TreeHouse Foods Inc (THS) 2015 Q1 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, promises 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, 2014 and other filings with the SEC 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 expectations with regard thereto or any other change in events, conditions or circumstances on which any statement is made.

At this time I would like to turn the call of it 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 bear disappointing news for the balance of the year.

We have lowered our annual outlook as coffee margins have eroded due to excess capacity and as snacks growth has been slow to materialize. While we are chagrined by these recent developments we regard them as issues which we can and must resolve.

We expect to gather momentum as the year progresses, establishing a solid foundation for sustained growth in 2016 and beyond. In doing so we will not only recover lost ground but also reaffirm our outlook for future growth in private label in general and TreeHouse in particular.

Before Dennis delves into the financial details of our performance I would like to address the immediate issues at hand, single-serve coffee margins and better-for-you snacks volume. In coffee we now know both the market's general condition and the national brand's perspective. Branded growth has been limited to the premium segment and new entrants as green coffee pricing has been pass-through and technological benefits have proven illusory.

Private label volume has soared as price gaps versus brands have widened. Opening price point products have been introduced by mass merchants to jumpstart Brewer coffee velocity and housewares. Growth in brewer sales has slowed as independents have secured a foothold on the basis of cost and simplicity.

Manufacturer margins have dropped sharply as product mix shift and excess capacity have further eroded private label pricing. The initial effect of these developments on TreeHouse should diminish over time as the single-serve category transitions to a new equilibrium.

Last year's tumult over the specter of technological lockout and the promise of enhanced consumer benefit has faded into background static. In consequence, less than a year following the introduction of 2.0 technology retail grocers have signaled their intentions to return to TreeHouse.

Our private label proposition is unique among single-serve beverage suppliers. No brand conflict, no technology lockout or workaround, no equal in category management and no compromise in value, quality or service.

Simply put, we are unmatched as custodians of customer brands. As such the beverage branch of our TreeHouse may be bent but not broken.

In our snacks category, timing delays on new product placement and produce merchandising programs have slowed our acceleration after a weak holiday season. This temporary lull will be short-lived.

In the interim at Flagstone we have installed a new president, developed new products, secured holiday bookings, invested in automation and diligenced acquisition candidates. While much has changed since its acquisition Flagstone Foods remains the cornerstone of a multibillion-dollar better-for-you snacks platform in the making. To sum things up we are tackling two immediate tactical issues but we are by no means disheartened by our future strategic prospects.

Dennis will now address our quarterly performance and annual outlook. I will return later with thoughts on the longer-term prospects of our ever-growing portfolio, its transition from industrial might to consumer insight and its future in customer brands and custom products. Dennis?

Thanks, Sam. I will spend a little less time this morning on our recently completed quarter as the earnings were in line with our expectations and in line with the guidance range we discussed in February. I will elaborate more on our outlook as that's where new developments are driving a significant change in our view of 2015.

First, however, let's return to the segments. Net sales for our North American Retail Grocery segment grew 30.9% to $592.4 million. Acquisitions were the driver of this growth as organic volume/mix declined 2.6%, our first decline in seven quarters off a very difficult year-over-year comparison.

Last year our Retail segment was up 5.9% in volume/mix in the first quarter. Although the volume was lower than we expected we continue to see the shift in consumer buying habits as it has been playing out for the last year or so. Our premium, organic, natural and better-for-you formulations continue to show year-over-year increases.

More interesting is that these products are priced about 30% above average for typical national brand equivalent products with both our customers and us enjoying enhanced margins from these products. This shows that consumers are willing to pay for the better products and the shift in consumer preference for more natural products is very good for private label. We expect this dynamic will continue to work in our favor for quite some time as there is still plenty of room for growth in these product categories.

Moving on to direct operating income, our margins decline from 16.6% last year to 13.1% due to the mix of sales from our lower margin Flagstone and Protenergy acquisitions last year and lower margins in our coffee business as Sam discussed in his opening comments. Excluding the impact of acquisitions in coffee, the gross margin percentage in North American Retail Grocery was flat year over year. Good performance in our other product categories such as dressings, soup, and Mexican sauces was offset by unfavorable foreign exchange and pricing.

Sales in our Food Away From Home segment were essentially flat at about $88 million in the quarter but this was dampened by an unfavorable foreign currency exchange impact of 1.3% which offset our favorable volume/mix in the quarter. Direct operating income improved nicely finishing at 13.6% compared to 10.7% last year. Last year we had operational issues at one of our plants while this year we are performing much better at that location.

In our Industrial and Export segment sales were up significantly due to acquisitions which accounted for 18.9% of the increase and volume/mix growth of 13.3%. We landed new business in soups, infant feeding, coffee and Mexican sauces all of which are contributing to the growth. Direct operating income margin was up as well finishing at 21% compared to 19.3% last year.

For the total Company revenues increased from $618.9 million last year to $783.1 million this year with the 26.5% increase coming from acquisitions. On an organic basis our volume/mix was flat compared to last year while foreign exchange had a negative effect of approximately 1.7% on total reported revenues.

One other key ratio I look at is our actual pounds shipped. This metric does not account for sales mix and as such every products can influence in its comparability. However, we did see an overall increase in tonnage this past quarter compared to last year as our legacy products like pickles, soup, salad dressings and sauces showed year-over-year increases.

Gross margins for the total Company finished the quarter at 19.5% compared to 21.5% last year with the mix of new acquisitions accounting for 100 basis points of the reduction. Lower coffee margins were partially offset by improvements in our other businesses. In fact, the acquisitions and coffee businesses overshadowed the very good performance we had from our other product categories.

Even are more mature businesses like pickles, cheese sauces and puddings and non-dairy creamer saw some margin improvements totaling over 170 basis points. This gives you some idea as to the overall progress our product teams have made in simplifying the business in order to improve our operating margins. Despite the positive performance of our other businesses the impact of negative foreign exchange in pricing offset the gains experienced elsewhere.

