TreeHouse Foods Inc (THS) 2013 Q3 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 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, all, and welcome once again to our TreeHouse. Dennis and I will report on our recent performance, outlook for the year and also early insights into 2014. Further, we will provide perspective on the Associated Brands acquisition, M&A opportunities and overall food industry conditions.

Three months ago on our mid-year conference call, I summarized our performance and condition as the Company had steadily progressed from past difficulties to present improvement, en route to future growth. To reiterate that summary, financially, 2013 is a year of solid performance and steady improvement.

Operationally, our Bay Valley Foods teams are executing our business plans with skill and grit. And strategically, the Associated Brands and Cains Foods acquisitions will both broaden and deepen our center-of-store private-label presence across North America.

Our third-quarter performance has added further testimony to this perspective. Revenues increased 5%, as single-serve beverages, traditional supermarkets and the Cains Foods acquisition more than offset broadly-based consumer sector doldrums.

Operating income, or EBIT, the best measure of operating performance, increased 9% on a run-rate basis, adjusting for one-time items related to acquisitions and restructuring. That this approximate $4 million improvement was net of an equivalent increase in incentive compensation demonstrates the power of our productivity and procurement programs, especially under trying market conditions.

Aggregate consumer demand in the food and beverage sector continues to sputter in fits and starts, as recent census data has revealed that only one family in ten has enjoyed even a 1% annual gain in household income since the great recession.

On a minor note of optimism, IRI has reported that composite private-label consumption of food and beverage has ticked up fractionally for the tenth consecutive rolling 12-week reporting period. While the gains have been small, the trend demonstrates that the center of the store has not yet been ceded to national brands.

Across the TreeHouse Foods portfolio, traditional supermarkets posted double-digit gains in that core grocery channel, moving in sharp contrast to mass merchants and dollar stores.

Market conditions aside, our deal team has resumed the strategic expansion of our grocery presence with the addition of Associated Brands and Cains Foods. Beyond the usual synergies and year-one accretion, these businesses promise access to new markets and growth opportunities.

Cains represents a gateway to the Northeast corridor and the full range of good, better, best mayonnaise. In parallel, Associated Brands extends our market presence to the Western provinces and regional grocery chains of Canada, as well as to the premium tea category. The latter is doubly valuable in its potential benefit in opening a close product adjacency to our single-serve beverage business.

Lastly, we have great confidence in securing the go-to-market and supply-chain benefits of these M&A deals, as we now have dedicated management focused solely on the integration of acquisitions. The leaders of this process include veterans of the ED Smith integration, which even 6 years on, still represents the gold standard in M&A expansion. It befits this new approach that, in both instances, our newly formed joint sales and marketing teams called upon key customers within a week of closing.

I will return later for an overview of the new year ahead. Dennis?

Thank you, Sam. As Sam mentioned, the third quarter showed our resiliency and resolve in the face of continued difficult times for some of our customers and many consumers. As I am sure you have seen across the food industry, sales volume has been difficult to come by. Consumers continue to buy less, shop for values and migrate towards better-for-you foods and beverages.

While these issues are generally headwinds for most food companies, we see the shifting dynamics as further opportunity in our private-label world. Two success factors we have are size and scale, along with an unwavering strategy to focus on private-label products for our customers. These two core competencies were clearly manifested in our results for the quarter and will continue to play a key part in our financial results.

In terms of size and scale, our total sales increased by 5.4% this past quarter compared to last year, driven by recent acquisitions and organic growth. In our key North American retail grocery segment, we saw volume mix improve by 2.3%. A major part of our growth was in both filtered and unfiltered single-serve beverages, as our scale provides us with the ability to invest in new products that will reshape our product portfolio for the future.

While coffee is the most visible of our new introductions, our culinary teams have been busy with new offerings in many of our other categories, including skillet sauces, with many new flavors of marinades, an expanded line of premium preserves, a new line of liquid beverage enhancers, new cereal offerings, including new flavors of regular and steel-cut oats, and even our pickle category is expanding its offerings with more organic choices and new farmers' market recipes with pickle chips and vegetables. And finally, we are now shipping our new filtered, single-serve tea products in a variety of flavors to complement our single-serve coffee items.

As other food companies have invested in promotional programs to attempt to drive up their volumes, we are investing in culinary options, new packaging concepts and customer promotions that better fit today's customer needs for better-tasting, better-for-you and more convenient food options. A great example of this is our instant cereals made with whole-grain oats.

