a lot of times it's relating to the seasonality of it. So you can figure roughly about half of that would be coming through again in the next 6 months, but it all relates to the measurement of when the deal is done and when the shipments start. And, as I said, roughly a 6-month lag.

But with a lot of that business being announced 6 months ago, shouldn't I expect a pretty big acceleration in the fourth quarter in terms of topline?

Yes, and I think we showed some pretty good numbers. Salad dressings, as I said, the powdered beverage -- certainly the dry-mix dinners being up 16% on a pro forma basis, so they're starting to go through but you'll see a better realization in Q4 than we even had in Q3.

Okay. And, sorry, but on the other income on the FX line, can you help me get a little more color on that? Did you expect that to be that big of a gain going into this quarter and how should that play out in the December quarter? Should be a similar type benefit?

Well, I think what you'll see is some flipping in that. That's one of the reasons that's part of our call out because it is the revaluation of the balance sheet and as most of you know we have a Canadian subsidiary with E.D. Smith. And as the rates fluctuated between the end of Q2 at the end of Q3 it caused those revaluation differences. And now that the Canadian dollar has [swung] back down under parity, it flips around in Q4. It's a little hard to tell what we're going to be because lately we got a little more strength in the Canadian dollar. So we'll continue to make that a callout just because it's really a non-cash revaluation of the balance sheet.

And just to clarify that, you are comfortable with $2.90 to $3 for the full year even if that reverses itself in the fourth quarter?

Yes.

Perfect. One last question. In terms of the food-away-from-home segment. How have trends -- seems like they've certainly gotten better for you. Have you seen the overall trend improve as we have moved even September and October or are they staying flatline?

I think they're still challenged and I think they're probably just below flatline. And we recognize that but we've got the advantage of having a bigger portfolio to sell through these acquisitions and that's what we're focused on to offset that. And as I -- in particular the salad dressings and hot cereals came through for us and helped to offset that. And I think for the time being, especially, I think some of you saw the non-farm payroll numbers this morning, unemployment stayed flat again at 9%. It doesn't seem like things are turning around and we'll just continue to try to drive incremental growth through the cross sell. I don't think we are going to see a recovery soon.

Got it. Thanks so much.

Our next question comes from Farha Aslam with Stephens, Inc.

Good morning. Some added color, Sam, if you would, regarding the M&A environment. It's been close to a year since your last transaction. Could you give us some color about how potential acquisition candidates are feeling about their business and timing, if you could lay anything out for us?

Sure. Two things. First of all, with regard to our activity, we just concluded a quarterly business review with our senior management. And we indicated that over the course of this year that the total number of companies that we have taken a look at and had engaged in direct discussions, was in fact, right in the norm of what we've been doing over the last -- the prior 5 years. And there's 2 differences in the characteristics of that group. 1, these have generally been smaller businesses. And secondly they have been things that we have found on our own outside of a public auction process. And we put all of them through the acquisition filter to look at not only the financial consequences, but the strategic ones. There has been a point here where none of those has -- none of any significant size has proved to be a good strategic fit. Now, with regard to going forward, as Dennis indicated, our fourth quarter will pay down outstanding debt quite substantially and my initial look at 2012 is that we will have the capacity and the capability to take on strategic acquisitions of the most substantial that are possibly within our site and ones that are quite large. Last point, if you look over the last three months at the leverage loan market, the high-yield market and equity offerings in the small-cap arena you see that these three months have been greatly dampened by world events that we presume sometime soon will work their ways out. And when I look at the consequences of all these things together, I think we will see more sellers coming to the fore in the coming year than this year. And I expect that there will be ones of more substantial size. And ones that are -- that will be in competitive auctions rather than one-offs. And if you'll remember that over time when we've done these things we've tended to hit a streak and do several and then we take a respite and then hit a streak and do several. I would not be unduly surprised if we're on the verge of another one of those.

Okay. That's very helpful. And then could you update us regarding your thoughts on the single-serve coffee business? I think you have some sort of a K-cup type product with instant coffee. As that patent expires going into next fall, how are you thinking about that single-serve coffee market?

We publicly announced to the grocery trade and to our customers that it is our intention to expand our current single-serve business which trades under the Grove Square name and which this quarter has been expanded beyond coffee into other drinks including teas and cocoa. We further intend to expand that business at late in 2012 and are accordingly in the process of visiting with our grocery and food-away-from-home customers to ascertain their interest therein. It is virtually a year away before this project can be realized. And I think it would be premature to say very much more about that at this point. Other than the early indications have been favorable both with regard to trade acceptance of the extensions of the Grove Par -- Grove Square brand and also early responses from our grocery customers.