Our operating costs, the total of selling, distribution and G&A expenses continued to be well-controlled finishing at 11.5% consolidated net sales compared to 11.6% last year. Our effective income tax rate in the quarter was 30.8% which was below our expected annual tax rate of 34% to 35%.

The decrease was due to finalizing our 2012 US tax return audit which resulted in us being able to positively adjust certain tax accruals. This is not likely to recur again this year.

In total our fully diluted earnings per share was $0.41 in 2015 compared to $0.38 last year. However, after adjusting for the items we highlighted in our press release this morning our adjusted earnings per share finished at $0.59 compared to $0.80 last year. The decrease was expected and in line with the $0.55 to $0.60 in EPS we guided to in February during our earnings call.

Turning to the balance sheet we had a very good quarter of cash flow and were able to reduce our net debt by just over $63 million. Combined with our EBITDA growth our leverage is now down to 3.3 times debt to EBITDA and we have approximately $400 million in dry powder along with additional access to capital markets to further grow TreeHouse through strategic acquisitions.

Now in regard to the outlook for the year, we believe that the next two quarters of 2015 will be challenging. We see it as a period of reinvestment in preparation for what we believe will be a very good finish to the year and more importantly the foundation for a very solid organic growth year in 2016.

While this may sound overly optimistic to some we have the advantage of knowing about new business that is committed and is expected to begin shipping later in Q4. This includes new customers and products for our snack business and importantly returning business in our single-serve coffee program. This is great news, but our sales and earnings will be under pressure in our second and third quarters.

Let me address the situation with snack nuts first. Last year the business had a series of successful promotions that drove very nice volumes in the seasonally low period of the first quarter.

We had anticipated some delays in these programs in the first quarter this year in light of lower consumption level of nuts during last year's first quarter. However, rather than being delayed from the first quarter of this year to early in our second quarter we are now seeing two major programs being delayed until well into the second quarter.

Additionally we are in the process of executing a national rollout of new display racks of snack nuts and dried fruits within the produce section for a major customer. As you can imagine we have been working with our customer to get these racks just right. We believe this will be a great program but it has delayed shipment well beyond what we expected just three months ago.

In addition we are getting great traction with our new products like heat and eat nuts and our new snack bars. And we will see those benefits during the fourth quarter when we normally see seasonally high shipments.

Turning to coffee, this continues to be a particularly challenging and dynamic situation. While we've had further volume loss in non-retail customers and that does present challenges, we are much more disappointed with the ongoing pricing pressure in the category. As one research analyst pointed out measured channel data shows that unit pricing in private label is flat while branded pricing is up.

More important the price gaps between private label and branded products is increasing. We believe this is a result of the brand leader's aggressive move to capture private label business. The positive result is that private label is growing much faster than branded sales in this category.

As your channel data for the 13 weeks ended April 26 shows private label unit sales are growing at nearly 40% over last year while branded sales are up only 14%. While this is great for consumers it is tough on our margins.

Downward movement in pricing occurred despite the increase in year-over-year coffee cost as a result of the timing of forward contracts and higher cost associated with the new 2.0 compatible technology.

However, we do have positive news. Our lost customers are beginning to come back. In the past few weeks we have been awarded business from a key customer that converted to the brand leader last year and we believe others will be following.

Although these shipments will not start until Q4 they demonstrate that retail customers want to do business with TreeHouse, they recognize that we are dedicated when it comes to their private label programs and we are not out of the game as the supplier of choice in the single-serve market. Whether it's coffee, tea, hot chocolate, cappuccinos or more recently soups and specialty dessert offerings we have both the capability and the technical wherewithal to lead private label in this category.

Let me give you some more data points that support the notion that private label programs work better with a dedicated private label supplier. Looking at measured channel data for our customers we see unit sales increases at our retained accounts of nearly 60% for the retail private label category which was up only 40%. We think this demonstrates how we help our customers maximize their private label offerings in single-serve coffee leading to higher customer satisfaction and higher profits.

We believe this is because our products are designed to be as good or better than branded products. We have no conflicts that require the products to be inferior by design in order to justify price points and products positionings and we strongly believe we will see more customers coming back to us. Unfortunately those benefits will not be realized until 2016.

So with these coffee challenges facing us this year and the timing of new business in our snack nuts category we are taking down our full-year forecast for both sales and gross profit to reflect those issues in 2015. We now expect full-year revenues to approximate $3.4 billion to $3.5 billion and gross margins to finish in the range of 20.5% to 21.0%.

The lower sales will be partially offset by lower spending including incentive compensation cost but not sufficiently to maintain our original projections for the year. As a result we now expect full-year adjusted earnings per share to be in a range of $3.40 to $3.55.

We feel most of the negative impact of the earnings will occur in our second quarter. As such we believe our adjusted fully diluted earnings in the second quarter will be in a range of $0.60 to $0.65 per share.

Sam?

Thank you, Dennis. In my opening remarks I noted that we are by no means disheartened by our future strategic prospects. While we face immediate challenges we enjoy even greater opportunities looming on the horizon.

Let me cite a few examples. In center of the store staples 56% growth in Bay Valley's better-for-you products as baby boomers' mainstays are updated for millennial consumers. In organic products TreeHouse participation in 4 of the top 10 private label categories snacks, soup, sauces and jams and spreads.

In the soup, gravy, and broth category a market-wide consumer shift in favor of paper cartons up 9% versus steel cans down 3% over the past year. In cold beverages a test market in organic smoothies under our proprietary control label. In single-serve beverages now a category of more than 200 brands and over 1,900 SKUs an opportunity to increase retailer margins and private label penetration for those customers no longer willing to subject their private label to national brand control.

