TreeHouse Foods Inc (THS) 2013 Q1 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 conference over to TreeHouse Foods for the reading of the Safe Harbor statement.

Good morning. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words such as guidance, may, should, could, expects, seeks to, anticipates, plans, believes, estimates, approximately, nearly, intends, predicts, projects, potential or continue or the negative of such terms and other comparable terminology.

These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause the Company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievement expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31, 2012 and subsequent Forms 10-Q discuss some of the risk factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented during this conference call. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in its expectations with regard thereto or any other change in events, conditions or circumstances on which any statement is based.

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

Thank you, PI. Good morning, everyone and welcome once again to our TreeHouse. Dennis and I are pleased to report a strong start to the new year, one in which we expect to report substantial progress in the execution of our portfolio strategy and its operational and financial consequences.

Leading indicators of this strategy can be readily detected in our first-quarter performance -- sales growth of 3%, adjusted EBITDA increase of almost 10% and earnings growth of more than 17%. Underlying this multiplier effect are the individual components of our fundamental go-to-market and acquisition strategies, as well as our operations supply chain agenda of internal improvements.

Specifically, our top-line growth was derived from organic growth in hot beverages coupled with the acquisition of refrigerated dressings and sauces. In combination, these factors more than offset our expected distribution losses in soup and contract packing. Our product portfolio continued its shift to value-added categories and alternative retail formats as growth in filtered single-serve coffee, hot cereal and Mexican sauces eclipsed losses in commodity-oriented categories.

Legacy gross margins posted a 60 basis point gain, exclusive of restructuring, as favorable product mix was further leveraged by limited commodity cost inflation and increased proficiency in manufacturing and logistics. Free cash flow of more than $40 million reduced our leverage, thus providing capital for further expansion and investment.

Looking forward, we expect the same steady progress throughout the year. Although the consumer sector of the economy has yet to recover, we are well-positioned for further gains across the broad array of our product portfolio, customer base and channel mix. While industry growth across food and beverage may be moderate, our strategic agenda of portfolio-based growth, business simplification, financial performance and external expansion should mark 2013 as a year of rejuvenation in our TreeHouse.

And then in this vein, we have just announced two significant changes to our executive lineup and our dual support of internal improvement and external expansion. First, Harry Walsh, a Company founder and long-serving leader of our operating units, has joined the corporate office as Executive Vice President, Acquisitions Integration. Second, Chris Sliva, a 2012 newcomer to TreeHouse, has been promoted to President, Bay Valley Foods, replacing Harry and assuming operational leadership of our consolidated go-to-market operations supply chain and category-based business unit infrastructure.

This executive reassignment for Harry and promotion for Chris provide both more bandwidth and more depth to our leadership team. Harry, our most capable and experienced General Manager, will now devote his full-time efforts to the post-closing integration of newly acquired businesses, much as he has done with E.D. Smith and in a prior Elfin life, Sunshine Biscuit Company.

Chris, who many of you have already met at investor conferences, will train his focus on organic growth, business simplification, margin expansion and organizational structure across our multi-category multichannel portfolio of customer brands and custom products. Their experience, expertise and leadership should prove to be invaluable as we proceed towards the next major milestones along our journey of strategic growth.

Let's now turn to Dennis who will address the specifics of our first-quarter performance and outlook for the full year. Dennis?

Thanks, Sam. First, I just want to reiterate Sam's comments regarding the overall quality of our first quarter, especially in our North American Grocery channel. One of the key measures of quality is fundamental growth. This quarter, we posted retail volume mix improvement of 2.8% after considering the soup business restructuring and this comes on the heels of last year's first-quarter growth of 1.4% and 2011's first-quarter growth of 2.9%. And this consistent year-over-year growth has come during three very difficult years in the food industry.

Another key indicator of quality is improving operating margins. This quarter, we improved our direct operating income in both dollars and margin percentages in all three of our segments compared to last year's first quarter. We also improved our retail direct operating income margins 140 basis points over last quarter to 17%.

While part of the improvement is a better mix of overall sales, we also made a lot of progress at improving our manufacturing operations and distribution network to enhance our overall margins. The combination of sales growth and margin improvement resulted in our adjusted EBITDA for the quarter totaling $76.8 million, a 9.5% increase over last year and more than triple our top-line growth of 3.1%. This increase is directly related to the margin improvements in our core product categories that actually offset slightly lower margins from our new Naturally Fresh business.

As we look at the profit improvement, the vast majority of it came from operational activities. Pricing in the quarter was up only 0.6% across all of our categories, reflecting the cost moderation we are seeing in most of our key raw material inputs. The big drivers of margin improvement were from positive shifts in sales mix, improvement in our factory operations and a heavy focus on supply chain savings in our distribution network.

