TreeHouse Foods Inc (THS) 2011 Q4 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 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, expect, 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 activities, performance or achievement expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31, 2010 and the Form 10-K for the period ending December 31, 2011, which will be filed shortly, discuss some of the factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented during this conference call. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revision to any forward-looking statements contained herein to reflect any changes 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.

Thank you, PI. Good morning, everyone, and welcome back to our TreeHouse. Our home, usually abuzz with guests at our table, has been a quiet dark place over the year-end holiday season. We have been humbled by recent events and chagrined by our meager fare. It was as if the Grinch stole Christmas at our TreeHouse.

For those of you still with us, we plan to be far more hospitable, no matter the weather, in the year ahead. For those no longer with us, we hope their absence is short-lived and that they will return soon. As your host, we are determined to return to our usual high standards of hospitality and to accommodate all of those across our threshold.

Today, Dennis and I will address the several questions that all of you must have regarding our unexpected difficulties at year end and their implications for the year ahead. Let's start with the obvious. What went wrong and why didn't you know it? When we last met in November, we had just posted an all-time quarterly high of $83 million in adjusted EBITDA and, in an apparent turnaround, projected continuation of improving volume, margin and mix trends. After a strong start to the fourth quarter, seasonally always our largest in terms of shipments, our Retail Grocery business, running at a 4% organic growth rate, lost all forward momentum. In my view, three key factors brought about this abrupt halt.

First, this year end was the worst for food and beverage in the grocery industry since the onset of the great recession. Measured channels, including Wal-Mart as tracked by Panel Data, recorded a unit sales drop across the entire dry grocery sector, approximately 8% below the trend line of 2008, 2009 and 2010. After several quarters of ever-escalating price increases, 6% alone in the fourth quarter, and coupled with a year-end collapse of holiday season promotions and merchandising, consumers cinched their belts with a renewed sense of frugality. Trading down, they deserted supermarkets, de-loaded pantries and sought value in discount, dollar stores and limited assortment stores.

Second, our normal fourth-quarter operations and supply chain activities, geared for the usual holiday rush, were disrupted by the year-end volume collapse in traditional grocery and the shift to alternate formats. The disruptive effects ripple across our portfolio as shipments to conventional grocers plummeted by almost 10%. Two of our cold-weather stalwarts best illustrate this phenomenon that occurred across a broad spectrum of brands and private labels. Soup -- and this is the category -- down 83 million units for the year, suffered 53% of that loss at year end while non-dairy creamer powder, down 5% for the year, suffered a 22% decline in quarterly merchandising activity. The resulting falloff triggered manufacturing efficiencies and shipment disruptions across much of our operations.

Third, and thankfully last, the retail channel shift to alternate store formats, which are a primary source of our organic growth, exceeded our short-term flywheel capacity to ramp up production on short order of opening price point merchandise, smaller packages and promotional multi-packs. The poster child of our temporary dilemma is pasta dinners and side dishes. Just as we were expanding manufacturing capacity in two new high-speed automated production lines, weekly orders late in the fourth quarter peaked at a 50% increase over the year's average weekly output. As a result, we have had to temporarily rely on two co-packers and selectively fill orders.

Both new production lines will be operational by midyear, when S.T. Specialty, whose historic customer base is dominated by discount retailers, should return to its normal volume and margin growth trajectory.

So therein lies the tale of the tape and the answer to the first burning question. As to why we didn't know it, the multiple choices are, A, we were on a roll, having reversed course in the third quarter; B, the year end was the proverbial 100-year flood; C, we lacked adequate tracking mechanisms to predict such a large and sudden shift; or, D, the correct answer, all of the above. There you have it.

Dennis will now lead us through a financial discussion of the quarter as well as earnings guidance for the coming year. Dennis?

Thanks, Sam. First I want to cover some additional background on our (technical difficulty) quarter. As Sam mentioned, we were caught by surprise with the very unusual sales trends we experienced. As many of you know, the food industry is considered a defensive investment because people have to eat, and for the most part, people eat consistently. Typically, our sales are also fairly predictable. While we may have some minor volatility due to days in the quarter or if the holiday straddles a quarter end, we rarely have movements of plus or minus 1% or 2% in a given quarter.

That being said, our fourth quarter was nothing like any we have seen in our six years at TreeHouse. We expected to generate good incremental sales similar to the roughly 4% unit increases we had seen for the first nine months of the year. Instead of an increase, however, we saw shipments in December drop by 8% from the prior year, and the majority of that decreased took place in the last two weeks of the month when orders seemed to just dry up.

So the obvious question is, what's happening? First, we believe some of our customers are managing their quarter-ending inventories much tighter than they had in the past. Our center-of-the-store categories are mature and do not significantly change from month to month, let alone quarter to quarter, when compared with history. Even through the last few years of input cost inflation in 2008 and deflation in 2010, our categories performed consistently regardless of pricing.

Sam did point out the changes in consumer dynamics in the quarter and especially at the end of the quarter. But the swings in our shipments were too large and too dramatic to be driven by the natural flow of consumer purchases.

Second, as Sam explained, traditional grocers reported lower foot traffic in the past quarter, and that likely caused a major part of the weakness in our sales volumes. As we disclosed in January, we saw nearly all of the weakest in what we term traditional grocers, those that sell the full array of food products in large footprint stores. These include national grocery chains and mass merchants with full assortment. On the other hand, the limited assortment store, from club to dollar to limited assortment on both the high end and the low end, saw year-over-year sales increases in the quarter.

And, third, we clearly saw unusual sales in the winter season categories that we believe are related to the unseasonably warm weather in the Midwest and Northeast. We had a disproportionate sales shortfall in soup, hot cereals and non-dairy creamer compared to our other core products.

Despite the weakness in the total sales in the quarter, we did show growth in our pasta sauces, salad dressings and powdered beverages. It's particularly interesting that salad dressing volume was up in the quarter as soup and non-dairy creamers were down. Apparently, there was at least some good benefit to the warm winter weather.

