TreeHouse Foods Inc (THS) 2016 Q2 法說會逐字稿

Welcome to the TreeHouse Foods second-quarter 2016 conference call. This conference 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, expect, 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, 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 statements contained herein to reflect any change in expectations with regard thereto or any 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 would like to turn the call over to the Chairman and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed.

Thank you, PI. Good morning all and welcome once again to our TreeHouse, the home of private label.

As you may have read earlier this morning and will now hear, our transformation is gathering momentum and is well along the course to achieving its full strategic potential. From honorable beginnings we have steadily grown, guided by a strategic compass while navigating the currents and tides of an ever-changing customer brands marketplace. A decade later, still on our original course toward strategic growth, we have the transformative opportunity to establish our TreeHouse as the industry leader in private label food and beverage.

Before Chris and Dennis update our recent progress and provide their insights, I would like to offer my personal perspective on our passage to date and the voyage ahead. First, after a Midsummer conclave regarding the future vision of our TreeHouse, our initial plans for integration of the Private Brands acquisition have not only been validated, but also accelerated, as once former rivals are now united as one in our common cause. Next, our initial concerns about the TreeHouse-Ralcorp-ConAgra integration, those of grocery customers' skepticism and resistance have proven to be short-lived, as our valued partnership with grocers and customer brand development is extended across our now doubled product portfolio of more than two dozen major categories.

Also, in considering the financial synergies of our combination, we are on track to achieve all of its planned benefits. We are particularly pleased with the ready collaboration exhibited by our jointly formed procurement, operations, supply chain, and IT teams. Fourth, and last for the moment, we have found that the spirit of our TreeHouse, growing strong, standing tall, resonates throughout our TreeHouse household, inviting all to join in a choral ensemble as we honor past visionaries, salute present captains, and appoint future leaders in seamless succession.

With that strategic perspective from the helm in mind, I will ask Chris and Dennis to provide their operational insights and financial analyses regarding our mid-year progress and future plans. Chris?

Thank you, Sam.

The second quarter marked another period of progress in the legacy TreeHouse organization, with the business moving forward both sequentially versus Q1 and on a year-over-year basis. This continued improvement in operating results emanates from an ongoing cultural shift, from a focus predominantly on integrating acquisitions to an organization that must now balance integration with organic growth. The seeds of this shift were planted roughly a year ago, as our obsession with customer intimacy drove us to add customer-facing resources and narrow the focus of our sales and marketing teams to a smaller set of highly adjacent categories within our portfolio. These foundational adjustments have been bolstered by investments in private label shopper research and by our ongoing business simplification initiatives. In short, focusing on the private label fundamentals of customers, categories, consumers, and capability building is driving steady improvement.

In terms of customers and categories, our progress was most pronounced in single-serve coffee, where the recapturing of supply at retailers lost in late 2014 and early 2015, in addition to new business wins in office supply and broad line food service distributors, allowed our unit and revenue growth to exceed the growth within the category and broader private label segments. We now estimate that we have regained roughly half the share we lost in the aforementioned period. And with more new and returning customers in the commercialization pipeline, we can now turn our attention to returning our share to our mid-2014 levels, albeit at a lower margin structure. As a result, we continue to believe single-serve beverages will be a growth avenue for TreeHouse in the foreseeable future.

Equally important to that belief was the fact that brewer sales grew in the second quarter at a rate of 2.6% on a year-over-year basis. This dynamic continues to be driven by the less-than-$100 machine segment. Lastly, private label continued to show relative strength within single-serve, growing 43% in the quarter, which was 36 points above the category rate. This growth means that, for the first time, private label as a whole has taken over unit share leadership in the category and now represents 20% of unit sales.

Our gains in the second quarter, however, extended beyond single-serve coffee, as several other categories, including hot cereal, carton soup and broth, pickles, tea, and snack nuts showed year-over-year improvement. Our investments in consumer insights continue to pay dividends, manifesting in continued strong growth in the better-for-you and premium segments of our portfolio, and providing the necessary learnings that prompted the launch of a new product line. The better-for-you and premium segment of our portfolio was up 15% in the quarter, and the natural and organic subset of these products were up a robust 50%.

Our growing understanding of the private label shopper landscape allows us to support our retail partners' choices as they assess whether to utilize their vast resources in building the array of niche brands that frequently trade in this space, or to invest in driving their own store brand equities. This premise led to the launch of a new cold brew coffee line with a number of our retail partners. The product is produced on the asset base we picked up in the Protenergy Natural Foods acquisition, and it is an example of how private label shopper insights can extend our reach and our retail partners' equities into new spaces.