Our transportation team has identified and eliminated inefficiencies in our shipping patterns and shipping lanes. This resulted in our outbound freight costs improving to 2.5% of net sales compared to 3% last year.

Meanwhile, our operating expenses were very much in line with our expectations for the quarter. Compared to last year's first quarter, which also had normal spending and incentive accruals, our operating expenses declined 50 basis points from 11.6%. On a sequential basis, the combination of selling, distribution, general and administrative expenses were up 70 basis points to 11.1% of net sales. This was very much in line with our guidance for the year and reflects normalized incentive accruals for 2013.

As I turn to the segments, net sales for our North American Retail Grocery segment grew 1.9%, including the negative effects of the lost soup business we discussed last year, offset by the addition of refrigerated salad dressing from our Naturally Fresh acquisition in last year's second quarter. Excluding these two items, all other product categories combined for a net sales increase of 2.9%.

This was led by a 29% increase in our powdered drinks category, which includes our single-serve coffee products. As Sam mentioned earlier, the new coffee business has been a huge success for us and we are continuing to add capacity to meet the demands from our customers. The increase in coffee products more than offset lower sales of single-serve drink sticks as the beverage enhancer category has shifted towards liquid rather than powdered enhancers. In response to the shift, we will be shipping our first national brand equivalent liquid enhancers this month.

In addition to powdered drinks, we had nice increases in pickles at plus 6% and pasta and Mexican sauces at plus 10%. And finally, it looks like the weather played a key role in two of our larger categories. I am sure you recall that last year's first quarter set records for high temperatures across the Midwest and Eastern US while, this year, we set many records for cold and rain. On the plus side, the very cool weather worked in our favor with hot cereals improving nearly 13% over last year. Meanwhile, dressings had the opposite problem with sales down about 8% in the cool weather this year compared to the nearly 25% increase we reported in last year's warm first quarter.

In regard to the Food Away From Home segment, the new Naturally Fresh business was the primary reason for the 8.6% increase in total sales. Excluding these sales, our volume mix decreased 11.5% due to lower sales of aseptic cheese and pickles. Direct operating income increased to $11 million due to the sales from the acquisition of Naturally Fresh while direct operating income margins improved to 13.4% from 13% last year due to improved freight and distribution costs, as I explained earlier.

Our industrial export business had a sales increase of 4% due to higher industrial powder sales and lapping some of the lost co-pack business that affected the prior year. Direct operating income improved to $12.5 million from $11 million last year due to the improved gross margins, partially offset by higher distribution expenses associated with new international sales we had this quarter.

As we look at the nonoperating parts of the income statement, interest expense for the quarter was down about $400,000 due to both lower rates and lower levels of net debt outstanding. During the quarter, we generated approximately $41 million in free cash flow, which was used to reduce outstanding debt. Our outstanding debt net of cash and investments now stands at $765 million and our leverage ratio was just under 3 times debt to adjusted EBITDA.

Also one new item you will see on our balance sheet is a line called investments. At the end of the quarter, we had approximately $7.7 million invested in funds that very closely mirror the investments underlying executive deferred compensation. This account acts as a hedge to the deferred compensation investments and effectively eliminates any gain or loss risk associated with deferred compensation investment returns. The income on this account is not material and is included in interest income in our income statement.

With regard to taxes, our effective tax rate for the quarter was 31.1%, up slightly from last year's rate of 30.4%, but generally in line with our expectations for the quarter. Net income in the first quarter was $23 million compared to $22.1 million in last year's first quarter. This equates to fully diluted earnings per share of $0.62 in the quarter compared to $0.60 last year before considering unusual items.

After adjusting for the unusual items highlighted in our press release this morning, our adjusted earnings per fully diluted share for the quarter increased 17.5% to $0.74 compared to $0.63 last year. Nearly all of the difference between reported earnings and adjusted earnings in 2013 was due to costs associated with the plant closures we announced last year.

In regard to the outlook for the year, our first-quarter results showed very good improvement over the same quarter last year. These results were very much in line with our expectations that we shared with you in February. We had expected that volumes would moderate due to consumer purchases matching consumption again and for the most part that appears to be happening. Our total volumes were just a bit lighter than we had forecast, but we think most of that was due to unseasonably cold weather.

Still, we think that absent any very unusual external conditions, such as extreme weather or drastic changes in economic policy, we should continue to see the moderation we predicted when we gave our detailed guidance in February. For those reasons, we are reaffirming our previously issued guidance of full-year adjusted earnings per share of $3 to $3.10 and are comfortable that the consensus estimates for the year are reasonable in light of the guidance range. Sam?

Thanks, Dennis. I will now conclude with an overview of food industry and M&A market conditions and their input for our TreeHouse outlook, plans and strategy.

