TreeHouse Foods Inc (THS) 2013 Q2 法說會逐字稿

Welcome to the TreeHouse Foods conference call. This call is being recorded. At this time, I will turn the call over to TreeHouse Foods for the reading of the Safe Harbor statement.

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

These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause the Company or its industries' actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements 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, all and welcome back to our TreeHouse. Dennis and I have much to report with news of real progress across a broad front of initiatives. We are particularly pleased to announce another addition to our Tree household as our private-label home continues to expand.

Strategically, the acquisition of Associated Brands will both broaden and deepen our center of store private-label presence across North America. We will gain both new grocery distribution, as well as operational synergies in powdered beverages, hot cereal, side dishes and other dry blended categories. Additionally, Associated's expertise in specialty tea offers a new avenue of growth that parallels our current single-serve coffee program.

We plan to integrate our go-to-market operations, supply chain and managerial teams under a joint program uniting Associated, Bay Valley Foods and in Canada, E.D. Smith in a common campaign directed at top-line growth and productivity gains in shared categories, channels and customers that we already know well.

The campaign will be further leveraged through our acquisition of Cains Foods in July. Cains will serve as both a gateway to the northeastern markets and an innovation platform in premium mayonnaise and salad dressings. Having followed and observed both Associated and Cains' progress since 2008, I am confident that these deals will be good ones for all TreeHousers, especially our shareholders.

Financially, our performance through midyear indicates that 2013 will be a year of solid performance and steady improvement. Despite sluggish market conditions, we have combined modest top-line growth and the expansion of single-serve beverages with substantial operating improvements to increase margins in all three of our go-to-market segments.

Direct marketing income margin, our principal measure of category channel and customer profitability, increased 250 basis points in the second quarter versus last year on a composite TreeHouse-wide basis. Our assessments of general market trends, private-label industry conditions and internal business plans for the second half are such that we have announced an increase in earnings guidance for the full year, excluding the Associated Brands transaction. In short, we are performing far better now than we have in the past.

Operationally, our business units' functional teams and go-to-market teams are tactically executing our strategic plans with high degrees of precision and determination. Our investments in information technology, customer marketing, food safety, R&D, procurement programs and logistics networks have provided the dedicated resources required to compete in today's marketplace.

Our operations supply chains have been particularly adept in integrating the bolt-on acquisitions of Naturally Fresh, AMPI and Cains into the TreeHouse infrastructure seamlessly and without customer disruption. These same groups have also undertaken large-scale consolidation projects in the salad dressing and soup categories. It is this agenda of scale, standardization and ultimately simplification that provides the internal impetus to drive our external expansion soon to exceed $2.5 billion in annual revenues.

These strategic financial and operational gains have been made against a backdrop of a sputtering and uncertain consumer economy. The entire food and beverage sector has struggled to generate real growth as indicated by IRI's syndicated data covering 102 product categories. This data shows a steady decline in sequential quarterly volume comps for both brands and private label since the fourth quarter of 2011.

For the second quarter of this year, IRI's general food and beverage index reflects year-over-year decreases in unit sales of 2.1% for brands and 1% for private label. The consequences of these trends upon all manufacturers are further exacerbated by the channel shift from conventional to discount retailers. Taken in this context, I am particularly pleased with our progress under such choppy industry conditions.

Dennis, would you please take everyone behind these headlines, as well as provide your seasoned CFO's perspective on our financial condition, the Associated Brands acquisition and our future prospects?

Thanks, Sam. Although the second quarter showed some challenges at the top line in some of our segments, our operating teams did a great job in navigating the soft consumer market with cost-containment programs. In fact, all three of our reporting segments improved their operating income margins and profits despite the softness in each segments' marketplaces.

We are particularly pleased that our North American Retail Grocery segment showed positive volume expect despite the growth challenges many other food companies are having. Our total volume mix in retail grocery increased by 0.7% leading to a net sales increase of 1.1% to $375.7 million from $371.5 million last year. That volume mix number is all in. If we exclude the soup business that was negatively affected by the partial loss of a major customer late last year, the volume mix would've been up 3.6% for all categories.

Single-serve hot beverages made up most of the increase while sales of our traditional grocery products, such as pickles, nondairy creamers, sauces, dressings and hot cereal, were essentially flat as a group compared to last year. This pretty much matches the overall volumes of US retail, as Sam outlined earlier. The only products with noticeable sales decreases came from sugar-free powdered beverages, which continue to feel the pressure of liquid beverage enhancers and a generally cooler summer in the Midwest and East that may also be affecting overall consumption.

In regards to margins, our gross margins improved to 22.5% from 21.6% at retail last year with the increase coming primarily from an improved mix of sales and operating efficiencies that were partially offset by increased input costs such as sweeteners and thickeners. Additional savings in freight and distribution, along with lower direct selling and marketing expenses, resulted in direct operating income improving by 11.4% compared to last year.

With respect to the Food Away From Home segment, total sales were down slightly from last year's second quarter primarily as our simplification process and SKU rationalization programs focused on driving higher gross margins rather than producing inefficient or very low margin business. This shift in emphasis helped to improve our sales mix, resulting in gross margin improvement of 170 basis points from 18.1% to 19.8% and an increase in total direct operating income by 14.1% to $12 million.

Our Industrial and Export business had a similar quarter to Food Away From Home in that the business that was rationalized away was in very low margin categories and our new business came in better margin products, which more than offset the effect of the sales shortfall. In the case of Industrial and Export, our new contract manufacturing accounts significantly improved the overall sales mix.

In addition, we had the benefit of stabilized input costs in our industrial nondairy creamer business. These factors helped to improve our Industrial and Export gross margins to 23.4% from 15.5% last year resulting in direct operating income improving from 12.2% to 20.8%. We will continue to focus on selling more value-added products and deemphasize low-margin products through our internal simplification efforts over the balance of the year.