In better-for-you snacks expansion of permanent displays in produce departments to another 400 grocery stores. In simplification improved margins in eight legacy product categories led by salad dressing, salsa, and soup.

In infrastructure capital funds to extend our SAP system to Protenergy and Flagstone, automate production in hot cereal, snack nuts and aseptic broth and lastly to support newly won business in aseptic sauces and pickles. In M&A a heated deal market insufficient funds to acquire midsize private label business in better-for-you snacks, aseptic cartons or another perimeter-based growth-oriented adjacency.

Taken in their entirety, these strategic opportunities demonstrate the vitality of our product innovation and customer engagement initiatives across the portfolio of 15 grocery categories. Our decade-long progression not without its difficulties has been one of ceaseless pursuit of the continuously evolving marketplace for customer brands and custom products.

It is this relentless quest to grow whether through acquisition, innovation or simplification that makes our TreeHouse the home of the very best in private label products, service and people. We are TreeHouse growing strong, standing tall.

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

(Operator Instructions) David Driscoll, Citi.

Great thank you and good morning. Dennis I had two kind of detailed questions for you and Sam I have a significant question for you.

Dennis on the single-serve coffee volumes do I understand it correct that absolute volumes were down year over year so it's not just a deceleration of the rate of growth, the volumes are actually down? Can you quantify that?

I can't quantify it but I will say that the volumes were down.

And then you said that you have a negative headwind on green coffee cost and you have the price reductions on the single-serve coffee product itself. Can you quantify the margin impact on the year because of these effects?

We don't have that. We try not to give margins out. You know that David.

But I'd refer back to the fourth quarter when we indicated that our unit sales were up 50% in that category but our revenues were up 30% with that all being pricing and hitting the bottom line. So I think it gives you the magnitude of the change in the margin structure of this category.

Okay. And then Sam so I'd love to hear you discuss the actions you mentioned that the brand leader was driving these price competition within single-serve.

I'd love to hear your perspective on strategy. What sense in the world does it make for Green Mountain to drive prices lower in private label?

We're watching the volume shift massively into private label from the brands. Doesn't this kind of fundamentally destroy the profitability of the entire category if it persists for any length of time?

And then if you could conclude your comments on this by just once again give us your sense of why are you confident that this gets better? I think this is the key issue here for everyone all the investors in your stock.

Well, David thank you. My view is that let me take the long run view first and then come back to the immediate. If we look at grocery product categories where they perform best it really requires three conditions.

The first is that there has to be national brand leadership and innovation and in communication and in developing consumer benefit. And that is the fundamental issue that will drive category expansion and bring consumers into that.

The second matter that one needs is that for the retailers they have to articulate and then follow a particular strategy for both the branded merchandise as well as their own customer brands. Then the third and last is that these categories seem to work best when there is a concentration of private label that always has the smaller piece of the business but in fact provides an analog to the national brand and then relies upon being able to differentiate itself through value, service, and superb execution.

And if one looks at those three conditions today, there seems nothing seems to be completely in equilibrium. But I believe that we are headed back to a new equilibrium here and that I can't comment about the national brand per se but I do know what our strategy has to be and it gets back to our fundamental competitive advantage is that we have no conflict. We are dedicated only to our customers' brands and we are all-in in that prospect.

And there was a period of time when there was as I had indicated in my remarks a great deal of tumult about technological lockout and whether there would be new consumer benefit. And what we've seen is that the marketplace has voted as it always does and now we will find I think over the immediate future that we'll be headed towards an equilibrium where those grocers, retailers who regard their customer brands as strategic tools or capabilities they will follow their own instincts and they will go back to their best interest and that will create opportunity that will again for us and I would expect that you will see over some period of time that private label will reach that new equilibrium.

The last matter with regard to this is we've got in addition to ourselves and the national brand we've got a series of small companies that are marginal with regard to the entirety of single-serve beverages. And the marketplace will work its way and we will see that number of others in this industry decline as their marginal economics force them to the sideline.

Thanks for the comments, guys. I will pass it along.

Farha Aslam, Stephens.

Good morning. Could we just focus on Flagstone for a moment?

You were planning to raise pricing. Has that pricing been implemented and what's been the customer and consumer reaction to that pricing?

We implemented the pricing last year in December. Most of it was effective by January and I think the reaction was pretty straightforward. It was primarily due to the higher prices in almonds and a little bit in pitons but mainly almonds.

And since that time we been working on formulation changes with our customers. And frankly I think we're making very good progress on that front. And as we said we are confident with where our programs are going.

What was disappointing with the timing of the programs and that's the dynamic facing us right now, the sell-in has been quite strong. At this point the only other product that seems to continue to be potentially at risk is almonds and we're pretty well set for most of this year and we'll have to evaluate into Q4 if almond prices continue to go up whether we need to do a pricing at that time. But that's kind of a TBD based on how the rest of the harvest goes with almonds in California.

And so what growth or sales expectation should we expect from that Flagstone business this year? And kind of as you look out into next year what type of growth should we expect there?

Well we're not deviating off our double-digit growth opportunity. We think we will be very close to that this year from last year. We thought that was going to be an easier goal originally but now it's going to take a good effort to get there.

But still I think it gives you a sense of the strength. And it isn't just selling snack nuts as I said, it is the combination of new products and programs we have that will drive that.

So we think we'll get some share back along with the new product introductions to get to that top-line growth. And if the selling that we're seeing right now for fourth quarter is an indication I'm not sure why we wouldn't see double-digit growth again next year. But it's pretty early to make that prediction.

This is Sam. To comment a little bit further as I had indicated we've taken all of the steps necessary to reestablish Flagstone internally.

We've appointed a new president. He's a long-term veteran of our business and has run our Canadian operations, has run a big business unit and also our North American Retail Grocery.