First, regarding the general market for food and beverage, we expect 2013 to be a year in which the central strategic themes of the post-Great Recession era continue to play out. Value and thrift will remain paramount with consumers as an hourglass economy takes hold of a consumer sector increasingly split among the few haves and the many have-nots. Just as value and thrift will drive staples, innovation and convenience will lure consumers to value-added categories, particularly in beverages and snacks.

Customer brand imagery, quality and value will differentiate successful retailers from the also-rans as the grocery industry adjusts to evolving consumer attitudes and behavior. Our commitment to value without compromise in customer brands and custom products will constitute the cornerstone of our go-to-market platform with our customers in all classes of trade and channels of distribution.

Second, retail channel proliferation will continue to squeeze conventional supermarkets, but that shift will evolve to one of alternate corporate banners, including Neighborhood Markets, City Target, Turkey Hill and GreenWise Market, as leading chains launch smaller formats in search of consumers who have migrated away from traditional outlets.

Additionally, a new generation of no-frills formats, including Ruler Foods and Bottom Dollar Food, has spawned yet another new generation in value retailing. Thanks to our 2011 and '12 focus on retail channel shift and its operational implications, we at TreeHouse are well-equipped to deal with these issues of evolving grocery industry structure in a slow growth marketplace.

Third, input inflation and commodity and energy cost is expected to be relatively limited as opposed to the general contagion of 2008 and '11. As the new crop year opens, the consensus is one of low single digit input inflation with the usual caveats regarding Midwest weather conditions and the difficult to hedge plastic packaging complex.

In contrast to seven consecutive quarters of escalating price increases that peaked above 6% at year-end '11, the level of average price increases in a portfolio of 102 shelf-stable categories has fallen to less than 1% in the first quarter of this year. Quietude in the input markets, coupled with the struggle for foot traffic and operating margin among grocery retailers, has triggered a wave of grocery demands for price concessions.

Many food manufacturers will spend much of the new year in a balancing act between the benefits of lower input inflation on margins versus the benefits of trade promotion and price concessions on volume. At TreeHouse, our consistent focus on innovation, productivity and customer service without equal will provide competitive advantage as we too balance our customers' expectations for margin, volume and differentiation.

Next, national brands, many loaded with cash, can be expected to pay to play tactically as retailers up the ante for co-op advertising and merchandising. Strategically, their brand focus on innovation, consumer benefit and communication will also continue to drive trial and eventual growth in our core categories.

In parallel, these initiatives will generate private-label opportunities, especially among those leading grocers whose house brands are integral to their retail image, shopping experience and competitive position.

Lastly, our outlook for M&A activity in the food and beverage aisles continues to be sanguine. We are optimistic regarding general M&A market conditions, especially corporate earnings, which fuel the stock market and high yield rates, which is the power of the deal market. We are also confident in our ability to identify, finance, close and integrate large-scale transactions of the $300 million plus variety that meet our acquisition filter and portfolio strategy criteria.

While, as usual, one could not predict the exact when and where of these opportunities with any degree of certitude, I for one am confident that we will undertake another large-scale expansion of our TreeHouse in the not too distant future. My confidence stems from past experience and our present condition as a well-capitalized and diversified acquirer dedicated to strategic growth in private label and superior growth in shareholder value.

Kyle, please open the lines for Q&A.

(Operator Instructions). Jonathan Feeney, Janney.

Good morning, thank you. When we look at -- it looked like, on an apples-to-apples basis, you did have some margin expansion, but, yet, I would think with the trajectory of commodity costs and getting a little bit of pricing even, that could have been more significant. I mean should we expect margin comparisons to get easier or more difficult over the course of the year?

One of the things we said was we were up about 60 basis points on an apples-to-apples basis. And we started the year thinking, and in our guidance talking to you about getting to 100 basis points. I still think that is a reasonable trajectory for us. So I guess, in that sense, we would hope to be additive to the margins as we finish the year and we said at the beginning, it would be a buildup to that improvement.

Thanks for that. And just a detail question on that is what effect on margins does the restructuring decline of soup sales have? Is that margin mix positive or negative?

That actually is a positive for us because, as we have said for many years, especially with the ready-to-serve soup, it is a category with a lot of brands and a lot of brands fighting for margin. So the margin umbrella is not very strong there and that accounts for the mid to low single digit share that private label has in that category. So it goes fundamentally that that will have a lower margin structure. So that is the positive of the mix -- one of the elements of the mix that I had talked about.

Thanks, Dennis. And just one last thing while we are on the topic of mix, I would be remiss not to mention the single-serve coffee business. Could you update us on what is going on? It seems like the growth has been slow and steady there. Maybe a little bit slower as far as the total private-label K-cup growth than I would have anticipated. Can you talk about some of the price dynamics there and the growth in brand?