The improvements in growth are also important in giving our organization the continued courage to forge the ongoing war on complexity that is inherent in any custom product supplier's business model. Our focus in growing capability to attack non-value-added complexity, both in our cost structure and that of our customer partners, continues to be a central theme of our success.

Lastly, and perhaps most importantly, our organization proved that it could both grow the business and simultaneously integrate one of Private Brands business units with a legacy TreeHouse unit. July 11th marked a major milestone in the combination of the two businesses, by bringing all our condiments businesses on to a common TreeHouse SAP platform. The transition impacted a broad cross section of our customer base and we are happy to report that we have maintained service levels in line with our usual high standards throughout the transition.

In short, I'm satisfied with the progress we have made in both growing the business and managing the operational realities associated with our business model and with the integration of the two largest suppliers in the private label arena.

I'll now turn the call over to Dennis. Dennis?

Thanks Chris.

Both Sam and Chris have given you a good sense as to the positive momentum we are building in 2016. Rather than walking through the segment results like I usually do, I believe the explanations in our press release are pretty self-explanatory. Instead, I want to focus on some of the key aspects of our results and our outlook for the year.

In terms of sales, our volume mix in legacy retail business of 4% was one of our best quarters in many years. Our recent realignment of resources closer to our customer base is a key part of the growth story, as we focused on smaller, more nimble teams that are accountable for all aspects of their businesses. This has not only helped us at the top line, but also increased our focus on product development, as Chris has pointed out.

In looking at the Private Brands business, sales are soft, but this was expected. We've said many times over the years that it takes a couple of years to realize the benefits of consolidated sales approach and this will be no different for Private Brands. However, we can control things like product costs, customer service, and operational efficiency more directly. In that regard, we are really doing quite well. For instance, despite a volume decrease from last year of about 3.6%, our margins are up 270 basis points from last year. This enabled our gross profit dollars to increase by 8.3%, despite the drop in volume. And from an efficiency point of view, our order fill rates for the business, which had been a major issue in prior years, averaged 97.9% for all categories, while our bigger and more profitable categories were mostly above that average. Having addressed most of the operational issues, our focus is returning to growing the top line. I firmly believe, like Chris and Sam, that our organizational changes will provide us with the focus needed to rejuvenate our top line at Private Brands.

In terms of second-quarter consolidated TreeHouse results, I would characterize them as being consistent with our plan for the year. Net sales, margins, and operating costs were on track with our forecast, while interest expense and the share count were a bit higher, offset by a slightly lower tax rate. In looking at interest expense in particular, our average interest rate on our revolving credit agreement and various floating term loans was 2.5% in the quarter. This is really a very low rate given our overall credit structure. As a result of the acquisition of Private Brands, our ratio of fixed to floating rate debt had become about 40% fixed rate and 60% floating rate. This relationship is just about inverse to our typical ratio and the ratio used by most businesses in the food industry. So to adjust the ratio back to our historic norm and avoid a costlier and higher interest rate long-term debt refinancing, we elected to swap out a portion of our floating rate interest for fixed rates. These swaps allowed us to lock in LIBOR rates of about 0.86% on $500 million of debt for three years, but starting on January 31, 2017.

For reference, the current 30-day LIBOR now stands at about 0.49%. One year ago that same rate was about 0.19%. Our expectations are that interest rates will continue to rise in the future, so it was the right time to adjust our interest rate structure. Our total debt now stands at $2.9 billion, a significant increase over the $1.2 billion we had outstanding at the start of the year, but all of that growth was for the funding of the Private Brands acquisition.

I think the key metric in regard to debt is our leverage ratio. Our leverage ratio of debt to EBITDA was 3.68 as of June 30th. When we drop below 3.5 times debt to EBITDA, we will see a corresponding drop in our interest costs. Despite significant growth we have had over the past two years, we remain prudent in our capital structure. This allows us to remain active in the deal market if the right businesses for us come to market.

Next our tax rate. In the second quarter, our effective tax rate was lower than expected at 29.4%, compared to our original expectations of 35% and the 34.4% we had in the second quarter last year. The lower rate in the quarter was primarily due to a $900,000 reversal of a tax reserve associated with a prior acquisition. While this adjustment is clearly immaterial in total, given the relatively low taxable income, it also reduced our effective tax rate by 280 basis points. We still believe that 34% to 35% is the best estimate of future effective tax rate for us, excluding any special tax adjustments.