Food Away From Home also had a challenging quarter, but the bulk of the sales decline was due to our previously disclosed decision to eliminate certain low-margin processed pickle business in conjunction with the closing of our Springfield, Missouri pickle plant last year. Excluding the pickles, our revenues in this segment would've increased 5.3%, primarily due to pricing and a mix of sales.

Our Industrial and Export business was a tale of two businesses. Our base industrial business showed a 1% growth in total volumes and a 15% increase in sales dollars, due primarily to pricing. However, our co-pack business, which manufactures branded products for other manufacturers, saw volumes fall by 33% as they reacted to their own shortfalls of sales. The segment operating income decreased, but since this is a low-margin business the effect is not nearly as great to the bottom line.

While sales were challenged, we did accomplish some very important operating activities this past quarter. We now have all of our headquarter systems in place and completed two additional plant conversions to our new SAP system. That brings us to four plants out of our 18 and two of our three major distribution centers now converted to SAP. Obviously, the project will be going on for some time, but the quantity and quality of the data we now have is allowing us to make better decisions on plant operating performance, SKU profitability and customer performance. We see this as a great tool for the future and a base for future business expansions.

Now let me cover a few other details regarding our fourth quarter. First, total gross margins in the quarter were 21.9% compared to 24.8% last year. The decrease in margins was due to a couple of factors. The largest driver of the decrease was due to the higher cucumber costs and LIFO accounting for pickles. This is our only LIFO-based product. Last year we had a favorable adjustment to our pickle LIFO reserves because of the lower inventories. This year we had expected another decrease in inventories. However, a combination of higher cucumber costs and the lower-than-expected pickle sales in the fourth quarter caused our inventories to increase. This resulted in both an unfavorable adjustment to the LIFO reserves and unabsorbed overhead at our pickle plants. As a result, we lost approximately 120 basis points of margin due to the pickle business alone.

The second big issue in the month was that we lost about 100 basis points in margin due to higher production costs as we slowed down plant production in response to the sales shortfall in our salsa and co-pack businesses, and we had inefficiencies with our skillet dinner lines. The remaining shortfall in the last year of about 70 basis points in gross margin was due to sales mix, including the effects of selling more value-based private label products and less premium products that typically carry higher margins.

As I move down the income statement, selling and distribution expenses in the quarter increased to $35.6 million compared to $33.7 million in 2010, due primarily to the growth in total revenues. As a percent of sales, these expenses stayed steady at 6.6% of net revenues. The incremental savings we experienced from our distribution center consolidation project was offset in the quarter by higher average fuel costs.

General and administrative costs decreased significantly from $28 million last year to only $14.6 million this year, as we made significant reductions to both annual and long-term incentive compensation expenses as the weaker than expected fourth-quarter results caused us to miss our full-year bonus targets. Last year's G&A expense ratio of 5.5% to net sales included a normal level of incentives as we slightly exceeded last year's bonus targets. We expect that in 2012 we will be back on track to a normalized ratio of G&A to net sales.

Amortization expense increased to $9.2 million compared to $7.6 million last year, directly as result of having a full quarter of intangible amortization resulting from the acquisition of S.T. Specialty during the fourth quarter of 2010 and our investment in new systems. Software is considered an intangible asset, therefore the amortization of those capitalized costs show up on this line.

Interest expense for the quarter also decreased compared to last year as a result of lower levels of average debt outstanding. Cash flow from operations reduced our average debt outstanding, while last year had increases in debt to fund the Sturm and S.T. acquisitions. In addition, our average borrowing rate is lower this year. The decrease in rates is due to having refinanced our revolving credit agreement at September 2011 and the expiration of an unfavorable interest rate swap agreement in August of 2011. Both of these events lowered our average interest rate on our revolving credit agreement during the quarter to just 1.7% compared to 2.23% last year.

In regard to our debt, we continue to have excellent cash flow despite higher input costs that have increased the average cost of our inventories. During the fourth quarter we had positive cash flow of nearly $88 million, which allowed us to reduce outstanding debt net of cash to $901.6 million. This brings our leverage ratio down to 3.09.

The loss on currency exchange in the quarter relates primarily to the mark-to-market adjustment of a currency contract and the revaluation of a Canadian intercompany note. As Canadian exchange rates increased in the quarter, we had to take a non-cash mark-to-market write-down on this note. We consider these fluctuations to be non-operating items because these items have no affect on the cash flow of the Company and they will eventually balance out over time.

With regard to taxes, our effective tax rate for the quarter was 31.4%, down from the full-year rate of 32.5%. Our income in the quarter shifted more towards Canadian sourced income versus the mix we had anticipated. As corporate tax rates in Canada are lower than the US, the overall tax rate decreased.

Net income in the fourth quarter was $29.9 million compared to $28.1 million in last year's fourth quarter. This equates to fully diluted earnings per share of $0.81 in the quarter compared to $0.77 last year before considering unusual items. However, after adjusting for the nonrecurring items highlighted in our press release this morning, our adjusted earnings per fully diluted share for the quarter increased by 6% to $0.85 compared to $0.80 last year. Despite the increase, we were all disappointed that we did not meet our expectations for much better results.

Now let me cover the outlook for 2012. The good news is we are seeing some moderation in our input costs, not decreasing costs but at least the movement should be very manageable in 2012. We still have some incremental pricing early in the year for certain ag-related inputs, but hopefully the markets will stabilize so we can maintain our focus on sales growth. Another point of focus in 2012 will be internal optimizations. As I said earlier, we undertook a lot of big initiatives in the past year, and now it's time for our operating teams to focus on the fundamentals. The new year will be one of controlling costs, being more proactive on pricing actions when necessary and gaining incremental business in categories and customers where we have opportunities to fill the white space.