Of course, new products must also meet the budget needs of consumers, and this is where scale comes into play. During the quarter, our selling and distribution costs totaled just 5.9% of sales, dropping under 6% for the first time in our history. The savings improvement was due to the efficiencies we are realizing in our distribution network. Our three supercenter warehouses serve as the hub for all of our 20 manufacturing locations, and this gives us the ability to ship more efficiently to our customers. Importantly, the improvement in our efficiency was all internally driven, as our actual field costs were flat compared to the same quarter last year.

As we look closer at our North American retail grocery segment, we had organic growth of 2.3% despite the year-over-year decrease in soup that we have discussed all year. Excluding soup, our organic growth would have been 6.3%, driven primarily by our coffee program.

Although the sales of many of our product categories showed little to no growth, we did see a small but interesting change in sales mix in the quarter. For the first time in quite a few quarters, we saw volume growth within our traditional grocery store segment more than offsetting decreases in volumes from the mass merchants and value customers. Although one quarter does not make a trend, we do see that as a positive to our overall sales mix.

Direct operating income margin showed a small decrease of 20 basis points to 15.5% of net sales, due entirely to the mix of new sales from the Cains Foods acquisition that has lowered our average margins lower than our legacy businesses. As a reminder, about half of Cains sales are to the retail channel and half are to Food Away From Home.

Likewise, we will see a continuation of this margin trend in the fourth quarter, as the addition of Associated Brands, where sales are about 80% retail, is reflected. Helping to offset this mix from new acquisitions, we are making very good inroads to improving our margins of legacy value products. We have mentioned in the past that these products carry lower margins due to the basic nature of the products being sold. Still, this quarter, we saw good margin improvement at our value customers as our simplification programs focus on higher volume sizes and flavors.

In our Food Away From Home segment, total sales increased by 7.8%, as the acquisition of Cains Foods at the beginning of the quarter more than offset the loss of low-margin pickle and aseptic cheese business. Direct operating income in the segment decreased to 13.4% from 14% last year, due entirely to the mix of new business from Cains. Excluding the mix of new business, margins in the category would have increased by 60 basis points.

The reason that Cains' reported margins are so low this quarter is due to the accounting rules that require purchased inventories be revalued to fair value. While this affects segment and total results, we have adjusted for this in our reconciliation of reported earnings to adjusted earnings per share. Although this accounting also affected the retail operating income slightly, the effect was more pronounced in Food Away From Home due to the relative size of Cains to this segment.

The Industrial and Export segment showed good revenue growth and an improvement in operating margins. Sales in this segment were up 7.5%, with volume mix up 2.3%. The operating margin showed improvement over last year as we continue to focus on more profitable business and rationalize certain low-margin activities, especially in the co-pack subsegment.

On a consolidated basis, sales were up 5.4%, of which 1% was due to volume mix and 4.7% was due to the acquisition of Cains. Reported gross margins were 20.3% compared to 21% last year, a decrease of 70 basis points. However, this year's reported results include the inventory revaluation adjustments and higher restructuring and facility consolidation costs that we typically exclude when showing adjusted earnings per share. Excluding those nonoperating adjustments, gross margins would have been up 30 basis points to 21.3%.

General and administrative expenses were $31.2 million compared to $27.9 million last year. As a percent of sales, we were at 5.5% compared to 5.2% last year. The increase in expense this year is due principally to higher incentive costs compared to last year, as we are tracking in line with our incentive targets, while last year we were trending below. In addition, the growth of the Company has expanded the incentive compensation pool.

Interest expense for the quarter was $12.6 million compared to $13.1 million last year, as our average borrowings have decreased slightly. In addition, average rates on our revolver were 1.4% during the quarter compared to 1.7% last year.

Net debt at September 30 was $802 million compared to $871.7 million at September 30 in the prior year. The decrease in average net borrowings was due to strong operating cash flow, partially offset by funding for the Cains acquisition.

In regard to our debt, on September 30 of this year, we paid off $100 million of 6.03% private placement notes using capacity under our revolving credit agreement. In addition, we used approximately $92 million of the revolver to fund the CAD187 million acquisition of Associated Brands in October of this year, with the balance of the purchase price funded by cash in Canada.

Our borrowings under the revolving credit agreement now stand at about $590 million. This leaves about $150 million of availability at the moment. We are in the process of analyzing options to increase and extend our debt capital structure, and expect to make these changes before the end of the calendar year.

With regard to taxes, our effective tax rate for the quarter was down to 22.8%, helping our third-quarter earnings by about $0.03 per share compared to last year. This is well below last year's rate of 25.6%. Both last year and this year contain favorable tax adjustments as a result of finalizing previously-filed tax returns and completing tax audits. Our first half of the year tax rate was 32.2%, and I expect that our Q4 tax rate will be back in the same neighborhood.