Great. That's very helpful. Thank you.

Our next question will come from Rob Moskow with Credit Suisse.

Thank you. This may be an accounting lesson for me, but getting back to that foreign-exchange benefit in the quarter and the revaluation of the balance sheet, the Canadian dollar, US dollar, the currency has been very volatile over the last few years since you've had E.D. Smith, but I've never seen an adjustment of this size. Can you tell me, Dennis, what triggers the revaluation and the income benefit here? And then lastly, getting back to fourth quarter, what is your tax rate assumption for fourth quarter? And my model indicates that needs to be something on the lines of like a 50% increase in operating income into fourth quarter to make consensus. Is that directionally possible or correct?

Let me go first, Rob, to the currency and the big swings are 2 things 1, the rate going from about -- from a $1.04 type of rate down to a 97%. So that's the Canadian swing. And it's a bit more compounded than it was in the old days because our E.D. Smith business has been doing so well that it's grown quite a bit. So it's becoming a bigger item. In terms of the tax rate, we've been almost steady all year at this roughly 33% range and I think that's a good assumption for Q4 as well. We have hardly moved more than a couple of tenths in the last few quarters.

Okay. And was the original tax rate guidance 35%?

Yes, it was.

So you are coming better than you thought. And then order of magnitude on the operating income increase. You said that there was more price realization certainly. But what else has to happen on the top line? Like you are no longer -- you're no longer getting an acquisition benefit on the top line? Do you need a lot of volume growth as well in fourth quarter for your year to make out?

We have a few things. One is we will have one extra month of ST because that closed last year November 1. So on a comp basis, you'll get more sales. Coming out of Q3 we are in what I would call full price realization mode from the price increases that took place in the summer, so you'll see the full impact for the full quarter as opposed to having most of that impact but not all of it in Q3. So those do drive it up. Typically Q4 is by far our largest sales quarter of the year and we expect that will continue. And as I talked about the hot cereal in particular we've been doing extremely well with hot cereal and soup. Those are 2 big fourth quarter items for us. So positive mix, positive pricing, an extra month of ST, and hopefully the realization of more of our big wins.

Got it. Okay. Thank you very much.

Our next question will come from Akshay Jagdale with KeyBanc Capital Markets.

Good morning. Thanks for taking the question. First one for Sam, can you tell me what you consider substantial when you were talking about acquisitions? What do you consider substantial?

If you look at our last 3 of -- and they've been, in reverse order, ST Specialty, Sturm Foods, and then E.D. Smith -- it's actually the last 4, San Antonio Farms, and I would say they share common attributes that I regard as making them substantial. The first is that these are highly attractive growth categories across the grocery channel and not only in traditional supermarkets but in alternate formats that are growing quite substantially. In each instance there has been a base of business that has shown that there is a profitable opportunity for a product that both consumers and customers regard as superior in the private label realm. And also that the resources of those individual companies are such that they have rationally built fine smaller businesses, but lack the distribution network, the sales and marketing capability, and the economies of scale that someone like Treehouse gets. And so what one looks at is more the view of growth opportunity rather than absolute size. And whether that growth opportunity can be achieved with a premium on its profitability because of the existing network.

I think the last element is a question of whether you can, through customer marketing and the use of research and development, see further growth. And I will go from the general story to the very specific. Yesterday I was sitting in a meeting when we were discussing 1 new item launched with a single customer that fits our profile with regard to high-quality products and reliance on the strategic value of customer brands and a view that they want distinctive products. And we launched our -- we've launched a product in this business that in its first year of distribution, this single product alone will exceed 25% of the base revenues of this company that we have recently acquired. And the interesting factor is that it is an unusual circumstance only in the sheer magnitude. That, as I look across the beverages business, salad dressing, salsa, pasta sauces, dry dinners, time and time again I see that we are developing those types of opportunities and that's what I would regard as substantial.

That's helpful. 1 more for you, Sam, on the single-serve coffee market, if I may -- why -- just trying to understand why you went with the Grove Square brand and not the retailer brand itself. Does the retailer need this category to have some scale before they launch these brands or these K-cups under their brands or -- can you help me understand why it's Grove Square and not a truly private label brands.

