TreeHouse Foods Inc (THS) 2012 Q1 法說會逐字稿

Welcome to the TreeHouse Foods conference call. This call is being recorded and at this time, I'd like to turn the call over to TreeHouse Foods for the reading of the Safe Harbor statement.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words such as guidance, may, should, could, expects, 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, 2011 discusses some of the factors that could contribute to these differences. You're 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.

Good morning, all, and welcome back to our TreeHouse. We've opened the new year on a positive note and have better news to report than that of last year. First, quarterly earnings were in line with market expectations as our revenues grew 6% under difficult industry conditions. Next, we have expanded our market leading presence in private label salad dressings via an acquisition that will open new markets in both retail grocery and food service. Lastly, we have addressed the internal difficulties that derailed us last year and are confident of steady progress in returning to the TreeHouse of old; particularly in the second half.

Let's first review our present circumstance, including both first quarter performance and current market trends as of the midway point in the second quarter. The retail grocery industry continued to struggle as general food and beverage, a portfolio of 101 product categories distributed through IRI-measured channels, declined 3.7% in unit volume. The past six months, including fourth quarter '11's drop of 3.1%, have been the most difficult for conventional grocery retailers in our five-year history. After five consecutive quarters of escalating price increases now accompanied by reduced in-store merchandising, supermarkets have witnessed an exodus of consumers in search of value elsewhere.

Private label performance generally followed the fourth quarter trends we identified in February. Aggregate market share and price spreads versus national brands were relatively constant, moving only 0.2 of a percentage point under both measures. Across the store aisles, private label was vulnerable in the most price-sensitive commodity-oriented categories including canned vegetables, fresh bread, carbonated beverages, and fruit juices. The big difference between the national brands and private label, of course, is the latter's ability to offset these supermarket struggles with growth in alternate channels.

Moving to TreeHouse, our headlines are as follows -- our core retail grocery sector fared better than most, posting a 1% volume gain and pricing-driven revenue increase of 7%. Our growth was led by double-digit advances in salad dressing, dry dinners, and pasta sauce, as well as strong Canadian performance. These increases were partially offset by weakness in our cold weather trio of hot cereal, non-dairy creamer, and soup. More than 40% of our retail grocery shipments in the first quarter were delivered to limited assortment dollar store, club store, Internet, and other alternate channel retailers. Our double-digit growth to these nontraditional retailers follows the accelerating consumer shift from supermarket to value-oriented outlets. These store formats have benefited as the traditional time-honored weekly shopping trip to replenish pantry stocks has been supplemented by a bargain hunting venture for just-in-time shopping for immediate consumption.

Profits improved marginally as operating income increased only 1.5% to $45 million, as higher commodity and energy costs exceeded the benefits of higher prices and lower SG&A expenses. The math effect of pass-through pricing that depresses reported margins obscures the great progress we've recently made in operations, supply chain, and procurement to eliminate the inefficiencies and bottlenecks that plagued us for much of the last year. Many of these improvements are directed at productivity increases and process changes that benefit our cost-to-serve model, which is focused on alternate channel retailers.

Looking forward, we expect the first half to play out much as discussed on our February 10 analyst call reporting 2011 results and our outlook for the new year. We see much of the same macro trends affecting the remainder of the first half, followed by a steady improvement through the year's end. The third quarter and fourth quarter performance should be favorably affected by six key factors, which are incorporated into our earnings guidance for the full year. These include -- our response to the ongoing bifurcation of the food and beverage marketplace, as the premium and economy strata of grocers outperform the conventional supermarkets and other traditional retailers. This program includes an array of smaller package sizes, opening price point merchandise, and standard NBE or national brand equivalent products. In parallel, an increased emphasis on in-store merchandising should, when coupled with product innovation, increase our velocity and sell-through in those chains in all store formats that utilize their corporate brands as a point of strategic differentiation.

New products and expanded distribution programs led by mac and cheese microwaveable cups and single serve roast coffee and flanked by cross-selling of Naturally Fresh's refrigerated dressings by the Bay Valley sales and marketing team. Margins will improve as input costs decline in the new crop year for which record corn plantings and a mild spring should favorably affect the entire Midwest grain and oilseed complex. Note that we have already hedged the bulk of our commodity and energy requirements as of the end of April and that these positions include the basis fluctuations in those buys. Our internal optimization program will increase capacity and reduce operating costs in the procurement, manufacture, and distribution of our higher growth and margin categories to all channels of distribution. Lastly, although single serve roast coffee will not be manufactured or shipped until the fourth quarter, with only limited effect on sales and earnings, the caffeine buzz associated with this prospect has energized our cadre in every corner of our TreeHouse.

In summary, from the perspective of a seasoned operator, I foresee a stream of sequential improvements in our operating performance that should translate into increasingly better earnings as the year progresses through the third and fourth quarters. Let's now turn to Dennis for more detail and the full particulars. I'll then come back with some thoughts on expansion opportunities and challenges.

Thanks, Sam. As Sam mentioned, the first quarter continued many of the trends we discussed on our call in February. We managed to meet our expectations for the quarter, but I can't help but think about what the possibilities could have been. Easily the biggest challenge for us last quarter seemed to come from mother nature. As a numbers guy, I don't like relying on circumstantial evidence, but the trends certainly seemed to point to a correlation between the very warm first quarter and softness in our key winter season products.

Before I get into the details, I do want to point out that due to popular demand, we've begun to report the volume/mix, and pricing table in our press release so you can better see the dynamics prior to the release of our 10-Q. We've combined the volume/mix statistics because the changing product portfolio has made the pure play volume number less relevant, due to the significant weight differences between our product lines. Our volume/mix calculation is based on pounds of products shipped, while the price is based on the average price change from period to period. In our North American Retail Grocery channel, our volume mix increased a respectable 1.4% over last year. While this increase is not what we had hoped for, it is on the heels of last year's 2.9% volume increase and both of those increases were better than the broader market performance, as Sam noted in his comments. As we look more closely at the underlying product sales, we see that the combined volume of our key winter season products, soup, non-dairy creamers, and hot cereal, combined for a volume decrease of 3.4%. The balance of the retail sales portfolio actually showed a volume increase of 5.5%. We saw very nice increases in nearly every non-winter category, paced by very good results in dressings, sauces, and dry dinners. In fact, we even had a 1.2% increase in pickle volumes in the quarter.