Total net income came to $22.7 million compared to $21.6 million last year. After nonoperating and unusual items, which are detailed in our press release, our third-quarter adjusted earnings per fully-diluted share totaled $0.82 in 2013 and $0.70 in 2012, an increase of 17.1%.

This $0.12 improvement in the third-quarter adjusted earnings can be summarized by three basic elements. Our operating activities of growth in operating efficiency contributed about $0.17 in year-over-year improvement, while incentive compensation's normalized cost deducted $0.08 and our improved tax rate added the final $0.03.

In regard to the outlook for the final quarter of the year, we expect that there will be few changes from the run rates we have been experiencing. Sales volumes should continue a positive, albeit small, trend compared to last year. We will lap the lawsuit business effective in December, so this will be a positive, but frankly, not much of an impact since the heaviest soup shipments occur in October and November.

We also expect that margins on an adjusted basis will continue to improve sequentially. However, on a reported, basis we will have the usual acquisition and integration-related costs for the Associated Brands acquisition, so the 10-K margins will be negatively affected. Associated Brands is now part of our consolidated results effective October 8, so we will see a nice uptick in total sales and gross profit dollars, but a lower average percentage than our core business.

At the end of the quarter, we expect that both Cains and Associated will have only a minor effect on our adjusted earnings per share this year.

And finally, as I pointed out earlier, our tax rate is likely to revert to the first-half run rate, so keep that in mind if you are updating your models.

So as we look to the full-year results, we are happy to be on plan so far this year and expect to finish right on track with our previous expectations. We are therefore reconfirming our previous guidance that we expect to finish the year with fully-diluted adjusted earnings per share in the range of $3.07 to $3.12. Now I will turn it back to Sam.

Thank you, Dennis. Let's now turn to the year ahead. Our business plans for the new year will be based on the following assumptions and insights. 2014 will be yet another year of little to no real growth across the general food and beverage sector. Input inflation should be limited, as a combination of slack export demand and oil and gas fracking will make domestic supplies, commodities and energy plentiful.

Private-label in aggregate will continue its slow and steady advance as customer brands gain new ground in traditionally-branded enclaves, such as coffee, hot beverages, snacks and better-for-you products.

The grocery industry will become increasingly bifurcated as retailers choose between the strategic segmentation and differentiation of their house brands versus the transactional advantage of national brand discounting.

Single-serve beverages, which now account for more than 30% of ground coffee category revenues, will continue its rapid growth as retailers welcome a store-brand alternative and product offerings beyond its legacy base.

The integration of our Associated Brands, Cains Foods and Naturally Fresh acquisitions will provide new go-to-market opportunities for both our Retail Grocery and Food Service units.

Financial market conditions will support a healthy M&A market in nonbranded food and beverage properties. We expect to participate fully as a strategic acquirer equipped with dedicated integration resources and a capital structure designed to accommodate growth.

With this outlook in mind, the principal issue for food manufacturers is whether to opt for the Band-Aid of discounted volume or to invest in strategic capability. At TreeHouse, we will continue to rely upon our category and customer portfolio strategy, our large-scale diversified base of business and, as Dennis had mentioned, the capital structure to find strategic growth opportunities in a sluggish environment.

With market-leading positions in 15 product categories and the means to reach all channels of distribution, we are extraordinarily well-positioned to execute against this mandate. To do so requires that we excel at product innovation, customer marketing, supply chain productivity, operational simplicity, accretive acquisitions and organizational unity. Doing so will mark 2014 as the second year in our resurgence as a growth company and private-label industry leader.

Lastly, having provided our corporate perspective on the future, I would like to add a personal note on our past and present. In its essence, TreeHouse Foods is a growth engine fueled by M&A and guided by strategy. As we close 2013, market conditions offer great opportunity for further strategic expansion. And currently, our ability to find, buy, finance and integrate acquisitions has never been better. You all should expect, as I do, that more of the same will be forthcoming, and hopefully sooner rather than later.

Lauren, you may now open the phone lines for Q&A.

Farha Aslam, Stephens Incorporated.

Hi, good morning. A couple of bigger-picture questions on private-label overall in the food industry. The first one is that Walmart seems to be testing a very basic line of private-label products to better compete with the dollar stores. That kind of shifting down of private-label to the very basics, is that favorable for TreeHouse? I know you have been working on just building up your capabilities on that just very basic margin items. Could you just comment on how that would affect TreeHouse?