As we look at the total Company results, you'll see that sales had a small decline of 0.2% from last year's second quarter, but the improvement in mix and internal operating activities resulted in gross margins improving 60 basis points to 20.8% compared to 20.2% last year. Our selling and distribution expenses decreased to 6% of net sales compared to 6.4% last year as our distribution costs continue to improve as we become more efficient with our network optimization programs and selling costs are kept in check.

One area I do want to focus on is general and administrative expenses, which increased quite a bit from last year. This year, we spent $29.1 million, or 5.5% of net sales in the second quarter, compared to only $22.7 million, or 4.3% of net sales in the prior year. This year, we are running at our normal and historical spend rate, but last year was very low due to the poor operating results that caused us to reverse nearly all previously accrued incentive compensation costs. The rate for the quarter was very much in line with our planned rate for the year.

With regard to taxes, our effective tax rate for the quarter was 33.4%, higher than our normal run rate as we incurred higher state sales taxes and a shift in income from Canada to the US where corporate income tax rates are higher. Net income in the second quarter was $18.6 million compared to $19.5 million in last year's second quarter. This equates to fully diluted earnings per share of $0.50 in the quarter compared to $0.53 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 8.3% to $0.65 compared to $0.60 last year. While this is a nice increase in earnings, from a quality standpoint, the results are much better. Taking into account the approximately $7 million in normalized incentive compensation that was not in last year's results would imply an additional $0.12 in quality earnings this year compared to last year's second quarter. That is the result we focus on internally and why we are very pleased with the results we are posting this quarter.

In regard to the outlook for the remainder of the year, we believe the trends of the first half are very likely to continue during the second half of the year as well. This means volume mix should be positive, but more challenged than we had originally estimated. However, the cost controls and business simplification plans we now have in place, combined with the favorable trend of sales mix, should allow us to generate gross margins to offset the softer top line.

As such, we are raising and tightening our earnings expectation for the year to a range of $3.07 to $3.12 in full-year adjusted earnings per share before considering the effects of Associated Brands that Sam discussed. We will provide additional guidance on the effect of the Associated Brands acquisition on our 2013 earnings once we have the final transaction close date and integration costs are more fully estimated.

We do expect the transaction to have an immaterial effect on 2013 earnings per share of $3.07 to $3.12. As noted in this morning's press release, we do not expect the transaction -- we do expect the transaction to be nicely accretive adding approximately $0.14 to $0.16 in earnings on an annualized basis.

Now I want to take a few minutes and talk about our recent acquisition announcements. First, we announced the acquisition of Cains Foods, which became effective at the beginning of July. Cains has annual sales of about $80 million and its products include spoonable and pourable dressings and sauces. Its main product focus is mayonnaise, which fills a void in our US product offerings in both retail and Food Away From Home. Approximately half of their revenue comes from retail sales; the other half from Food Away From Home. Since the acquisition closed after the end of the second quarter, there was no effect on our reported results for the quarter. Cains will be immaterial to our 2013 earnings per share but should generate about $0.05 in accretive earnings in 2014.

Our new announcement from this morning is our agreement to acquire Associated Brands. Associated is a Canadian headquartered company that makes an assortment of private-label products for both Canadian and US retailers along with a small amount of products manufactured for other branded companies. Their annual sales are just over CAD200 million with approximately 80% of their net sales being in the retail channel. Their products include drink mixes, specialty teas, side dishes, sweeteners and other dry mix products sold in the center of the store. Their productline is highly complementary to ours, especially to products produced by our Sturm and ST specialty divisions.

Associated employs approximately 650 people and produces the majority of their products at their Medina, New York and Vancouver, British Columbia locations. Most of the dry mix products are produced in Medina, while Vancouver specializes in tea products. Additionally, they have a very talented and experienced management team and we are very happy that they will become part of the TreeHouse team.

The transaction is expected to be accretive to our annual results by $0.14 to $0.16, but will likely have an immaterial effect on our 2013 earnings. We expect the transaction to close in our third quarter subject to the usual closing conditions. We will finance the transaction with borrowings under our current revolving credit facility. After the transaction closes, we expect our leverage ratio to be in the range of about 3.3 times debt to pro forma EBITDA. This will leave us plenty of dry powder to pursue additional attractive transactions as we can lever up to 4 times debt to pro forma EBITDA to make acquisitions. Sam?

Thanks, Dennis. In the interest of time and in the context of the news of our Associated deal, I will limit my closing remarks to a strategic overview of our prospects through 2014. First, TreeHouse will continue to improve internally and to reflect those productivity gains and increased profitability.

Second, whatever the macro industry conditions, we will utilize our growing and diverse portfolio to pursue strategically and financially sound top-line growth.

Third, we have sufficient capacity and resources for more external expansion, whether bolt-on or strategic and the appetite for both.

On this last point, please note that, as of mid-year, we have already added nearly $300 million in revenues to our TreeHouse. Given the strength of the M&A market and our cash generation capability, there is always room for more. Erin, you can open the lines for Q&A.

(Operator Instructions). Jonathan Feeney, Janney Capital Markets.

Good morning. This is Mark Williams for Jonathan. Congratulations on the Associated transaction. I would like to know how much it affects your ability to compete in single-serve and was that a consideration of the deal?

Mark, this is Sam Reed. Thank you. Your question shows great insight. We believe that the single-serve beverage platform currently focused on coffee and other certain hot beverages will be a platform for broader expansion and that in particular this transaction introduces us to the world of specialty tea and that we see that as the next step in a series of expansions of this platform and look forward to being able to do that. And that was a significant part of the whole of the matter.

And Sam, does it materially increase your capacity to produce single-serve beverages?