I think it's only fair to say that the weather that hurt our cold weather products may have actually helped our summer season products. We continue to have very strong sales of dry good dinners. Volumes were up very nicely as total sales in this important category increased by over 16%. We've made great progress on increasing our line capacity and expect to be at full efficiency by mid-year. In terms of customers, we continue to see the bifurcation of consumer purchases that we discussed last quarter. Consistent with syndicated data, we are seeing volume decreases in many of our national grocery chains, but they are more than offset by sales to both premium, specialty, and value-oriented retailers. This shift in customer sales played a small part in the decrease in direct operating income margins from 18.5% to 16.3%.

Approximately 100 basis points of the margin decrease is due to the math of having an average increase of 6.1% in selling prices that substantially offset a corresponding dollar amount of higher input costs. The remaining margin decrease was due primarily to the carryover of less favorable input costs. On a positive note, our retail operating income margins did improve 40 basis points sequentially from our fourth quarter of 2011, so we are heading in the right direction.

Our Food Away From Home segment had top line growth of 1.5%, but this was driven by pricing. Overall volumes decreased primarily due to exiting very low margin processed pickles at certain national accounts. As we discussed last year, this business was very low margin and the exit of the business was done in conjunction with the closing of our Springfield, Missouri pickle plant last summer. Excluding pickles, the rest of the Food Away From Home business was up a modest 1% in volume. We expected that it would be difficult to grow volumes in this segment because economic conditions have not improved enough to drive meaningful consumer traffic. That being said, I do believe the lack of major winter storms in the Midwest and Northeast probably helped volumes slightly in the quarter.

In terms of direct operating income, margins were down from 14.5% last year to 13% this year. A portion of the margin decline was due to the effects of 3.4% in new pricing, but also because that pricing was not sufficient to fully recover higher input costs and distribution costs in our dressing business.

Our Industrial and Export business had a revenue increase of 5.5%, driven by increases of 0.7% in volume/mix and 4.8% in pricing. Although direct operating income margins were down from last year, we did have 160 basis points of sequential improvement from the fourth quarter. Pricing actions carrying over from last year helped sequential margins, but a reduction in soup and broth co-pack volumes had a negative effect on factory efficiencies, causing the decrease in margins compared to last year's first quarter.

On a consolidated basis, our total sales increased 6.1%, driven primarily by pricing, along with a 1% increase in volume/mix. Gross profit was 21.9%, down from 24.5% last year, as the first quarter of 2011 did not have the full effects of the input cost inflation we experienced over the balance of last year. Sequentially, margins were steady with the fourth quarter of last year. Although we have some new pricing that was initiated in this year's first quarter, we believe we should be in good shape with input costs and we'll see improving margins beginning in the third quarter.

With regard to operating expenses, selling and distribution expenses in the quarter decreased to $34.3 million compared to $36.3 million in 2011, as our warehouse consolidation program, that was initiated last year, is now showing the efficiencies we had planned on. These savings more than offset the higher average diesel fuel prices compared to last year's first quarter. General and administrative costs, as reported in our income statements, also decreased, coming in at $26.6 million, compared to $29.2 million last year. The decrease was due primarily to lower stock compensation expense as last year's expense included costs associated with grants that had not yet vested. Stock compensation expense in the quarter was $2.7 million and this is consistent with the run rate from the fourth quarter of last year. Other operating expense was a $0.5 million in the quarter compared to $2.7 million in last year's first quarter. The expense last year related primarily to the cost to close our Springfield, Missouri pickle plant.

Interest expense for the quarter was $13.2 million, down from $13.9 million last year, due to the average interest rate on our revolving credit facility. This quarter's rate was 1.73% compared to 2.30% last year. Outstanding borrowings are now $933.3 million compared to $952.8 million last year. These figures are gross. Cash on the balance sheet is now $67.3 million and includes the intercompany repayment of loans that results in cash on the books of our Canadian subsidiary, ED Smith. With regard to taxes, our effective tax rate for the quarter was 30.4%, much lower than last year's rate of 33.8%, due to the effects of repaying the intercompany loan with ED Smith and a decrease in the Canadian statutory tax rate. These tax items helped our reported earnings by about $0.02. Thank you, Canada.

That leads to net income for the quarter of $22.1 million compared to $19.8 million last year. This equates to fully diluted earnings per share of $0.60 compared to $0.54 last year, before considering unusual items. Our reported results for 2012 and 2011 include unusual nonoperating items that should be considered when analyzing our reported results. In the first quarter of 2012, we had approximately $0.01 in cost associated with the previously discussed pickle plant closing compared with $0.05 last year. In addition, we had non-cash losses of $0.02 this year and $0.01 last year, resulting from the revaluation of the cash held at ED Smith and intercompany loans and minor mark-to-market gains of $0.01 to both quarters. Finally, we had $0.01 of cost in the first quarter related to the acquisition of Naturally Fresh, which closed during the second quarter.

After considering these items, our adjusted earnings per fully diluted share increased 6.8% to $0.63 in 2012 compared to $0.59 in 2011. As I look at our outlook for the balance of 2012, our original expectations of volume growth in the 2.5% to 3.5% range came up short in the first quarter. We had not anticipated the record-setting warmth in the month of March and one of the warmest overall winters in history. As I mentioned earlier, our retail unit sales in the non-seasonal categories were actually very good. Still, this was not enough to overcome the declines in our seasonal soup, non-dairy creamer, and hot cereal volumes and maintain our original growth expectations.

