TreeHouse Foods Inc (THS) 2016 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, good, 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 industries actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31, 2015 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 based.

For the purpose of our discussion today, statements such as Private Brands or the Private Brands business refer to the recently acquired TreeHouse Private Brands business. Private label, on the other hand, refers to the customer and corporate brand industry.

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

Thank you, PI. Good morning all and welcome back to our TreeHouse.

Dennis and I will be joined today by Chris Sliva, Executive Vice President and Chief Operating Officer. Chris will address the significant progress in our core legacy businesses which continue to improve margins across both the center-of-store grocery and food service categories. We also have early news of the strategic transformation made possible by our acquisition of ConAgra's Private Brands business.

As we approach our first 100-day milestone, we are steadily advancing across a broad front of critical engagements. Specifically, top-to-top customer calls have been welcomed by all 30 of our largest strategic accounts, some of whom, including the market leaders in the supermarket, mass merchant and food service broad line channels have initiated joint business plans. The two-year systems integration of TreeHouse Private Brands is proceeding as planned under the direction of a strategic steering committee.

We will over the back half of this year establish unified business planning and execution for the 2017 fiscal year. TreeHouse Private Brands customer service and financial performance have both steadily improved as ConAgra's corporate influence wanes and TreeHouse's operating engagement waxes. Our Annual Leadership Meeting was marked by an atmosphere of communitas as legacy TreeHouse and new Private Brands teams totaling 560 former rivals undertook a right of passage in a new venture of equals.

Our more perfect union with the former Ralcorp has fostered a sensation of transformative opportunity that permeates our TreeHouse. The breadth and scope of our enterprise are extraordinary matched only by the magnitude and intricacy of our opportunity.

According to IRI, our grocery categories represent 17% of total edibles and 31% of center-of-store revenues across North America. Our grocery portfolio of more than a score of core categories we are number one in virtually all and command more than one half of an $8.9 billion market as measured in syndicated channels.

After Dennis and Chris provide a comprehensive review of current operations I will return with a strategic perspective on future milestones of years to come. Chris?

Thank you, Sam. Building on Sam's comments, since the closing of the TreeHouse Private Brands acquisition in early February we have had the opportunity to meet with all of our largest customers. These top-to-top discussions confirm that a large-scale and private label focused organization is an attractive concept in the eyes of our most discerning stakeholders and have reinforced that our focus has been in the right areas.

The union of scale and ordering, manufacturing and distribution of private label products combined with consumer insight driven product innovation will enhance TreeHouse's promise with our customers for years to come. Specifically, service and quality remain foundational to winning and maintaining customer support.

Consumer-centered innovation, predominantly in better-for-you, organic, clean label and non-GMO continue to be the primary drivers of growth for our customers brands. These premium solutions now represent 18% of our legacy center-of-store business and are growing at over 30%.

Turning to our business performance, the first quarter of 2016 was one of continued improvement for our legacy business. In our coffee business, retail cup volume continued its upward trajectory, growing mid-teens on a year-over-year basis.

Wholesale and retail pricing continued to flatten out, holding at roughly parity with the previous two quarters. We continue to be confident this business will be a growth engine for us in the remaining three quarters of 2016 now that grocery retailers have begun to return to us as their customer brand supplier. That said, legacy center-of-store margins improved another 80 basis points excluding single serve coffee in the quarter.

Retail volume and mix in our legacy business continued to make sequential progress in the first order tracking at flat to year ago. Flat volume and mix is not ordinarily a cause for celebration within the TreeHouse ranks. However, when considering a center-of-store food and beverage marketplace that is embarking on its fifth consecutive year of virtually no unit volume growth and given our ongoing rationalization of inefficient customer practices it represents a positive step towards our longer-term expectations.

Late in the third quarter of last year we reorganized our go-to-market teams, reallocating resources from smaller customers who tend to be the primary drivers of complexity to larger scale, more efficient customers. In the first quarter, growth at many of these customers offset declines resulting from the strategic actions we had taken over the course of the past 18 months with less efficient customers.

This strategy was particularly evident in Food Away From Home where our teams have been working diligently over the past year to properly incent smaller customers to move away from direct ship which was both inefficient and costly for us and move to purchasing our products from consolidators or broad line distributors. These factors have begun to yield emerging growth trends in a channel that is gaining both share of stomach with consumers and importance to TreeHouse. In total, the quarter's results suggest that our teams are working on the right balance of efficiency drivers and growth stimulation to support our long-term business objectives.

I will now turn the call over to Dennis. Dennis?

Thanks, Chris. Today I'll spend a bit more time on the new Private Brands business and our outlook for the second quarter and the balance of the year.

First, you can see in our results that the new Private Brands business contributed significantly to our top-line increase. As Chris pointed out, our legacy business performed reasonably well at the top line with the notable exception of our cold season products like non-dairy creamer, canned soup and hot cereal.

We try to stay away from seasonal explanations but that seems to be the only unifying factor for the sales declines in those three businesses. Even with those declines we managed to have flat volume mix in our retail channel which is a better result than most of our peers.

Going more directly to Private Brands our results for the first quarter include two months of sales and earnings because the transaction was closed on February 1, 2016. The general theme is that volumes of sales were down in total, about 4.7% and 8.1% respectively, but margins improved by 120 basis points. We are expecting that the trend of lower sales but better margins will continue into the second quarter but are confident that most of the Private Brands categories will begin to stabilize their top lines in the second half of the year.

Our confidence is based on the marked improvement we've seen in service levels. Overall the Private Brands order fill rates are now nearly at the levels we achieve in our legacy businesses and the positive momentum should have them at parity with our overall corporate goals.