The focus of the current business is primarily on Starbucks, Tazo Tea and a limited amount of grocery product that is served -- is packaged in the conventional package for that particular category. What it offers us is a newer, much broader vista of opportunities to utilize with the capital equipment that we have committed to our current program and which we have indicated on several occasions in the past that we continue to expand that capital base. I think this will only accelerate that long-term growth.

And just the last question I had on the single-serve business. You noted it has seen strength in that business during the quarter. Can you just talk about I guess your near-term outlook for that business, how you are doing, what you are seeing in terms of private label getting share there and has your assessment of your ability to compete there increased at all since you launched?

Well, let me reiterate a few of the trends that are underlying this. First of all, we indicated from the very beginning that we would bootstrap our investment in this business and a year and some later, we still see that as the case and our outlook for the remainder of this year and going deep into 2014 is that we have got a substantial -- we have got a forward book of business that requires that we make ongoing investments to expand capacity as that business comes onstream. And that rate of growth continues to be very strong and it is, in its aggregate, beyond our original expectations.

In terms of being able to compete in the category, I had indicated at the beginning that I expect that the TreeHouse will be first among equals in the private-label business. And while we could not estimate the aggregate share that private label would have on the totality, we expected that that share would settle out over time to be well within the range of similar products and dry grocery. And we are clearly first in this regard and have, in the private-label sector, quite a substantial lead over any and all of the others. And with regard to the share here, we are just beginning to see through Nielsen and IRI what those true numbers are as you get past the period of the initial rollout where it is quite hard to read that.

And again, I will reiterate that with regard to the split between brands and private label, I will let the marketplace sort that out, but we are greatly focused on accommodating all of the substantial growth that we see here. And it is not just in single-serve coffee. Our Grove Square line of non-filtered products continues to grow at very strong rates as that distribution has expanded. And as I said, our next venture would be to incorporate specialty teas in conjunction with the expertise that the Associated Brands acquisition brings us.

Fraha Aslam, Stephens Inc.

Hi, good morning.

Good morning.

A question regarding the category of tea. Could you just kind of scale for us the category size, private-label share in the category, Associated's role in that category and what category growth trends are just so we can get a better feel for this new acquisition?

This is Sam. I don't have the data at hand. I will say that you see here a substantial business in not only black and green teas, but specialty teas across all of North America in both the Grocery and Food Away From Home and the business is largely one now of while there are three very substantial branded leaders, they tend to focus more on the black and green tea and very little -- and most of the specialty sector is left to independents and regional companies. And again focused primarily on loose tea and tea bags.

Where we see the opportunity is to use tea as an adjunct to the private-label coffee program and as an adjunct to Grove Square and where we have already establish a presence with grocers that is working greatly to their advantage that the merits of an incremental expansion of that into other beverages offers them a substantial opportunity to establish a private-label presence in a sector that is not at all consolidated and highly diverse with little in the way of brand recognition more than on a regional basis among the specialty suppliers. And I think that the message here is less one about what is the exact size of tea than it is about finding new sectors, new frontiers on which we extend the single-serve beverage platform.

Absolutely. And then in terms of growth, could you just share with us kind of the growth trends of the Associated business and now that it's in your hands, how quickly those sales can grow over the next perhaps two to three years?

They have had moderate growth over the past few years. As the case with us as well, certain categories up, certain down. What we liked about it, Fraha, was that their business really has great penetration in some of the key accounts in Canada that we really don't have as strong a presence in that will be a very nice plus for us. Roughly just under 50% of their revenue comes from Canada, just over 50% is in the US.

So as we did with E.D. Smith, as we've done with San Antonio Farms and others, what we are interested in is finding outlets in the US for the products that were primarily Canadian and finding Canadian outlets for our products that we didn't have penetration at their account. So we think there is a great opportunity for growth. We are not ready yet to talk about long-term growth trends there. We usually don't do that on our numbers either, but we really do envision a mini E.D. Smith here in terms of our ability to expand distribution and that's what really excited us.

Great. Thanks for the added color.

Thilo Wrede, Jefferies.

Good morning, everybody. Sam, I understand that tea and coffee are complimentary. Yet, tea -- private-label marketshare in tea I think it was lower than in coffee at least in the US. So just a question, where is the attractiveness in tea and why, unlike in coffee where you entered it organically, why was M&A the right route to get into tea?

I think the category to focus on is not tea in its aggregate, but in fact the specialty tea sectors and that, as I had indicated in an earlier answer, that is an industry that is replete with a large number of small, regional and local suppliers and that the presence of private label to date has been limited to the large volume sectors of black tea and green tea, primarily because that is where the suppliers and stores can find a critical mass.

What we offer that is different here is that we will bring an expertise in specialty tea and when one combines that with the filtered coffee and Grove Square and then on top of that, if you then have an advantaged entry point, that once we move into the specialties then offers us a second or third generation of further expansion.

And with regard to the internal development versus M&A, I think we have been quite clear from the beginning that our programs here are a combination of expansion through M&A first. Secondly, as new business systems come into TreeHouse to take advantage of the breadth and scope of our distribution system to find new distribution for products that are already established in certain parts of the marketplace, but are not universally distributed.

And then, lastly, that there is organic growth that has been of the three vectors of growth, the one that was least emphasized until the development of single-serve coffee. We will take the growth where we find it. One comment in that regard to follow up with regard to Cains is that while this was a relatively small acquisition, the third bolt-on in I think the last five or six quarters, it has great strategic value to us and having an established base in the northeastern United States as does Associated Brands and we see the combination of those two as offering an advantage to all of TreeHouse that without them we have not been able to fully exploit.

Right. And then Associated Brands obviously doesn't just come with tea, but there is, among other things, powdered beverages and soup in there as well, which are categories that -- soup, you have deemphasized, powder beverages you called out some weakness today. How much should we factor in SKU rationalizations within the Associated business a year or two from now?