John, this is Sam. I will give you a general overview. First of all, our hot beverage program led by single-serve coffee and accompanied by Grove Square continues to operate on plan as we had originally envisioned. And with regard to the speed of that rollout, I will reaffirm what I had said earlier. One, that what we are trying to build here is a diversified private-label and custom products business, not a dedicated coffee business.

Secondly, that I want to reaffirm that it is very clear from the information we see that we will lead the private-label sector in single-serve coffee and that the aggregate size of the private-label share will play out over the course of the remaining year, largely related to how the whole of the category does and branded companies, what promotional activities they undertake and then, lastly, our velocity off the shelf. And all of the indications I see are quite positive and in that regard, I will reiterate Dennis's prepared comments that we have decided to expand capacity yet again. And while we will not give specifics, I think you can see from the aggregate of the beverage number that we are developing this business in a very fine fashion.

Okay, great. Thanks very much.

Akshay Jagdale, KeyBanc.

Thank you. Good morning. So Dennis, just to follow up on gross margins, so despite the weakness that you mentioned in the hot weather categories, it didn't impact your margin projections? So in other words, gross margins came in exactly where you thought they would?

They were very much in line, right, because the weather -- the hot cereal, salad dressings, some of those mixes, they kind of offset and played up and down against each other. So it didn't really have a margin impact on us.

And on my numbers, excluding the pickle downsizing and -- sorry, the soup downsizing, as well as single-serve, your volumes were down in North America slightly. Am I roughly correct there?

No, I think that if, as you look at the Retail segment, we were actually slightly up after you take that into account. So total net sales were up 2.9% and our pricing was minimal in that category. So it was actually somewhat positive. The soup really weighed us down.

Okay. And just one for Sam. I mean in terms of the M&A environment, so I know the timing is very hard to predict, but what is keeping the Company basically from announcing a deal? Is it valuations, is it the right fit? Is it a combination? Can you help us understand that a little bit better?

Well, I think with regard to prospective announcements, they will really come when we identify and then reach agreement to add another strategically important, and I am hopeful large-scale addition to the business. And what we are not in the business of is simply going out to find deals to announce deals to do financial engineering. This is largely about developing a go-to-market strategy across a broad portfolio and doing so in the context of a marketplace that dramatically changes with regard to consumer behavior and grocery industry strategy.

And in the absence of a large-scale deal over the last two years, I would take a moment to indicate that, if one looks at the potential magnitude of a private-label entry in single-serve coffee and thinks of that as organic growth, totally homegrown at TreeHouse, I would argue that its effect is comparable to that of some of our most substantial acquisitions. And while it took a lot of development to do it and there is risk in doing this, the economics of doing that internally are quite handsome.

With regard to the next one, we simply all have to stay tuned, but with the knowledge that TreeHouse is actively in the market and we have got all of the resources to execute any of these matters and when we do so, you can be sure that it will be a strategically sound, financially prudent model that leads us to further growth and improvements in margin and cash flow as well.

And just one follow-up on that. So if I am interpreting your comments correctly, the deal -- the activity seems to be picking up, so correct me if I am wrong there. But do you also agree -- I mean you have said in the past that there will be more competition, which means, in my opinion, that valuations will be higher than previous numbers perhaps. Is that also a correct way of interpreting your comments or that is not necessarily the case and it is really asset by asset?

There is always competition and I think we can see the nature of that competition changing somewhat in that we may be moving back to a return to an earlier era when private equity were far more active than they had been in the recent past. And when that happens, private equity leverage and equity models set the clearing, not for the deal itself, but for the first round and we can expect that effect.

And with regard to the ultimate price that you pay, I think that it gets down to the individual asset and the determination of whether there are synergies to be had here by a strategic buyer and most importantly growth opportunities to be had that could be realized under different ownership. And if you go all the way back to the biggest things we have done, you will see those earmarks around both the E.D. Smith acquisition and the acquisition of Sturm Foods as well, which I think all can agree have played out extraordinarily well for us.

Okay, great. I will pass it on. Thank you.

Thilo Wrede, Jefferies.

Good morning, everybody. Sam, would it be fair to assume that the change of responsibilities for Harry Walsh is related to this large-scale addition that you mentioned at the end of your prepared remarks?

Good morning. I think that with regard to both Harry and Chris that what we want to ensure that we are completely prepared for is the simultaneous organic growth and internal improvement that Harry has led over the last several years that we are able to pass that on to equally capable hands in a different market environment.

At the same time that our organization is prepared to take on an expansion of large-scale magnitude, large scale by private-label standards and we have got the capability to do both and we have been investing in systems and people over the last several years to get to this point. And we are now at that point where we can say that we have got the executive leadership in both areas to then kind of split our team and pursue the dual agenda in parallel. And I am hopeful that I see more of you than either one of them over the course of the next several quarters.