While our operating teams are focused internally, Sam and I, along the rest of our deal team, will pursue acquisitions that add strategic categories, new platforms or selective bolt-ons. As we always do, our guidance for next year will be based on our current businesses and we will provide updated guidance for acquisitions when they arise.

So with that in mind, we expect our 2012 total revenues will grow between 8% and 9%, due in part to carryover pricing from 2011, some positive mix from our hot beverage category and anticipated volume growth of 2.5% to 3.5%. This growth is primarily in the North American Retail Grocery channel as we expect the Food Away From Home channel will remain stagnant as a result of economic conditions in the US.

In terms of gross margins, we will see some improvement as our pricing catches up with the input costs and we continue to push to drive value from the center of our P&Ls. Our gross margin dollars will grow, but the margin percentage will be up only slightly, in a range of up to 40 basis points. The primary reason for the relatively low percentage increase is math. The large increase in pricing that was put in place to recover input costs keeps our margin dollars neutral, but with the higher sales the effect is to pressure the margin percentage. We estimate that this alone is worth nearly 90 basis points.

So the increase we are projecting for next year in terms of gross margin dollars is actually higher than our historical goals as we recover some of the margin we lost in 2011 due to the late pricing.

We do expect that 2012 will not have the same calendarization of revenues and margins as we have seen historically. We expect to see a lighter than normal first quarter, both in terms of sales and margins. We see the early part of the year as being somewhat uneven as fluctuations in our customers' purchases will likely affect the first quarter, and becoming more level and predictable the rest of the year. Margins will be softer in the first half of the year due to our expectations of continued input cost increases and our adjustments to potentially lighter volumes. However, the back half of the year should be nicely improved over 2011 results, especially with a more favorable mix of single-serve hot beverages coming online in the fourth quarter.

As we look at operating expenses, we will see spending efficiencies as a percent of sales. This results from improvements in our cost to serve area due to the completion of our initial network optimization plan and our expectation of lower average fuel costs.

In addition to these distribution efficiencies, savings will result from the integration of Sturm and S.T. into the Bay Valley organization through the continuation of the rollout of our new system. However, offsetting much of these improvements will be the resetting of the Company's incentive compensation and bonus plans in 2012. As a result, we would see our G&A expenses back to a more normalized level of between 5% and 5.5% of net sales, still well below industry averages and a further leveraging of our expenses as we grow the business.

In regard to interest, we expect interest rates to remain fairly steady in 2012, so we will see a reduction in interest expense commensurate with our debt paydown. One new matter for 2012 is that we are repaying an intercompany loan between our US operating company and our Canadian subsidiary. This repayment of approximately $70 million took place in January of this year. Those funds will sit on the balance sheet of the sub and will be used for general corporate purposes and business expansion opportunities in Canada. These funds will be invested in marketable securities with the return covering a portion of the interest costs we incur to maintain the US portion of this debt. The repayment of intercompany loan will have a positive effect on our effective tax rate and more than offset the slight increase in net interest expense.

In regard to taxes, we expect a tax rate of 33% to 34%, up slightly from 2011 as we expect our percentage of US versus Canadian-sourced income to increase in 2012. Given the higher corporate tax rate in the US versus Canada, this will have a slightly negative effect on our overall tax rate.

As to matters of cash flow, we expect our capital spending programs in 2012 to focus on productivity and capacity enhancements. We are targeting approximately $90 million of spending. This investment includes increasing production capacity in our coffee business next year along with line expansions in our US dry dinners and Canadian dressing and sauces businesses. We will also complete our productivity enhancements in salsa and the soup business. While our normal range of spending is one-third maintenance, one-third productivity and one-third growth, we will be skewed a bit more towards growth next year.

Included in the total capital spending will be our continued rollout of SAP to our manufacturing locations.

In terms of depreciation and amortization, we will see a 10% increase in depreciation in 2012 due to the systems and production capacity investments made in 2011 and continuing into 2012. In total, D&A should approximate $88 million. Our other significant non-cash expense is stock-based compensation costs, which we expect will increase to $17 million to $18 million as our equity incentive programs are reset after a weak 2011 performance.

To considering all of the items, we expect our fully diluted earnings per-share to increase by a range of 10% to 16%. Using our results for 2011 as the base, we expect an earnings range of $3.00 to $3.15 in 2012. In arriving at these estimates, we have used an average of 37.8 million fully diluted shares outstanding.

Overall, we see 2012 as a bit of a throwback to 2010. We believe our operating teams will be back to executing on our organic growth plans and internal efficiencies while our deal teams focus on what should be a much better acquisition environment. We are all excited about the prospects for private label and especially looking forward to a year of growth for TreeHouse in 2012. I will now turn it back to Sam.

Thank you, Dennis. Regarding the new year, the next question all of you must ask is, in the short run, what does all this mean for 2012? And in the long run, is TreeHouse still on the correct strategic track to generate superior shareholder value?

In response, I believe that we will face difficult and uncertain market conditions, especially in the first half as consumers pinch every penny, traditional grocery formats lose foot traffic to discounters and hand-to-mouth spot purchases replace the usual pantry stock-up shopping trip.

I am also convinced that our TreeHouse will resume its double-digit earnings growth this year, adjust to a rapidly evolving consumer market in hot pursuit of value, expand our portfolio via another acquisition and launch the first large-scale private-label entry into single-serve roast coffee.

As for the longer run, I also remain entirely confident that we are on the right track and that our investment pieces will continue to generate superior shareholder value. Now let's consider some of the particulars.

First, the immediate outlook is one of continued hard times for consumers, 68% of whom say 2012 will be worse, and the food industry, where consumers' quest for value will clash with more pass-through pricing, especially in the first half. Syndicated market data shows that 2012 is off to a poor start in measured channels as January posted a 6% volume loss across the entire grocery sector comprised of more than 100 categories.