And finally, our share count for fully diluted shares outstanding in the quarter was 57.33 million. That figure includes the full quarter effect of the shares we issued to partially fund the Private Brands acquisition. Additionally, as we do every year, we grant our annual incentive shares in the summer to coincide with the anniversary date of our initial public offering. This year's grant fell on June 27. Our third and fourth quarters will include the full dilution effect of the annual offering, which has grown due to the additional participants from Private Brands. We expect the average shares outstanding will be 58 million for the third quarter and 58.1 million for the fourth quarter. Which now brings me to the outlook for the balance of the year.

As I said earlier, we are tracking very well to our forecast and expectations for the year. Overall, our commodity input costs have been consistent with expectations and we are pretty well hedged on all inputs that can be locked for the balance of the year. We see slightly increasing interest rates in the back half of the year, but that was part of our original budget. And with sales and operating costs remaining on track, we are comfortable leaving our full-year guidance of fully diluted adjusted earnings per share at $3 to $3.10.

In looking at the third quarter of 2016, our internal budget for the year and most recent internal forecasts are still very much aligned on earnings. Our plans are based on our best assessment of the timing of synergies, investment spending in our sales and marketing organizations, and most importantly, the timing of sales. I mention the timing of sales because the Private Brands business is more skewed to fourth quarter seasonal sales than the legacy TreeHouse product categories. And those sales tend to have higher average margins than the rest of our business. This will lead to an increased percentage of both sales and profits shifting to our fourth quarter. As a result of these dynamics, we expect third-quarter adjusted earnings per share to be in the range of $0.75 to $0.80, which leaves our fourth quarter earnings estimate to be in the range of $1.23 to $1.28.

Now on a personal note, I want to address my decision to retire as the CFO of TreeHouse and move to an advisory role with Sam and the rest of the management team. This is entirely a personal decision and has nothing to do with TreeHouse in general, our prospects for the future, or the organizational changes we are making to take us to the next level. First of all, the Company is in very good shape right now. We are well on our way towards the successful integration of Private Brands and we have inherited a tremendous team that fits in seamlessly with the TreeHouse culture. They will be an incredible asset to our Company over the long-term. And I'll continue to be involved on a senior level with integration strategy.

Second, the new organization changes we are putting in place are exactly what we need to take TreeHouse to the next level of growth and profitability. Sam, Chris, and I, along with the rest of our senior team members, have worked on this together and are fully aligned on the changes. And because I'm sure someone will ask or assume, I want to be crystal clear: my health is fine. I'm close to 60 years old, so maybe my mind and body aren't in perfect working order, but I am par for my age. Okay -- maybe a bogey or two thrown in occasionally, but that is to be expected. My decision to retire from the CFO role is based on my personal belief that TreeHouse is now ready for a new CFO with ideas, insights, and the energy level to take us well beyond the nearly $7 billion and 16,000 TreeHouse employees we are today. I will remain as CFO until we, including me, find the right person to take us to the next level.

I have no firm date for this transition to an advisory role, so you can be assured there will be no gaps in financial leadership. And when we bring the right person in, I will be involved in the on-boarding activities to ensure a seamless transition. And finally, while I can always point to mistakes I have made and things I could have done differently, I take a ton of pride and satisfaction in knowing that I helped to develop our finance systems, corporate development, and investor relation teams that are the best in the business. My successor will have the benefit of an extremely talented group of people who somehow manage to make me look good despite my best efforts to the contrary.

Sam?

Thank you, Dennis.

Before opening for Q&A, I would like to comment upon today's organizational announcements, our strategic approach to executive succession, and our unwavering commitments to external expansion and internal improvement. To begin, our fundamental premise revolves around a go-to-market strategy dedicated to our customers, their house brands, and their custom products. We adapt an unrivaled product portfolio to our customers' specific needs and then deliver with unmatched service capability. As our knowledge and understanding of private label have deepened, our strategic construct has expanded successively to include the four Cs of category, customer, consumer, and capability.

In his first four years as a TreeHouser, Chris Sliva has mastered the practical application of this conceptual framework and its implications across the whole of our grocery, food service, and industrial businesses. As President, Chris will not only be a worthy successor to our founders, but also the standard bearer for growing strong, standing tall in our ongoing transformation to industry-wide leadership.