We put the team in place. We've committed to large-scale automation projects in two of their most important snack nuts categories. Those lines will be coming on.

Importantly we will extend the SAP system to that team as well. And then as Dennis has indicated we have developed this line of microwaveable nuts that along with other product, new product development will move us quite forward.

The single thing that I am the most pleased about this display program although it was delayed has been greatly improved. And the number of stores that we will reach now and the numbers of SKUs on those display units, both of those are beyond the original projections that we had when we were first looking at acquiring the business. It will be from a lower base but you will see great growth out of here.

And any read on how many stores you plan to target over what time frame that can grow?

Well in this one program we will be in 400 new stores when the program is fully rolled out in the second half of this year.

Thank you very much.

Ken Goldman, JPMorgan.

Good morning everyone. Sam, how do we get out of the cycle where you win the bid in coffee, you lose a bid, win a bid? I think it's great you gained some customers back and I understand why but isn't the nature of private label that someone will always undercut someone else on price?

Again I hear you on providing customers with unique solutions. But grocers don't always act rationally and my experience has been that more often than we would like will just choose a product or an offering based on what is cheaper.

There will always be a segment of that, Ken. Those are the stores where the demographics of the consumer are such that you've got to have that open price point product. But go back to one of my comments, coffee now is a section or single-serve beverage, there are over 200 brands currently in the market excluding private label.

There are over 1,900 SKUs and what has happened is there has been -- there was a mad rush to make sure that one wasn't locked out from a technological standpoint. And ensuing in that there was what apparently as you look back a real lack of category management discipline, the whole thing was get the new technology and don't be locked out and we'll sort this out later.

And what we're hearing from grocers now is that they need our help. They not only want our product and by the way the products that we're selling provide all have the original weights in the cups. None of ours have been changed and a number of our customers have seen their private label products reduced and the size of the cup contents, that's what Dennis was talking to about the degradation of the product.

But this whole idea that we can provide without being conflicted. A second voice with regard to category management I think is that's going to be the matter that brings us back in.

And we will have to compete on the basis of cost in an instance where there is more idle capacity today than there was earlier. But that, too, will change over a period of time.

Okay, thanks very much, Sam.

Robert Moskow, Credit Suisse.

Hi, this may be more of an in-the-weeds kind of question but I think Sam you said that the price gaps in single-serve coffee had expanded with branded pricing going higher, private label staying down and that had hurt your margins. But does that mean that last winter when you were making price contracts with your customers you were talking very positively about those arrangements but were you able to take price on single-serve coffee in line with underlying coffee commodity inputs? Or were you unable to take price in line with those commodity inputs?

Our first concern was retaining the volume and share and that required us to do one increase our costs with regard to replicating the 2.0 technology and secondly it required that regardless of underlying coffee, green coffee situations this became a matter of direct bidding to retain business and we opted to retain that business as opposed to giving that up. I should indicate to you that the pricing pressure has come from both the top, the entry of the national brand equivalent and then also it is from the bottom of this industry where you've got marginal operations that have to generate cash in order to keep their doors open and it's been a combination of that. I think that we'll see that account by account begin to subside as the grocers come to the realization that this circumstance is not one that is working in favor of their brands or their stores either.

Rob to give you a quick insight on those price gaps, as we look at the main products categories and the most popular products from what we're seeing in the data last year the average price gap on a 12 count was about $1.70 and this year it is about $2.40. So you could see it has gapped out significantly and frankly we find that the price elasticity in this category is very strong. And that's why you see the private label numbers going up for the category up by 40% when the brands are only up 14%.

In fact some of the higher-priced brands are actually running negative now. I mentioned that our private label customers are seeing their business up 60%. So it's driving a lot of volume but frankly it's putting a lot of pressure on the margins.

I guess I don't remember a time when price gaps in one of your categories got this big and it still was a negative for your Company. Do you think there's something unique about this category where it is going to be continue to be difficult to get pricing up in line with commodities? Because that's the thing you could always depend on the brands to do.

They could always raise their list price in line with what is a very volatile commodity. How do you think it stands?

Rob, the one factor that is different in this instance is that there was a period of time through intellectual property in effect a legal monopoly was allowed to exist. Then when we took advantage of the termination of that period of patent protection and developed a private label counterpart to the national brand that we entered into a phase where there was a real threat of technological lockout at a time that the business, the brewer placements were increasing at double-digit rates and the industry in its aggregate was growing at a phenomenal pace. And you had this moment in time where the retailers across food had to decide whether they were prepared to risk a technological lockout.

In retrospect they found that that risk really was far less than they had imagined for two reasons. One very replicated the technology. Secondly consumers found that the promises of great enhancement to consumer benefit were in fact substantially overstated compared to the reality.

That's the anomaly that our industries that we dealt with and our industry and our customers are dealing with the aftermath. But I think that once that passes all of that behavior that you would expect would occur, that will return.

It will be a more competitive marketplace. There's no question about that. But at this point I think you'd see that it will be a level -- it will be a level battlefield, I don't know that it's a level playing ground anymore.

Well, if it's any consolation I guess misery loves company. Your competitor's stock is down a lot today too.

So I will leave it there. Thank you.

Evan Morris, Bank of America.

Good morning everyone. Just trying to I guess understand how the rest of this year plays out.

I understand that the broader issues you've talked through them pretty well but could you give guidance for the second quarter? Dennis you mentioned that the third quarter was going to be challenged. I'm going to take that is kind of flattish year over year.

Correct me if I am wrong. If that is the case then that suggests the fourth quarter to get to your guidance is anywhere from 30% to north of 40% EPS growth year over year which is pretty significant. So I guess what I'm hoping for is you've talked about some of the new wins and the expected shipments in the business that you know that's coming in the fourth quarter.