Wal-Mart, reverting to its house of brands philosophy, shifted its emphasis to national brands, some at sharply discounted prices, which slowed private-label growth in the second half of last year.

Although our shipments increased 10% in January, much of this increase only replenished depleted year-end inventories at groceries. Of greatest concern is the ongoing cutback in promotion and merchandising of all grocery private label, which was down 7% in the fourth quarter and 15% in January. In the big engine that drives the grocery channel, many profits may be up, but cases are down as shoppers either elected to draw down pantry stocks or have gone elsewhere. Shopping patterns long dominated by weekly pantry stock-up from a single supermarket have become a desperate search for value in which pennies saved outweigh hours lost in a merry-go-round shopping for bargains. Only 40% of shopping trips now are made to supermarkets, and more than 90% of consumers regularly shop in four or more channels on a regular basis in search of bargains.

Turning to the full year ahead, I see a brighter picture, and in accessing that year, our operational and financial agenda has been narrowed to the basic tenets of our fundamental private-label strategy. These are organic growth guided by our portfolio strategy, margin expansion driven by productivity and procurement, product mix and price points that serve both traditional grocery and alternate formats, acquisition to expand our portfolio and low-cost production and distribution to maintain competitive advantage. We should note that the principal risks in our plan reside in the grocery channel volume and mix, first half pricing to cover commodities and the learning curve associated with the October launch of single-serve roast coffee. Also, as we learned the hard way last year, all of us TreeHousers must bring our A game, regardless of market conditions.

Thirdly, looking at the long run, I am absolutely sure that our TreeHouse is the private label and beverage company best positioned for the future.

Let's take a few minutes to review our investment thesis. Number one, private label has consistently outgrown brands, and continues to do so. Secondly, private-label suppliers remain an unconsolidated cottage industry ripe for acquisitions that extend reach and generate economies of scale. Grocers' appetite for the unique identity, customer loyalty and substantial margins of customer brands favor a low-cost private-label partner with value-added strategic insight, the go-to-market portfolio strategy that encompasses product categories, channels or distribution and individual customers that guides our enterprise to attractive market opportunities.

Fifthly, we expect that customer brand growth will expand upon four principal vectors, from basic commodity to value-added categories, from a me-too national brand equivalent to a unique multi-tiered offering, from traditional family sizes that stock pantries to alternate channel sizes for immediate consumption and from bricks and mortar retailers to Internet-based e-tail. This multidimensional growth requires an investment in infrastructure that leverages strategy, marketing, innovation, technology and food safety as well as a low-cost, efficient supply chain.

So in answering your questions, in hard times we botched 2011. Market conditions may be only marginally better early in the new year, but we will recover in that new year. And after a struggle, we are back on the track for strategic growth, TreeHouse standards of profitability and further expansion.

Before we open the lines for Q&A, please allow me to repeat my introductory comments. No one on this call is more distressed about the past year than I am, than Dennis is and that our teams are as well. We know that we have disappointed many of you. We also know that we have disappointed ourselves. It is now incumbent upon us at TreeHouse to repair the damage and to build anew. Reconstruction of our TreeHouse and recovery of our good name are now our all-consuming passion.

With that, Brandy, please open the lines for Q&A.

(Operator instructions) Jon Andersen, William Blair.

I guess I wanted to begin, Sam, with -- as you have talked in the past, it seems to me that the concept of trade-down, perhaps more trade-over, but the consumer belt-tightening in general has been a good dynamic for private label in general in your business, and I guess I'm just looking for a little more color. It sounds like from what you said today that that has changed somewhat, and I was looking for your input on that.

Good morning, Jon. The only change of note is the rush with which the channel shift occurred in the last of December. I think in our case, as I indicated, S.T. Specialty was just swamped with orders. By the way, their business when we bought it had approximately 47% of its total revenues in two of the discount or limited assortment retailers. And that business is very profitable to us.

Where we got caught sideways is that, while we had authorized capital expenditures in a new automated line for microwavable cup macaroni and cheese and a second line for skillet dinners, when this rush came in we were still in process of commissioning those. And the temporary loss of profitability is the result of having to go outside on short notice and pay the piper for co-packed product.

However, when I separate out the long-term here, I think that we are fully capable and already have assets in place to address these markets on a wide basis. And we are one of the few that has substantial businesses in not only all channels of retail distribution, but within the three segments of the alternate channels -- dollar stores, discount stores, limited assortment. And I think you will find that we adjust quite well -- satisfactorily to that change in the marketplace. And so I look at this as a surprise that should be short and transitory in nature.

One more -- you mentioned two or three times the plans for single serve later in 2012, and that contributing to a stronger performance in the back half of the year. Is there any more color you can share with us there in terms of your expectations and timing for that business to come online?

Well, we intend to launch in October, and the trade reception that we have received here has been very gratifying. And we have found that among our current grocery customers, and frankly, to my surprise, among substantial Internet retailers, that there really is a very fine and large market to go after.

I would note, if you look back on recent quarters in the branded side of this business, its growth rate continues to go -- just march ahead in an unabated fashion. And this last winter and holiday season was a very good one for not only coffee itself, but the machines which -- that are really the essential leading indicator of what the coffee sales itself will be. So I'll be glad to brew you some, but you're going to have to wait until October.

Okay, thanks, I'll get back in the queue.

Farha Aslam, Stephens.

Just a point of clarification, Sam -- you had mentioned that the margin degradation issue in the fourth quarter was not so much that the consumer is switching to the dollar store, where you have a more limited assortment and therefore they are just buying that basic ranch dressing rather than the peppercorn ranch in the fancy glass bottle, but it was rather an issue where you got so many orders in that alternative channel that you couldn't fill them and you had to go outside because you didn't have capacity. But in the future, you will have capacity, so that channel shift is not going to be a long-term margin issue at TreeHouse. Could you just clarify that?