As Sam pointed out, the grocery market dynamics have yet to show substantive improvement, so we expect that the second quarter is likely to be very similar to the first quarter. Traditional grocers will still be challenged for volumes, while the nontraditional retailers will maintain their volume growth. Still, we're confident that our back half margins will recover as pricing and input costs finally balance out and our cost savings initiatives take hold. In addition, we believe that as the environment moderates, the traditional grocer will begin to recover as they execute on the strategies that have worked well for them in the past -- a full array of products, a good shopping experience, and of course, a healthy assortment of private brand products that provide them with the differentiation and profit potential necessary to compete in the crowded marketplace.

All things considered, we are still confident in our prospects for 2012, albeit with a slightly lower top line, offset by a greater degree of internal efficiencies. With our current gross margins running at about 22% compared to run rates that were close to 24% in some prior quarters, we feel there is sufficient runway to recover margins this year, even if that recovery is back half loaded. As such, we are reaffirming our previous guidance of full-year adjusted earnings per share of $3 to $3.15 per share. Now, I'll turn it back to Sam.

Thank you, Dennis. I'll conclude our prepared remarks with a summary of our outlook on further expansion of our portfolio through acquisition. Naturally Fresh, with its $80 million in revenues, regional retail base, and refrigerated distribution system, will open a new strategic vista for TreeHouse. It will unite our salad dressing business, now at $220 million in revenues, and which has grown 40% since its 2007 acquisition with refrigerated channels to both retail and food service customers. Additionally, the new acquisition will provide an avenue to packaging technology, formats, and sizes that are beyond our current capability. In parallel, [NFL] will provide sufficient scale to unite our geographically isolated refrigerated pickle and sauces operations into a network linking our Chicago and Southern California facilities with NFI's Atlanta hub. Net-net, I believe that we will not only extend our salad dressing business to new markets, but also establish a refrigerated base that should generate 10% of our Company-wide revenues within the foreseeable future.

Beyond NFI, we will search out bolt-ons and near end adjacencies, even if they are not $300 million plus deals, because of their disproportionate effects on organic growth and earnings accretion. We now have a capital asset base of extraordinary range and food processing technology and supply chain capability. Looking back, our initial strategic plans for various acquisitions did not envision pasta sauce, hot beverages, food service oatmeal, or pie fillings; all of which materialized from the subsequent assessment matching market opportunities with our untapped capabilities. In this vein, I believe that bolt-ons of adjacent product categories, technologies, and distribution systems will, in the wake of NFI, become an integral component of our expansion strategy as we seek to leverage our infrastructure.

On a larger scale, our advantages as the strategic acquirer, disciplined buyer, experienced consolidator, free cash flow generator, and seasoned issuer are matched by few and surpassed by none in our customer brands and custom products milieu. As always, it is our strategic vision of growth, coupled with our consistent record of deal making, that differentiates our TreeHouse from others in the M&A hunt. Although current M&A activity, or inactivity as it were, belies the early promise of 2012 as a banner year, all can be assured that our corporate development team is actively engaged on several large scale, strategic expansion fronts. As always, we will be guided by our portfolio strategy and acquisition filter, which form the cornerstone of a disciplined approach focused on shareholder value, not merely size or quantity. Whether the next deal is large or small, with only 0.2 of our industry consolidated by a handful of strategics, we have extraordinary opportunity matched only by our capability before us.

In conclusion, at this early juncture in the new year, I find myself and our TreeHouse team in a condition and circumstance radically different from those of 2011. Then, the market was robust but as subsequent events revealed, we were unprepared. Now, we are ready, come what may, as the traditional grocery industry flounders. Whatever our problems of the past, and many of which were self-imposed, I know that our go-to-market operations and supply chain teams have redressed those ills and are ready, willing and able to take on all comers in 2012. In food, private label remains the golden opportunity of the day and for that matter, many years to come. Tom, you may open the phone lines for Q&A.

(Operator Instructions) Jonathan Feeney, Janney Capital Markets.

Excellent use of the term, codgery. (laughter) A little bit of socialist humor after yesterday's European elections, I like it. I have one question about the core business, but I wanted to ask more specifically about -- the largest competitor in the single-serve coffee market recently made some comments about considering some targeted private label efforts, and this is on their conference call. Is this a move you somewhat anticipated? Is that at all a change to your strategy or vision as how you see the evolution of the single-serve coffee opportunity and private label within that?

Jon, this is Sam. From the beginning, we expected that there would be substantial competition in this sector, and had expected that there would be, if not one, at least one, several in that place. Their announcement has only an incidental effect on our strategic thinking. We have focused on a model that allows us to build a substantial presence in the private label segment of the coffee market, which I believe was acknowledged to be generally in the range of 10%. And we've done so in that model on a basis that we would be a substantial factor but not the only factor.

We've also incorporated our business systems with regard to private label manufacturing and distribution, so that through our distribution network reaches all channels of trade and all parts of North America that we can provide a competitive product of the highest quality and appropriate margins for private label. From our cadre, I think it is, again, will have a minor effect.

Thank you. You have to be happy, I would think, with the 1.4% volume/mix growth in North American retail this quarter. To couple that with a reduction to the full-year sales guidance for the second half, to me, has to anticipate some adaptive pricing due to recently falling costs. I just wonder -- if costs didn't move from right now, would you anticipate prices to be flat, up, or down this time next year?

Jon, Dennis here. I think we're in good shape. If things level out, I think prices maintain, and I think we kind of get back to the normal mode. I think we're in good shape.

In terms of the 1.4%, I guess compared to peers, maybe that's a good number. We're a little disappointed, as I said, with the key weather areas. We had some great successes in a lot of our categories to drive a 5.5% increase in those non-winter ones. So, yes, we're a little disappointed, but at the end of the day, it's a positive number and that's a good thing.

Okay. Great. Thank you very much.

Farha Aslam, Stephens.

You noted that you have much of your commodity exposure hedged. Could you just share with us how much cost inflation you anticipate total in fiscal 2012, and how that falls in the first half versus the second half?