To continue, while we at TreeHouse have always been blessed with extraordinary partners, Dennis Riordan has proven himself to be incomparable, the first among peers and confederates alike. From the CFO platform, Dennis has vaulted from expert technician to accomplished manager to strategic leader and, at the highest level, champion of TreeHouse shareholder value. Beyond that, Dennis is a close friend and next door neighbor. I should note that he has never taken a corner office with executive trappings, and always been just a short walk away. I will miss him in the daily ebb and flow of our never-dull business. We can all be comforted, however, by Dennis's continuing engagement, just like that of his former colleagues, as a senior adviser to the Company.

To conclude, while our transformation will entail great strategic operational and financial change elsewhere, it will not alter our strategic mandate for external expansion. M&A has been and will remain a growth engine that propels our strategic momentum in the marketplace for customer brands and custom products. In parallel, our internal investments in organic growth, operational productivity, organizational development, and process standardization will both expand the margins of our present portfolio, as well as leverage the synergies of future M&A-based additions.

Matt, you may open the phone lines now.

(Operator Instructions)

John Baumgartner with Wells Fargo.

Hi good morning thanks for the question. Dennis congratulations on a great run. We'll definitely miss your insights going forward. Question for Sam or Chris. I would like to ask about retail pricing.

In that branded price promotions in the center store I guess pretty broadly have been down for the better part of the past two years it seems and even for a number of your categories as well. What is your impression of the focus by brands on dialing back trade promo or reallocating it? How are you thinking about the risks to the current rational environment? And then maybe what kind of read across should we take from the competitor pressures you noted in the away from home channel?

Well I'll take the first part of that and then maybe you can come back and remind me of the second and third parts of the question. But in terms of promotion in the center store, we certainly have noticed that promotions in our categories have ebbed a bit and I think has largely been positive for our business. That is a dynamic that has gone on in the industry for years and years and years.

I have worked from packaged goods for over 30 years now and as far back as I can remember, we have talked about the inefficiency of trade promotion spending. So I think what you have now is just a broader base of suppliers who have begun to actively, all sort of at the same time, begin to work against that dynamic. I think that bodes well for private label, because private label, typically, has been an under promoted segment of most of the categories.

And so in some cases, you'll see retailers turning to promoting our products more. And in other cases, it simply means that our products will have to live at the normal price deltas that they enjoy on an every day basis.

Chris just to build that, what are the risks to that going forward of a reversal there? And what is the read across in the competitive pressures in the out of home channel?

Look we've operated in a high low promotional environment before. Our business will find a way to grow and be successful, whether our branded partners are promoting or not promoting. So I think we can only react to the dynamics that are at play and make adjustments. I don't think it has a long-term impact on our strategic premise.

And I'd just add that the price gaps we are seeing are in fact, widening. Which is to our benefit. And they are at close to the highest level we've seen in a while. As I track the internal on our basket of products a year ago, it was about 27%.

And with the categories, we have a little bit of change, but we are up to about 29%. So it is about a 200 basis point delta on a year over year basis. I think the lack of promotion that we're seeing or the lower amounts of promotion is actually will help us in the long-term.

As far as food away from home is concerned I said last quarter that is a focus area of ours. It will remain a focus area of ours. We took a bit of a step back in this quarter in terms of food away from home sales.

That had more to do with what was going on in the baseline a year ago and an inventory position with a fairly large customer who buys one portion of our product line in the space. That said, our belief is that we are underdeveloped in food away from home and it remains a significant opportunity for us to continue to grow the business in that space.

Thank you.

David Driscoll with Citi Research.

Thank you and good morning.

Morning David.

First I want to say congratulations to Chris. Dennis, say it isn't so my man, say it isn't so. It won't be the same without you and thanks for all the help. I have two questions here.

First one let's go to Dennis and then Sam one for you. Dennis, just on the margin expansion expectation for Private Brands, is it still at 100 basis points of expectation over the three years? And then maybe now that you have had more time with the [business] can you talk a little bit about the what is embedded in that margin expansion? What gets us there?

And then for Sam, you made a really interesting comment recently about the potential to get to $10 billion in revenues. I'm a little confused as to how you get to that kind of figure. Is it an M&A related comment? Or was this maybe the potential of Private Brands and other portions of the business you currently own? Thanks guys.