First of all, this integration -- I mean this acquisition is one that, unlike virtually everything else we have done, this is clearly marked by a substantial overlap and from a product category perspective with different geographic and account -- channel-based points -- pockets of strength. So a substantial amount of this program will be an integration whereby what we will attempt to do is identify where in the combined companies do we have the great economies of scale with regard to production and distribution and where do we have the biggest opportunities with regard to the go-to-market.

And I think what we will see is, much like E.D. Smith, that there is -- will be both north and south of the US Canadian border marketing and sales teams that will be able to go to existing customers with new variations, new varieties and in some cases new categories of product and that the operations and supply chain that backs that up will be a combination of Bay Valley and E.D. Smith and Associated operations and supply chain that will give us the best costs available over the combined network.

So it offers -- even in those categories where we already have a substantial presence, there is a complementary opportunity that comes with the new business that we will be sure to fully use to our advantage.

Okay. And then maybe one last quick question for Dennis. The margin expansion that you have had in the retail business, how much of that was driven by your productivity programs versus the growth of the single-serve coffee business?

Out of that margin growth, a little more than half of it is sales mix and the rest is the productivity and other improvements.

Okay, thank you.

David Driscoll, Citi.

Thank you and good morning, everybody. First off, congratulations, guys. Nice acquisition and certainly good comments on K Cups. Wanted to ask a little bit about powdered beverages and liquid beverages. You called out weakness there. Can you give us some sense of magnitude? I mean is the combined operations, both powdered and liquid, I mean are we talking double-digit decline, single-digit declines? And what is the prognosis for this business going forward?

David, we don't break out the subsections. I will say that the total of the beverage business, which includes hot and cold, was up 36.5% in the quarter from roughly $52 million to just over $71 million. You will see those product numbers come out in the 10-Q this afternoon. All of that growth was driven by the hot side, not just filtered, but unfiltered products as well. So we definitely did see the decline in the powdered side.

Our liquid beverage enhancers have just started shipping. We just saw the first fruits of that come out in the second quarter, but it was really pretty minor at this point. So we are gaining traction, but it is a little late. But out of that 36% increase, as I said, that was all due to the hot platform.

Hey, David. This is Sam. If I could add a little further commentary. I think the headline here is, and while we all will carefully watch kind of single segments and single quarters, but the headline here, David, is that, for TreeHouse, beverages in their -- primarily in a powdered or nonliquid form are now seen by us as a great expansion opportunity and far beyond that of what we had originally expected when we had started the business.

And that we will be managing a portfolio of beverages in the same way that we currently manage a portfolio of product categories that are largely canned or bottled or other -- packaged in the center of the store. We will look back and say that, in this 2011, 2012, 2013 period, it was the basis of the formation of what will effectively be TreeHouse in beverages that will rival the TreeHouse in the center of the store solid foods.

Thank you for the additional color. Two questions -- interest expense for the year and your inflation outlook for the year.

Interest expense will be pretty steady. We have a $100 million senior note that will be coming due that will be refinanced at least in the short term through the revolver. So that note carried interest at roughly -- just over 6% and our current borrowing rates are just under 2%. So in our guidance and in our expectations for the year, we had expected that to be refinanced through the revolver. The rest of it will be pretty steady. So that should be straightforward.

When we put our accretion estimates together for Associated, we use a longer-term rate. So our expectation is that, at some point, on a long-term basis, will be different financing. So that is based on a more long-term market rate, something approaching the high-yield markets that we could tap. So think about that in terms of your models for that piece.

Inflation?

So far, I said I wouldn't use the word benign. Every time I say that, something happens, but I think benign is the word. Pricing this year has been just above 0% on average for us and we price for input, so I think you can kind of get the sense that input costs for this year have not been an issue. Based on our forward buys, we don't expect it will be an issue. I think we are solid in all of our commodities, a little nervous on cucumbers. The crops were a little bit late in the Southeast and the cool weather has delayed some of the plantings and we have had some storms in the upper Midwest that could have a bit of an impact on the cucumber crop. But at this point, nothing major to call out. But that is probably the only input that we still have to wait to see what happens.

And then just a clarification on Associated Brands. I think that you have alluded to the fact that you would expect significant revenue synergies, but no quantification and on cost synergies, I don't think I heard anything about that. So I am assuming that there is nothing embedded in your 2014 outlook related to it. Is that true?

That is correct and that is our usual process. We've tended to buy good companies and our objective is how do we make good companies better and that is through the sales synergies. And this is -- Associated is exactly in that same case. It is a very good company that we were looking forward to looking at how we can drive that top line. But at this point, we are not ready to give a top-line growth number.

Final question. K Cup repeat rate, it certainly -- it sounds like the business is going well, but I was wondering if you just happen to have data on the K Cup repeat rate to give us some sense of how strong the business momentum was in existing customers after it has been in there for a little while. Any comments would be helpful. Thank you.

David, Sam. The fascinating data that I have seen indicates that the repeat rate for the private-label products that most closely emulate the industry branded leader is twice that of other formats where other companies have taken, if you would, the shortcut or the low road to get into the marketplace without the type of technology that we have invested in.

And that portends quite well for us because, as I indicated at the beginning, I was quite confident that we could take this measured iterative bootstrap approach to private label knowing that after we -- as we got our business settled -- that we would always have a competitive advantage in costs thanks to our distribution network. But I am pleased to find out also that, based on the consumer data that we have that in the private-label arena, we have a great product quality and consumer perception advantage versus other private-label manufacturers. And that is evidenced in this prepurchase rate that is essentially twice that of our most direct competitors.

Sam, that is a great answer. Thank you, guys. I will pass it along.

David, that was a great question.