Dennis and I both will touch on different parts of the same manner. But with regard to the specific point that you just asked, we will commission one of these two new production lines in the first quarter, and that will give us all of the capacity that we need in microwavable cups for mac and cheese. And then in the second quarter, we will bring a skillet line -- skillet dinner line onto commission. And by the middle of the year, I expect that both will be up and running at full efficiencies and that we can repatriate that production that we had to send out to contract manufacturers.

I think Dennis has got some comments about other factors in the costs that were more related to volume itself in groceries. Dennis?

After taking into account both the pickle and the absorption issues, we are left with roughly the 70 basis points of all other. Part of that 70 basis points is mix. As Sam indicated, the alternate channels were strong. And although the alternate channels include Whole Foods and Trader Joe's as well as dollar stores, it was more mixed towards the opening price point value products in the quarter. So that was one of the items.

But the majority of the margin shortfall were other matters, so some effect, yes. But it wasn't the deciding factor in our margin shortfall.

Okay, and then if I could just have a follow up on that. As you address these growing alternative channels, can you target a product mix that gives you a margin structure similar to traditional grocery?

I think the answer there is that most of this is going to be in smaller sizes, opening price points and promotional multi-packs. And there is an offsetting gain in what we call a cost to serve, and that these stores have extraordinarily efficient supply and logistics operations. They order electronically a single SKU with long lead times to be shipped in full pallets and full truckloads directly to their units. Those are immediately unloaded there, and then we are actually paid electronically on a very quick basis. There is no deduction, and so the infrastructure that one must have to devote to their -- that customer base is substantially less, and that has an offsetting effect against manufacturing costs that alone may be a little bit higher.

So our best accounts in those channels of trade rival the best accounts that we have in grocery and club store.

Great, thank you for the added color.

Brett Hundley, BB&T Capital Markets.

This is Brett Hundley stand again for Heather Jones this morning. I just had a question on pricing. Dennis, you talked about the need to maybe take some additional targeted pricing. I just wanted to get some comments from you on your ability to do so and your view on that.

Yes. One thing we have proved last year is when we went after pricing we were successful in getting that. For us, the big challenge we had last year was timing, and we got a much better handle on the input costs. I'm not that concerned about the pricing. It's always hand-to-hand combat, but we have always been successful because of the way we present and the way we pursue it in terms of strictly correlated input costs. So we are very confident. Some of that is already in place. It's just being realized in Q1. And others is yet to come.

Okay, I appreciate that. And I don't know if I missed it, but you guys gave out some January trends specific to TreeHouse midway through January. And the volume numbers were favorable. Can you talk a little bit about how that progressed towards the rest of the month and into February here?

I think I indicated that our aggregate shipments in volume for the month of January were up more than 10%.

Okay.

We believe that a substantial amount of that, though, was replenishing grocer inventories. And I may not have given all the color, but we had one of our top 10 customers whose shipments from us declined 35% in January from December -- pardon me, December -- thank you, Dennis -- and increased [to] 21% in January and are running at approximately that same rate through the first two weeks of February. So the aggregate there, I think, is once it balances out, we will see that it was some part of that 10%, but certainly not all of it.

And that's part of the reason for our caution in the first quarter, to some degree. The numbers were down in December; they were way up back in January. It's a bit of a seesaw, and we are just -- we're taking a bit of a wait and see. We fully expect that that seesaw is going to level out, but it is moving up and down by month, which has been very unusual.

Okay, thank you. And I just had one other question pertaining to some of the business wins that you procured over 2011. I was just wondering if you could speak to trends, volumes, expectations there. Have they changed at all? Or if you could just speak to that.

I'm sorry. I missed the change in regard to what -- the change in volumes?

Yes, just volumes and trends and expectations surrounding some of your new wins that you procured in 2011.

Yes, our big win program, I think, was very successful last year. We can track it, we can see what happened with those. We closed deals. What we found, though, in the fourth quarter was because we secure a big transaction in March with the expected ship date in November and everything works fine, if the retailer decides to delay, they delay them; we had some of those issues. But our carry into 2012 is pretty solid, and the guidance we gave in terms of volume increase, that 2.5% to 3.5%, is a pretty healthy volume increase and represents the realization in 2012 of that 2011 activity.

All right, thanks, guys.

Rob Moskow, Credit Suisse.

I'm trying to reconcile the 8% to 9% sales guidance. And I know you've talked about the new business wins here. But when I look organically at the business, Sam and Dennis, 2011 ex-acquisitions, sales were up probably 3%, flat in 2010, maybe up 1% in 2009. I have to go back to an inflationary year in 2008 to get 6.5%.

So this year, you're coming out with a very aggressive top-line number. And at the same time you're also talking about some very difficult consumer conditions. So I'm trying to reconcile these things. Do you think this is like the best possible scenario, 8% to 9%? Or is this truly like a middle-of-the-range kind of thing?

I think it's a good scenario. What I think you have to take into account when you look at history -- 2012 is going to be, I think, the first time in a long time where we haven't put an asterisk behind our growth to say that excludes the low-margin pickle rationalization, excludes branded baby food, etc. We are working off a pretty good apples-to-apples comparison from 2011 to 2010. And our volumes, as you remember in Q1, Q2, even through Q3, if you took into account just two product categories where we had really tough comps from 2010, we were doing quite well. And we continue to have some good sales. Our view is that this last fourth quarter dropoff is not going to continue. We are not seeing people eating less, we don't think -- as Sam says around here, caloric intake doesn't seem to be changing.

So we are confident that any of these shifts that retailers are seeing are playing very well for private label. And since we participate in every channel of private label, we think we're looking at a solid 2012 for volume. But, again, remember, we won't have those caveats on the comps from year to year in 2012.

Just to follow up, you mentioned the caveats. So does that mean that pickles are going to be like a big part of the growth algorithm in 2012? It sounds like you're sitting on a lot of inventory that didn't sell through. Is it now selling through? And if so, how is that influencing your gross margins?