Another positive sign is that we started to slowly win back some lost business. Our first three wins as I will call them are in cookies and crackers which will start shipping later in the year. These rewins can be traced directly to the quality of our products and are the result of productivity and capital investments made at those plants. We are actively involved in other bid situations that could result in other category rewins.

Although Private Brands to Sales declines we're seeing momentum in margins. Even in the Private Brands condiments business which has recently been more of a breakeven proposition than a moneymaker has seen margins improve to just under double digits. We believe that the closing of our Ayer, Massachusetts and City of Industry California plants and consolidating these products into our other condiments facilities we will see further margin improvements in this category.

Now for some of the specifics behind Private Brands. First, net sales in the quarter totaled $506 million. This was a decrease from their prior period when they were under different ownership. However, the gross margins were much better than prior year, resulting in a slight increase in gross profit dollars despite the sales decline.

Gross margins excluding the impact of acquisitions and integration costs were about 17.5% during their short quarter. The Private Brands margins are about 160 basis points lower than our corporate average excluding the impact of adjusting items outlined in this morning's press release. Our legacy center-of-the-store business had nicely improving margins, partially offsetting the negative mix, and unfavorable foreign exchange.

By the way, I'm using the term adjusted margins to reflect gross margins after adjusting for the items highlighted in our press releases morning. The GAAP margins reported in our income statement include items that relate to acquisition and integration matters. We believe they distort the real underlying performance of the business. So my comments will generally refer to adjusted to keep the numbers comparable to prior and future periods.

Looking at the totals for TreeHouse, our North American Retail Grocery segment, net sales increased 72.1% to just over $1 billion but the increase was driven by having the acquisition of Private Brands. Excluding the acquisition, our volume/mix was flat while foreign currency reduced sales by 1.3%.

Pricing changes were minimal in the quarter. More direct operating income in the quarter was approximately $128 million, an increase of 66%. As I mentioned earlier the margins of the new Private Brands business are lower than our legacy business, so mix was the primary reason for the lower direct operating income percentage this quarter compared to last year.

In our Food Away From Home segment sales increased 27.5%, again primarily due to new sales from the acquisition. On an organic basis, sales were relatively flat with pricing and foreign currency basically offsetting each other. Direct operating income was up 50 basis points to 14.1%.

Finally, in our Industrial and Export business sales increased due to the acquisition where organic volume/mix was down 9.4% as we had lower co-pack sales of national brands in our coffee, soup and infant feeding businesses. While the lower sales were expected in the soup business they did occur faster than we had originally expected.

The good news offsetting this is that we have freed up capacity for our retail carton soup and broth products going into next year's soup season. This is important for us given that our retail carton soup and broth had volume increases of 38% in the first quarter compared to the year before and we expect the trend towards carton soup products to further increase next season.

Operating expenses for TreeHouse totaled $205.6 million in the first quarter compared to $105.7 million last year. The large increase included $33 million in acquisition, integration and related costs that we've excluded from the adjusted earnings per share. Excluding these amounts, our operating expenses would have been 13.7% of net sales compared to 13.5% last year.

Although we are pretty consistent on a year-over-year basis, we are still incurring duplicate operating costs as a result of running the Private Brands business on separate systems. We will start to see operating expense leverage later in the year when we begin to transition from shared services with ConAgra to our TreeHouse systems and services.

Regarding income taxes, our effective tax rate for the quarter was a low 30% which is comparable to last year's first quarter of 30.8%. There were really no significant changes in the tax structure from the prior year and I expect the full-year rate will stay close to our original expectations of 35% to 36%.

One other point I want to make is we continue to generate very good cash flow. Despite the costs associated with closing the acquisition such as advisor fees and expenses we were able to generate over $50 million in total cash flow in the Company. At the end of March our total debt now stands at $3 billion and importantly our leverage ratio for compliance purposes is now under four times debt LTM to EBITDA.

In regard to income we finished the quarter with GAAP loss of $0.06 per fully diluted share compared to net income of $0.41 per share last year. This loss was expected and is the result of the many costs associated with the closing and financing the acquisition of Private Brands in the quarter.

Excluding the items noted in our press release this morning our adjusted fully diluted earnings per share came in at $0.48 per share compared to last year's $0.59 per share. This was a bit better than we expected in the first quarter as both our legacy and Private Brands businesses finished with slightly better margins.

Now turning to the outlook, as I mentioned last quarter we will be giving quarterly guidance this year. As our business has changed significantly and we want to make sure everyone has consistent information on the timing of our results for this year.

First, though, let me comment on the full year as I believe that's the most important relevant earnings target. We are off to a good start and we maintain our optimism for a good year in 2016. We're making good progress on the integration activities and our sales teams are doing a great job of managing the sales process and working with their joint customers.

From a macro standpoint our view that sales will be relatively flat this year continues to play out. On a positive note, for the first time in a while we're seeing exchange rates move in our favor.

We set a budget target for the year of $0.72 for the Canadian dollar to the US dollar and locked in rates very close to that for the first half of the year. We should see upside to the currency in the back half of the year which at this time I view as a hedge against the usual puts and takes that occur. And we are still nine months to go in terms of results to achieve the balance of the year.

So the bottom line is we've not seen anything that causes us to be concerned with our original full-year guidance. As a result we are tightening the guidance range towards the higher end of our original range and now guide to full-year adjusted earnings per share between $3 and $3.10 per fully diluted share.

For the second quarter we are expecting fully diluted adjusted earnings per share to be in a range of $0.50 to $0.55. Although this is lower than the consensus estimates, it is a bit higher than our original internal target for the second quarter.

Expectations are based on having no real synergies occurring until the third quarter. This is because our first partial system integration should occur on July 1. As a result, we won't be able to leverage additional savings until that time.