Bill Chappell, SunTrust

Good morning. I just want to dig back into kind of the single-serve side and just get your take on -- Green Mountain last night basically said they have excess capacity and they are going to more aggressively go after the unlicensed market. And that seems to mean they are going after your customers to do private label. So trying to understand -- I mean I presume they already have some kind of cost advantage so they could offer the lowest price if they wanted to. How do you fend that off? When you talk about kind of a business out there that you already have orders in the future, do you have said contracts or how do you look at that with their kind of renewed interest at going after what has kind of been your core market for the past year?

Well, I think we are about six weeks into our eighth year of doing this and we started out with two substantial private-label categories and now are approaching 15 and I think that our business system is unlike that of others who are not dedicated to customer brands and custom products. Our whole business system is built around that one thing and it is to provide a combination of price, quality, service and resources that enables grocers to fully exploit their own banners and to make that private label an integral part of the store's image and its position in the marketplace.

There are others who can focus primarily only on cost of a basic product and we have seen that there is that niche for others here that have not committed the resources and the intellectual property to customer brands that we have. And frankly, it is like the deal business, Bill. There is always somebody out there with deeper pockets and what we have to do in terms of not only M&A, but our go-to-market proposition is to make sure that we develop superior strategic insights and then execute those in a superb way. And whether it is kind of the national brand leader or somebody else, I can't think of a single category or a productline where we do not compete and where there is not one time or another someone else out there that strictly on an arithmetic basis can't get to costs that either rival or surpass ours. It is more business as usual from our perspective.

But there is nothing contractually that they could -- if somebody wants to come and underprice you or do whatever, they could pick off a customer or two over time?

You have addressed the essence of the private-label business.

Okay. Second, just kind of switching to Associated Brands, if I am doing back of the envelope in terms of valuation, it looks like, kind of using your accretion for next year, maybe you paid 8 to 9 times EBITDA and I guess can you give me an idea if I am in the ballpark and if so, does that kind of imply that overall multiples in the space have moved up a little bit over the past year?

Bill, we don't give out the number, but obviously with EPS you can make your assessments. We have said before the transaction that we thought the multiples were probably up just a little bit because of financing. I would say that we consider this transaction to be consistent and what we think a good situation. It was a -- we think we paid a good price, a fair price and I think the sellers thought they got a good price and it worked out and I think this is very much in line with our historical transactions with, as you indicated, probably a little bump and as we've said before due to just the circumstances in 2013 with interest rates.

Okay. So we are in the ballpark and this is kind of where you would normally pay. You weren't kind of paying up for the growth or the category. It was kind of more in line with what you would expect?

I think I will just stay with what I just said, Bill.

Okay. And last one, Dennis. Tax rate for the full year now?

To be honest, that has been one of our hardest things to calculate. This obviously went up a little bit because of the shift. Next quarter is always a challenging one. That is the one that moves around the most if you go back in history because you file the final tax returns. But I am not ready to make a change yet. We were a little light early on. We went a little heavy now. So I am still thinking we will finish at about the range we started our original guidance with. But I admit that is going to be kind of a TBD. We will have to see what happens in third quarter.

Got it. Thanks so much.

Rob Moskow, Credit Suisse.

I think I am going to ask the sixth question on Associated Brands, but no one has asked. I want to know what is the growth rate of the business over the past few years. I didn't see it in the press release. And also, when I have seen Associated Brands at the tradeshows, it just seems like a lot of powdered beverage business and my impression would be that that powdered business has been in decline because of liquid. I understand the strategic rationale for buying it; it makes total sense, but is the overall business right now growing?

Yes, the overall business has grown in I would say in the low single digits in general, but they have had acquisition, so that kind of distorts it a little bit. So they have had the purchase of the North American Tea & Coffee Companies as they have expanded their business model. But I think the center of the store categories are similar to the rest right now in terms of relatively low single digits.

But as we said, we think there is great opportunity to expand the distribution. I will point to what we did with salad dressing. There is a category that historically has grown at about 1% to 2% and you look at our numbers that we have reported over the years and since we have purchased E.D. Smith, private-label share has gone from 12% to about 24%. So our goal with Associated and that is a lofty number, I am not sure we can do quite that, but similar program, see how we can take these categories and grow them.

In regard to the drink mixes, there is really two elements that are in drink mixes, the single-serve stick-type business. That has been impacted by liquid beverage enhancers, but the 12-quart packs, the individuals that make quarts at a time, that has actually done very well and we have seen nice growth in our business and Associated has maintained their business. So it is not all about single-serve. So we think there is still legs in that one as well, Rob.

That is good color. Thank you, Dennis.

Andrew Lazar, Barclays.

Sam, from an overall energy perspective, you spent a little time in your prepared remarks talking about how volumes are still sluggish at best across the broader group and that in your sort of more recent data volume -- scanner data for both brands and private label was still down year-over-year, although private-label had a little bit less of a rate.

So I guess I wanted to ask a question that maybe was asked a bunch of times to a lot of food companies a year ago. Where do you think that sort of volume is going? I mean I am assuming at this point consumers have kind of unloaded their pantries of everything they can; although I could be mistaken. I guess there is always the wasting less at home argument. I am just trying to get a sense of if you've got any further clarity on that and if they are not trading down to private label in any significant way, like where is all that going because we have kind of lapped a lot of the pricing that the industry thought might be the main culprit and it is not turning out to have been?

Well, it is clear that the totality of the retail market, it simply hasn't responded like we had expected a year ago and perhaps even longer than that. And I think the underlying causals here have to do with the uncertainty in the consumer sector. That part of the economy simply seems to kind of lack the catalyst to pull itself completely out of the aftermath of kind of the great recession and then expansion of the business community that has had little effect on kind of middle-class families.