All right. Let me jump first David on the margins. You know the margin expansion year over year is running well. We expected that. I'm still quite confident in the guidance we gave on margin expansion over the next two years, with the 100 basis points moving up to 250.

There is nothing to indicate we can't do that. The more plants we get to see, and we see the continuous improvement processes that the team have worked through, I certainly hope that's conservative, but we are not ready to jump out that far at this point.

David, I'm delighted to hear someone pays attention to what I say about these things. With regard to.

Always.

With regard to the $10 billion, shortly after we acquired the business, I laid out a long-term overview of a long-term plan with our management that showed that major sources of growth were first of all a recovery of what had been lost at Private Brands in the interim that after it was no longer operated by Ralcorp.

I think secondly we have across the totality of our business, clear indications that we will run these businesses better, both at Private Brands, as well as legacy TreeHouse than we have in the past. And that those benefits will come from the economies of scale from greater volume and importantly, from improved processes and procedures internally. The other matter is that, when I look at the cash flow models, we clearly are going to pay down debt in an orderly and expeditious way. And that will offer us more capital when we do see acquisition opportunities.

Last point is that while we will remain in the private label business, when you look at the growth in better for you products and new and emerging small, local brands, and I think Chris indicated that our volumes in the better for you categories were up 17% and in the organic and the related matters up 50%, it certainly shows that investment in innovation and better for you foods is something that both our customers and our consumers want.

Sam is it fair to say that a substantial portion of this, this gap between current revenues and the $10 billion is on the organic side? And then whatever the remainder is, is your thoughts on M&A?

It's really, David, it's a combination of those things. One had, we can make a set plan but you have to look at market conditions so that, if things, those market, we have to be prepared to grow in both that internally and externally. But it is largely going to be related to market conditions and what is, in fact, we are able to do with regard to innovation on the one hand and then acquisition on the other.

Okay. Thanks so much guys.

Thank you.

Akshay Jagdale with Jefferies.

Good morning and Dennis, congratulations hopefully you'll take some time to find a replacement, so we'll still have you on these calls. But we'll certainly miss you.

I wanted to ask maybe I'm making a little too much out of this. But the wording on the guidance as it relates to GAAP versus non-GAAP changed pretty significantly.

Can you address that Dennis a little bit? I don't know why the charges are something that can't be estimated. I know the change there, I'm just trying to understand what happened.

Not sure, Akshay. I think we are comfortable with $3 to $3.10 on a consistent basis with what we have done in the past. I think the only thing I might have put a little bit of a nuance in is when I talked about the tax rate itself subject to adjustments.

The reason I always say that is when we get to the third quarter the tax return finalizations you file the tax return on September 15, and inevitably, there are some final adjustments that take place there. So there could be some tweaking in the tax rate, especially with the low, relatively low amount of taxable income, due to the integration related charges. So other than that, I think we are all very comfortable with where we stand on the guidance.

Great. I was probably reading into it too much. So, what was, can you help us with the operating performance of Private Brands this quarter? In the 10-Q you give us the operating number. Do you have that hand by any chance?

Well I'll reiterate the a little less than 4% volume decline, which was very much in line with what has been going on over the past 18 to 24 months. It's a slow process to turn that around. But as I indicated, the margins are up 270 basis points more than offsetting that volume decline.

So the teams are working hard to, to find those incremental sales. But, and Akshay you have been around us for awhile. You know it's about a two-year process it seems, to one, reestablish, two, present, and then take advantage of, you only get to sell once a year in many categories due to the seasonal nature of the products.

So I think we are going to get this leveled out next year and then we'll start getting the growth going in 2018. And that's pretty much what our plan has been on almost every deal we've done. I would say we are progressing as expected.

And the percentage margin was up sequentially as well for the Private Brands business that you bought?

That I don't have right at my fingertips, Akshay so I can't answer that.

Okay and just one last one. Again, there seems to be a lot of duplicative costs right related to the acquisition? The segment direct operating profit performance was very impressive.

But the unallocated corporate expenses were way higher than we were projecting and probably some of the highest we've seen. Is that sort of what's flowing through that line? And as you get the synergies to flow through, over time, should we see that normalize to a more mature rate? If I may?

That is correct. So what we have, basically, is two distinct operating units. Right now, Chris has talked about we did our first combination with the condiments business. But we are still running about four different systems for the Private Brands group.