This is Sam. I'll answer the general question, and then ask Dennis to comment on the specific numbers. As a reminder, generally we focus on hedging out over at least a half of a year for those commodities and energy components that lend themselves either to hedges per se or forward contracts. Going back to September/October, planning this year, what we could anticipate was that the carry-in effect of 2011 would continue through the first half of '12. Then, as we got into new crop year, specifically in corn, wheat, soy bean oil in the Midwest, we expected those components to come down. At this juncture, it appears that our forecasts were generally correct, with the notable exception that natural gas has also hit an all-time low. We see the demarcation point being around the beginning of the new crop year, coincident with mid-year.

Dennis, can you offer some more specifics?

Just in general, I'll echo Sam on where the market is. I think we had a roughly 6% average pricing had gone in into Q1 over last year. That number, compared to last year's second quarter, will be a positive. By the third quarter, I think we're at equilibrium with pricing and cost. As Sam said, it looks like things are moderating.

Oil this morning, we're under $97. I certainly hadn't expected that from a few weeks ago. I think we're looking at probably a nice second half of the year in terms of moderation, but I'm not sure I'm ready to say that input costs will be down, and that we're going to have a big benefit in the back half. But I do think we're going to be caught up.

Really much of that, you're going to be done with by June.

That's right. You still have some of the energy-related items. Natural gas, we're generally locked in, but the rest of the complex in packaging, there's a lot of pass-through, so, glass, tin, and a lot of the plastics, so, we'll see that moderate as well. We don't lock those in.

I understand. Sam, could you just comment a little bit more on the M&A environment? Are you seeing more competition from other competitors in private label, private equity? Are you thinking of making your deal structures perhaps more flexible with earn-outs, et cetera, for you to be able to convert some of the deals that you're working on right now?

The general headline for the M&A markets is that, in spite of plentiful and very cheap money, the public auction market has been -- it's marked by its quietude. We continue to see some deals there. There are kind of fewer and far between, and you can imagine that they will attract, in the first instance, a number of strategics and financial buyers, and, frankly, an increase in the looky-loos. When it gets down to the real value in the second and third rounds, you tend to see the same kind of strategic players and private equity groups time and time again.

We are, in addition to that market, looking, as we always have, but with a greater intensity at kind of small bolt-ons. While it's early yet, I just see the promise of NFI being something that I believe that we can replicate in other parts of the product portfolio, where our competitive advantage will be an established presence, and already have committed the fixed assets in manufacturing and distribution, and then have the IP and strategic matters, marketing, and customer contacts.

I believe, in those instances, that we will be able to structure deals that fit our financials, arrangements and capital structure, as well as our strategic outlook, and fit them to the particular needs of one seller after another. That's what we did it with NFI, and could do so without compromising either our strategic or financial interests. But I think that's kind of the general outlook, and we'll be happy when the real big one comes along. We'll be, as Dennis indicated, our capital structure will be in great shape for the -- consider the next big thing as well.

Great. That's very helpful. Thank you.

David Driscoll, Citi.

Just wanted to first-off talk about the second quarter for just a quick second. Dennis, I think you said second quarter would be similar to first quarter. Is that a year-on-year rate of growth, or is that the $0.63 in the quarter, you're saying that second quarter should be roughly the same. Can you be clear on that?

I'll be clearer. What I'm thinking is that we're going to continue to have tight top line sales, that the market hasn't come back. I think the margin structure will also be tight as well, like Q1, and that when we get into the Q3, we'll have gotten through all of the pricing programs, and we'll see the benefits of the moderating input cost now. Think about top line growth and think about margins as being very consistent.

Because I would only say that the other takeaway that I got from your comments was that the back half of the year, I think you said at least two or three times, the back half of the year it was back-half loaded, ie, that's where you'd see more of the gains. Right now, consensus is completely opposite of that. Consensus has got $0.24 benefit in the front half of the year versus $0.14 back half. That's 23% growth in the front half versus 8% in the back half. I think you're telling us right now that's not right -- that put more of the growth in the final two quarters.

Yes, I think what the consistency is, consistency Q1 to Q2. Remember, last year, we had a relative disaster in Q2 with the earnings in the $0.43. That's the big change.

I remember well, which is why I think consensus has what they look at a consistent pattern, Q1 to Q2 on an absolute basis, but it sounds to me like it should be moderated just given your comments. Why are you guys targeting further price increases? I think the press release says that. If you say you're fully hedged for the year, I just got the sense that most companies right now would not be announcing new price increases, they would be announcing maybe increasing promotional activity for the back half of the year. I was a little surprised by that. Sam, can you talk about that?

Let me start, David. What we had is we had some pricing that was presented in Q1, because we have some cash crops, in particular pickles, or cucumbers I should say, that could come into play in that season. Really, the big shipping starts in April, May, and runs through June. You'll see the benefits of that pricing into the back half, and there's some other minor cash crops that just aren't subject to forward buys. You can't buy them off the board. We've got a little bit of pricing there. It's moderate, but it's still a little bit of pricing coming through in Q2.

But for the things that you can hedge, you're fully hedged on the year?

Yes. The big board type items -- the soy beans, corn sweeteners, [KC] and things of that nature, we're in good shape.

What's your tax rate guidance and your capital spending guidance?

Originally, we were saying 33% to 34%, but based on what we're seeing with the Canadian tax rate and with the repayment of the loan, we're going to be a little bit below that. I don't have a firm guidance, but it will be a little south of 33%.

Then capital spending?

No change in the capital spending. We guided to the $90 million, and that still looks like the right number.

Of the $90 million, what's the K-Cup spending, can you tell us that?

That I can't say, David.

But it's relatively small, would you agree with that?

It's in the plan, but it's not the big, significant number that some people were saying. But if you look at our last couple years, we're only moderately higher this year. It's included in the plan, and we've got other spending we did last year that's come out of the plan. We're able to do it within, generally, the range we've had the last couple of years.

Where do you see volume growth on the year? And can you comment on the transition as a percent of retail sales from traditional grocery to the alternate channels? If that wasn't clear, I'll do it again. But volume growth, and then this retail channel shift from traditional to alternate channel, how does that progress?