With regard to where is that business going, I think that, as a general matter, it is some combination of changed consumer habits that by now have -- the years have been lapped and whatever pantry deload and whatever reduction in household waste and increased leftovers, etc., that is already in there. What surprised me in the last quarter was that there is a calculation that one of the government agencies does that looks at the aggregate of food consumption and there is another that divides that into food away from home and food at home.

The aggregate consumption, which had gotten up post-recession to growing as much as 4%, is now back down to kind of hovering at 0% or slightly below on a lagging basis. And within that, the lowest numbers of aggregate, approaching 51% of purchases now, are seen as being done through grocery stores for at-home consumption.

And in the data that I looked at, that 51% share was in fact the lowest that had been reported in comparisons to something like 53% a year ago in the same quarter. And that the transfer appears mostly to be toward the value meals and the economy and the Food Away From Home. And I will grant you that what we have not seen in our Food Away From Home business is any substantial increase in revenues there that would relate to that.

But that is at least my interpretation of it now and what you can see in our operating results is we have attempted to position the Company so that we can ride this thing out even as we continue to marvel at the difficulty for all of us of being able to identify causals in a clear and concise way and be able to take action against those.

Thank you for that. And then just two quick ones on single-serve. First, once you close the Associated deal, how quickly can you, based on your current capabilities, start to offer a private-label sort of specialty single-serve tea? Is that something that is going to be a tremendous amount of sort of planning and whatnot leading up to it or is it something that you can do relatively quickly?

And then the second part of that would be more just for fun thinking ahead. I mean you haven't even close this yet, but if one wanted to think broader in single-serve beverages and you wanted to think beyond coffee and tea, where would you start to point to some potential opportunities although admittedly this is not something for right now?

Well, first, with regard to the specialty teas, we will plan to -- we presume that we will own this business for the whole of the fourth quarter and that that will coincide quite well with the annual strategic planning and budgeting exercise to go forward. And before I can give you thoughts about exact timing of specialty teas and other productline extensions, what we really need to look at first, Andrew, on a detailed basis, how is this business operating now and ensure that we first and foremost prove ourselves to be good partners to Starbucks and then begin to incorporate that new opportunity into the whole of the beverage program.

As I had said a few minutes ago, when I look at the projections for the remainder of 2013 and the projections going out to the first part of 2015, what I clearly see in beverages is that what we will continue to do is expand our capacity in both manufacturing and distribution and extend the productline through innovation and research and development as new business comes online.

And as I look forward, I see no slackening, no diminution of new business coming on. And the commitments to new business in this category are -- while these items always take -- no matter what the category -- always takes a long time to develop them. Here, what you have got to do is also include the provision for the purchase of green coffee and its roasting and its blending and going -- and working in conjunction with not only our customers, but roasters and growers as well.

So the point I am making is that kind of the leadtime that one can look forward with regard to coffee and say new business is coming online, that is a much longer leadtime than in some of these other businesses.

And then with regard to kind of what will come beyond this, I think that the answer there really lies in better understanding the consumer of these single-serve beverages and what is driving the occasion, what is the source of the satisfaction and then once one understands that, then to look across the panoply of beverages and decide where that opportunity lies elsewhere. And if this sounds like the way a branded company has approached these things, I think that is generally the case here with regard to consumer research and R&D-led innovation.

With all of that, probably what will happen is that somebody will come onto the scene with a great branded product and make a big splash with it and then we will try to follow them as fast as we can.

Well, Nestle has got an espresso infant formula capsule. So hey, you never know, that would've come in handy for me a bunch of years ago, but I'm way past that at this point. Thank you.

Well, perhaps when I become a grandparent later this year, I will take a greater interest in that.

Brett Hundley, BB&T Capital Markets.

Good morning, guys. I'm sorry. This is actually [Robert McGouri] in for Brett. Just to expand on that sort of innovation side of things, can you -- I mean we have seen a lot of the brands recently increase their marketing expense and whatnot. Can you talk just about how you are matching their innovation and whatnot?

Yes, that is a great observation. We are looking forward to the brands transforming some of their margin improvement that we are starting to see into innovation. Innovation is actually a key to success for private label. Frankly, when brands come out with new products, new packaging, it allows them to advertise, promote, draw consumers into the aisle and our size and our expertise in research and development, both for formulas and packaging, we think we are the best and fastest follower in private label. So bringing consumers into the aisle and us with our resources to be able to put in matched products I think separates us from the rest of our private-label competition. So the more they do, the better. And so that type of trend is something we actually really look forward to.

Excellent, excellent. And are you having any like different conversations with your retailers today versus two or three years ago on kind of that platform where you are seeing a lot more of the spend from the big boys and whatnot and kind of how that transitions into the customer and impacts the private-label side of your business?

This is Sam. I think among the customers who have most clearly declared their brand to be a part of their overall merchandising strategy and their retailing, there, in fact, has been greater demand for differentiated products. And where that has worked best to our advantage has been in the premium end of the business. And Dennis has on the last several quarters indicated how we have seen substantial growth and while the middle of the economy may be really struggling, those in the top end that frequent the premium retailers, that demand has been quite strong and it has led us to work with those customers with regard to premium products that are brought out for them and that has been a welcome development from customers.

And then there are others where they are much more transactionally based and you will see if you can get into the data that those retailers where the customer brand is more regarded as kind of a secondary factor, they have drifted back toward more and more branded merchandising and the monies that come with that. But we manage that on a category and on an account basis.

Okay, great. Thank you very much. And then just lastly on your margin improvement, I know it was somewhat touched upon earlier, but how do you see that kind of mix in just both the internals, as well as just the cost basket moving forward and going into 2014 and how could that impact your margin there?

Well, our original thought was this year would be about 100 basis points in margin improvement and I think we will get there. I'm pretty confident of that. I'm not sure about next year, but I think we are nicely on track.

Awesome. I really appreciate it, guys. Thank you very much.