It is a control label that we own. And at this point Grove Square is a line of beverages that exclude roast coffee. And as we looked at this several years ago, we saw that the real big opportunity would be in single-serve roast coffee and that that opportunity would be best manifested in customer brands owned not by Treehouse but by our grocery and other customers. However to launch what we needed to do in the smaller end of the broad category, that which excludes roast coffee, we needed to have a program that was not just an amalgamation of insufficient quantities in any given variety or brand that really would destroy -- threaten the economics of the startup program. So we came to the point of view that the non-roast coffee program ought to be, in our view, considered not as a strategic end to itself but, in fact, the opening, the beachhead that would then lead to a far larger and broader presence. And Grove Square had met every expectation in that regard. And I think while we are still a year away from single-serve roast coffee in the -- packaged under the brand names of our largest customers, that we will a year from now look back and say that was the right introductory campaign for us to learn about this business in the small but highly controlled way.

That's helpful. And one for Dennis. I wasn't -- I'm a little bit confused on where the charges that were reported this quarter, one-time items would fall exactly. The question really is how did adjusted gross profit do? Like what was what you call adjusted gross profit this quarter and how did that there fair relative to your own expectations?

Actually the one item in the callouts that has an effect on gross profit of any consequences is really the facility consolidation cost and a bulk of that would be impacted in cost of sales. So that's the one item that you'd really have the callouts. The rest were below the line so that has a small positive impact. But the real driver of the gross profit is the pricing and that's the good jumping point for Q4.

And did the gross profit performance on an adjusted basis, was that in-line with what you were expecting, better or worse?

It was very much in line. We would have loved to have had 100% realization of all the pricing on July 1 and that wasn't quite the case. Part of it is due to just the timing of how the increases go through, but by the end of September everything we went out for we got. Not to say that we aren't continuing to look at pricing and some of the grains are still fluctuating and there is likely to be some more. But in terms of the bulk of the program, it's in place and effective now.

And one last one on commodities. Can you update us on the commodity guidance? I believe the last one you gave was $160 million for '11. And then also for '12, Sam mentioned a benign environment in the back half of '12. If you could be a little bit more specific on '12 and more importantly also just give us the number for '11.

Actually, it's Sam. Dennis and I will tag team this. First of all, as I'd indicated in my notes, on a mark-to-market basis our input costs we now see as of the year end, should that be up $150 million over our 2010 run rate based on an equal volume. At one point we had announced that, that was as high as $160 million, and it's come down somewhat since our last call. With regard to next year, what we are seeing when we take -- primarily the futures markets and lay them out contract by contract, over the next four quarters we will have substantially high inflation on a mark-to-market basis for the first and second quarters and then it -- that inflation begins to diminish in the crop year that is 2012/2013. Again we work off of the futures exchanges and mark-to-market. I should note that it's too early for us to really talk about what we expect for the coming year, but that it's been our practice all along to make sure that we've covered at least 6 months going forward. And we will -- have over the last several months and will over the beginning of 2012, have hedge positions coming off that may or may not be -- they will be replaced and then that market values that may be either lower or higher. So you're always going to see this timing -- I don't know that it's quite a lag -- I guess it is a lag on sharp ups and downs with regard to our actual costs. But it is -- it's been proven that over a long period -- sustained period of time that manufacturers are far better off of being hedgers than speculators and that's the way we do it. Dennis?

All I can add, actually, is that we have a commodity committee here at Treehouse -- Sam and I, Harry Walsh, our President of Bay Valley Foods, and at least 7 or 8 other executives in purchasing and sales are in that room. So generally there's about 12 of us and there are probably 12 different opinions on what's going to happen next year. So I'll keep reading your reports and hopefully I'll get some insight from the street on what's going to happen with input costs.

Great. Thanks for the answers. I will pass it on.

Our next question will come from David Driscoll with Citi Investment Research.

Great. Thanks a lot and good morning, everyone. One thing just to suggest, if you'll be willing to take it, is that if you could add cables in the back that would show price volume and in foreign exchange reconciliation to the sales growth for your segments. You guys are now certainly a very significant company and that would put you in tandem with where most of the other food companies are on disclosure. And then it would prevent what I'm about to ask. Could you repeat -- I don't even know if you said it because I missed it. What was price realization in North American grocery in the quarter?