If you can you help parse that out and put some numbers around it to give us a sense of how much that is to really bridge that gap from what's going to be a pretty lousy first three quarters to start the year, pretty lousy to get to a pretty big jump in the fourth quarter. So if you can help bridge that gap with some hard numbers that would really help.

Evan, I'm not able to give you the hard numbers but the third quarter will be challenged but not necessarily to the extent that I'm implying we're flat year over year. As I look at where most people had expected us to come out as I look at the consensus it was a pretty strong third quarter and a very strong fourth quarter. And I'm saying it won't be quite as strong.

As I said these are seasonal shipments. We actually start a lot of our winter seasonal products late in the third quarter, so I'm not able to give what I would consider really good third-quarter guidance yet just because of the timing nature of some of these and how they hit. There's a big difference between starting a program in the middle of September and starting it October 1 in terms of how the quarters go.

So I'm confident with the range for Q2. I'm confident with the full-year number. We will have a better sense of how three and four roll out as we get to the next earnings call.

Okay and I definitely understand the timing of the shipments but just again trying to understand the magnitude of the business. If you exclude these new wins in that the business that you booked for the fourth quarter, if you exclude them from the conversation I guess where would EPS have settled out for the year? I know that's probably hard to parse out but just try to get a sense of where the base business is really tracking outside these new wins that you talked about which will certainly helped later in the year.

I can't really help you on that one because part and parcel to everything is not just the new wins but it's also the timing. So some of the programs we're talking about weren't necessarily new wins but when an account decides to do promos one year starting in Q2 and then the next year decides we're going to delay those to Q3 it may not impact your total volumes significantly but it significantly changes the timing.

So what we have here is the timing on the snack nut business. On the coffee side it's a question of which customer come back and when their timing takes place and that's not always easy to predict. Sometimes you can be awarded business and you might start shipping four months later and sometimes it's eight months later.

That's the part that's hard to predict at this point. So when I'm talking about our numbers we're talking about what we know about. And as long as we were taking our numbers down we decided to make sure we took into account all of those and didn't bank on new business that we hoped to come back but we don't have in-house.

Okay. And then just a question on Flagstone when you made the acquisition the growth weights were pretty strong. I guess it was our understanding that a fair amount of that growth came from a lot of new customer wins at Flagstone. You have now run into a couple of quarters of issues here, you've had a leadership change.

So I guess just trying to get a greater level of confidence in maybe your view or the growth potential of this business. It is not a little overly optimistic at this point maybe those expectations have to be reset a little bit lower? Why isn't that the case right now?

This is Sam. As I have indicated we're starting at a lower position than we had initially planned.

But what we see here is that the better-for-you snacks businesses starting with trail mix and tree nuts have an extraordinary promise in front of them as consumer preferences for snacking shift. And those trends are over the next several years really inexorable. And we are putting ourselves in the place to take advantage of all of that to a far greater degree than anyone else will be in private label.

And as I had indicated we have already taken those steps to reestablish at Flagstone that winning formula although under different ownership, in some cases with different leadership. But we intend as Dennis indicated to stay right -- get right back on that double-digit track and that's what we're absolutely committed to.

You do have to as we have recognize that our starting point is something different. But from a strategic perspective there is absolutely not a single iota of change here with regard to the direction and our capability and strategy to have that play out favorably.

Thank you.

Chris Growe, Stifel.

Hi, good morning. I just had a question first if I could please on coffee. I just want to be clear on the softness if you will, the challenges in that category.

There were some customers that you've lost and I know that's a source of some volume pressure. Is it that or maybe and/or the pricing that's eroding as well? I don't know if you can help give a little color around each of those factors, but just I'm not clear on what's really driving the weakness in coffee.

Chris, it's a combination. We did lose business.

I mentioned the volumes are down from year ago and we're working diligently to try to get that back. So we do have volume as part of the issue.

Second is that as the brand leader has made the aggressive move to try to win as much private label as they can they've taken the pricing and the category down. Their wins have also then opened up in accounts where we aren't there capacity with some of our other competitors. So we have a Sam indicated there's some excess capacity in the category and those who aren't capable of doing the match on 2.0 technology have dropped their prices further to try to utilize them a capacity.

So it was an interesting swing there. In order to be competitive we have not been able to pass on pricing and in some cases had to reduce pricing in order to retain business as a result of those competitive dynamics. So we have both a volume and a pricing issue.

What has given us great comfort, though, is the fact that our teams are doing a fantastic job and working with some of the lost customers in trying to get them back. We see opportunity ahead. Fortunately that is two to three quarters out leading to the situation we're in right now.

You have lowered your sales growth expectations for the year for the overall Company. Can you say how much of that in rough terms is beverages or is that a majority of your reduced expectations? There's a lot of moving parts here with the acquisitions as well.

The primary factors are as we had indicated in the beverages and also in the snacks businesses. What we have not talked about is just the very fine growth in our center of store business.

While Dennis mentioned that we've had an increase in our contract business that really in center of store this simplification has driven margin improvement and at the same time in certain instances shown substantial growth in the top line as well. So it is the two factors that we identified in the headline and have talked about.

And if I could ask one more quick one, the expectation for strength in the second half of the year in earnings if I heard you right, Dennis, it's in relation to programs that are you know you're going to be shipping those products in the second half if I'm saying it the right way, these are not things you hope will get better, it's actually programs you have in place already, is that correct?

It's predicated on that yes. There's always some level of new business that you're expecting to get. But as I said the good news is most of our shortfall that we had seen is being made up by what I would call in the house programs and in the house orders to be shipping anywhere from four to six months out.

Okay, thank you.

Amit Sharma, BMO Capital Markets.