Farha, good morning. It is Sam. Let me give you the kind of broad view here. That new offering price first is yet another example of the grocers' plans to segment and differentiate their house brand offerings. What we have to have is the capability to deal across the broad spectrum, ranging -- generally -- it was good, better best. Then it went to good, better, best and premium. Now it has gone to -- at the top end to add kind of better-for-you, and at the bottom end, an opening price point.

And what we have to develop and do so in both our go-to-market and our internal operations is develop the capability and then execute against it to be able to play in each of those markets.

I think from that particular customer's perspective, what they are hopeful of doing is bringing back customers from the value retail segment, and we are well-positioned in any case of wherever those consumers elect to purchase those opening price point products.

Okay. So you now feel like that you have fully developed that opening price point and that would be fine for TreeHouse?

Well, it's a work in progress. I won't say that any of these matters is fully defined or developed, because every one of them presents both a new opportunity and a new challenge for us. But what we have done over the last several years is create the internal capability to go where the customer believes that their interests are best-served and to do that across all retail and food service channels.

That's helpful. And my follow-up question is again a big-picture question relating to kind of the events in Washington, talk about that whole SNAP food stamp program being contracted into next year. Do you view that as a headwind for TreeHouse or do you view that as an opportunity for TreeHouse?

I think that the policy -- if you go back to the cessation of the tax benefit last year and now this, both of those in combination have the effect of tightening consumer budgets yet another notch or two. And what we have seen is that while the market has been flat, the American consumer has great resilience and capability of under difficult conditions finding those places where value is most meaningful.

I think that in absolute terms, these things will negatively affect the total market for some period of time. On relative terms, they favor value. And in that event, for the last several years, TreeHouse has focused on developing value without compromise, so that as consumers have to trade down, that they find that they don't have to sacrifice for quality, convenience or the array of different products coming from us.

Okay, thank you for that color.

Bill Chappell, SunTrust.

Good morning. Just sticking on the macro picture, maybe you can kind of give your thoughts on food deflation or a heightened promotional environment as we move into 2014, and how that will affect the private-label category, just with the thought that with the benign commodity environment, I imagine retailers are asking for more promotions and more price cuts. And kind of how you see that affecting you, and not just in the core categories, but also even in single-serve coffee.

Bill, Dennis here. In terms of the input cost environment, I think you are on the mark. I think in general, it should be very quiet. It seems in certain categories, it has come down; it has trickled up in a couple of others. But overall, it looks like we will be in a good situation in terms of not having to worry about input costs at this point.

And when that happens, I think one of the things we have to be concerned about and we look at is will that opportunity in terms of margin be funneled into advertising promotion and innovation from a brand or will it be funneled into price promotion. And price promotion is a difficult thing with private-label. The price gaps come down, it does make it more challenging.

I think what we have done internally is, as we have talked about, focused on our own costs so we can react to that. But importantly, what we are doing is funneling our opportunities into the innovations for new products. And that is the best way for us to combat what potentially could be tightening price gaps, if in fact volumes stay low and branded companies decide to use price to drive those volumes.

So you are not seeing it now or you are not getting the strong requests from retailers yet. I think you had said before it takes all of 30 seconds for them to call you and ask for price drop.

Yes, that is typically the case. But the price gaps seem to be holding pretty steadily. The standard on-the-shelf price is actually staying steady for us in our basket at about 26.5%. And the promoted number is just down slightly, the price gap at about 23.5% compared to 24% a year ago. So there is just a tiny bit of tightening, but in general, they are holding up.

Great. And then just switching on single-serve, can you kind of give us some color on where that strength is coming from? Is that largely just your existing customers adding more SKUs or getting more used to private-label? Or have you picked up some new customers in the past few months?

Bill, this is Sam. The growth in the category as a whole, as well as our own, has primarily come from continued rollout of new distribution of customers who are -- it is principally retail groceries that have had no opportunity before to have a private-label offering.

What we have seen is that among those early adopters that got their first shipments last September, that their continued growth has been primarily a result of devoting additional shelf space to more varieties and flavors. And that pertains to both the single-serve roast coffee business as well as the gross square brand -- house brand -- control brand that is effectively all other hot beverages excluding roast coffee.

So that is the primary development. And I think that for the next -- well into 2014 it will be that combination of new distribution and then a -- not proliferation, but the extension of the product lines at grocery.

Got it. Thank you.

Akshay Jagdale, KeyBanc Capital Markets.

Good morning. First question is just on retail inventories. I know there has been a lot of talk about large customers cutting pricing and also cutting inventories again. Did that impact you at all in the mass channel this quarter?