I don't think there will be a material change in retail pickles volume unless people develop a newfound appetite for vinegar and brine. With regard to the inventories that have backed up, what we will do is adjust our purchasing for the coming year and plan to get those inventories back to a normal level at the end of next year. And there is a long lead time. We have to commit to the crop; in fact, we have long since done that for the coming year. And it is one of the things that the financial adjustment can ripple through quite quickly if these inventories that are the only thing our business accounted for by LIFO jump up at all.

So the places to see the growth next year, Rob, I think look at the line extensions and product extensions in our sauces business, including salsas, pasta sauces, salad dressings, etc., frankly we had a rough back half in soup and we think soup and some extensions there look favorable as well. But I would not count on pickles to be a growth driver in 2012.

Okay, so there's nothing unusual going on with respect to the pickle inventory into first quarter or second quarter? That's really what I was getting at.

I'm not expecting that.

Okay, all right, thank you.

Chris Growe, Stifel Nicolaus.

I had two questions for you. My first one is just, if you look at the gross margin performance for 2012, I'm just trying to understand this mix degradation, if you will. I get the other factors that have worked against your gross margin here in 2011. So as you look to 2012, is this continued mix weakness built into your estimates? Again, you're calling for gross margin growth in 2012.

Yes. The mix is a minor factor. As I said, if you just took an example on math -- and I'm just going to throw out round numbers. But if you added $100 million in input costs and made that up with $100 million more in revenue and just kept your margin dollars the same, you will see about 100 basis points. We aren't at that point, but a 100-basis point decrease just in the margin percent. So that's playing a big role in this.

The shift in channels -- it's got some minor effect. And as I said, our goal next year is working on efficiencies, as Sam talked about, getting more efficient in our cost to serve. And our goal is to ensure that any channel mix like that is not going to be degrading our overall margins.

Okay. And then I wanted to ask about the cadence of the EPS growth through the year. You do have, certainly, an easy comp in the second quarter. Is it that simple? Is that the way the EPS -- I should say those are factors in really influencing the EPS growth in 2012, basically, the comps to a year ago.

Yes, I don't want to get into too much into real details, but the old walk before you run -- well, we are going to crawl.

Okay, it's a fair point. And just one final one; this is kind of a follow-up. In January, this nice rebound in shipments, did you see these lower price point product still as a dominant part of your shipment, so the recovery in the shipments? Just curious how that trend is occurring and what you can see so far this year.

We certainly have, and the only kind of blip on it is that we are literally out of capacity in pasta side dishes and dinners and microwavable cheese. But other than that, the trend -- I won't say that it's steady. I would say that it is surging.

Okay, that's very helpful, thank you.

Bryan Spillane, Bank of America.

Two questions -- one, just Dennis, I think you had mentioned that there was some of the capital spending planned for 2012 is for hot beverages. And is that for like coffee roasting capacity? Is it packaging lines? Just what exactly -- what is the investment going into?

It's primarily in the packaging world for -- that piece for coffee. But as I said, that's just one component. We have a lot of other pieces of our capital spend.

Okay. And then in terms of pricing, I guess listening to Pepsi yesterday talk about their view, I guess, is that the consumer really can't accept much more in terms of price increases right now. And so they are going to throttle back a little bit, I guess, in terms of internal pricing for next year. And you all have described an environment where volume across the food industry has been pretty low.

So I guess my question is, if you're going to raise prices, A, how does that kind of square with the signals you're getting about just where the consumer is and the movie for the consumer to absorb more pricing? And then second, if commodity costs begin to roll over, what are the odds that actually pricing, retail price points begin to roll over as well as commodity prices ease?

I'll touch on one item and then turn it to Dennis. The big issue here that does not show up in list prices is the lack of merchandising and promotion support in the grocery channel through the back half of the year. And the key to getting the pricing through -- actually, the key to, first, the volume and secondly to get the pricing through is to work out those arrangements with our customers that, in fact, lead them to promote, advertise and merchandise through displays.

In a branded company they've got large amounts of discretionary marketing expenses, including trade allowances to, in fact, motivate and pay for that motivation. The issue that we face is that our customers own the brand, that we sell it to them on an EDLP basis. And what we have to do is to use our marketing teams in conjunction with our sales teams to show our customers that when they fail to promote, fail to merchandise, fail to put things on display, that it is a -- it's a degradation to their volume and their profits as well as what we as manufacturers have. And I am of the belief that we will see a rebound -- maybe not a rebound, but a turn up in that regard, and it will first come in branded products.

And by the way, brands have, for seven consecutive quarters across the entire amount of the dry grocery sector, increased prices at an escalating rate. And I think that that is largely -- of late, it has been a phenomenon related to this absolute shutdown in merchandising. And that I just can't believe is going to last. Dennis?

Not much to follow up on, other than I think the second part of your question was -- what happens if we see the prices come down? And we have always said, we price our commodities -- we price for commodities. And we've had rollbacks before when commodities have come down significantly and it's just the way the game goes. We protect the margin dollars on that. So if we do see a softening in the back half, I would expect there could be pricing.

Okay, but that scenario is something that you are prepared for if it happens?

We are more prepared for any aspect of pricing this year than we were last year. I can guarantee you that.

Okay, great, thank you guys.

David Driscoll, Citi Investment Research.

I wanted to ask -- I've got a couple of fast questions that will eat into my real question, but I've got to make sure I understand something. Dennis, when you talked about commodity hedges, how long are you hedged for? How long are you hedged out into 2012? Can you give us a sense here?

It's typically -- we try to be six months. We are a little bit -- just slightly more than that on the items that can be hedged. Not everything we buy can be hedged, but our general rule is to be about six months out. So we're through the summer right now.

Would you characterize inflation in 2012 worse than 2011?