Good morning everyone. Sam, a clarification on what you talked about earlier in terms of the coffee category and the pricing pressure is both from the branded large branded competitor and also your smaller competitors. As we look to the end of the year or early next year what gives us comfort that even if the branded competitor gets more rational in their pricing, how long is the pressure from the smaller guys who are like fighting for survival at this time, how long will pricing pressure persist from those competitors?

I don't have a specific time in mind but I will tell you what I've seen happen time and time again. And it is that private label goes through an early stage in new categories where it is a cottage industry of small private firms. In this instance most of them were already in the coffee business in either private label or OCS and the opportunity to roast more beans and put them into portion packs or pods was too tempting to pass up.

And what will happen as it has in other businesses is that the private label as the demands of the customers are focused as much on the strategic value of their customer brand as what is the cost of the opening price point here that those people start to drop out. And I think we told you over a year ago that there were nine companies showed up in one grocery bid for a very fine piece of business.

That business went through -- that same business went through another bid recently. There were three of us there and we won the business in its entirety.

But we've gone from nine participants on that one piece of business to three and we will see the same thing across the board as the year goes on. Where private label is -- it is absolutely required by the grocery customers in a category like this, they can't decide not to participate with their brands in this kind of phenomenon.

The demands that they will put out will be met by only a few. We're the only one that can meet all of those demands and do so without a direct conflict that imperils their customer brand in favor of someone else.

Then one more quick follow-up if I may. The new account wins that you talked about in the coffee which start to ship later this year, are those at pricing where you're able to capture higher green coffee cost and make margins comparable to what you were making last year or are those also at lower prices?

This sector is going to remain highly competitive for the foreseeable future and what we have done internally is to adapt to that. We've developed a program of simplification, cost-reduction, greater -- greater look at hedging the internal cost means of revamping our production, our packaging costs, etc. so that in fact we can take costs out that will offset the additional cost of the 2.0 technology.

Got it. Thank you.

Jonathan Feeney, Athlos research.

Good morning guys, thanks very much. Dennis you reviewed, or Sam, I know you want to be careful about what you say about single-serve coffee very competitive, you don't want to give any data away, but on an organic basis could you tell us what the volume ask was for the business?

You told us it was flat with the acquisitions. Could you tell me what organically it was?

We've never given that, John, in our history on a particular category in terms of --

No, I mean for the business as a whole.

The business as a whole, again we don't do that. But I will tell you this afternoon when our 10-Q comes out since it will be published then that last year in the first quarter our beverage business was about $124 million and this year it's about $111 million. So you get a sense of how that's coming down.

So it sounds like there will be a lot of that data in the K or the Q then.

In the Q, yes.

I guess one other follow-up to that, Dennis. If you look at the disclosure you gave us 26.5% I think you said was a contribution from acquisitions. When I look at press reports at the time of the Protenergy and Flagstone acquisitions even with using today's currency rate it's like CAD130 was disclosed as I think 2014 sales -- 2013 sales for Protenergy and I think it was $697 in Flagstone.

If I add that up it gets to like divide that by four it gets to a little north of the $163 million that would be a 26.5% contribution to sales this quarter. Was there some significant declining to those businesses versus when before you owned them or is there some seasonality that I'm missing between those two?

Both of those are highly seasonal in terms of the first quarter so you have to take that into account. The suit business by far and away Q1 is the weakest and frankly it's the weakest for the snack nuts too. So you're not going to be able to do the math off this quarter to get their contribution.

Rats. Okay anyway thank you for your help.

Brett Hundley, BB&T Capital Markets

Good morning, guys. I had a question on your Canadian business. We've seen one of your branded competitors there talking about taking in-country pricing higher in February.

It was at least my understanding that if there was some pricing in-country there and currency stayed relatively range bound from where it is from Q1 that there could be some margin recovery there. Can you speak to your business and the trend that you're seeing in that country?

We are getting hit by exchange there and where there has been a little bit of pricing we've been able to get through. But frankly we have not been that successful and I think as you look at other companies who do business up in Canada frankly nobody's talking about recovering much in pricing up there as a result of the exchange. So when we did our guidance for this year our assumption was we weren't going to get any and unfortunately I think that assumption has proven to be right.

Okay. Dennis just switching gears a little bit back to your Flagstone business in some of the program timing differences that you had talked about, if you gave this I apologize but do you have any idea what some of the motivating factors are this year as far as the shift in timing or being pushed out on those retailer programs?

This is Sam. The headline here are delays in programs and it was a short list of three very large scale projects. And we're in the process of getting those back on a different and later schedule.

Let me talk a little bit about the one that racks in the produce department. A program was sold in and then there was a change in management at the customer and we had to come up with a revised program. It was later.

The good news there are two elements of the good news. One, we're getting more placements than we had originally anticipated and will be in 400 stores by the end of the year. The second is that the number -- the holding power of this display unit when we were forced to go back to the drawing board we actually were able to increase the holding power to where it will now hold 80 SKUs of a proprietary label that is found only in these freestanding displays and that those displays from the time they go in will remain up not until the original deadline but for the same interval starting at a later period of time.

That's not a trade-off that I would have preferred. But it is once we get up to that run rate we will be pleased that it will contribute more on a run rate basis than we had expected albeit later.

Thanks for that, Sam. Just one more for you.

Your approach to deals, the Company has messaged at least in the past six to nine months on wanting to move further into the healthy space, healthy snacking, etc. But I'm curious to hear what value TreeHouse might find in consolidating center of store further if such larger opportunities were to present themselves?

Well with regard to M&A we are a strategic acquirer in both the center of store and the perimeter and one that has a deserved reputation for doing these things quite well. With regard to the center of the store there is a great deal of opportunity that remains there. It is the big cash generator of this business and what we will look for we will always look for are adjacencies that fit nicely.