We didn't say that, but let me tell you that we will be issuing our third quarter 10-Q. It will be out later this afternoon. So let me give you a few pieces on that. The retail number was 3.5% in terms of pricing for the quarter, and as I said, that's the composite for the quarter, and the going out is better than the average for the quarter.

Would you say the run rate is something north of 5?

I wouldn't say that. I'm not going to be able to answer that question.

Okay. On soup pricing. So Campbell's has taken an enormous price increase, both list price and reduction of trade promotion. Maybe conceptually, Sam -- I'm thinking that you should have done well in soup and I think on this call you're telling us why you are facing a hard comp. But in terms of the environment in soup this big price increase from Campbell's would look like it would be a positive for your volumes in private label soups, that you would see a real benefit from this activity, seeing an even wider spread between the private label price and the branded price. That didn't work out but maybe you could help me think through why it didn't.

Well, David, I'll get to this. Dennis and I will both talk about some of the particulars, but remember here that when you look at the aggregate number, what you're seeing is the surface and there may be roiling currents below that at any one point. I would also say with regard to your request on the tables, I'm delighted that you ask us these difficult questions. That one is a lot better than the time you asked us to announce early and I'm glad that, 1, we heeded your advice, and 2, that we don't need to in that regard again. With regard to soup, again I look at the longer term. We are up for the year I think 4.1% in units. And a lot of that business has come from -- and not only our existing base but the launch of some new distribution and some new varieties. And with regard to the Campbell's action, they're -- Dennis will talk to you about the general matter of the price spreads, which I indicated were pretty stable. But you also have these anomalies where, at the national brands, even as they take substantial price -- list price increases can at one time or another and in one count or another, have prices that are temporarily much, much below that. And we run into those things quarter in and quarter out and this last one being one of those as well. Dennis?

I would just add that everybody in soup, I think, had to take pricing that we still continue to have challenges in some of the vegetables and ingredients and tin plate. What happens, though, is clearly this is one category where we had a little bit of a widening in the price gaps but it wasn't that much and retailers know what they want in terms of a price gap. And if we price and Campbell's price at what we find over the quarters and over the years is that price gap stays very consistent regardless of who moves first on pricing. We saw a little bit of a widening and I think that helped to contribute to that 4.1% volume increase we saw. But it in general wasn't as if the gaps widened significantly.

On a 9e-month basis, do you have the numbers for what your volumes are growing in North American grocery? I think this would put into explicit light a number of questions that have been previously asked about the rate of volume growth and the health of it.

I'm trying to look for my 9-month number. Again that will be out this afternoon. The composite is 2%. But if you recall, we had some comps like the baby food business that went away. So it's a little more difficult. I think the best thing to do is to bridge with the guidance we give each quarter and the earnings calls we give with the adjusted numbers.

Okay. Two more quick ones for me. In the quarter itself the $0.85 -- it's like $0.02 ahead of consensus. But in there, as I think as others have been asking, is this $4.6 million gain on the foreign exchange. Dennis, if my math is right, that's about $0.08 a share. Was that in your original guidance for the year or is that something that just happens, whether it's positive or negative, and you're not putting this -- you're not embedding this into guidance? You're just making the thought process is that you'll be able to handle the number whether it's a positive or a negative. Is that the right way to think about it or did you actually know that this would happen such that it was embedded in the guidance?

We did not know that was going to happen. And just like when we started the year, I think the expectation was that the Canadian dollar was going to be about $0.97 of the US dollar and went up to $1.05 at 1 point and now we went back to $0.98 and now we're back to $1. This is one area that we just have to manage our business to absorb and counteract those.

The underlying quarter then would come in a little bit light against consensus. Did it come in light against your internal budget or was consensus just too high?

Yes, we came in at the high-end of the range that we gave. We said $0.80 to $0.85 last quarter. So overall we were pleased with the results.

Pardon me, but what I was trying to say was with the $0.85, you drop off the $0.08 from a foreign-exchange gain that maybe wasn't forecasted and I'm just trying to look at the underlying number. That number would look a little weak to me. And I'm thinking is this either consensus is a little too aggressive or was it operationally a bit weaker than you had expected?

No. Overall I think it went well. When we gave that guidance, we knew where the Canadian dollar was for this quarter so there was some of that in there. So I think overall it was strong. As I said, from a margin realization standpoint, we'll do even better next quarter. And I think that as I look at worth, I saw the street numbers. I think there was a thought there was going to be a greater margin realization in the quarter at -- assuming that the price increases were 100% effective in July. So I think that might be where some of the gap was.