Akshay, this is Sam. Good morning. At one large-scale mass merchandiser in particular, it was well publicized that it had excessive inventories. I believe they made that publicly known. And that had an effect on all of the suppliers.

It differs greatly by category, and food was different than non-foods. And I would say that over the last several years what we have become accustomed to is that the volatility of shipments to individual customers has increased as they have been more mindful of their financial condition. And we have had -- as I had indicated in my opening remarks, we've learned to live with fits and starts here, and I would put this one in just another example of that same matter.

That's helpful. And then just on your single-serve business, coffee and tea and cappuccinos, I guess, can you just explain to us how you see the competitive dynamics there, whether it is in relation to other private-label players or branded? I mean, just generally, is there any discount pricing war per se going on in your opinion? How do you view the pricing environment in that category relative to all the categories you compete in?

Well, let Dennis and I both touch on this. I will give you kind of the macro view. And Dennis, you have some information to support that.

In a larger sense, this category is growing substantially both at the private-label end, where we give most of our focus, and it's in certain members of the branded community as well. I think it is largely the fact that you have got to continue to have a large installed base of machines. That base continues to grow. We will have to see what the coming holiday season offers.

Then secondly, that there is a -- for the individual consumer there is more choice now. And it is both branded and in the private-label segment as well. And the consumers are responding to those choices. And that has been -- that remains to be a very positive matter.

With regard to pricing in the category, I think, again, if you think about brand and segmentation and differentiation, you have at the high end one coffee company that sells 10 K-cups for a greater price than anybody else sells 12. And at the low end, you have not really private-label, but an old brand that goes back over 100 years to A&P Stores that is on a day-to-day basis kind of the price leader in most instances.

And the difference in the prices there on a per-cup basis, it is a spread of 100% from bottom to top. And when you look at the brands, you can see that consumers are responding to the different segments. We are pleased with where we are. I think, as I had originally indicated, that we expected that whatever share private-label eventually settled in, that we would be first in the category, because we had made the commitment in every aspect to in fact provide a private-label option that even the most stalwart advocates of the brands would find to be an equally satisfying beverage experience. And we've stuck to that.

I think that is kind of my summary of the general market. Dennis, particulars that you would offer?

I'd say just that we are actually very pleased. And I think when you look at the inroads private-label has made, the good news is that it isn't being done on a pricing basis. The price gaps as we look at this category range from 15% to 20%, with maybe the majority of it being at the low end of that range. So what you are not seeing is pricing to drive private-label volume. What you are really seeing is just a good quality product, and our view is that the consumer is speaking to the national brand equivalent as the private-label choice, the filtered cup. So we think we have got the right product at a very right price point for the category.

That's helpful. And just to follow up, Dennis, on specifics in terms of the growth drivers for retail. When you say primarily all the growth driven by that platform, is that like 100% or around 60%, 70%?

In terms of the grand total, this category where we have all the powdered beverages was up about 57% for that one category. So it is making the substantial amount of the growth, so it is a major driver for our results this year.

And are the margins in that business above or below that segment's average? Any direction there? All I am trying to get at there is margins sequentially in that business ticked down a little bit in the retail segment. You are growing a lot. I am sure there is some growing pains in terms of making investments. Just give us some sense of the profitability of that business. That would be helpful.

We don't comment on the individual categories. I think what you are seeing in the retail coming down, as we said, was the product mix from new acquisitions. That has been really the driver down. We are pleased with the margin structure of the new products in the beverage segment and we view that as generally it is a positive overall. But that is about all I would say.

Perfect. Thank you. I will pass it on.

Andrew Lazar, Barclays.

Morning, everyone.

Hello, Andrew.

I want to explore the gross margin question just a little bit more, just to make sure I understand it. I guess the expansion came in somewhat below what we had modeled, and it slowed sequentially quite a bit. You have got the advantage of the faster growth on the single-serve piece. I assume you have some of the savings now coming through from some of the asset restructuring work you did in soup last year. And obviously, volumes in North America retail even outside of single-serve were pretty good as well. And last year, the gross margins were down pretty significantly in the third quarter.

So I guess I want to get a better understanding of that. And I think on the last call, Dennis, you had said think about maybe 100 basis points or so of gross margin expansion for the year. Is that still the case, or was that previous to the acquisitions that were announced, which impact the percentage of it?

That's a good question. That was before the acquisitions, so the acquisition mix is going to dilute that a little bit. So that will have some impact on the full-year margin.

The other item is in Q3, the mix of sales in the base business, I mentioned we were up on a legacy basis, although not quite as much as we had hoped, as we saw generally a little lower volumes than we had expected, which made the operating efficiencies at the plant a little lower than expected -- at our plants. So it did come in just a little bit below our expectation in terms of the legacy businesses.