We have acquired Protenergy within the past year. And then I look at what we've done there and when I see the spread between consumer growth in paper packaging and decline in cans across the whole of the industry it is 1,200 basis points, that tells me that there's something to be done at center of the store and we're committed additional capital to do that. And I think what we have to look at is as I said those old standbys for my generation look at how are they being modernized or made more relevant to millennials and that will lead us to acquisitions there.

With regard to the perimeter and snacking, the dietary habits of this country have changed dramatically. And you are seeing it in not only in foods that people eat but how they shop.

And the biggest change that we've undertaken here with regard to M&A is that this is all about following the consumer around the store and getting consumer insights and applying those to our acquisition model. And we won't deny industrial might but it won't be the only part of our M&A program going forward.

Thanks, Sam.

Akshay Jagdale, KeyBanc.

Thanks for taking the question. My question is on coffee. Can you just take a step back, at your Investor Day you were expecting significantly more growth than what you now expect.

Things have clearly changed. Can you comment a little bit more on just visibility on this business? And it seems like it's been lower visibility than most of your other businesses because of some unique operating conditions, if I may.

So can you just talk to that a little bit because clearly there's conflicting messages from you and the national branded competitor and what we hear in the marketplace. It's been quite confusing. So if you can just help us out as to why the predictability has been so low on this business for you?

Dennis here. I will give you my thoughts first. Then I will turn it over to Sam.

I think what makes this unique for us is that this is so unusual to have a private label category with a brand leader who is involved in the category. And it causes us to take some step back and look at what's happening because it's frankly very unusual I think. Based on what we see in measured channel data we see significant increase in private label and we see the brand leader being the beneficiary of a lot of that share gain and meanwhile we see negative volumes in the brand leader's branded products.

That's a dynamic that just typically doesn't exist where the brands are sacrificing the brand in order to drive private label volume. So that has caused that visibility to be rather murky because it's frankly not a very logical step. That's a consequence where we just don't usually see that and at least from my perspective that's been the challenge.

I think Dennis has described it well. Let me turn to what I expect what will be the future outcome here. There are three major factors that will determine it.

First of all with regard to consumers, what we have seen is that this is a highly price elastic category. And what one has to do is whether you're in no matter where you are in the spectrum of brands in private label one has to be highly efficient, highly effective and in private label most importantly in complete consonance with your customer's brand. Now that's one factor.

The second factor is with regard to consumer communication, consumer innovation and benefit and in that regard absent a technological lockout everybody wins when the national brand leader in effect leads through innovation and consumer communication culminate in real benefit. Whether it's coffee or coffee creamer we welcome that without reservation.

Then the third matter has to do with the intermediaries here and that in this instance it's primarily the grocery retail industry. And grocers will as they always do put their interests first and a key matter in an increasingly competitive Retail Grocery business is the role of brands in not just private label that were transactionally developed but in fact customer equities now that make their stores a destination. And what you will see in coffee is that the present circumstance when we look back from the future it will be seen as an anomaly that came and went.

And those are the three factors that drive us. And it's all about the long-term strategic perspective.

Okay, and then just a follow-up. Dennis, the factors you mentioned are more sort of category management factors but from a customer-specific perspective, why is the visibility so low where in short periods of time you have to change your plan by this magnitude? I understand the category dynamics are very unique and different but what is it about the customer-specific plans that are different in this case?

It's our understanding that a lot of these decisions to move over to Keurig were made at a level above the buyer. So just trying to get more color into that so as to better figure out what's going to happen in the future with you're saying you're gaining share starting in fourth quarter. I'm sure Keurig is going to refute that so we're just trying to make sense of the whole situation.

We have reasonable visibility on retail brands so when retail customers when they move and generally we've got enough notice to factor that in. We were taken a little more by surprise by some of the contract manufacturing customers where the difference between win, loss and shipping is far tighter and that frankly took us by surprise.

And I know you follow the brand leader and they've talked about some of those contracts that they've one won and frankly we lost some of those. So that's where we had a change in visibility and that was a key driver and I mentioned that in my prepared remarks earlier.

Okay, and just one last one on Flagstone. Can you talk a little bit about the category dynamics, the growth you had mentioned in the fourth quarter that there was a slowdown in category growth and some inventory deloading by specific customers.

Can you just update us on that? It seems like the issues that it relates to growth in Flagstone from where you sit are timing related and specific to programs that you're executing on. But any update on the category growth and any changes in inventory?

This is Sam. You were correct in remembering that fourth quarter was an aberration with regard to holiday sales that affected not just private label but in fact the whole of the nut industry. And my model indicated that revenues for the fourth quarter were $74 million for the category, $29 million for private label below the projection and over 60% of the stores that we track individually chains, showed an absolute reduction in volumes.

In the first quarter the good news here is that in the four categories that we track, snack nuts, trail mix, baking nuts and dried fruit, private label increased its share in all four of those categories and on a composite basis increased share by 170 basis points. We all have -- we are all waiting to find out about the almond and walnut crops and we will have to adjust accordingly. But based on what I saw in the first quarter I was very pleased with the uniform movement in a positive way with regard to our share of the market.

Okay, thank you. I will pass it on.

John Baumgartner, Wells Fargo.

Good morning, thanks for the question. Dennis, just wanted to ask about the natural and organic portfolio in terms of what you're seeing there with new distribution and growth. Is that still running in that 20% sales range?

Then I think you also mentioned the premium that the price point for that private label overbranded. What's driving that premium and how sustainable is it? Why wouldn't you see downward pressure on prices there over time as well?

First of all let me clarify in that I mentioned 30%, it's a 30% average higher unit price than our private label. So basically the price gap's in that 25% to 30% range it effectively puts it at parity with national brands.

So the value side of that is you can buy a Simple Truth or a Nature's Harvest brand of an organic product at the same price as a more processed national brand. So that has been continuing to grow.