At the moment, I don't expect that. But I think if you listened to our call last year in February, I wasn't expecting, either, what we saw in March or April. But all the conditions seem to be for much more normalized, if you will, input cost environment in 2012.

Of course I do think you made the stipulation, though, that the first half of 2012 is still pretty high inflation, and then the second half is much lower, and that's the balance which I think is the comment you just gave about -- you were almost speaking on an average, but the haves will be pretty different. Right?

I believe so, and I think you probably hear that from others as well. There's -- as some of the hedges have rolled off and market adjustments take place, I think the first quarter and bit into the second quarter, things are going to be not -- the mark-to-markets will be a little bit different than maybe what the pure market is. But I think by the back half of the year, that's when you see everybody back to normal, including us.

I think that makes a lot of sense. On volumes, forgive me, I think you guys have been talking sometimes about pound volumes and sometimes about unit volumes. You typically report in unit volumes. That's correct, right? Last quarter I believe the press release said unit volumes. But the 8% number, Sam -- that was pound volumes? Can you guys clear me up a little bit on where we are on these numbers?

Yes. Let me clarify quickly. We historically have been units, and that is because that's what our system could do and we translate the units into equivalent units. But one of the big benefits of our SAP system is we get pounds now. And frankly, that has always been a much better general barometer for it. So the 8% was pounds that we were talking about.

I will say that as we go into 2012, one of the things we will be doing different starting in the first quarter is we will talk about volume mix. And we have to do that because we're finding that our sales mix, especially as we look at our single serve beverages -- and I'm not just talking about coffee, but both the hot and cold -- have good sales value, much better sales value per pound than things like pickles. So sometimes the volume can distort the reality of our success in the marketplace.

So I think Procter & Gamble is doing something similar, where they're finding a shift. So just the caveat for next year; it will be volume mix, but it will be based on pounds.

Okay, but in the fourth quarter when you talked about the volumes, in the preannouncement on January 20 with the minus 4, that minus 4 was pound volume, and that's really not how we have been talking about it in the past. But you were doing that as emphasis for descriptive reasons, if I'm --

Let me clear it up, David. There are both pounds, which is our internal measure in our discussions. And when I talk about the entire market of dry grocery, that syndicated data typically comes in cases, I believe. And so you have a mix and that whenever I referred to volume as a TreeHouse matter, as Dennis said, we now measure that strictly in pounds. But when I quote or refer to syndicated data or as a broad dry grocery category, that is cases.

I would think, over 102 different categories that make up dry grocery, that those things tend to move very closely. But we don't have the same physical unit of measurement in publicly available information that we have internally. I hope that's helpful.

That's very helpful. I do understand that problem; I've dealt with it for years. On the pound volumes in the quarter, so -- but again, I've got to be clear on something. The first three quarters of the year, every number that I have, I believe, was a unit number. What was unit volumes in Retail Grocery in the fourth quarter? I think it was zero, if I'm getting your numbers right.

No; actually, we have been using pounds all year with the SAP system. So this year was always about pounds. Sorry.

Final question for me is just, then, bringing everything together here on first quarter. There's been a lot of questions on first quarter. I want to try this one slightly differently -- January and early February temperature data -- it has actually deviated from normal even more strongly than we had in December, meaning to say temperature departures are -- it's much warmer on a relative basis, year-on-year comparisons, versus normal weather. You mentioned this 10% shipments in January to refill, but I'm worried that that's a refill, like you are saying, Sam, in that what we need to think about is if we are materially having a very warm winter, doesn't that just fundamentally say that we should expect pretty weak volumes for first quarter? And then maybe the super specific question to you guys is, what's in your business plan for Q1?

I have been counseled that, with all of the provisions of Safe Harbor language, the one thing that I'm not allowed to talk about is the weather.

Having said that, we see those same seasonal trends. And, again, I think that the season, the cooking soup season and the height of the hot cereal season and also for non-dairy creamer, in a typical year, our peak of shipments is in anticipation of the holidays. And so I think that there is -- at the moment, we have passed from one season to another. And while there may be a marginal effect, I just can't speak the W word out loud.

But, David, I agree with you, and part of what I was talking about in our guidance is that we also have the same concerns about the early part of the year. We like the idea that January was up, but we knew how bad December was. And so we are cautious about the first quarter as well, but we expect that that will balance itself out as the year goes on.

Okay, great, thank you for the comments.

John Baumgartner, Telsey Advisory Group.

In terms of new product development, and I guess the prospects there for new business in 2012, and I guess and a lot of this bifurcated consumer, are you seeing any sort of overall bias as to how the traditional retailers are looking to develop their store brand portfolios? Is there more interest in developing more opening price point items? Do you still see interest in premium type products? What is the retailers' position there?

I think that it is quite different by segment. And for those stores that have really greatly developed their customer brands, many of those have a multi-tiered approach, appealing to different consumers. And in their case, they are looking for more of an opening price point. But, frankly, it's not across the entire portfolio. Store by store, it may be one category or another.

And there is kind of fascinating dichotomy in that the stores that are posting the best comps year-over-year are either in the discount universe or they are in the specialty universe. And there are stores out there such as Whole Foods and chains such as Trader Joe's that I think their comps are leading the industry. And none of that is opening price point, let alone brands that aren't unique to their particular outlets. So it clearly will have an effect. I think that it will be, though, secondary to the three channels of alternate formats, and the way for the grocery stores to get back in here is to go back to what has worked as long as there have been brands, and that is promotion, advertising and merchandising.

Thank you.

Akshay Jagdale, KeyBanc Capital Markets.

My question is a little bit more about the overall category dynamics on the M&A side, and. Obviously, with Ralph Corp. splitting off into two and being more focused on private-label, what are you guys seen in terms of multiples, etc., the availability of business? Is there more competition now, or it's similar? Just give us some perspective, as much as you can.