And one more factor playing into the estimate of sales mix, the second quarter is our primary season for condiments including barbecue sauces and pickles and those categories tend to have lower margins than the corporate average. As we discussed previously, Private Brands and our legacy business have relatively large condiments businesses. So despite the differences from consensus estimates for the quarter, we're still bullish on our prospects for 2016.

I will now turn it back to Sam for closing comments.

Thank you, Dennis. Let's now consider the strategic milestones that will make our future progress.

Over the course of our second 100 days running through the Labor Day weekend we will lay the operational and organizational foundations upon which to build the transformed TreeHouse of our future. The cornerstone of this construct is the integration of our legacy operating units with the acquired Private Brands business into a single unified operating Company spanning all branches of our TreeHouse.

The building materials that are required to undertake this project include a channel portfolio strategy that allows TreeHouse to serve all 1,700 of our customers efficiently while marshaling our resources in support of the 5% which count for the bulk of our strategic growth opportunities; a product portfolio strategy that consolidates two dozen product categories into a handful of $1 billion-plus fully resourced business teams each representing all that TreeHouse offers in a given grocery on section or department; an operation supply chain that spans 100 processing and packaging technologies, 50-plus manufacturing facilities, dozens of distribution centers and thousands of suppliers scattered across the globe. This system must be capable -- is capable of delivering the equivalent of 3,500 truckloads of groceries each and every week of the year.

An organizational structure numbering more than 15,000 TreeHousers who are descended from 45 corporate predecessors and are now united in a common vision of the TreeHouse promise of customer brand and custom products leadership that transcends legacy culture, prior ownership and very IT systems. An acquisitions program that targets complementary businesses over a broader M&A landscape that leverages our market leadership, manufacturing and distribution economies of scale, our growth strategies and premium and better-for-you grocery products and debt paydown.

In summary, while we may pass a dozen such milestones before our strategic transformation is fully complete, it is clear from our first 100 days experience that we are well along the right roadway to the TreeHouse promise of a new era in food and beverage private label. Bethany, please open the phone lines for Q&A.

(Operator Instructions) David Driscoll, Citi.

Great, thank you and good morning. First, just big picture, guys, are you able to reiterate your expectation for year-three accretion of $1.50 to $1.65?

David, Dennis here. Nothing has come up to make us think that number is not very achievable.

Okay. And then on the gross margins, did you say in your prepared comments that the Private Brands gross margin was like 17.5%?

And I thought back when we were talking about this it was more like 14%. Is there some seasonality issue going on here? Or maybe I'm mistaken about the 14% that I thought we discussed a few calls ago.

David, you're correct on all accounts. We talked about 14%. The change is not structural.

The change is in reporting. As we have them now in our results for two months we have been able to do a better job of aligning their cost structures with how we report. And so the 17.5% represents a consistent application of cost of sales with how we report, so it is lower, it isn't quite as low.

As I indicated, we were still kind of working through this so their operating expense actually should be a little bit lower than what we had because some of the are a little bit higher because some of the cost of sales will show up as operating expense now. So that's kind of the answer here. Obviously with this big acquisition and diving into it we're learning a little more about the nuances of their financial reporting and the key for us is keeping them aligned with the rest of our business.

Okay, and then just to last for me. Yesterday and I guess the day before you guys had a recall announcement. Can you quantify for us what the impact of that announcement is?

And then just one on K-cups. The private level K-Cup volumes are up like 60% in our Nielsen data and I think you guys said that volumes were up like 15% and I think you said mid-teens for the Company. And I'm just curious about the discrepancy between the 60% vol growth that I see in the Nielsen data and does it mean there's more opportunity for you or just can you somehow put this into some level of understanding for us given the data we see?

Let me comment quickly on that recall, as we indicated in the press release a supplier of ours, and there's been a few press releases over the last 24 hours, I think it's pretty clear that SunOpta has put out their press releases regarding the sunflower seeds. We use that in some of our products.

We put our announcement out, I think you've seen a variety of retailers also putting announcements out. We've got less than 100,000 cases are affected, so I think you can tell by that matter we don't expect to have a material -- based on what we know at this time. So I think I'm expecting this to be a developing story but nothing significant at this time as we don't know of any illnesses or any other negatives as a result of this.

I will turn it over to Chris for coffee.

Yes, David, on the K-Cup front you are correct, private label cups in the quarter were up 48%. We were up mid-teens as you heard in my comments.

We are still lapping two customer losses I believe that occurred in the first quarter of last year, one of them late in March of last year so we fully lapped it in the quarter, that was actually a co-pack customer. So I would expect for the last three quarters of the year where we will have more of an apples-to-apples comparison. Our growth will be at or above the category levels.

That's really good news. Thank you and I will pass it along.

Farha Aslam, Stephens Inc.

Hi, good morning. A question about ConAgra Private Brands. Should we expect sales of that business to be about $550 million to $600 million each quarter or is there any seasonality we need to think about?

There will be seasonality in that. The back half of their year is the strongest so it really mirrors the TreeHouse numbers.

So it will be definitely higher in Q4. Q1 for both of our businesses tends to be a little bit lower, so that's the way to think about that. Very similar cadence to what the TreeHouse numbers were.

That's helpful. And as you've gotten into the combined businesses, have you noted any integration opportunities with the plants at this time?

Well, we made the announcement already about the one condiments plant, so that's out there. And we obviously closed another condiments plant on the TreeHouse sites, so we are looking at all aspects. These things take a little time and we're in the process of evaluating the structure and we will do our best to provide the most efficient structure but at this point we don't have any announcements to make.

My final question is on the Flagstone business, we've seen almond prices come down a bit. Could you provide us some color around the Wal-Mart expansion as well as your outlook for that business as input costs come down?