Okay. And with the creation of Harry's position, will that enable you to more aggressively pursue completely new categories that where before you maybe didn't have the bandwidth to fully integrate something that is entirely new?

Well, I think it will do two things for us. One, that with regard to the acquisitions that we find that we can move more quickly and more surely to capture the synergies that are implicit in those. And in doing so, to then move to more quickly assimilate the go-to-market phases, capabilities where, under Chris's leadership, we can begin to get an earlier response with regard to new distribution opportunities.

In terms of the capability of going beyond our traditional center of the store, that is where we will continue to focus because it offers us the highest returns at an acceptable risk. But I think that you can take it that, for a company that never mentioned the word beverages until a few years ago, that we are looking like -- now realize that there is a much broader marketplace in private label for us as we redefine our sweet spot and that Harry will be an integral part of the pursuit of that broader field of opportunities.

Okay. And then last question I had for you, would you ever consider producing K-cups for branded producers, so basically become a co-packer for that kind of product?

Well, our primary business will always be focused on private label in both retail and food service segments with the first emphasis being on retail grocers. There will be those occasions where an opportunity will come up where we may one by one determine whether in fact it would make sense to contract pack for someone else and we will really consider those matters on a one-off tactical basis as opposed to a long-term strategic commitment.

Okay, thanks a lot, Sam.

David Driscoll, Citi.

Thanks a lot. Good morning, everybody.

Good morning.

Hi, David.

Dennis, on the fourth-quarter call, you discussed SG&A costs and your expectations that they would be something like 13.1% to 13.5% of sales for the year. I think, in the quarter, you came in nicely lower than that at 12.7%. Is this a timing issue or are you just coming in better than expected?

It is mostly timing. We are just a touch better, but what will happen is as we move into the second half, you will see the normal increase we have in things like stock compensation when we do our annual end-of-June stock grants and then as we build up through the year, the expectation was you would have more in the back half. That has normally been our way of going, especially with the fourth quarter being by far our largest sales quarter as well. So it is pretty much on track, just slightly better.

Okay, so this is where the model came in more favorable than what we were looking for. And so I am thinking, because you didn't raise your full-year numbers, that this is like a key component of it. We should all be modeling this a little differently in the future quarters to get the full-year catch-up. Hence, you don't make any guidance raise at this point in time. Would you guys generally agree with that?

I think, in general, that's on par. And that is kind of what I was referring to when I talked about my view of where I see the consensus right now.

In NARG, the organic revenues were down. I realize soup had I think a 3.5 percentage point impact. However, it still feels a bit weak. I think you guys kind of made comments to this, but do you expect organic revenues, inclusive of the soup issues, to be negative for the year?

No, we do not. And so, as we said, we are a little lighter than we thought on the top line. As you look at our total business and you can see in the numbers in the press release, we had about $540 million in revenue this year to $524 million last year. If you were to exclude the soup category, as you will see in the 10-Q this afternoon, sales would have actually been up 7% year-over-year just with the exclusion of soup.

So the soup business really did have a negative effect and we will do a little lapping of that in the fourth quarter and now we are coming out of season, so you will see less of an impact in Qs 2 and 3 as opposed to what we had in Q1 just because of the seasonality.

Would you be able to quantify the operating profit impact of the lost soup business?

That we can't and as we have had from day one, we really don't talk about category profitability, product category profitability.

Okay, final question. When does the next chunk of new single-serve capacity come online and are you limited right now because you are waiting for that new capacity investment to come on?

Hey, David, it's Sam. With regard to capacity here, we have said from the beginning that what we wanted to do was bootstrap ourselves into this and make commitments to additional capital as we anticipate new business to come on. And we have not been constrained by capacity; nor do we expect to be going forward.

The leadtime for commitments from private-label accounts on new categories is always somewhat longer than that of simply line extensions of kind of their old standards. And in this case, what retailers have seen is that there really is an extraordinary opportunity to expand the whole of their single-serve coffee business kind of led by growth in branded ventures both from the national brand leader and its licensees, coupled with a private-label presence.

And in that regard, the programs that we are developing with these customers tend to take -- their gestation period tends to be slightly longer than that of send me another can of peas and so that gives us the opportunity to work throughout our supply chain with OEM equipment manufacturers, as well as suppliers of packaging your coffee to do this with a very orderly thoughtful long-range look. And as a result, we have been able to grow the business as we had anticipated and make capital commitments and other commitments in a forward-looking long-term way that has been quite successful.

So no constraints to date. We can't tell you about the next round of capacity other than this is more of a flow of increasing velocity than it is a stop/start undertaking.

Thank you for the comments, Sam. That is really helpful. I will pass it along.

Bill Chappell, SunTrust.