They have their own billing collection. Everything is kind of a duplicate. So you run with almost double the amount of overhead costs.

Right now, and that drives up the unallocated corporate expenses. So two ITs, two everything. So we're going to be, over the next two years, bringing that down and you will see a more normalized number.

Perfect I'll pass it along. Thanks a lot.

Evan Morris with Bank of America.

Good morning everyone.

Morning.

Dennis, congratulations, and pleasure working with you and Chris congratulations as well. Dennis just to clarification on just sort of the wording in your announcement this morning. Getting a lot of phone calls just trying to understand the transition to the senior adviser role and the timing. I guess will you continue to be there and oversee the integration at least through when all the IT and systems integration is in place?

I think there is just some worry this morning that you're going to leave kind of part way through. So if you can just kind of help provide a little bit more clarity. I know you are going to relinquish the financial responsibilities, but in terms of how long you plan on staying on to oversee the integration.

I plan to stay as long as Sam says he needs me and wants me and as long as there is a need for me to be involved in that. So I'm, things are going well. We've got an integration team that, frankly, is doing all the work. And they're doing an incredible job.

So I am not jumping ship. Think of it as I'm moving from the cockpit to the main cabin. And so I'll still be on the ship. It's just that we'll have beer, wine in the back.

Yes, I guess you deserve that now. Chris on the comments that you talked about on the consumer insights work and I know Rachel has talked about this in the past. You are going into you talked today about moving into the cold brew category. Do you see additional sort of category white space opportunities now that you are going to pursue, based on that work?

And then I guess as you think about your base business or your current portfolio, are there categories now that you are in that you think are poised to accelerate some or decelerate? And has it sort of changed the way you're thinking about the portfolio going forward over a multi-year period?

Yes, I think clearly there is other white space that we can get into. And I think one of the most significant opportunities in front of us, is to leverage the broad asset base that we have. I think we said earlier this year we now have 50-some plants in over 96 different processing and filling technologies inside the organization.

So that is an opportunity that demands our attention to see whether we can stretch that into other spaces. That said, we have to do that in concert with our customer partners. Attempting to simply do that on our own, without sharing our thoughts, our, the benefit of our consumer research, and bringing customer partners along, will lead to false starts on that front.

And then, I think as far as growth being differentiated, yes I think there are segments of our category that certainly lend themselves better to the better for you and particularly the natural and organic space. So on the last call, we talked about in the salsa space, we do a disproportionate amount of our business in salsa, in organic and natural products.

That segment enjoys a disproportionately high share of private label in the space. And so, that is part of our ongoing planning as we look forward and certainly represents another opportunity for us. I agree with what Sam said.

I think focus on that space where consumers are demanding innovation will benefit us going forward. Our opportunity and our responsibility is to bring those insights to our customer partners and make sure that they see a profitable way to bring their equities into those spaces as well.

So would you expect then again as you think about it over a multi-year period assuming no changes to the current growth rates in the food industry, but that your business, as you pursue some of these opportunities, that you would expect to see an acceleration, sort of like, if you will, in terms of top line growth at TreeHouse over the next couple of years?

Well, I think as Sam said we will continue to be an acquisition-driven Company. We will, we still see the industry as highly fragmented. But as I signaled in my remarks, I think we have to step up our game in terms of organic growth.

And grow the businesses that we have and the asset base that we have at a at a accelerating pace. That applies both to the legacy TreeHouse operations as well as to the Private Brands operations.

Evan this is Sam. I would like to go back to the first question. With regard to the integration, the organizational changes that we are putting in place, have absolutely no element of additional risk with regard to the integration.

In fact, I think we will see that we will do better than originally thought. Not related to Dennis's change to a senior advisory status, but related to the integration work that Rachel and her team have led, as well as the organizational changes that Chris is putting into place as we merge the two operating companies.

And as I lock across the transition services arrangement, and the systems work ahead, and most importantly the organizational meshing of two different groups, I'm very pleased with the progress to date and anticipate that we will not make any false step at all. Thank you.

Thank you, I'll pass it along.

Our next participant is Bill Chappell with SunTrust.

Thanks good morning. And Dennis congratulations as well and Chris as well. A couple of questions on kind of categories. On snack nuts, can you kind of help us understand is this improvement you are seeing right now, just pretty favorable comps with some of the hiccups of last year?