Well as input costs come down that's been helpful. The almond prices in particular are down. Obviously the weather in California was a big plus and we're starting to see some price coming back on that which is a good thing.

One of the challenges we had over about a year and a half ago when the almonds were up over $5.30 a pound was that price points were challenging. So I think we're starting to see better price points and we're starting to see some volume come back.

I don't want to talk about any particular customers but I think what we're starting to see is we're lapping some of those challenges we had a year ago and the prospects for the nut business is broader than just Flagstone because there's a good nut business within the Private Brands business as well. I think we're bullish on where the snack nuts are going to go for this year.

Thank you.

Joshua Levine, JPMorgan.

I just had a quick question on K-Cups, I know your comments before around volumes sound like certainly they are going to accelerate from here but there's obviously been a lot of change at your largest branded competitor. I guess can you just speak to what you're hearing or seeing from your customers, sort of what the outlook is just on especially on the private label side but just generally?

Hey, Josh, it's Sam. Good morning.

With regard to the outlook to confirm what Chris had said we have continued we have again made commitments for further capital investment and expansion of our base with that capacity coming on later this year and in anticipation of returning to a marketplace where the primary grocery customers want to make sure that they have a competitive situation in their supply of one of their fastest-growing product categories. And I think as we go forward we will look back and see that there was an aberration here that was built around misplaced confidence in 2.0 technology. And as those arrangements end we will be back to a circumstance where private label here will be a business that is one that grocers will see that we excel at.

With regard to the change in management, I can only provide congratulations to the new CEO for his prior accomplishments at Pinnacle. And we will reiterate that for us as a private label Company the best businesses to be in are where the brand leader is focused on innovation and consumer communication to drive category size.

That's very helpful. Secondly, you talked about, Chris talked about obviously better-for-you doing well and K-Cups certainly doing well, snacks are doing well with maybe some more momentum behind it.

Can you talk about the rest of the business and how that's doing I guess on the SKU rationalization plans or eliminating complexity that you talked about last quarter and even back at the Investor Day? Has that started, how is that going and how should we think about sort of that core center-of-store business for the rest of the year? Thanks.

Sure, Josh, this is Chris. I think we're well into that. We've talked about our simplification efforts for a couple of years now and I would say we're now getting into the middle innings of that work.

I think we have become somewhat more aggressive in the first quarter of this year in implementing a set of processes and policies that drive complexity out of our business. And as I mentioned in the prepared comments I think we're beginning to see the fruit of that beginning to pay dividends.

It does have some short-term consequences on volume. But as I said in the prepared remarks I'm also very pleased that we're beginning to get some traction with our larger customers.

And so while as I said flat is not usually cause for celebration it does signal that we're working on the right things and taking a step in the right direction. And as you work down both of those paths that's what's driving a lot of the margin improvement in that legacy business.

Thanks very much.

Amit Sharma, BMO Capital Markets.

Two questions. One for Chris, you talk about natural and non-GMO 18% up legacy business and growing at pretty healthy 30%. Could you give us similar numbers for where your Private Brand business is today on that?

Let me take that because I worked a putting those numbers together. Unfortunately, we don't have that detail for that business. Our SAP system gives us the ability to look at products not just on a SKU by SKU but on a label basis so we can track labels to get that information.

We don't have that information for the Private Brands business at this point. I'm not aware of anything that would significantly change that but I just can't comment because we just don't have that information.

And is that something, Dennis, as you delve deeper into it is that something we will be able to get some visibility on?

Probably not until next year realistically because we're going to start the condiments business. That will happen this summer so we'll start to get some visibility of that but that's just one aspect of the business and not the biggest. So I think we're going to be a little blind to that for a little bit until we get a few more of their business units put onto our SAP system.

Got it. And then Sam one for you. I mean looking at the listening to commentary, it looks like the reception from retailers has been very positive and at least in our view it looks like the recovery in sales may be tracking a little bit ahead of expectations this time.

Is that how you see it as well? And then just your view on like is it that simple? You improved your service levels and that puts you in the driver seat in terms of winning some of those businesses?

Chris and I will share this. I will say that after 10 years of doing this we have had more activity in this first 100 days than we typically would have in an entire year and that with Chris' leadership we are meeting with top level executives in addition to middle level category managers on the buying team. Chris?

Yes, I would say that we've been very pleased with the reception that we've gotten from our customers. There is no question to your point that service levels, quality, etc., are the foundation of building the business going forward.

Whether the growth or the volume trajectories are ahead of our expectations I would say we remain healthily dissatisfied with where we are at. And we see tremendous opportunity in front of us and are anxious to grab hold of that as quickly as possible.

Thank you very much.

Bill Chappell, SunTrust.

Thanks, good morning. Dennis, I guess first just on the synergy standpoint, as we're kind of looking through this year, is the thought that kind of the dilutive nature of the deal is pretty even throughout the four quarters and just I guess the offsetting synergies just don't kick in until kind of July 1, is at the right way to look at it?

It's not dilutive throughout. What will happen is we're much more dilutive in Q1, less dilutive in Q3 then we start getting into the plus. By the time we get to three at four we start to see the benefits of the synergies happening in our Q3 and that is what helps to drive that turnaround.

Obviously when we make an acquisition there are existing purchase contracts or other things that you just can't turn around immediately. We will start to see the benefits of some of those existing contracts wear off. So it will be hockey stick for this year leading up to a strong fourth quarter.

Okay. And then you had talked I think on a previous question about the lower gross margins of the Private Brands business. Is there anything fundamentally different about just the product mix why it should be that much lower or is that the key area when we're looking at synergies?

There are some inherent areas. For instance the much larger snack nuts business in just like us and frankly if you look at other public companies that are heavily involved in snack nuts the margin structure is lower primarily because the product itself is significantly made up of raw material so there's not as much value add as in our other businesses. So the margin structure tends to be lower and that is a big business for the Private Brands area.