We do see, though, some of that coming back though in the fourth quarter, and that is why we are confident in reaffirming our original guidance, despite a little bit lower margin than we would have liked in Q3.

Okay. And obviously, coming in above at least where the Street was from an EPS perspective in the third quarter, holding your full-year, I guess, suggests for some, I guess, the Street's at the high end of the range, perhaps needs to trim numbers for the fourth quarter? Would that be based therefore on the legacy margin piece that you just talked about coming in a little lower?

I think it is part of that. I also think it is possible that some had modeled in EPS accretion immediately for Associated Brands and Cains. And we are going to see some -- very little lift for Cains, but we are not necessarily modeling in anything for Associated, as I mentioned. We just got that in October and with inventory revaluations, it is very unusual to get accretion in the very first quarter, as Sam said. It will be accretive definitely full-year, but not necessarily taking our range on an annualized basis, dividing by 4 and putting that all into Q4. So I thought maybe there was a little miss there.

Got you. And, Sam, just a broader question. I think it is a harder one -- it has been a harder one for folks to answer. But over the course of the last year when the industry had to take a fair amount of pricing, that was the main sort of rationale given for why volume elasticity seemed to be so great across the industry. And that once a lot of this pricing was lapped, volumes would start to kind of rebound.

And volumes -- I mean the pricing has been generally lapped now, and just that volume may be very slowly but surely coming back. But you see some very large categories that just continue to have -- every month, you get the scanner data, and sales and volumes are down 3%, 4%, 2%. It just -- it is hard to fathom and I just don't know where that volume is going. And I realize people are probably wasting less and all sorts of these things on the edges. But I don't know. It doesn't seem like folks are ingesting fewer calories. I am just trying to get a sense of where you are at on this now.

Well, Andrew, my view on this is that the demand for aggregate food and beverage is going to essentially remain flat for the coming year, and that the primary driving force behind that are kind of the microeconomics at the family and household level. And what we have to focus on is how can we operate better in that environment and still post improved earnings. And that is the extraordinary challenge.

With regard to why this is happening, when I saw that only one household in ten has had its real income improve at least at a 1% rate since 2008, that just indicates how pervasive the softness in the consumer sector is. And we are going to have to live with this until such time as you see full-time unemployment improve, you see real wages improve, and that the uncertainty that is always there kind of comes back to kind of more normal levels.

And so I think the important thing for us is that while we think we generally understand it -- and there is still some mystery to it -- basically, we have to adjust so that the Company operates well in that environment. And there is a certain portion of that that means tightening our belts as well.

But with private-label as opposed to a brand, what one has are extraordinary opportunities with individual customers and individual categories, even in the midst of quite -- these difficulties. And what we have to do is harness our go-to-market capabilities and our supply chain in order to go after the strategic growth and the growth categories and with growth customers, every instance of that, and try to win in those places, and then hold our own in the other aspects of the business. And that is where our focus is and it will continue to be a difficult market, but what one has to do is adapt to it.

I appreciate the color and we will see you in two weeks.

Good.

Thilo Wrede, Jefferies.

Good morning, everybody. Sam, you have talked about this ongoing shift towards value for consumers and retailers creating opening price point items. But what does that mean for your single-serve coffee business? Do consumers look at your product as a less expensive option of a branded product? Or do consumers increasingly look at single-serve coffee as a very expensive alternative to drip coffee? So where do you think the consumer stands there, and what does it mean for the outlook for the whole single-serve category over the next 6 to 9 months?

Well, remember that single-serve now is over 30% of the roast coffee category, and that that is going to -- has been an extraordinary growth here. Some of it continues at the very premium end of the branded business, but most of it is driven by the private-label.

And I think that what you will see here is that over a period of time, the single-serve beverage business will have products, an array of products, much like other consumer categories, where you have got an array based on -- from low to high pricing, based on the quality of the product, the variety that is offered. And I think coffee in that regard -- I think that single-serve coffee over a long period of time will pretty much mirror the value and quality differences that you see in whole-bean coffee as well.

And the opportunity for us is to focus on the premium segment of the private-label industry. And we have to date done that and have a very substantial lead in the private-label segment of the business and will continue to invest there in terms of both greater capacity and, more importantly, in terms of innovation.

We have customers now that you can see what the potential here is. We have got customers now in K-cup categories that their house brand is greater than 20% of the unit volume across all brands in the store. And these are the circumstances which demonstrate to grocers everywhere what the potential is, but provided that they are willing to invest in their own brands and look at that house brand as really a strategic marketing matter, as opposed to simply a transactional tool.