David, your questions are always clearly stated. With regard to growth for the year, I think we see that the long-term trend where private label continues to make in-roads will, against -- over brands, that's going to continue and will prevail. With regard to one quarter after another, I think that the trends that one has to incorporate are that, first of all, that we are seeing quarter-after-quarter double-digit increases in our physical shipments to alternate channels. I expect that those will continue until such time as we overlap a full year of that. We will, in that regard, create new volume opportunities by basically adjusting to their product lines that incorporate a lot of opening price point merchandise, smaller sizes, et cetera.

With regard to the 60% of our business in retail grocery that's traditional supermarkets and mass merchandisers, the real issue there is going to be -- at what point those grocers begin to woo back customers through tried-and-true measures that Dennis had earlier alluded to, which is a full array of product, and substantial in-store merchandising of both branded and private label. As a matter of fact, whether a store is everyday low cost, everyday low price or high/low, there are still merchandising measures that can be tailored to each of those. My crystal ball there is no better than others, perhaps it is cloudy. But I think that those are the independent variables that will have the effect on the short-term growth rates.

Sam, what struck me last quarter was when you talked about the alternate channel shift, in that it hurt TreeHouse. What I'm really getting at with the question is -- given the shift in the retail landscape, has your organization adjusted such that no matter where the consumer goes, you have appropriate footprint, and you'll be able to capture the volume share? Is that a fair statement going forward, or do you still have more wood to chop on these alternate channels?

I think with regard to unit volume, it is a fair statement. With regard to the profitability, part of what happened in the fourth quarter was that our ST specialty business showed a 50% increase in fourth quarter orders for dry pasta, whether it is mac and cheese or side dishes, and we were in the midst of two capital projects at the time and were unable to respond. As of the first week in May, our order fill rates are, in that operation, back up to the very high 90 percentage points. And we have brought one of the two new lines on, and we'll shortly begin to roll out the microwave cup promotions and authorizations, and those will be followed in the second half of the year by skillet dinners and side dishes, as those lines come on. I think the issue for us will be to use that additional capacity and our cost-to-serve model to make sure that as we grow those units and dollars, that we do so in a way that is highly profitable.

Thanks for all the comments, everyone.

Andrew Lazar, Barclays Capital.

First off, I'd just be curious to get a sense for the cadence of volume trends in North America grocery through the quarter. Because I remember last quarter, you talked about a pretty strong January, a sell-in off of a depressed December, even though that may not be in sync with what real takeaway trends were. I'm trying to get a sense of how much that might have helped your overall volume/mix number this quarter in North America grocery. In other words, was your takeaway consistent with your shipments?

Yes. We think the general takeaway was there. Andrew, what I did touch on was that March was so warm, that's where we had more of an impact than we had, frankly, expected, and that really affected the soup category, in particular.

Got it. Okay. Sam, you talked about how some of the larger scale public transaction market right now is pretty light. I'm trying to get a sense of, is there one or two key reasons why you think that's the case, even though financing rates are so low? Is it buyers just aren't in a place where they're ready to sell with margins in their businesses at a low point, or what do you think the hold-up is? I'm curious.

I think that the catalyst for the hold-up was several months back when many of us had presumed that, based on the GDP and other data, that the recovery was well under way and that the consumer sector, which was lagging the industrial and financial sectors, would, at some point, move with that. Then we were all, I think, quite surprised to find that there was another rush of commodity and energy inflation, and that was coupled by declines in consumer confidence and continued increases in saving rates. Ultimately, the effect of that on prospective sellers was they had thought with low rates, if their businesses improved, that you could find that sweet spot after several good quarters of substantial increases, that one could project a continued recovery and growth, and that would entice buyers to the table. I think sellers have looked around and seen what's going on, and thought -- well, we can afford to wait. Although money's cheap now, one side effect of that is that it is relatively inexpensive to wait until times get better, also. None of the businesses that, as we've seen, have been really over-levered or substantially [in net] debt beyond their means. I think you've got to go back, Andrew, several months to that set of events as the catalyst.

You've certainly signaled, I think, here a willingness and even desire to think about some of the other potentially pretty accretive bolt-on type deals where you already have a lot of capability. Do you think those sorts of transactions, while they may make a lot of sense financially, would fit into a category of -- it's just as much work to buy and integrate a smaller deal that may not have as much impact on the P&L as it is a bigger one? Or would that not be a fair statement?

I think that is a fair statement and, frankly, it's a part of the reason that we have, in the past, either looked in a very cursory way at these or substantially discounted them. I believe what we're going to find here is that, yes, they take just as much work. But if we are able to, over several years, deliver $0.10 of accretion at a far lower investment of capital than we otherwise could, and we can do that in conjunction with pursuing the big matter, the big opportunities, then I think it's the two strategies working in tandem that will, over a period of time, deliver the best combination of shareholder returns and capital structure that allow us to be very flexible even in bad times.

That's helpful perspective. Dennis, you had said I think last quarter, the hope was to have gross margins on the year perhaps up a bit. I know you're still looking for, obviously, margins to recover quite a bit in the back half. Didn't know if that's dramatically changed based on the depth of the margin decline in the first quarter? Just trying to get some perspective on the full year in terms of gross margins.

That's still what we're trying to go. Obviously, we're a little bit shorter than we thought. But in terms of the full-year margins, the goal is to try to get back to the level, and that's taking into account the basis point issue with pricing and cost. I think what we've demonstrated internally is we've got a lot of cost savings initiatives that we can have come through, and so that's still our target at this point.

Okay. Thanks very much, everyone.

Thilo Wrede, Jefferies.

I think last quarter you talked about retailers in the US drawing down their inventories, and that had an impact on your volume growth last quarter as well. Was there an offsetting effect this quarter? Did retailers increase inventories again, and that helped your volumes?