You also have a large cereal business which tends to have slightly which has challenges at times in terms of margin. So I think part of it is inherent but I think the bigger opportunity is that I think they were dashed they could be run a little better.

We're running it better in terms of the product assortment and the SKUs and the proliferation. So we're just rolling out the simplification that will help bring that structure back.

And I know Bill you've been around for a little while. Back four or five years ago under the Ralcorp ownership the margins were in fact significantly better. So that is our goal is to try to get them back to that level but that's a multiyear process.

Got it. And then last one for me, just as I look through for the summer season in terms of I mean do you expect kind of a seasonal shift back to some of these products? Better question, revenue synergies weren't in the original guidance or rewins, are they now in the guidance going forward?

They are going to take back in the fourth quarter and to be honest we have not necessarily built in revenue wins into the fourth quarter. We are going to see how that goes. Historically we've not made adjustments to our guidance after first quarter.

There are still nine months to go. I will say that the headwinds that we typically have had the last couple of years in terms of currency and coffee factors have now switched to behind our backs and that's a good thing and that's where our confidence is pretty high.

But at this point we haven't built all the upsides because after doing this 10 years we're always surprised there's something always seems to happen as well. So I think read it as optimism for the back half of the year, Bill, and we will take it from there.

Got it. Thanks.

Chris Growe, Stifel.

Hi, good morning. I just had two questions for you if I could. And I think this follows a bit onto Bill's question there, but as I'm thinking about the ConAgra Private Brands business regaining lost distribution and you cited that in the press release today, I thought of that is more of a longer-term opportunity.

If I heard right there, Dennis, maybe think of some new revenue wins in the fourth quarter, is that related to loss distribution at the ConAgra Private Brands business? And should we expect that to be more measured if you will in terms of benefit going forward?

That is starting to get some wins back and I can't say enough about how our two sales teams are leveraging both of the businesses to present solutions to our customers that take advantage of the broader portfolio. Couple that with the fact that some of the lost business that this Private Brands had over the past couple of years which were service-level related didn't necessarily represent that their product wasn't the right product.

And now that the service levels are back we've got a few cases where customers are realizing that the choice they made which we put them into was not the best choice in the long run and we're starting to win back some based on quality. And so that's got us energized a bit here and it bodes well for the future.

But as we've always said there's about a six- to nine-month lead time between when you land private business and when you start shipping it. So this is all great news but it is news that will manifest itself late this year and really put us on a good footing for next year.

Okay. And then just help us to better understand in terms of the integration process you have duplicative costs coming through, you obviously have the TSAs you hope to go off and you talked about in the third quarter some synergies picking up between the two businesses. So I guess I want to understand, are the synergies related to some of those duplicative costs kind of going away in the third quarter as well as there is procurement synergies and that kind of thing that are coming through?

That's right. We will start picking up some of the operational synergies. So that's purchasing and distribution, that will come later in the year.

The current Private Brands business runs off at least four systems. We will be able to convert one of their businesses. The condiments business will come onto our SAP system this summer.

When we do that that will start the process of kind of untangling some of the duplicate system costs as they roll into ours. So that's kind of the start and that's part of our two-year process here to uncouple from the ConAgra systems. We talked about that with the TSA.

So that piece ticks in July 1. It is not huge but it is a victory of sorts and we're happy with that. But the rest of the operating things like purchasing and the transportation, you will see that benefit later in three and four.

Okay, thank you for your time.

Carla Casella, JPMorgan.

Hi, I had one question on the capital structure, you mentioned that you have $3 billion of debt outstanding, so it sounds like you paid down a big chunk of the revolver. Can you just tell us where that stands at the end of the quarter?

Let's see. The total debt is $2.961 billion and off the top of my head I don't have that. But --

I can follow up.

The 10-Q will be released at 3:01 p.m. today and it will have all the details there. So a little later today it will have those.

Okay great. And then you commented that your leverage is now less than 4 times. I wonder what pro forma LTM number you're using including the ConAgra business? Are you still using about a 700 million number or are you including something with some cost savings?

There's a little bit of cost savings in there. We're allowed to do some of that.

But mostly the challenge that you'll have on the outside right now, and I can't give more clarity right at this moment, is that a lot of you have looked at the financial statements that were put in the prospectus which were based on the ConAgra brands fully allocated cost going into the Private Brands unit and now under TreeHouse we don't have some of that duplication that existed in the prior. So the EBITDA is just a little bit different.

I want to be careful when I put in there that the leverage is for compliance purposes. That's obviously the critical piece but when you're working with bank compliance it isn't as simple as just going to the financial statements and taking the earnings plus D&A and coming up with EBITDA. It's a little bit different number for that.

But I wanted to make it clear, though, that with leverage under 4 times we are maintaining what I think is a good capital structure. We have strong debt paydown and we're ahead of the game in terms of where we thought we would be in terms of leverage right now. And I think that bodes well as Sam put the opportunity to continue to look at appropriate bolt-ons in this business and not necessarily be hamstrung for a multiyear period with the Private Brands integration.

Okay. I know you gave the Private Brands or you gave the acquisition contribution to growth for each segment. Did you give the overall total ConAgra contribution for the quarter? I'm calculating about $500 million, $505 million, does that sound about right?

Sounds right on the money. I think I said $506 million.

Okay great. And that was just since February 1?

That's correct. So you're missing four weeks, five weeks.

Okay. And then just one clarification on the product recall, how much of the cost of the recall will you have to foot versus your supplier? Or are you indemnified for any and are you insured?

The way this typically works is that it's the supplier's obligation. So we expect to be indemnified.