Good morning. I just wanted to ask something on the beverage category and believe it or not not talk about coffee. Just trying to understand -- I mean part of the issue last year on the beverage category is you were kind of late to the game in terms of the flavor-enhanced liquid product. And I think you said on the call that you are planning to launch that in the next month or in the past month, but I have seen some other private-label products already out on the market. Didn't know if you were kind of behind the game there, if there is some catch-up you need to do and kind of how you look at that playing out this year because that is a pretty hot market in terms of the beverage category other than looking at K-cups?

Yes, that is a good point, Bill and I wish we could say we always hit it out of the park every time, but we did not do it on this one. We were definitely late to the game on the liquid beverage enhancers and we pretty much missed last season, which opened the door to some other private-label manufacturers and we now have a product that is actually launching this month and will be at some accounts. So we are definitely playing catch-up on this one, but we are really happy with our product and we are going to have to kind of bootstrap this one back up.

But that has definitely impacted us and from a category standpoint, I think the brand leader has really shifted a lot of advertising towards the liquids side, away from the powdered side and that has had a negative impact on not just ours, but the entire powdered category. So again, a little catch-up on our part, but now we are looking at it as opportunity and focused on the future.

And I guess is it fair to say it is kind of muting your overall beverage growth still to this point?

That is correct. Our powdered beverages were down and that -- even though the category for us in powdered drinks was up 29%, it was really driven by coffee and we had negative in the powdered side, powdered single-serve beverage.

Got it. And then maybe can you give us kind of an outlook of what you are seeing intra-quarter and even into April in terms of just food volumes? I mean I know you have said things have gotten better, but are you seeing it sequentially from January to February to March to April in terms of we are finally out of the 18-month, two-year funk that the whole category has been in?

Hey, Bill, it's Sam. I think that what we are still seeing is a push and pull in the marketplace as opposed to a turning point of steadily improving kind of quantities across a broad scale. Conditions are much better primarily with regard to pricing being down to -- I track a portfolio of 102 categories. Pricing is less than 1% in the first quarter as opposed to what I had indicated a year ago and that will work well.

And we see that in the -- among the customers that we serve that there is a broad difference in behaviors of those that have strategically focused on their customer brands and commitments to those. And those businesses, many in what we call the alternate channel formats in both the value and the premium end, are showing better performance than the traditional grocers. And I think that while we have had some good consumer news of late that it will still take a while to kind of translate to steady increases in foot traffic and unit sales across the broad array of retail or grocery.

So trends were pretty steady throughout the quarter and into April?

Well, I think the market is improving, but this is a thing where it is three steps forward, two steps back, three steps forward, two steps back and you have got to hunt out those pockets where you have got certain accounts where we are enjoying double-digit growth and then you look at the category numbers that Dennis announced and look beyond coffee what we are doing in oatmeal and Mexican salsa and other categories. We are finding those growth opportunities, but it is not in a marketplace where you are growing simply because all boats are rising on an incoming tide.

Got it. Thanks for the color.

Fraha Aslam, Stephens Inc.

Hi, good morning. Sam, you mentioned that single-serve coffee was equivalent to an acquisition for TreeHouse and equal to some of your more substantial acquisitions. Would you characterize it similar to an S.T. Specialty or an E.D. Smith or was it the scale of Sturm?

Well, let me repeat what I had said earlier. I think that the economic effect on us of an organic growth platform of this nature has the same salutary effects as a strategic acquisition where you enter another -- a new category. And while our history has been replete with transactions and then improving those businesses after we have gotten them and extending distribution of existing product lines, this undertaking is singular in effect in that it was entirely homegrown and organic growth. And as a result of that, the investment that one makes in something like that is entirely for resources, assets that -- where there is not the premium paid for intellectual property and goodwill of going concern. In that regard, the returns could be quite handsome.

With regard to the size of this, we will have to let that -- only time will tell us that. We have got plenty of benchmarks out there with regard to the size of the category and how private label has -- what share it has of other shelf-stable categories and we've steered clear of the specific numbers, but I think that a quick reading of that indicates that this is a large-scale opportunity for us and one that we want to take full advantage of provided that we do it in the context of our portfolio strategy and use beverages, hot beverage as a part of that strategy to build a larger, more diversified TreeHouse.

Okay, and then do you think that, on your base business, the timing of Easter at all impacted results in the first quarter?

Yes, that is a good question. It was really hard to tell because of the different impacts of the weather and the days, but, in general, in talking with our sales teams, I am not hearing that the timing of Easter had any significant effect at all.

Okay, thank you. And then my final question would be in terms of M&A again. When you are thinking about M&A picking up and Sam, your commentary was very specific that you are thinking of 2013, what is it that is allowing private-label manufacturers to come to market and for you to see more opportunities?