One of the things we talked about last year was the margin erosion that took place in the middle of the year, we thought, kind of slowed that deal market down. I think that as we go into 2012 we are going to see margin stabilization. I think companies will be back on the market. Rates are very low, and especially in the food industry when we look at even where our bonds are trading right now, which had a 7.75% face value and they're trading under 6%. So I think there's great liquidity in the market for the right companies, of which we are one. So I think it's going to be a good year.

In terms of competition, it's a $90 billion market. And there is always been competition, and having -- whether ConAgra or Ralph Corp., as you mentioned, or anybody else, I think we have always had competition, but it's an awfully big pie. And I don't see that things are suddenly going to go crazy where multiple expansion is going to be the name of the game because of having two, three or four players consolidating in private-label.

And another one, this one -- I guess this could be for Sam. But in the past, before this round of commodity inflation, you had mentioned that you thought private label has become sophisticated enough that you are not as much of a price follower. But after the results that you had this year, are you rethinking that? Or you still feel there is some pricing power, even though you are private-label brands, basically?

I think our strategy has to be acted out on two tactical grounds. The first is that, as costs go up, we have to pass them through. And as Dennis indicated, that pass-through mechanism both works both ways. And what we -- a primary lesson of the last year was that when costs unexpectedly escalated early, after we had just completed a round of pricing, we ran into difficulties with customers who had just absorbed one and were, frankly, concerned about a second one. But all of the delay only worked to our disadvantage.

With regard to list prices, I am virtually uninterested in what the brands are doing.

The second tactic I get back to is that, like the brands, private label benefits from category growth. And the second factor is to ensure that we get our fair share of advertising and promotion by our customers whose brands are being developed, at least in our categories, entirely on our nickel. We do the research and development; we do the formulation; we spend the money for the packaging design. And we just -- we have to require that our customers, as a part of being their supplier here, actually support those same products in the stores -- not as much as brands do, but certainly in a similar fashion.

And again, the best thing that can happen to us over the long-term is category by category have great innovation and advertising by a national brand leader bring traffic to that aisle, bring interest to the category. And then the private-label phenomenon will do just as well. Thank you.

One last one for Dennis -- I jumped on the call a bit late, but did you say how much your commodity costs were going to be up? And did you give us an update on how much they ended up being up in 2011? And also how hedged are you on these costs?

We didn't talk about specifics on the cost. We are hedged roughly about six months out. So we think that's pretty much our normal hedging program.

So you haven't changed your 2011 -- the guidance you gave in 2011 for commodity costs -- has that changed meaningfully since you last gave it?

Not really.

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

Amit Sharma, BMO Capital Markets.

Forgive me if this has already been asked. We have seen recently some uptick in food service trends. Are you seeing that in your categories as well?

We've seen some. We discontinued some of our processed pickles in that channel. So you will see overall our numbers being down. But I indicated that, if you looked at outside the pickle business, we were actually up about 5.3%. So we are doing and we continue to push more of our products that we make primarily through retail -- in the retail channel, through the Food Away From Home channel. So we have been doing a little better than the industry, but I still think it's going to be a soft industry in 2012.

And this drag from the pickles business will continue throughout 2012, or are we going to see you lapping it in the first or second quarter?

You won't see lapping until at least the third quarter.

[Victoria Constantinople] [Thompson Hortzman Brand].

I had a quick question regarding the category business. Do you see a general shift in the soup category in terms of canned soup going down towards more fresh soups across the whole grocery channel?

And one more question on, if you can drag down the alternative channel shift, you said that in that channel is also the Whole Foods and the Trader Joe's of the world. Do you have any breakdowns in how much of that shift is going towards the more natural, organic, versus low-cost? And do you have any market share data?

This is Sam. I'll take the soup, and Dennis, do you mind commenting on the channels?

With regard to soup, there has been, in the aggregate, a relatively small movement to the other packaged formats, but it has trended over a long period of time. It has transformed only one subcategory, and that is broth, which has gone completely to that format.

The big trends, though, in soup have been that the Campbell's, the market leader, had across traditional markets really pulled in their reigns quite substantially and that the offsetting -- and that allowed Progresso to have a very strong fourth quarter. It did affect us in those, as I indicated to you that I think that for the total category of those 84 million units that I talked about, that the 53% of that loss occurred in the fourth quarter. And it was somewhat related to that shift among the brand -- between the brand leaders. So those are the big factors from our perspective.

In terms of the shift, we make organic products in just about all of our categories, but it still represents a very small piece of that, of our categories. So although there is some shift in markets -- obviously, Whole Foods has done quite well lately -- in terms of the broader food market, it's still not a big piece of our business, but we do offer it.

And what would be the margin degradation if they are already going after the more natural part of markets or targeting alternative channels in the low-cost.

It's not about the margin difference. It's -- frankly, we react to our retailers reacting to consumer demands. And in general, for most of ours, they have not pushed for the increase. So we are following their lead on organics.

And one last question -- I was just wondering about you mentioned the whole grocery channel, volumes going down. And I assume that that frees a lot of capacity on the branded food producers. So do you see any loss of shares or accounts in terms of having those branded manufacturers going after private label?

In general, no. I think brands compete against each other and they compete on innovation and on trying to come up with new products, new packaging, new taste profiles. And private-label is still generally a small piece of all the categories, and we don't typically see someone saying we need to compete directly with private label. And we certainly don't see brands talking about getting into the private-label world with maybe the one exception of ConAgra is trying to increase theirs. But for the most part, we live pretty separately.

Okay, thank you so much.

Robert Moskow, Credit Suisse.

My question has been answered. Thank you very much.

And at this time there are no further questions in the queue.

Thank you, everyone, for dialing in this morning and getting a full picture of both the year passed and the year ahead. We will look forward to talking with you in the first week of May and may see several of you before that time. So, from TreeHouse, thanks and safe travel.

This concludes today's conference. We do thank you for your participation.