Okay, great. Thank you.

Evan Morris, Bank of America.

Good morning, everyone. Dennis, you mentioned earlier in the call about just better that you finished the first quarter with better than expected margins in both the legacy business and the acquired business. I guess one, can you talk a little bit about with it across the board, was it certain segments, what drove it, and I guess just thinking about the sustainability of those drivers to the upcoming quarters?

Evan, this is Chris. I would say the biggest driver to that is both organizations in their own way have been working on this process that we call simplification which is really driving complexity out of the business. When you're in a customized business like ours where you're building custom products your complexity is your largest enemy.

And I think when the Private Brands organization was restructured and separated from the ConAgra branded organization and for the last two years the legacy TreeHouse organizations have both recognized that common enemy and been working against it. So I would say operational improvements have been the biggest driver of that margin enhancement.

I would say if there is a secondary driver, particularly as we look toward the back half of the year we expect to get some synergy out of the now combined size of the Company and we expect that to pay dividends. So we think there's good reason to believe that there's an opportunity to continue to enhance our margins.

Was that I guess just taken from your broader comments that the better than expected margins really was across all of the business segments?

Yes, it's difficult to pinpoint it to any one place. I would say our condiments business, to Dennis' point growth in Private Brands and the legacy TreeHouse had a particularly solid first quarter. They made real progress against driving complexity out of the business and that paid significant dividends on both sides of the condiments business.

And then just I guess Dennis on the synergies, when you came out I guess at your Analyst Day, whenever it was, and you talked about a lot of the synergies they were focused more on purchasing, distribution, things like that and you didn't really talk much about plant closings but you have since announced one or two. I guess one, are those closings and those savings incremental to your original thoughts on synergies and if so, is there still considerable opportunity for those types of initiatives to add to synergies, and you talked about them being conservative in the past?

When we go through the original assessment, we made some broad-based internal assumptions based on making a more efficient supply chain and that may have included our assessment of what we thought plants could be. So as we make these adjustments, I would say that they were built in primarily into our thinking.

We're never in a position to announce until we've done a full analysis and sometimes what we think at the beginning doesn't quite work out and we see other opportunities. So the two plants we announced were pretty much contemplated in our original estimates. So I wouldn't call those incrementally.

But as your thinking and continuing to do work on that supply chain are you starting to find again opportunities that you think may be incremental to your original views or thinking?

Evan, this is Sam. I think that will come out of the discussions we're having with our major customers. And as Chris indicated we've had great contact there.

It is a matter of simplification and there is also a stream of incoming capital expenditures to improve productivity particularly in coffee and biscuits. So it's an amalgam of those things but it is more -- it's highly dependent on customer engagement here as compared to a branded Company.

That's very interesting. One quick last one, bringing up the bottom end of your guided range, was that more related to some of this margin upside that you're talking about, is that what gives you the confidence to bring that bottom end up, is that the primary reason?

Actually I would say it's rather kind of a host of little things and clearly the jump to the margins, Chris talked about some of the positives we're starting to see in the coffee business. I think some of the opportunity in the back half of the year potentially on exchange rate, there's a lot of things the right now seem to be moving towards our favor we thought we could tighten the range up.

We certainly hope that these trends continue and we don't wind up with an unusual headwind along the way. I hate to go back and go through history but I do remember back in 2011 we were off to a very good start and suddenly it stopped raining in the US from about mid-June until September and a drought hit and we got a surprise. So nothing looks like that will happen yet but we always worry what can happen when you're nine months in but we are certainly off to a positive first three months.

Understood. I will pass it along. Thank you.

John Baumgartner, Wells Fargo.

Goodwin, thanks for the question. I'd like to ask about the private brands SKUs in the sense that TreeHouse itself has been pretty focused on reducing the SKU complexity for a few years now.

And as you get into the acquisition here, what you seeing in terms of low profit or no profit SKUs in the acquired business? How sizable are the opportunities to address that and how should we think about the impact on volume and margins in that business going forward from an SKU rationalization?

I think they're in the same stage we were probably three, four years ago and as we look through the list I can see that and they would say the same thing. They've got too many variations of very similar formulations and too many package sizes in the same opportunity exists there.

So we're just starting to kick that activity off. And I think we're going to see some opportunity here in the condiments business as we start to consolidate there. But we're gonna go through the same process.

And to be honest the teams are fired up about that opportunity, especially operating teams where they kind of pay the price in the manufacturing side for these SKUs. So they see the same thing we saw and they are excited about the opportunity to start streamlining the opportunity.

We talked to them about what we did in our soup business, what we've been able to accomplish in our salad dressing business and they love the results. And so we've got a very engaged team looking at that. But Chris is a baseball guy, we're barely in the first inning there with Private Brands business.

Thanks, Dennis. And just maybe a follow-up on that point.

In terms of the capacity situation you closed down a few facilities over the years in terms of soups and dressings and you announced the Massachusetts one a week ago. But can you speak a bit to where your utilization is right now to relative to maybe your peak over the years and how do you think about the opportunity to maybe enhance that capacity either through new business wins or closures going forward?

Yes, John, this is Chris. I would say we have excess capacity in most of our asset base. There are some that certainly that doesn't apply to.

Sam mentioned that we're adding capacity to coffee. But for the most part in part because of the number of changeovers that we do, so that's a big driver to why we view the opportunity to rationalize the tail and rationalize small runs as such a big opportunity, but we've also we've gotten the question over the last two calls about the margins in the Private Brands business. And when you take $1 billion of revenue off the top line of a business there's no question that there is an absorption impact to that that materializes in your margin structure. So we think over time as we're able to grow this business and push more pounds and more revenue across that asset base it will have a meaningful impact on our overall profitability and certainly on our margin structure.