I can't say they increased their inventories, but I will say that we continue to see some fluctuations month-to-month that we hadn't experienced in the last few years. Whether it's weather, whether it's inventory management, whether it's consumer pull-through, frankly, it gets a little difficult to tell. But it isn't the consistent 1% growth each quarter over the prior year; it's pluses and minuses. That's still going on, but I'm not so sure it's constant re-evaluation of retailer inventories.

Okay. Dennis, you already said that your tax rate will probably come in below the previous guidance for the full year. Will the non-cash stock comp expense also be below your prior guidance?

I think we're going to be pretty close. Because what had happened was -- last year's first two quarters were high, and then we had a vesting take place last June and that reduced the stock comp expense. If you take a look at this quarter's stock comp, it's right in line with Q4. What'll happen is -- we'll have our usual summer grants, and it will adjust back up a little bit in the second half. I think we're still pretty good on guidance.

Okay. This quarter, I calculate you had about a $0.06 benefit from the lower tax rate and lower stock comp than what I thought what you would be for the quarter. I shouldn't extrapolate that for the full year?

I don't think you can extrapolate that for the full year, because for the first quarter we had some benefits. When we talked about a 33% to 34% rate, and we came in at 30.4%, I was calculating about a $0.02 benefit off the 33%.

Okay. Great. Thank you.

Bryan Spillane, Bank of America.

First, in terms of the outlook for the second half, it just seems to me you've got, relative to what we've seen over the last four quarters, a better fix on your costs, and ability to manage costs. Is there any expectation embedded in your second half that there's going to be any improvement in just the retail landscape? Are you expecting the consumer to improve, supermarket trends to improve? Or are you basically expecting the same sort of sell-in environment that exists today?

Hello, Bryan, it's Sam. With regard to the second half, or more generally the longer-term, the intermediate-term view on the retail grocery industry, implicitly in our plan we've built marketing programs across the categories to appeal to all classes of retail trade, and that includes traditional supermarkets and full-service mass merchants. And as we speak today, our sales and marketing teams are presenting those programs on the presumption that the best of those will be accepted by our customers, and that they will be accompanied by private label merchandising that moves the product. I look at the current data, and one cannot explain when this may end, but I expect that we will see that the best of those merchants will begin to go back -- they've got to get the foot traffic back in the store.

In the meantime, what we are focused on is that, as those consumers have gone to other outlets, that shift, while in part is driven by economic issues, difficult times for consumers, that once those habits are engrained, they will be difficult to break. Even as traditional supermarkets come back, I would expect that the alternate channels will have found their niche. And that we will, after struggling the traditional piece as we point to the end of the year, I would expect that we've got better circumstances, and those are implicit in our plan now.

So, maybe just tell me if this is a good characterization, but you've just got more control over the outcome that you're expecting this year than maybe was the case last year?

I would say the issue is really there with regard to our internal disciplines. And I would not say that there's a greater degree of control over what may happen in the marketplace. We're better prepared to react to it, but the fundamental changes are largely internal. A lot of the ills that we suffered last year, we created those issues for ourselves. And we have attacked the core of each problem and rectified that, so that from the beginning to end, our operations and supply chain are operating at a higher degree of proficiency than they were a year ago, and we are acutely attentive to that.

Okay. In terms of refrigerated, thinking about it as an adjacency that could grow, I guess this is a bit of a broad generalization, but those are relatively higher value products. Is it a more attractive profit pool in terms of store branded products versus maybe some other product categories? Where does it rank in terms of a profit pool in terms of relative attractiveness?

From the beginning we've talked about the possibility of a second business system here, and obvious ones are going to -- they're all built around distribution systems and the alternatives to ambient, one of the very attractive things is refrigerated. Quite frankly here, a big impetus for this transaction was that we have got otherwise stranded assets in our system that we like a great deal. For example, to be in a refrigerated pickle business allows us a substantial point of differentiation at the high end of the food service market, and with some degree of similar attraction in retail grocery. When we looked at that business and see that it virtually operates on a stand-alone, the opportunity to link it to something like refrigerated dressings -- we have a track record in dressings that is the envy of everybody else in our Company.

It's just extraordinary that we have developed a business of that size with that growth. And the private label category today, I believe, is a full 8 to 10 points further penetrated by private label since our acquisition. I just see that having refrigerated capabilities for both retail and food service can be a tremendous adjunct to that core business. Whether we go beyond this or not, I think, will largely depend on how this operates over the next several years. I do believe that, with the businesses we have, what's readily attainable is to, even as we grow further through acquisition and organic growth, that the refrigerated business is focused on dressings, sauces, pickles, related products can easily be 10% or more of our revenue, and that would be a substantial foothold in that channel of distribution and to look beyond it.

Okay. Thank you.

Bill Chappell, SunTrust.

Going back a couple quarters, I think I'll get these numbers right, but the Company had won roughly $120 million of new business, and had pricing that probably added $110 million, $120 million of top line. Is that fully reflected in this quarter? I know there had been some delay. Are those still good numbers?

Bill, this is Dennis. Yes, our program last year, we thought, was very successful. And as we indicated in our last call, the challenge sometimes is being able to 100% translate a new business gain, which was earned today, and what actually ships seven to eight or nine months later when the product went. But in terms of the programs we sold in, yes, they're all there and reflected. A few of the volumes came in a little lighter. Obviously, hot cereal, we had some great wins with that, but it didn't quite materialize in this last quarter. Not because of an unsuccessful big win program, but just due to other circumstances.

Those are all reflected in these numbers. And again, we're finding great success with distribution of new products. I think you just have to look at the 5.5% growth we had in the non-winter season products. They're manifesting in the numbers, but what we're not quite doing this time is going through and quantifying exactly the big win number and how it works. Because I think it was maybe a little bit confusing last year, and what we did find out at the end of the day, sometimes it's a little bit beyond our control. But we've had great success and great new sales efforts this year as well.

Great. Just to understand the flow of the business or flow of the quarters, can you remind us on the variable comp issue, is it a tougher comparison as we get to the second quarter or third quarter, just in terms of how that [played] last year versus this year?