Is this focus on the premium end of the private-label segment an impediment to better growth right now, given where the retailer mind set seems to be at the moment?

Well, the retailers now -- whatever else they are going through, every one of them is struggling for more foot traffic. There is not a retailer out there that is pleased with their traffic counts.

Some of that, you can do through price. A lot of it to the American consumer is I need variety, I want to see something different and I want to see a way to package value in a way that it gives me the same emotional attachment and trust that people will traditionally feel for leading brands.

So you have got the retailers here -- I talked about the bifurcation of the community. I mean, we saw in the last quarter strong double-digit gains across the traditional supermarket customer base that we have, after virtually two years of being under siege as the product -- as the channel shifts moved more and more toward value. And we will have to see if this is more than a quarterly occurrence, but the numbers were so strong there I would say it certainly feels like a harbinger in the traditional supermarket channels that those that really value their private labels will find that they can be a big traffic builder.

So you have got grocers of both minds there. But I think that it is not only something about the margins they are making weekly off of discounted product.

Okay. And then the other question I had was just a housekeeping question for Dennis. I think I recall you initially gave tax rate guidance for the full year of 31% to 32%. Given what you gave us for the outlook for the fourth quarter, it seems to be that you have gotten closer to 30%. Have I got my math right, that that is about it $0.06 or so benefit to EPS?

In this quarter, we had that benefit. So what I wanted to get is the standalone Q4 rate, I think it is back to that 32%, which is -- we are at that rate for the first half of the year, so we should be back in that range. What we were affected by this quarter was strictly tax return and tax audit settlements that are nonrecurring. So again, 32% is I think the best estimate I have got for Q4.

But the tax rate for the full year should still be lower than what you initially thought, right?

That is correct, yes. Because of Q3. You are right.

Yes. Okay, thank you.

Chris Growe, Stifel.

Hi, good morning. I had a question for you, first of all, on the -- if you look at your product mix, you talked about the customer mix being a little better, the food stores growing versus, say, mass. And I am just curious if that was a factor in the mix contribution for the quarter and therefore on the gross margin.

Not really that much, Chris. What I thought was interesting, though, was this is the first time we had seen that positive volume in that channel in I think at least six quarters and it could be a little bit more. Frankly, I think some of us see it as we look at the reported results for the public companies who are in that traditional grocery range.

So the positive is that generally that is a little better margin because they run the gamut of good, better, best. And they are the ones who typically have a very important and very well-defined private-label program. So as I said, that is not necessarily a big impact on the quarter, but it was very nice to see that positive number, which we hadn't seen in a while.

Sure. Okay. Then I had a question for you on -- to be clear on what is included in earnings. Are there any one-time expenses, say, from Cains that are actually included in our adjusted numbers for the quarter?

We adjust those out, and you will see it in the press release. So those come out of the EPS. And then in the back of the press release, we indicate where those adjustments take place in terms of cost of sales and the operating expense. So that should give you the roadmap to make the adjustment if you are modeling out the adjusted P&L.

I certainly have done that. I guess what I was curious about is as you look to, say, the fourth quarter with Associated, are there inventory reevaluation costs, things like that, that will be actually embedded in the earnings that we wouldn't see, that wouldn't be excluded from our adjusted numbers?

There will be a little bit of that in the reported results. The guidance I give and that we have given for the $3.07 to $3.12, that excludes any of that negative impact, those one-time costs.

Okay. So like I had Associated as a contributor to earnings in the fourth quarter, as accretive to earnings in the fourth quarter, when I exclude those kind of costs. Is that the wrong way to look at it?

Yes, because there will be some normal operating type things that will go through there. So instead of using that $0.04 average, if you will, based on our original guidance, our view is it is going to be negligible, and we are not really factoring anything into the Q4 numbers.

Okay, thanks a lot for your help.

David Driscoll, Citi.

Hi, good morning. This is Alexis [filling] in for David this morning.

Good morning.

Hi. I just wanted to spend a little time on soup. I know previously you have kind of said that there was going to be expected about $30 million in run rate cost savings related to the restructuring you are doing on the soup and the salad dressing plans. I was just curious -- did you realize any savings this quarter? And maybe how should we think about the pacing going forward?

We realized savings, but frankly, some of that savings gets eaten up because of the fairly weak volumes overall in soup. The category for us was down roughly 30% from a year ago in terms of sales volume. And so when you have that kind of sales volume, you run some inefficiencies. So we didn't quite see it in this quarter as much as we had hoped to see it.