Final question is on 2012. I think in the prior quarters you talked about a fairly large expense shift from 2012 and 2013 into 2011. And that this is the underlying thesis going on right now in the consensus numbers in terms of why the rate of growth can be so significant, X acquisitions in 2012. You haven't talked about '12, but can you at least reconfirm that this thought process about this big expense shift from '12 and '13 into '11, that, that is, in fact, the right way for all of us on the outside to be thinking about this?

That is correct. That's what we said at the beginning of the year, David. We brought forward roughly $0.10 when we took our very original guidance down. That's in the range of $5 million that was pulled out of future periods and put into this and that should be a benefit going right back to next year. So I think we said when we announced this that it was, in effect, a pull-up and that as we end the year it will be gone and done and so your starting point for 2012 improves by that roughly $0.10.

Really appreciate the comments. Thank you.

Our next question will come from Chris Growe with Stifel Nicolaus.

Hi. Good morning. Just want to ask two questions, if I could. The first 1 is in relation to pricing and maybe some of the follow-up to David's question, the pricing was less than I thought it North American retail. Last quarter in particular we talked about $100 million in pricing for the year. And then we'll get more information from the Q today. Is that still a good number for the year? Meaning there's a big pickup in Q4? I realize the one month lag in July. But it still seems to be a little less than I expected for the year.

That's still the right range of annualized pricing. And I indicated some of the grain markets were -- are still a little volatile and we could go after a little more but that $100 million works. And based on our math and the annualized a number you can see we'll be north of $2 billion, so that's your roughly 5%.

And the -- do we know, is the fourth quarter the cost inflation peak for Treehouse this year or was it in 3Q?

Because of the way the Hedges work, Q4 will be the highest of the input cost inflation periods.

Okay. And I had a follow-up. There's a comment before about being a little too early to get into cost inflation guidance for next year. I wonder, is it too early to get into a conversation with a retailer, though, about pricing for next year? Can you talk at all about how you can prepare for -- likely to be some inflation next year to get pricing in place to more closely match that cost inflation?

Chris, as I had indicated, that it is our policy and our practice not only to hedge forward but also to communicate our market views with our customers. And we do that on an ongoing basis. And in some instances that causes them to decide that they will ask us to take a position that's specifically related to their business. And that in doing so they will commit to a period of time or volume to, in fact, allow us to -- as we -- those costs are incurred, pass those -- incorporate those into the cost of their products of that individual customer. There are others that want the information but are not in their policies able to make those forward commitments. And in those instances we want our customers to realize that at some point we will have to talk to them about a type of adjustment. And then I think importantly here in these -- we have been in substantially two periods of great volatility -- the 2007 bubble, the 2008 bust. And then early in this year the whole of the food industry was caught largely unawares by another round of cost increases. What this has done has required -- allowed us and those of our customers who are more progressive ones, to closer collaborate on taking waste out of the supply chain and making changes to order patterns, transportation, products, packaging that allow us to offset at least some of this through cost reductions that we and our customers share. And the long-term virtue of that is that if we move closer to being a partner than simply a supplier who answers request for proposals, that we develop a broader common interest that through thick and thin will put Treehouse in a competitively favored position. In part because of our procurement prowess and in part because of our policies of sharing this information.

Okay. That's helpful, Sam, thank you.

Our next question will come from [Milo Reed] with Jefferies.

Good morning. Just wanted to follow up on the question regarding the impact of the current gain and the $0.85. Did I understand you correctly that this currency impact was not included in the annual guidance but was partially included in the guidance for the third quarter?

That's correct.

Okay. And then as for the hedging, are you -- how much more than six months out are you hedged right now? I assume you are.

Typically we try to be fully covered 6 months out. But this particular -- at this particular time we are a little less than that. The volatility in the markets have caused us to be a little bit shorter than we would normally be.

So is that, in other words, a reflection that you assume input prices to go down?

We expect -- we think they'll be leveled out. We think there are possibly some areas where they could go down and given the broad range of inputs we have, we have to look at them on a one-to-one basis. So just an in general concept is we're little bit shorter than we've been historically on average.

Could that create a pressure from retailers for you to lower some of your prices again?

Yes, we have one-on-one conversations with all of our retailers and with all of our products and we are priced, we think, where we need to be in just about all of our categories. We've got a couple that we think we may need a little bit more on and we are in discussions with that. But as we've always said, input costs are to be margin neutral to us. And if input costs go down there will generally be price decreases. And when input costs go up, we expect to see price increases. It's not a margin driver for us as we plan our business. Our margin is driven through productivity.