On the variable comp, last year was pretty consistent throughout the year until the fourth quarter, when we had to make the big adjustment, and that was why you saw last year's G&A drop so much in Q4. We typically will spread this evenly throughout the year. The stock option number will be back-half weighted this year because of the new option grants that typically happen in June/July. Q1 is not necessarily indicative of what Q3 and Q4 will be. That's where, from an earlier question, full-year numbers we think will be pretty close to what our original guidance was.

Okay. On the acquisition front, would you look outside the US? I know [Hain] had recently referenced a private label business in the UK that they were looking to divest. Is that something outside the US you'd be interested in?

We're going to focus on North America, and while you didn't ask the question, we're going to focus on private label.

Perfect. Well, I think it was a private label business they were selling, but no, I understand that. Thank you.

Akshay Jagdale, KeyBanc.

In terms of the channel shift that we've seen in the grocery business, our view has been that consumers are just spending more on food. They're buying more food. But they're just spending more in the Away From Home channel, and that's our view, and obviously we don't know if it's 100% true. But if that's the case, we would have to see some strength in your Away From Home channel, but we're not seeing it, in my opinion, because your Away From Home channel product mix is mainly warm weather categories, and then you've had some weakness in pickles. Am I generally reading that correctly? Do you guys agree with the thesis that there has been some shift to the Away From Home channel in terms of consumption of food items?

Akshay, this is Dennis here. I think when we looked at our numbers and, frankly, we moved pretty well with big main line distributors -- Sysco, US Food and such. We do have a nice array of national accounts as well, which tend to be more in the quick serve. But I don't think we have seen a significant pattern of any sort regarding consumer movement away.

As I said, I think, though, that weather patterns did help Food Away From Home. Typically, you're going to get, in the Midwest and the Northeast, big population centers, at least one or two major storms in the winter, sometimes three. If you have one of those, you're going to lose traffic for one or two days on a storm, generally one. All it takes is one lack of storm in a month to get the traffic going. We believe it was more of a weather issue.

But to your point, and you make a good one, that our products do tend to be more summer-related, so I'm not sure we can make, at least with our numbers, a positive indication of first quarter being a trend. But that's just the way we expected it to be more weather, and still expect a little bit of softness in the back half there.

To follow up on that, I jumped on the call late so I may have missed this, but I did catch something about -- what were your sales excluding the warm weather products? What was the growth in your non-warm weather products?

In the quarter, I've got to go back to my notes here, but we were negative 3.4% in volume in soup, non-dairy creamers, and hot cereal. We were plus, this is in retail, plus 5.5% in the non-winter products, the all others.

I know the magnitude was probably less, but you saw a similar pattern in the December quarter?

I don't have that handy.

We can discuss it offline. All I'm trying to get at is -- if weather normalizes next year, the comp should be pretty easy for the winter timeframe, correct?

I would think next year first quarter, winter won't be like we had, the comps should be pretty good. As I look at the Food Away From Home business, if we took out the pickle business, we were up 1% in the all other products. A 1% volume increase in the quarter in Food Away From Home, excluding the pickles where we had a rationalization, to me that didn't indicate a strong trend, but I give you credit. We don't have a lot of warm weather products running through Food Away From Home, so it could be a seasonal thing.

We are today developing marketing programs for the fourth quarter of this year and the first of next year. They, in part, are predicated on a return to normal weather patterns, and they should have a favorable effect on those categories that have been depressed for the last two quarters.

Just to follow up also on the comments and questions asked on retailer inventory, it's interesting you mentioned there's been more fluctuations in that particular place, more so than usual. Is one of the theories that these buyers of various products are just waiting for prices to come down? There's been a lot of deflation in specific categories, for example, I'm assuming because casein is going to be down, non-dairy creamers pricing has got to come down at some point. We've heard in certain categories where there's been major deflation that retailers or retail buyers are waiting to load up inventories once prices come down. Have you seen that? It's hard to make a blanket statement because prices are moving all over the place, but have you heard that from your retail buyers at all?

I think that may be the case in some other categories. But with food, the velocity through which it moves through the stores and the number of turns per year, there's really very little opportunity for that. What we do see from our customers, particularly those that are the most dedicated to their customer brands, and sophisticated in their approach, is that we have an increasing number of customers that want to look forward into the commodity and energy markets, and look at those inputs that really affect categories that they believe are significant to them.

Then we will enter into arrangements whereby if that customer in effect guarantees us the volume, then we'll go out and make a commitment to buy forward the critical inputs. Those grocery customers tend to kind of manage their cost in the same way that a number of our industrial customers do, and that, frankly, is a good thing for our business. It's a capability that not many, if any, of our direct competitors can offer.

Can you talk about what's going on in Mexican sauces? Then also comment on soup, other than weather patterns, have you seen better innovation pipeline from the branded guys? Just generally speaking, comments on Mexican sauces and soup category would be appreciated.

I can give you an incomplete view, and perhaps Dennis has a broader perspective. With regard to Mexican sauces, we completed last year a major expansion of our capabilities at San Antonio Farms for both retail and food service products. The measure of output that we could run has more than doubled through these capital expenditures. As a result, we've now been broadened our market for salsa and related sauces to greater geography and, importantly, a wider spread across the good, better, best spectrum where we have always been the leader in premium quality, but struggled to compete in the opening price point and the good sub-category of the three. That expansion also has allowed us to develop a capability in pasta sauces, which has been just an extraordinary success for us.

With regard to soup, I think that as much as anything else, that's the one category where weather has had a great effect, and we're in that condition where it's the only place where we have two national brands intensely close. One is number one in condensed soup, the other is number one in ready to serve. They both want to make in-roads into the other's product mix, and I think that you see a lot of activity there that sometimes affects private label. I think we have to expect that will be an ongoing circumstance, and deal with it in a competitive way.

Thank you.

Heather Jones, BB&T Capital Markets.