Thanks, Chris.

Akshay Jagdale, Jefferies.

Good morning, this is Lubi filling in for Akshay. Just regarding the acquired Private Brands business, obviously still relatively early days for you but you clearly have a number of initiatives to improve profitability in the business. I'm just wondering overall is there anything that makes you feel more or less optimistic relative to your initial expectations about the opportunity to improve operating results within that business either near term or longer term?

This is Sam. I will offer two instances.

First is that we as I mentioned we had an Annual Meeting of 560 of us. And if you go back to the pedigree of people in that business we've actually come from 45 different predecessors. And over a three-day period I watched our 12th deal in 10 years really form a new social basis and we're seeing it in great cooperation in dealing with our customers.

I see it on an integration steering committee and then in the supply chain as well. But you can have great plans that they have to be matched with a true belief and a great enthusiasm. And this is the best that I've seen since 2007 when E.D. Smith came in.

Then to reiterate on the customer front, I mean for 10 years we've struggled to get the top retention on a broad scale basis, we've done quite well on individual categories and individual customers. But if our forward bookings, appointments with executives now, we're reaching our capacity and that's a delightful change. I think you should take those as harbingers of circumstances changing in our favor and I know that our operating teams and strategic planning teams will take full advantage of that circumstance.

Thank you, that's helpful. And then are you able to quantify at all your expected synergy capture? I know for this year you said you don't really expect to capture any real synergies until 3Q but are there any specific numbers you can share on synergies either for this year or longer term?

Lubi, Dennis here. We typically don't do that. To be honest it sometimes is challenging to uncouple what is an original synergy which is operating which is shared between two different businesses.

So what we do is we put together what we believe is a synergy opportunity which translates to margin improvement or operating expense leverage and as we achieve those targets then we know we've been successful. I think there are certain areas we can be a little more specific but that's mostly purchasing and we don't share those types of numbers.

Okay, thank you then one last quick one if I may, just on net interest expense it was a little bit lighter than we were expecting. What's a good number to model for the year?

To be honest I think we will be pretty close to where we had originally estimated. We may have a little bit of upside depending on Fed interest rate changes. Our original model anticipated three small adjustments.

I think realistically we're at two at the most. And if we had an hour I could go through all SORTS of theories on interest expense but maybe there will only be one. But there could be a small upside in interest due to Fed rate changes but otherwise I think our original guidance should be pretty solid.

Okay, thank you. I will pass it on.

Brett Hundley, BB&T Capital Markets

Hey, thanks for taking my question guys. Dennis, the Private Brands margins, the EBIT margins that we back into for the quarter were indeed encouraging from what we expected at this point. And I'm just curious if it makes you more hopeful in your pursuit of in your initial pursuit of expanding, re-expanding those margins more than 100 basis points?

You know after one quarter I would say that we're a little more encouraged than not and so we're off to a good start. You never know what is going to happen with input costs down the road and so on. But clearly the teams are off to a good start in Private Brands.

I appreciate that. And then also while I have you, Dennis, just on currency and revisiting that, there were two things I wanted to ask you.

I think before you guys had talked about in dealing with an environment maybe there's some changes you can make at the operating level and across the board in order to mitigate some of that currency effect. I just want to get a very quick update there and see if you've been able to make any changes that could benefit you. And then secondly are you able to hedge or lock in some of these newer levels for the back half of the year?

Yes and yes. So on the first one we are starting to make some adjustments in production. Trying to take advantage of the rates in terms of raw material where we purchased some of the consolidation in condiments is going to help.

E.D. Smith is predominantly in our condiments world, so we think we've got a little bit of opportunity there. We've been working on again to take advantage of the Canadian dollar difference on raw materials.

And secondly we have done some hedging into the back half of the year at rates above 72. Indicated most of the first half was locked in pretty close to 72 so you don't see a lot of upside in currency. Certainly not in Q1 and only marginal in Q2 but we should see more improvement in Qs 3 and 4.

That's good to hear. And Chris just on the coffee environment, I just have a question, I just have a two-part question for you. On the margin side, do you think it's fair for me to assume that you guys were operating at a certain level before the entire category kind of did what it did.

Your margins came down to a certain level and we can all estimate where they were and where they've gone to. Do you think it's fair for us to assume that in this newer dynamic that you guys can maybe get back to halfway to where you were previously?

And then the second part of my question is have you guys made any updates or made any headway on kind of tiering your coffee offering? I think that's important as it relates to winning back customers and improving volumes. I'm just curious to get an update on that.

Yes, I would tell you I mean in terms of the margins we're comfortable with where the margins are. As Sam mentioned we're adding capacity to the business and it's certainly a capital investment that has -- that still has a logical return to it.

We do not have in our numbers a significant uptick in coffee margins built into them. We've kind of assumed that the business is where it is now and our job is to win back the share that we lost over the course of late 2014 and 2015. Remind me what was the second part?

Tiering in coffee?

Yes, Sam talked about this a bit last time. I think most retailers are now emerging with a two-tiered program. There is a product line that plays kind of below the $5 level for a 12 count.

That business represents about 60% of the private label share today and has grown quite nicely and we're participating in that. I think that move to the lower pricing and lower price structure has also created a bit of a vacuum and there is an emerging gap between that price point and where the brands are sitting that creates an innovation window if you will.

And a number of our retailers have begun to take advantage of that and launched higher performing products if you will to play between the $0.40 per cup price level that private label that represents 60% of the private label business and the $0.60 that represents -- $0.60 a cup that represents the low end of the branded segment. So I think you're right and I think that segment will begin to grow as more and more retailers take advantage of that innovation window if you will.