The volumes especially in that organic side are up significantly. The premium is up as well and I think there's a lot of room. Sam mentioned this is starting to approach 12% of our sales.

I think a year ago it was about 9% of our sales in retail. Frankly I think we're going to continue to see that same shift take place and we're going to see more of our retail customers shifting over to -- we used to call it private label, then we called it corporate brands and I think the real term we've been using now is signature brands. And it's those signature brands that are driving great volume for so many of our retail customers and that's exactly where these products lie.

So I don't think this is a fad at all. I think it is a secular trend and as you look at where the growth is it's private label is the biggest beneficiary of that shift.

Okay. Then Sam just one last one on single-serve coffee. I think historically there's been a quality issue with some of these smaller independents that are out there.

As the excess capacity in this market it sounds like independents have been a little bit of a headwind for you there in terms of sustaining your share. Are you finding the quality of the independents has gotten better over the past two years?

I think the quality issues are not related to the independents. Most of these -- they are all privately held to my recollection. A lot of family businesses, long-term multi-generations in coffee but primarily through whole bean or ground roast coffee.

And we see there that they've done what small businesses do so well, they find a single niche and then develop an expertise there. The difficulty on the independent side has been where there is new capacity put in for single-serve beverages when they face the possibility of not running at all or running at rates that will keep them at least cash flow breakeven they will opt for the latter in the short-term.

Over a period of time what they have to determine is can they develop the kind of local expertise in this business that really demands national scale. And I think for many the answer will not be.

The other matter I wanted to mention just regarding pricing is that the lowest prices on the market are now opening price points by several major retailers who are traditionally have large-scale housewares departments. And when there is a backup of coffee brewers we know that by NPD that the national brand brewer's business dropped 14% in the last quarter.

As the independent brewers came in and grew 19% that way to move those brewers through the system is to drop the price of coffee and that has had an impact, a very big effect on the private label pricing. We have a product out there on an everyday basis now, a dozen pods for less than $5. And so it's that compounding effect, and as I said I think both of these things will work their way through over a period of time.

But as you've seen the smaller competitors I think back in 2012, 2013 out of the gate there were some issues with the packaging quality from some of these smaller guys, it wasn't as fresh as TreeHouse was. Have you seen the packaging quality improve? Has the overall product on the shelf become better from these smaller competitors?

We're the only one that completely replicates the national brand program in every regard with regard to the product and the packaging. And the packaging has proved to be an area where the smaller ones simply don't have the capital and the resources to replicate it. So those differences I think will remain.

Thank you, Sam.

Thank you.

Jon Anderson, William Blair.

Thanks for taking the question. I apologize if this has been asked. I just jumped on.

So the guidance revision on the top line for the year is about I guess 6 percentage points or a couple hundred million dollars in sales. Is there any way to quantify that how much of that is due to a different outlook for the single-serve coffee business versus maybe it sounds like Flagstone is the other area where it's coming in below plan.

We don't give those breakouts Jon, but you're right those two are the substantial recent for the change in the outlook on the top line.

Maybe another way, did you update your expectations for organic growth in the North American retail business for the year?

I did not get that out but I think that would be indicative that we will have some organic challenge in some of the other areas only in the sense of timing. The fourth-quarter numbers we mentioned the volume growth was down in Retail.

We're relatively flat for the total Company. So a little lower than we expected but most of that was in fact driven by the coffee and the timing of the Flagstone business.

And then the new outlook still seems like it implies a recovery in the fourth quarter, kind of minimum in those businesses. What's your level of I guess visibility on some of this new I think you mentioned new single-serve business coming online later in the year? And then also what are some of your specific plans to improve the performance of the snack nuts business?

When we talked about the visibility we only talked about ones that we know about. We're not hedging on taking in customers that have not made a formal commitment so I think we're pretty good with a coffee. The snack nuts as we would typically have you're selling in April for the winter season so we're pretty comfortable with where we're heading with that business.

It's frankly doing better than I thought we would be doing at this point. We've made a nice recovery in terms of the programs and the sell-in.

I can't say enough about the sales team up at Flagstone and all the work they've put into drive this incremental volume with products and displays and promotions. So you inevitably always have risk in every forecast but we're pretty comfortable with where we're at right now.

Last what I have and again this may have come up, but just some of the changes that have happened from an organizational standpoint and maybe the level of integration you're looking for now out of Flagstone versus at the time of the acquisition thinking of running it more as a separate operating separate operating unit. Can you talk a little bit about some of the changes that you made there and what we should read into that?

Jon, this is Sam. We start with we have appointed a new president to Flagstone. It's Kieran Kelly, who has been with us since the acquisition E.D. Smith and prior to this had not only run the Canadian company but also a business unit here in our North American Retail Grocery business. And we are very pleased that Kieran and the Flagstone team will form a very fine go-to-market unit very quickly.

With regard to other thinking, as I had indicated we've committed to a full SAP implementation and that will provide us with the extraordinary go-to-market visibility that is going to be required to pursue this growth. And then I know you joined us late, we remain committed to creating a multibillion-dollar snacks platform, better-for-you snacks platform around to use Flagstone as the cornerstone of that business.

That commitment has not changed at all. And beyond that we have got our full agenda. As we look at ways to put these companies together inevitably you find big savings in certain areas and we will achieve those to the benefit of both companies.

But right now it's all about reestablish that momentum. Dennis talked about double digits and we're firmly are absolutely sure we're going to be there.

Okay. Good luck, guys. Thanks.

At this time we have no further questions in the queue.

All right. Thanks everybody. We are looking forward to seeing many of you.

We're going to visit more than a dozen cities this year with our Investor Relations team. We will look forward to plenty of one-on-one in small groups. Thanks again.

That does conclude today's conference. Thank you all for your participation and you may now disconnect.