We are happy with the progress. Our Pittsburgh plant has been doing a fantastic job in terms of adjusting to the volume changes. But I think we are going to see more of that benefit coming through next year as we get through this soup season.

Okay. And kind of a follow-up maybe on the impact of soup on the top line. I think, Dennis, you said in the prepared remarks that you are lapping in the fourth quarter some of the decrease you saw and it is a positive. But if I remember correctly, last year in the fourth quarter, the negative impact of soup wasn't as great as you thought. Correct me if I am wrong. So can you maybe explain about a little bit the dynamic and some of that was supposed to shift to this year? Can you maybe explain a little bit about that?

Yes, when we announced this last year, we thought that we were going to be losing this volume at the beginning of the fourth quarter last year. So our original estimate was that effectively the volume impact was going to affect all of the fourth quarter.

As it turned out, we maintained shipments for October and November and maybe even into the first week or so of December last year. So that was a positive to last year's Q4 results. Obviously, that is gone now. And so we will lap that in December.

But as I said, the biggest impact is October and November were still full shipping months last year, and we won't have that. So you are still going to see a pretty reasonable year-over-year impact in Q4, but at least it will be gone by December.

Okay, that's helpful. Thank you.

Brett Hundley, BB&T Capital Markets.

Hey, good morning, guys. This is actually Robert (inaudible) on for Brett. Just to kind of shift gears and be slightly more optimistic, where do you see some catalysts to drive retail volume growth in the quarters ahead? And how can THS sort of capture the turnaround when the consumer income might come back and spending sort of could get better?

This is Sam, and Robert, the issue specifically for TreeHouse is all related to our capabilities in the go-to-market to work with individual customers on product innovation and product quality and extension of their offering. And we see that among -- if you take, I think, our top 30 customers, among those that have recommitted themselves to private-label and are full fashion in a strategic fashion, those accounts posted solid private-label growth this quarter, as they have throughout the year.

There is a very different situation in that part of the grocery industry that has simply essentially said that private-label is going to be transactional, and that as long as national brands are prepared to offer substantial discounts, that they will shift their merchandising in that effect.

It is my belief that as we focus on those core customers that have really dedicated themselves, that will give us the best growth opportunities. And that we have to be prepared that after some period of time, those that have elected to go the other way will see that they have in fact exacerbated a difficult situation -- store traffic and I expect some of them to turn back around.

So that is the key for our business. With regard to the macro conditions, I think I covered those fully earlier.

Yes, definitely. Thank you very much. And just one last one. On your M&A side of kind of acquisitions moving forward, the summer, there are a lot of opportunities out there and you took advantage of that. But where do you see -- and I know you can't be super specific -- but where do you see -- kind of what category do you think -- category or categories do think you might focus on with acquisitions in 2014?

Again, we won't give you specific category information, but we have talked at some length about the attributes of the categories we are looking for. And the best circumstances are categories or segments that are continuing to show superior growth on a relative basis in comparison to the whole spectrum.

We think that there should be a profit pool that is substantial enough that allows us as a manufacturer and our customers to not only benefit, but invest in that category. And we are looking for ones that have strong branded leadership in order to support innovation and consumer communication.

And then lastly, either a well-formed private-label presence or the potential to in fact undertake that. And if you look back over the last several matters, what we have seen, you can take those comments and interpret them, that in the case of Naturally Fresh, we saw a way to move into refrigerated dressings, sauces, and see that that is a growth opportunity.

With regard to the Cains Foods, we have had a big hole in our salad dressing business since inception that we never were able to, on a large scale, produce premium mayonnaise. And that is not in and of itself a growth category, but it fits quite nicely into a void in our portfolio that we can now fill and do so with very fine economics.

And then with regard to Associated Brands, there, there is an extraordinary overlap in our core categories. What we see there is the opportunity to have better financial performance in those categories, because both we and Associated went in very different directions with regard to customer base and packaging formats.

And lastly, what we get with Associated is a premium tea business that is today focused entirely on -- primarily on the food service industry, but has great capability in terms of the sourcing, blending, packaging of premium tea, both in bag form and in single-serve beverage form. And I think we will see that that opportunity becomes a catalyst for further growth.

That's really helpful. Thank you very much.

It appears there are no further questions at this time. I would like to turn the conference back to management for any additional or closing remarks.

Okay. Thanks again, everyone. We look forward to seeing many of not all of you at our annual Investor Day, which is scheduled for Monday, November 18 in Chicago, in conjunction with the Private Label Manufacturers convention that week. Until then, we are TreeHouse, growing strong, standing tall. Thank you.

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