I appreciate that. And then just one last for me, guys, I'm just curious about sourcing of more natural or organic type ingredients and maybe if this is becoming harder or more difficult and what you're seeing from your chair.

Because I personally think the one of your opportunities with the acquired Private Brands business is to maybe copy some things that you've done on the legacy TreeHouse side. And I'm curious if it's getting harder to procure those ingredients? You have sleepier categories maybe in cereal or pickles but on the organic side they are growing really well.

So if you're able to get the inputs, do you feel you have a clear line to gaining distribution with some of those products? I hope that question is clear.

It is. This is Sam. And part and parcel of what comes with the change to millennial consumer tastes and the opportunity it offers around the perimeter of the store and in particular snacks is that one has to go to a global supply chain and I think there are two issues to deal with.

One is aggregate supply and the conditions that can affect crops in that regard. We have made commitments to be actively engaged in these agricultural areas as opposed to relying on third parties. And as Dennis has indicated, he and Chris lead a program of hedging forward now across a much larger portfolio of ingredients.

And I think the other matter is that food safety particularly with regard to dealing with global suppliers now it will -- we've long regarded that as a cost of doing business and now we've got to commit ourselves to making a strategic advantage out of creating a food safety network that not only spans this continent but the whole world. We are in the vanguard of that movement in private label food and beverage.

Thanks, Sam.

Jon Anderson, William Blair.

Good morning, everybody. Sticking with the better-for-you business, I think you mentioned legacy TreeHouse now represents about 18% of the business.

Where are you in the development of that business? Where do you think that can go over time based on the trends you're seeing in the marketplace and conversations with customers?

I don't know that we have a hard-core number built into our minds, Jon, but we certainly see it as a driver of growth in the industry as a whole and certainly in our business. And so I think it's largely driven by consumer education as consumers get smarter and smarter and more educated about what they are eating.

It lends them to choose options that are perceived to be better for their overall health. And so I don't see that changing in the short term. Obviously our success in that is tied to an ability to work with our customer partners and develop a set of products in an expedient manner that move down that path.

Do you think in better-for-you segments that private label is represented as well today as it is in natural brand equivalent and opening price point?

I'm not sure I understand the question.

I guess what I'm trying to get a little better sense for is if you think about the natural and organic kind of segments of the categories in which you compete is private label share within those better-for-you segments well represented? In aggregate I think private label is in the high teen share range as a percent of total food and beverage. What I'm trying to understand is private label as well represented in the better-for-you segments from a share standpoint today or is there room for upside there?

Okay, I understand what you're thing. Actually in better-for-you private label shares tend to be well above what they are in the national average, in many categories as much as 2X the size of what sort of the private label ordinary fair share of roughly 20% is.

Okay, that's helpful. Last one for me, we've talked a lot about and you've talked a lot about the impact of the Private Brands acquisition and the capabilities that TreeHouse can bring to improve service levels within that business, regain lost distribution if you will.

I'm wondering if there's also an opportunity because of kind of the scale of the combined entity for this to have a positive influence on your legacy business in legacy categories whether it be reducing net lanes of cost or other dynamics that can help you accelerate the performance of your legacy categories? Is that a decent way to think about it?

Jon, I think that's the way to think about the opportunity. And I think as we see our businesses coming together and our distribution points coming together it does allow us that opportunity. The Holy Grail of food is shipping full truckloads and to be able to better balance and better set the loads with more products is going to be a plus.

So I think we had that opportunity. We're not there yet but your point about this being it goes both ways. We're seeing improvement in Private Brands but I also see that this is an opportunity for our legacy business as well and that was one of the things we saw when we went into this.

So even though some people thought the categories themselves may not be the most interesting the fact that we've got, and I think Sam you've used 26 categories, we've got this category it gives us the scale to be a better supplier, not just a bigger supplier. And that's what we want to leverage in the years to come.

By the way, Dennis, on the 26 I just happened to run out of letters.

Jon, I would say one of the places where scale will really benefit us is not so much in the ingredients that go into our products but certainly in areas like packaging. As we bid out lane rates I think there's a significant opportunity for us to become more efficient and leverage the fact that we're twice the size of what we were six months ago. Fuel costs, and even in many of our indirect costs, the prices that we have to pay to fly our people around the country and for those kinds of things, I think long term there are significant opportunities that come from our greater scale in that space and further differentiate us from the people that we typically compete with in the marketplace.

That make sense. Thank you guys, I appreciate it.

Robert Moskow, Credit Suisse.

Good morning, this is Cathy Xu on for Robert Moscow. Thanks for taking my question.

So my first question is on your tax rate guidance. So your guidance now implies 37% to 38% for the rest of the year. But looking back in history we can't really find a time when the rate was that high.

So why would it go so high this time? Would you say there's an opportunity for the guidance to go lower for the year?

I still am thinking we're in that 35% to 36% for the full year. The first quarter, the issue there is the net loss was actually very low. And so a little light on discrete items have a more outsized effect on that tax rate.

So I think this is the anomaly. But as we build up the income in the back half of the year I still think that we're in that 35% to 36% rate. So I'm not expecting to see 37% at this point.

Okay, thank you. And one more question. You mentioned the acquired Private Brands business continued to decline in 1Q.

Do you have that expectation for when those declines will stabilize? Or should we expect the declines to persist for the rest of the year?

At this point we're still thinking that we'll see negative volumes for the full year but I'm hoping that as we get to the very back end of the year we will start to see stabilization and obviously we're going to push hard to see growth in the next year. But I think in this first year just because of the sales cycles you have in Private Brands it's tough to turn that around in year one.

Okay, thank you.

Thanks everyone. We're delighted to have you with us again today and we look forward to seeing, visiting with many of you over the summer and then lastly reporting next our midyear progress on Thursday, August 4. Again thanks.

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