Well, I think the general conditions are that, while the consumer segment of the economy continues to stutter step, that the market has crossed 15,000. The food stocks are up broadly and when one looks at the underlying factors, it is because the profitability of margins across a broad array of companies and categories, public companies have improved and I think that is -- if it is not a leading indicator, it is a coincident indicator with what is happening in the privately held market. And whether these are investments that have been held by private equity or long-term independents or family-held, the time for those that have thought about selling, but were unwilling to come forth because their forward-looking trends were not favorable, can now come to the marketplace in the context of a generally improving food and beverage category and indicate that their plans showing improvement in the future are something that are quite credible.

And by the way, there has been virtually no risk to holding these companies longer. I mean essentially working capital is as close to free money as there has ever been and this has not been an industry that has been threatened with reorganization or bankruptcies if one didn't move the assets. So I think those are the underlying conditions and when you look at market evaluations of food, it is far more related to margin improvement and cash flow than it is organic top-line growth.

And your confidence in being able to do a transaction this year?

Well, I had said the not-too-distant future and you should know someone of my age tends to have a relatively limited outlook as to how long --.

Fair point. Thank you.

Certain year.

Bryan Spillane, Bank of America.

Hi, good morning. One question, Dennis. On capital spending, had you updated us on the guidance on capital spending? I think it was $90 million for the year. Is that still a good number to use?

Yes, we haven't deviated from that. I think you will see in the quarter we are lighter than that on a run rate basis, but that is still right now our expectation for the year.

Okay. And then I guess if we are contemplating -- if you guys are contemplating potentially a large transaction, how would that affect your capital spending plans or would it have an effect on your capital spending plans? And I guess the question is, if you use your resources to do a big deal, would it affect at all your decisions in terms of investing on some of your organic homegrown growth? And I guess part of that would be would it affect at all your thoughts on expanding in single-cup coffee?

I don't think that would affect us at all. The cap spending is based on our current operations, our current needs and expansion opportunities within organic categories. We have got great capacity right now and access to markets. So I can't imagine right now a circumstance where we would have to make adjustments to that.

Okay. And then just one last question on the flavor enhancers on beverages. Coke has got into the market and Kraft certainly has added some line extensions and that market -- I think that market has the potential to actually be bigger than the powdered market was because it opens up more usage occasions. I think there is -- it seems like maybe there is just going to be more -- the branded companies are going to put more resources behind it.

So if that is the case, can you talk a little bit about how you scale that business up? Are you co-packing today? Is there a thought to bring it in-house if you are and just conceptually just how you can scale that business if the market actually ends up being bigger than the powdered business?

Well, the good news is, if it turns out to be as big as you are thinking it could be, I think that is great news and we would definitely be scaled up and ready to take advantage of that. So that is not an issue. On occasion, we have used co-packers to help in categories where we may need that, but this is -- if it has the legs, which it is starting to seem it may have, we would much rather have internal manufacturing than to rely on an outsider to help us. But we aren't against using that on a short-term basis to kind of fill in the gaps.

So are you producing any of it internally now?

We can't -- we usually don't talk about where we produce our products, just like we don't talk about where we sell our products, but that is about all I am willing to say on that topic.

Okay. And then just one just sort of I guess naive question related to that. If it is flavor enhancers for beverages, why couldn't it be flavor enhancers for foods as well? Like is there a flexibility in the manufacturing that would allow you to have ability to kind of apply it to whether it is hot beverages or to maybe seasonings for skillet meals or for foods? Is there any way to sort of expand it beyond just beverages?

Bryan, this is Sam. Either you have been reading my mail or my mind.

Well, I haven't been reading your mail. Right now, I am looking into your mind, Sam. All right, thank you.

John Baumgartner, Wells Fargo.

Thanks. Good morning. Sam, wondering if you can speak a little bit more about the pricing environment at retail here. I think you alluded to some price concessions from grocers and just wondering your thoughts as to how aggressive that could become, how much of a risk that could be to your guidance for the full year?

Well, I think it poses very little risk for us, but let me go back to the fundamentals. We have seen pricing steadily come down since the very beginning -- end of '11, end of '12 and during that period of time, there has been, particularly in private label, there was some catch-up to costs that had come through earlier and private label always tends to lag. And now we are back down to a point where across, as I said, 102 categories for both branded and private label. Net pricing in the last quarter was less than 1%. We hadn't seen that in many, many quarters. And the reasons for that underlying it with some lag are the reductions in input costs in both commodities and energy.

Now going forward, the conventional wisdom now is that this should be a very fine crop year and as a result of that, there is always push and tug in the marketplace for food and beverage for when times are good in input costs then all retailers expect out of a branded companies and private-label companies alike a different -- if not concessions, at least open checkbooks for things like merchandising and price concessions.