Akshay Jagdale, KeyBanc Capital Markets.

Thank you for taking the question. Dennis, the first question is for you. So just on the gross margin trends this quarter, sequentially why did they deteriorate sequentially, if I am right in saying they were, worse sequentially? I wasn't expecting that and I think you had said sequentially we should expect an improvement, but correct me if I am wrong and then just tell me what happened there.

Our margins actually were on track internally and one of the things you have to take into account is some of the seasonality. Q2 is our big pickle time and as I think we have historically known that is a lower average margin category for us so we do get a little of that deterioration. But other than that, nothing in particular I think jumps out on a quarter-over-quarter basis other than the normal flow of products. Compared to a year ago, we talked about the powdered beverage being down, which is a better than average margin for us. Typically certainly better than pickles and so that hurt that Q2 mix a little bit.

Great. And then just on single-serve, maybe you can just talk about what are you hearing from retailers. First of all, are you aware of the new strategy that Green Mountain is pursuing with retailers specifically and what are you hearing from retailers in response to that new strategy, which is being rolled out basically over the last 60 to 90 days?

It's Sam. Good morning. We, as you would expect, we stay abreast of developments of most of the branded companies in the various categories here and all are searching in one form or another for more top-line growth. And we adapt our strategies to -- we try to anticipate what the brands are going to do and then adapt accordingly.

With regard to single-serve beverages here, the category now is one where -- the big headline has not been the private-label entry as much as the number of brands that are proliferating both licensed and unlicensed brands out there. And in a certain way, it reminds me of kind of the structure of the categories where you have got a leading national brand or a global brand at one end, private label at the other and then typically kind of the regionals that still account for around 52% of all the grocery businesses in dry grocery.

Here, the equivalent of the regional brands are these kind of unlicensed brands and there will inevitably be some type of evolution shakeout to where the branded end of this business, there is apt to be more if not consolidation at least fewer branded players over a long period of time. And we are going to be affected by that. We will watch it carefully. But, again, I think that there is going to be, on the private-label portion of this business, it is going to sort out in a way that is greatly determined by the grocer's approach not only to single-serve beverages, but to the whole of coffee, whether it is ground or whole bean.

There is great variation there that allows us to align ourselves with those grocers that have a deep and abiding commitment to their coffee program and that they have had that for a long period of time. And where they do best is to prominently market this way the best brands in the industry and to complement that with an alternative that either is value-based or -- and in some cases, we have customers that have, I believe, three different private-label offerings, coffee, so that they can include a premium alternative as well. And it is the grocer's economics that favor us in that regard. This private-label product offers them very fine margins. And as I had indicated earlier, if we have got repeat purchase patterns that are twice that of our private-label competitors, that gives us a great quality advantage. And somewhere in the context of that, you learn to adapt to how the national brand leader adjusts its strategy and tactics. And we do that now across 15 categories all the time.

That's helpful. Just to follow up on that topic, so in theory, the risk is that some of your larger private-label customers might go over to Green Mountain because now they are saying we are open for business, which previously they weren't to everyone and they would do that presumably because of the same reason some of the brands have partnered with Green Mountain, which is to be part of the future innovation pipeline.

So can you just address that? How do you think of that risk? And secondly, am I right in thinking that -- or my estimates are that you, relative to your largest private-label competitor and most other private-label or nonlicensed competitors, you are mainly -- your mix is mainly private label and very little co-packing for other brands and that is strategic and I think in the context of the conversation and Green Mountain's new strategy, that positions you pretty well because I think what is at risk more than private label business is these co-packing relationships. So am I understanding that correctly and then if you could respond to the first half, that would be great. Thank you.

Well, let me take several questions in a certain sequence. First of all, regarding the private-label and contract packing for that matter, Food Away From Home opportunities here, we are going to dance with the one that brought us and that is private label and it is grocery and that will always be the primary focus of this business and it will always be strategic. We will look at other opportunities, primarily from a financial perspective and where they make sense and they don't interfere with the strategic imperative of private label and grocery we will pursue those.

And I think there that the other matter with regard to coffee is that we believe that there is, within the private-label segment, great opportunity for differentiation in the quality, the aroma, the taste and that what we have to create is a business system that accommodates the way our grocery customers want to do that. So if you would, say, take a situation where a premium grocery customer has a great following for its whole bean coffee and that is an integral part of the way that grocer relates to its customer, its consumers. In order to develop a single-serve beverage program with them from a private-label perspective, what one starts out with is kind of a double premise. One, you are going to have to do it their way and two, you are going to have to meet their already defined standards and that those may vary from one premium grocer to another.

And in some instances, it is all about the blending and the roasting. In other instances, it is all about the logistics. Some, it is about the packaging and the merchandising. We have a special capability to do all that stuff. And again -- lastly, with regard to changing brand strategies and that type of matter, I seem to recall for 2012 that when I looked -- think back about that year, if I looked only at major categories and major customers, I think that we had something in the range of 110 situations in which customers came to us and said we want you to competitively bid on this category either to defend what you have got or to come in and enter -- access new opportunities.

My point in mentioning that is it is part and parcel of the private-label world. Over an eight-year period of time, we have gotten steadily better at dealing with this whether it relates to a particular brand or a particular private-label competitor. It's what we do.

Great. Thank you. I will pass it on. Thanks so much.

Jon Andersen, William Blair.

If it is okay, I am going to buck the trend and not ask about single-serve or Associated Brands. But I would like to ask if you have an update on the status of your efforts on the soup rightsizing and the manufacturing consolidation in salad dressings. I think you previously indicated that those were going to result in annual cost savings of $30 million or $0.50 per share. Have we started to see any of those benefits or are those kind of still on the come and when may they begin to show up?