Right. But so far there hasn't been any questions from retailers that the prices should be reduced by you?

No, not at this point.

And then last question. I think on the second quarter conference call you talked about that you were actually hedging diesel fuel which I thought was unusual. Is that still the case?

Yes, we have -- not a lot, but we still have diesel futures out there. And the idea here is to just try to mitigate some of the exposure we had, especially at the early part of Q2 when oil went up well north of $100 a barrel.

That's all I had. Thank you.

Our next question will come from Jon Andersen with William Blair.

Good morning, and thanks for taking my questions. Historically, you talked about 100 basis points target for growth margin expansion through procurement and productivity benefit. I was just wondering if you could give us an update whether you are on track for that this year? And then as you develop your plans for 2012 if there are a pool of opportunities there that would support that objective in 2012?

Hey, Jon. Yes, we continue to internally drive to that 100 basis point. Obviously the way the input cost worked this year and the margin erosion we had due to pricing, it's not very evident. But we still think there's room to go. We have a very good operation. We think, but when you have 18 plants and you look at productivity throughout those -- we're always looking for more from our plants and distribution operations. Our goal will be to continue to find that 100 basis points, at least for the foreseeable future.

John, this is Sam. I concur with Dennis. I also believe that as we've talked we've made substantial capital investments in those attractive categories that we see as high growth opportunities. And when we start 2012, we will have production facilities with lower costs and greater capacity in virtually every one of the categories that we place in that top right-hand quadrant. The value of that is that we not only create a competitive edge but then are able to reinvest some of those savings in innovation. And there is a virtuous circle, if one pursues this carefully, whereby those cost reductions lead to greater innovation that leads to a greater growth rate and more sustainable presence in those categories.

Okay. Maybe one bigger picture question, Sam. Over the past several years you've constructed a nice diverse balanced product portfolio. I'm wondering how many more product platforms do you think Treehouse can support? Does the new systems implementation and distribution consolidation that you're going through expand the range of platforms which you think you can support or at some point do you reach a point of diminishing returns there?

I think that if we only buy businesses and add those as they are and you do reach that point of diminishing returns. We are not there yet. And importantly what we've found is that the -- what the systems implementation will allow us to do is have an omniscient view of all the variations in our business. And we know that there are many variations with -- in small businesses that we will, over a period of time, more standardize and that we will continue to be a highly specialized firm that for substantial opportunities and substantial customers and growth categories we will find ways to further segment and differentiate ourselves. But in other places -- and I talked about the Grove Square control brand. What we will do is have 1 label or 1 set of choices as opposed to many for those businesses that we want to keep in the portfolio and those customers that we value, but don't warrant the investment in that very detailed segmentation or differentiation.

Thanks. That's helpful. Actually, just to follow up on that. With respect to the single-serve opportunity. Should we expect a step up in CapEx in 2012 to support the single-serve opportunity around roast coffee? Or are you able to do that within the existing confines of your overall budget?

We haven't developed all the 2012 plans, Jon. But, in general, we believe that this will fall into our more normalized working -- sorry, capital spending requirements.

Thanks a lot, guys.

Our next question will come from Jonathan Feeney with Janney Capital Markets.

Good morning, guys. Wanted to ask about the price pass-through process a little bit more specifically. Dennis, you mentioned the one-on-one conversations with retailers. That makes perfect sense to me. But I guess when you think about price pass-through, it seems to me that it tends -- has tended to work in a lot of segments of private label like you -- what happens is you announce a price increase, some percentage of people are on board, other -- a smaller percentage aren't. You wind up firing the customers that aren't or losing some facing or some manufacturing opportunity of this customers that aren't and find new customers that are. And as an industry all the cats kind of go one way or the other depending on how much capacity there is. At least that's always been my understanding of it. But my question would be this recent -- when you talk about the trials and travails of passing-through pricing here, have you lost any customers or lost significant volume from customers? And is that an accurate characterization of what's going on here as you pass price through?

Jon, good question. The reality for us is we lost very little business as a result of that and the real driver of that is the fact [based] selling programs we use where we just spell it out. And here are the costs and here's what's going on. Part of the reason these are one-on-one discussions is that every retailer has a slightly different formula, slightly different mix. And as a result you really need the one-on-one. We can't just send a price list out and say everything goes up 5%. So there's a little extra work there that takes place. And the challenge tends to be not so much getting the price increase -- the challenge is getting the price increase timely.