Everybody will feel a certain amount of that pressure. I think that we are well-prepared for that for the reasons I mentioned and unlike many others, we are quite open and aggressive with our biggest and best customers about encouraging them to look at markets with us and either arrange indirectly the hedge products -- prices or if they are willing to make volume commitments, we will go out and book those underlying commodities and take a certain -- if you can take either volume or cost risk off the table, then you are much advantaged.

And as I indicated in our discussion, we are not a business that is focused only on the intrinsic value of the good, but that we provide a whole array of value-added services to our customers that provide us with a capability that not everybody else has. And so I see little risk to us in that regard for the course of this year. And in fact, there may be some competitive advantage.

Okay, great. And then in terms of private-label single-serve, I think a lot of the talk here is more focused around retail measured channels. But wondering if you could speak a little bit to the opportunity for private-label single-serve in the out-of-home channel be it getting into hotels or distribution to the office network?

We have seen two opportunities outside of our measured channels and now the greater food retailing network. The first is Food Away From Home with office coffee services and then all the institutions that are served there. And we have a capability and a business that is, while it is second to our grocery business, it is still a very substantial part of our business running into the hundreds of millions of dollars a year and with very fine economics. And we see that, as part of our strategy, that we should pursue the Food Away From Home businesses, as well as retail with to date the first priority being to the Retail Grocery business.

The other avenues we see are with regard to retailers that are not bricks and mortar and we know that the best of the Internet retailers are developing businesses in, first, consumer product goods and now food and beverage and that single-serve coffee has established itself first on a branded basis as a significant business there and we see that opportunity in front of us as well. It is a great opportunity for us not only to have new product, new technology, but new customers.

Thank you.

Jon Andersen, William Blair.

Hi, Sam. Hi, Dennis.

Good morning.

I just have one kind of bigger-picture organizational question. On the one hand, TreeHouse is a larger and perhaps more complex business today than it was a few years ago, more categories, some internal restructuring going on. But I know you have also invested to improve internal capabilities and systems. Of course, now Harry Walsh kind of dedicated to the business development front. How would you kind of characterize the organization's capacity and capability to integrate a mid or large-scale acquisition today relative to a few years ago? Thanks.

I think it is the best prepared and most capable that we have ever been and that we have built an infrastructure of business resources and business systems and information technology that allows us to do this in a very different way.

And I was going over some plans this morning for teams to put onto specific projects, and I was struck in reading a message from Harry, not about the names per se, but about the functional departments that we are going to deploy and some of these activities and when we started this Company, those types of functions just simply did not exist and now we have got a dedicated strategy function. We have a marketing department focused on not only our product categories, but our customers. The research and development function across the Company has been integrated, the work on innovation and the cost reduction and packaging formats. Every one of our category teams now has a dedicated financial resource where those were shared in the past.

And then the backbone of all of this from an information technology standpoint is that, at TreeHouse, SAP is not a dirty word and it is not the emblem of botched go-live. We have expanded SAP across all of our go-to-market operations in the United States at many of our manufacturing sites and that has greatly improved our capability.

So you are right; it is larger; it is more complex. But over the past two years, while we have struggled with earnings, we have remained steadfast in our dedication to build up our internal capabilities and I think the time is nigh to see that payoff.

Thanks, Sam. That is really helpful. Congrats on a good start to the year.

Amit Sharma, BMO Capital Markets.

Hi, good morning, everyone. I am sorry if you already addressed this, can you talk about the food service division a little bit, Sam? I mean clearly volumes were pretty weak in the quarter, but, as you go forward, excluding the pickle business, what kind of environment are you seeing?

It was a little more difficult at the top line. That was cleared by the numbers, but what had happened is we had lost some business that frankly was low margin and not a business that we felt we needed to have. And the offshoot is that, despite that, we actually increased our operating income and we increased our margin. So it was the right thing to do and that was isolated.

In terms of the market though, I think this is still a challenging environment. I think the Food Away From Home market is still shifting towards value and our business with the large value-oriented chains is doing nicely and the mid-tier is still having some challenges in that casual dining. And so we are going to continue to see I think a relatively flat experience in Food Away From Home, at least the way our business is set up where we are going to have some positive movement in the quick serve and maybe some slight negative movement in the casual dining section.

So it is going to take I think a little bit before we see the growth in that segment and what we will do internally to try to grow organically is continue to look at opportunities to move more of our categories, the 15 key categories we have, into Food Away From Home where we aren't today and that is where our organic growth will come from as opposed to industry resurgence.

Got it. Thank you.

We have no further questions in the queue. (technical difficulty)

Well, that concludes the M&A. Again, everyone, thanks for joining us today. Our mid-year earnings call is tentatively scheduled for early August. We also are looking forward to seeing many of you later this year in conferences in New York and Boston, on road trips to both coasts and if you can make the tract, in our offices in Chicago. Take care and thanks.

This concludes today's conference call. Thank you all for your participation.