And then the second question is kind of unrelated. Are you doing anything from an innovation standpoint in the natural and organic area given the trends there or is that just not as relevant in your categories or with your customers? Thanks a lot.

Sure, let me take the first, Jon. The restructure activities are moving along. The soup business has been transitioned over to our Pittsburgh plant. The teams are working diligently through their initiatives on cost savings since SKU rationalization and making great progress. The salad dressing business is in process. I think we will be finished with that by the end of this quarter and as a result, we will start to see the benefits of that program as we move into next year.

And the Cains acquisition is another plus that will -- as I indicated, there is -- about half of that is retail. It is spoonable dressings that will be in that part of the dressing category. So you will see -- we hope to see a nice little lift here as we move into 2014 on that, but they are progressing nicely.

And I think with regard to your question, Jon, about natural and organic, the way to look at this is on a broader basis and (inaudible) better for you in its aggregate. Natural and organic is clearly an important subsegment of that and we are actively engaged there. It tends -- the better for you tends to be concentrated -- the big opportunity is with only a certain segment of our grocery customers and we are very keenly attentive to their needs and working with them.

It is a different proposition though than when one doesn't have a brand you focus on. It is not simply a matter of trying to get to the national brand equivalent, but in fact trying to find the right better for your positioning for that customer that doesn't have a national brand to hold up and say go copy that.

When I think about what we were doing lately, specialty teas I think offers a better for you proposition for us. Interestingly enough, when we looked at Cains, we found that they have a regional brand and the technology for private label to make a product that is at the very premium end of the spoonable salad dressing sector and we like that.

And then when you think of the leading retailers that have a reputation for better for you, while we are restricted from saying that we make this range of products for this particular customer, I think you can take every name that is effectively a household word, or a connotation of better for you products and you will find that TreeHouse Foods makes products for all of those grocers. Again, and known primarily for premium presentations and secondly that we offer better for you products in that regard for most of the product categories that we currently serve -- we currently have.

Thanks, Sam. That's helpful and congratulations on the recent acquisitions.

Thanks, Jon.

Amit Sharma, BMO.

Good morning, everyone. Sam, if I may ask you, if you look to 2014, most of the manufacturers talked about some sort of commodity tailwinds. Can you talk about the promotional environment that you foresee? Are you expecting a little bit more on the pricing gap between national brands and private label? And overall, if you look at 2014, what is the (inaudible) going to be? We have had commodity headwinds, we have had volume weakness, we had some share gain dislocation back in 2009 and 2010. As you look to 2014, what do you expect the conversation to be?

I think while those factors are important, the overriding and paramount issue is going to be one about consumer demand and it will be about consumer demand for at-home consumption. And as we were talking some time ago, this doldrums in the consumer sector has lasted longer and been more perplexing than any of us had expected. And I think what we have to do is, one, we have to adapt our business systems and our economic models to that. And that is evidenced now by, as Dennis took you through, the improvement in margins in each of the three businesses.

With regard to the brands, I would expect that given the margins that they are posting that we will continue to see high levels of merchandising. And to the extent that that is related to innovation, it will give us great opportunity to copy it. To the extent that it is related to branded discount or pricing, we will just have to tighten up our belts and withstand it and -- but with regard to the promotional matters, that tends to be cyclical and I don't expect that it will go to a heightened level and remain there for an extended period of time. And with regard to input costs, it is frankly too early for us to comment publicly about 2014. But Dennis gave you I think a very clear picture of what our 2013 position is.

I just want to add one thing on that. I think one of the more interesting aspects for 2014 is going to be retail consolidation and what has taken place there. Obviously, Kroger and Harris Teeter and Sobeys and Safeway Canada and Loblaw's with Shoppers Drug Mart, consolidation is generally what we have seen as one of the key reasons why European private label has been stronger than the US and as we look at that type of consolidation, our belief is that is going to actually play very well for private label. It is a little early, but I think that could be a very nice driver for private label as we look out to 2014 and beyond.

And Dennis, on that point, apart from the overall benefit of consolidation, just the specific incidences of retail consolidation the last three or four months, does that provide an opportunity for you to perhaps increase penetration in some of these customers?

I think it can. It depends. Kroger, as we all know, has a great private-label program and they have a substantial amount of self-manufacturing. But, in general, I think what it does is that consolidation impact makes it more and more critical for the retailers to differentiate themselves, not just from a product standpoint, but the store experience. We have got some retailers that just do a fantastic job of that. But I think consolidation is going to continue to make that experience as important and then sometimes more important -- look at Publix down in the southeast -- more important than just price. And private label is a key way to make that differentiation.

Got it. Thank you very much.

John Baumgartner, Wells Fargo

Hi, this is Dennis Geiger filling in for John. Thanks for the question. Just in terms of single-serve, could you speak a little bit to any details around SKU expansion within existing accounts?

This is Sam. I think our general history right here is that we have got accounts that the penetration and the growth rate, there is a great deal of variation there and it does depend on the commitment to the brand. At the high end, we have seen certain customers that tend to have every substantial private label -- look at the brands and determine what are the best selling of those products and in several instances, there are grocery customers of ours that may emulate through their local brands seven or eight different flavors in private label and that clearly represents something that is at the high end of penetration.

And we have seen certain instances where private label will approach a 20% unit share within single-serve coffee and again, that is at the high end. That indicates to us what the possibilities are. And then there are others that will go with quite a limited line and that represent kind of long-term projects to build out the category. And that will come as those that have really a limited of the SKUs at the beginning see the missed opportunity that their competitors are taking advantage of.

Great, thanks, Sam.

It appears there are no further questions. I would like to turn it back to management for any closing remarks.

Thanks again, everybody. We look forward to seeing many of you this fall as investor and analyst interest turns to 2014. In the meantime, we are TreeHouse, growing strong, standing tall. Thank you.

This does conclude today's conference. We thank you for your participation.