Okay. And so it really is then, it sounds like, mechanical. It's that there's different -- a different sales process and you just can't get around to everybody, so you wind up having a margin lag.

That can happen. And I think it was probably one of the big drivers of our Q2. And then just trying to get everything in on a timely basis with the retailers due to the negotiation that inevitably takes place.

Okay. I want to just follow up on the single-serve business at little bit. A little bit's been said about this topic in the media and others around. And I'm kind of curious -- you're making this Grove Square instant coffee right now. Can you be more specific about what the potential opportunities are to make other kinds of single-serve coffee in the same form factor? And I'm taking the comment that -- when I think about that potential opportunity, the capital that would be needed to support that would be a lot greater, it would seem to me, than what you're talking about for 2012 if it's the context of your regular private label re-capacity expansion plan. So any insight you could offer this fine morning would be appreciated.

I think the clear -- the important distinctions here are that the program that we're contemplating for the late in 2012 is specifically roast coffee. And that there are -- one very large -- there is a national brand equivalent out there. There are several brands now that have licensed the use of that K-cup for their distribution under their brands and what we have to do in order to have a meaningful presence is to, at a minimum, equal those national brand equivalents. And in coffee that means developing individual blends of Arabica beans that, in fact, emulate those that are the most popular across the consuming public. So we have a clear competitive standard to meet in that regard and we will develop those. It will be a different type of venture for us in that most of our businesses are completely vertically integrated and we're still examining the degree to which we should be vertically integrated here and that examination will then, among other things, lead to considerations of capital investment.

Okay.

I think it's clear -- Dennis made clear, though, that the aggregate capital investment we intend across the whole of the business in 2012 will be pretty much in keeping with what we've done for a long period of time. I would say with a single qualification that we are -- once we get into '12 and '13, we're really on the backside of the SAP project, are we not?

That's right.

And that there should be some small effect of that on the overall capital. So that's as specific as we are prepared to be.

That's pretty specific, Sam. I appreciate it. The only follow-up I would have -- and this may fall out -- this may be outside your ground rules of specificity, but are there potentially co- manufacturing opportunities? I know there are places in your business where you're not just a retail brand leader but a co-manufacturer for folks in the industry. Are there potentially some of the current licensing brands -- is there an opportunity for other licensing brands to -- for you to compete for that manufacturing business after this September [pan tax break]?

There may well may be. I think that for us that -- as I indicated earlier in the call, for our non-retail businesses, what we're looking for there is a return on capital and cash flow. I think here we're best advised to focus on the growth opportunity in North American retail grocery. We have the -- all of the assets in place to leverage that new volume. We have the resources, the sales and marketing teams, the distribution systems. That's where we're going to go first and whether it becomes something broader than that, only time will tell.

Thank you very much. I appreciate it. Have a good day.

Our next question will come from Brett [Hunley] with BB&T Capital Markets. Please go ahead.

Hi, thanks. Good morning, guys. This is Brett, standing in for Heather Jones this morning. Just one question here given the length of the call. It's easy to see the growth potential of private label over the long term and clearly in the current market, you expect strong growth out of the private label sector. And I'm just curious it to get your more short-term view on the marketplace, Sam. Just given branded-player actions as far as change in packaging size, or heavy, heavy advertising, changes on placements within the store, etc. I was just wondering if you would speak to how or if private label needs to react in this environment? Thank you.

It's a thoughtful question. I believe that the growth of private label across the broad portfolio of CPG categories is largely going to be sourced from not the national brands but the regional and secondary and tertiary brands that in food I think the last number I saw still account for 54% of all unit or pound volume. And that's where -- that's the source of the volume and it's because those competitors have inferior economics and have difficulty in meeting the demands of a retail grocery business that is now, among many of the players global in scope, and at a minimum have businesses that cover all of the North American continent. With regard to the branded activity, I mean, the -- what we welcome is a great deal of innovation by branded leaders and advertising to communicate to consumers those new benefits. And that may seem to be something less than apparent and it -- certainly from 1 month to the next or 1 quarter to the next in a given category can temporarily give us fits. But what our role is, is to provide -- as those innovations come out to find an effective way to emulate those under the umbrella of the value without compromise banner. And to be -- then to go to the retailers who really value their customer brands -- and that is the essential distinction here -- and provide to those retailers an array of products that, in fact, either meet or exceed that national brand standard. There will always be a lag in that regard. We can anticipate some of the innovation. But we've got to be careful to allow that branded innovation to come to the marketplace and get some early indication of how it's doing before we invest the research and development and the capital into it. And I think you'll see this year and going forward that the new product introductions that are part of the big wins, a lot of that is exactly examples of that approach. So I think that over enough period of time -- a long period of time, that the national brand programs, which will always have an effect on us, we believe are over the long-term that not only will we coexist but we'll benefit from their investments in their brands and that it will be others who get squeezed. Have I left you speechless?