This is Brett Hundley standing in for Heather this morning. Sam, just some more clarity into your thinking on EPS guidance and reiterating that? I'm just trying to understand a little bit better in how you think about that. Given the outlook that you guys have laid out for Q2, the comments on an improving back half, a likely easier comp in Q4, in reaffirming that guidance, is it something that you think you could and should prove conservative? Or has the landscape just changed and presented more problems towards reaching that goal? Do you think it's one of more of caution, or is it really reflecting the reality today?

Dennis has a sign in his office that says -- CEOs cannot discuss EPS. I'll give you some general observations, not about earnings, but the state of the business, and perhaps Dennis can address that. But I will remind everybody that we did reaffirm the full guidance for the year, and that is not out of an innate sense of conservatism or stretching, that's where we believe the opportunities are in front of us.

The key factors that relate to the timing with which earnings will unfold are the following. One, the input costs, particularly on agricultural commodities, perhaps with a lesser effect on energy-related inputs, those input costs, we expect, will differ substantially once one gets into the new crop year. The end of March report was for record corn planting (inaudible - technical difficulty), and weather has been so mild that the markets currently believe that we will not only have a bumper corn crop, but that this weather will favorably affect wheat. And if the wheat harvest comes in as expected, that will allow additional acreage late in the year to be planted with soy beans, and we have that favorable effect across the bulk of the grain and oilseed complex.

On the energy side, I think that petroleum is -- it's as much a political as an economic good now, and one can expect nothing but volatility there, and that has an effect, primarily on packaging and transportation costs.

The other internal factors are what I talked about in internal rationalization program, we are better today than we were a year ago at the manufacture, distribution, and procurement of our goods. We're better at determining the pricing changes that are required when input costs increase, even on an unexpected basis. And the addition of SAP over all of our USA go-to-market functions has allowed us to, for the first time in six years, run the full of the US business on a fully integrated and seamless way.

As I see the effects of those, I think that they, other than the commodity and energy inputs, the improvements here are sequential and they are cumulative. That is my reasoning for thinking about the unfolding of earnings over the four quarters. Again, not that I will speak to EPS per se, but I can speak to the independent variables that drive those conditions. Lastly, we'll get better at dealing with the consumer moving from one retail outlet to another, in terms of our capabilities of delivering those products and doing so profitably.

Dennis, I said no more than 1,000 words without mentioning the letters EPS. It's now up to you.

Brett, all I can add is that our full-year guidance is going to take work. It represents a 10% to 16% increase over last year, and the markets are still volatile. We are expecting things to smooth out in the back half of the year, but as last year proved, anything can happen. We're still comfortable with where we are, but I wouldn't classify it as either conservative or aggressive. I just think it's the usual challenge with a 10% to 16% earnings increase.

That's well understood. Thank you, guys.

Chris Growe, Stifel Nicolaus.

I just had a question for you regarding pricing. Just to understand, you have some incremental pricing going into place in the second quarter. You'll be lapping some pricing from the second half of a year ago, but that took a while to go into place. My question really is just trying to get a better sense of how price realization flowed through the year in the second half of the year. There was a question to this effect earlier, but is that a period where you're going to see price realization still coming through because of the incremental price increases you put in place earlier this year?

That's right, Chris. Last year, if you went through the numbers, we had minor, very minor pricing in Q1 and Q2. Q3 picked up, and I'm going off memory, but I want to say it was about in a 3.5% average increase. By Q4, we were at about a 5%. We were fully realized, for the most part, for last year's pricing. This quarter, we talked about 6%, so you see just a little bit of add-on there. We'll be having quarter-over-quarter pricing increases that are sizable for Q1, and reasonably sizable for Q2, and then sliding off a bit in Q3 and probably very close to even on Q4.

Okay.

Last year's pricing started July 1, and was fully implemented by September 30.

Okay. Have you given an accretion level for Naturally Fresh for the acquisition this year, so what is expected for EPS accretion this year?

Net-net was about zero because we're thinking in that $0.04 to $0.05 range without -- on an ongoing basis. But you always have that quarter one restatement of inventories to fair value, so you lose all the margin in that first quarter. I think on the year, it's going to be break-even, but on a forward basis, $0.04 to $0.05 right now. It will be up to us to grow that business and make that a conservative number.

Okay. That's helpful. Thanks very much.

Jon Andersen, William Blair.

I noticed in the press release, there's a comment here on -- you expect to realize greater internal savings due to some cost management at plants and distribution centers. Is this a continuation of the benefits of the warehouse consolidation, and are there incremental cost savings that you're going after? I don't know if you can highlight any of those. That would be helpful. Thanks.

That is one core part of the progress. Now that we have opened each of the two new major warehouses, and repositioned inventories, we've seen that our proficiency in shipping and warehousing in its aggregate has improved substantially. Importantly, Jon, that the average cube adjusted weight of trucks going out has moved up quite nicely, and that is kind of the hidden jewel in the creating the distribution network. While it has only a small effect on our largest customers, we tend to take full truckload lots of a given commodity direct from a plant. Now we can appeal better to a broad array of customers who are not the giants of the industry, but who account for a very substantial amount of part of our business by offering them, at any day during any promotion, any season of the year, full truckload rates on the entire spectrum of our product portfolio.

I do think in addition to that, that SAP has a substantial benefit to us in that it gives us, on a consolidated integrated basis across USA grocery and all of our non-Canadian businesses, a daily look at what the state of the business is, and allows us to make adjustments throughout our supply chain to fine-tune that. Lastly, I think we will see in our manufacturing processes real benefits of the full integration into the TreeHouse system of our new acquisitions, and the payoff of the capital expenditures where we have invested a new capacity over the last three years in five of our fastest growing, highest margin product categories. Those are the key drivers.

Thanks, Sam. That's helpful.

That is our final question. Mr. Reed, I'd like to turn the call back over to you for any concluding remarks.

Thank you. We look forward to seeing many of you this spring and summer at investor meetings. If not on the road and in the interim, we will next inform you of our progress on August 8 at our mid-year analyst call. Until then, do your part in the long overdue economic recovery and buy private label. Thank you.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time.