Thank you. That answers my question.

Our next question will come from Ahmed Sharma with BMO Capital Markets.

Good morning, everyone. Sam, we want to focus on competitive dynamic within your key categories not so much with the branded players but within the private label community. So that if we look at overall private label trends, in which categories would you expect Treehouse to outperform total private label growth and in which categories which you expect to underperform.

Well, the evidence that we have when we look at a composite portfolio of total private label grocery -- total grocery, then total private label and then thirdly our portfolio. And we look at that data on a quarterly basis, both in pounds and dollars. And consistently we've seen that our portfolio outperforms that of the aggregate of private label food, which I believe is over 92 categories. And also the aggregate of food as well. And within that we have those that we will be -- gain on and those that we fall behind. It's important that we stick to the discipline of the portfolio strategy and in that regard we expect to show leading improvements in those categories that we've designated as most attractive. I think today we named most, if not all of those, that would include beverages, hot cereal, dry dinners, pasta sides, salsa, pasta sauce, jams and jellies, and I think we included a couple of others. And those are where we put the predominant -- predominance or preponderance of our marketing and research and development funds to develop. Again they are highly dependent on the owner of the customer brand to find that our offerings are a good fit for their strategic purpose. And so you get -- at any one time you are in the process of dealing with individual customers who, in some instances, demand that it be done yesterday, in other instances take a long time to come around to the realization that our programs can be of benefit to them. I would say that the singular -- we have 2 advantages in that regard over other competitors. 1 is we really have made the investments in the infrastructure that is quite similar to that of branded companies to create intellectual property, to have research and development facilities, to have a culinary capability and to stay abreast of category of movements and innovation. I think the other big advan -- and that doesn't work for everyone, Ahmed? And we've got to be careful to ration the resources to those instances where while all will get some, a few will get a lot. And then the other big advantage that we have is that, I think, in -- outside of traditional supermarkets and I know that the financial analyst community and brands that are focused entirely on syndicated data in those channels. But outside of that, where nontraditional formats, whether they are limited assortment or dollar stores or discount stores or club stores or other mass merchandisers -- we spend -- we have, in reorganizing our business, gone from a spreading the resources evenly across all businesses and all territories to amassing resources as to where the opportunities exist. So you'll see our revenue numbers and retail climb at a very different rate than the traditional supermarket industry. And it's because we've identified and focused on that growth not only in those channels but in these alternate format as well.

So are you prepared to give a little bit more quantitative measure again -- if you look at your growth in supermarkets (inaudible) measured, are you like growing at 50% higher growth rate or any color on that?

I think the main point there is that if you looked at our biggest customers, we don't give all the details, but if half of our top 20 customers are in the unmeasured channel. And out of our top 10, half are on measured channels as well. So to Sam's point, we move with where the food industry's going. And right now you're seeing great growth by companies like Aldee and Target with their food. Obviously Wal-Mart will soon be measured. But right now it's a growth opportunity. If there's food and there is private label to be had, we expect to be a player there.

Great. Just one more, quickly. The big export opportunity in the industrial and export segment that you had this quarter, will that continue in the fourth quarter or is that just for the third quarter?

As I said, it's opportunistic. And with the dollar coming back up, it will be more challenging to get that kind of business. So I would consider that to be a nonrecurring type of business and if we can land one, great. But I wouldn't think of that as being a baseline for us for the future.

Great. Thank you very much.

We have no further questions at this time.

Thank you all. And again for joining Dennis, our Treehouse gang, and myself this morning. We look forward to seeing many of you in the -- at the next PLMA, or Private Label Manufacturers Association Investor Day in Chicago. That's 10 days hence on Monday, November 14. And if you haven't exhausted your inquiries, we'll be welcome to take your questions and comments at that venue as well. I hope I see you there. Thanks.

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