Or are you seeing some of the distribution gains you kind of expected all along? And then on cereal at least the track data, which I know is not perfect has shown some kind of private label weakness. So maybe you can address what you are seeing there or if that's just more of a timing issue?

I'll just quickly jump on Flagstone. That is the numbers are up a bit and the comps are still rather difficult from last year. I think we won't pass what I would call the tougher comps until Q4 so I think overall we were relatively pleased.

I think it's clear we had to deal with a recall of sunflower seeds and that certainly didn't help matters in the quarter. Not that we had that affected the adjusted earnings as we showed. But it did have a bit of an effect on the top line sales at Flagstone.

So overall we are pleased and I think we are going to see a stronger fourth quarter, especially when we lapse some of the lost business that took place when a customer went inside with manufacturing as opposed to having us supply that. So that's the first. What was the second Bill?

Just the private label cereal trends, which I think has been historically a big part of Ralcorp. Just it seemed at least from what I have seen in the track data, that's been turning south and so didn't know if there was anything going on there? If you are seeing more pressure from the branded players or if that is kind of as expected?

Bill, I would say that as a whole, the cereal category has been a challenging space for a couple of years now. I have seen the data that would suggest private label has fared not as well as branded in an admittedly tough environment. I would say at this point we are just now sort of putting our head under the hood and figuring out, strategically, where we want to take that business. And are more news to come in the future on that.

Okay and then Sam, I think last quarter you talked about rewinning some business that would show up in maybe toward the fourth quarter. Any further update in terms of working with the large mass retailer to rewin some of that business? Or other areas where you see that as an opportunity?

There are two significant areas, Bill. First of all, with regard to beverages and single serve coffee. Chris gave you, I thought, a fine summary of what has transpired to date. The headline is that private label has finally become number one with regard to unit volume.

And its growth rate across all of private label, I think, was 36 points better than the totality of the category. And virtually all that have growth is being driven by business that we are acquiring or reacquiring.

Underlying part of that is that the brewer business that begun to perk up again. And with machines at less than $100, in many cases, half of what they were several years ago that portends very well for increased distribution. And if private label takes 20% of that we'll be quite pleased.

Other areas with regard to the second half. We have, as I had indicated, quickly dealt with issues of retailer skepticism and resistance to this deal. And we have found that for plans in the second half of this year and the first half of next year, that we've got organic growth programs in categories that we would regard as important segments of our business. And with those customers, whom we believe will lead industry growth in private label products over the next several years.

Great and I assume you are not willing to quantify that at this point?

Certainly not to you.

Thanks so much. I'll turn it over.

Chris Growe with Stifel.

Hi. Good morning.

Hey Chris.

Dennis and Chris, I offer my congratulations as well. I know it has been said every time but we want to make sure we pass it on to you and we'll miss you on the calls here. Sam first of all would you divulge that information to me if you wouldn't give it to Bill?

I certainly will but on a different medium.

There we go okay yes. I had two quick ones if I could. First one kind of pertains more to Dennis. Just looking at the gross margin performance in the quarter I want to make sure I understand Ralcorp is making great progress on its underlying margin, but the gross margin was weaker than I expected.

Is that a function of you know the transition services agreements? Is that a function of seasonality? Is it the volume weakness or is it just a matter of the way the margin builds for Private Brands? Just wanted to give a little color on that.

I'm thinking it is on our plan. There is two dynamics I think that are still out there that haven't flipped yet. And one is the Canadian exchange rates. So although on a market base, the exchange rates have gone back in sync, and are pretty well the reality as last year we were locked I think at this point about $0.82.

And we are locked in at about $0.75, $0.74 right now and those will be coming off. So fourth quarter we'll be back to more market driven exchange rates. So that is putting some pressure on the numbers right now. The second is that, as we built-up and have really done a nice job with the coffee business, the mix base compared to last year the margins are a little bit lower.

As Chris said I think on the last earnings call, we'll be lapping that margin fall in the fourth quarter, so we still have a drag in the second and to a degree the third quarter on margins due to coffee. So those are the two main items that have pulled it down. As I look at where we were for the year we are tracking actually pretty well to our original expectations.

Okay and then a follow-up I think for Chris, but somewhat related to that answer then Dennis, first of all I was curious on coffee which was it seems like a strong contributor to growth in the quarter.

Could you give us a sense of what volumes did excluding coffee just to get a sense of what the rest of the base TreeHouse business did? And then just to be clear on the gross margin effect from coffee, was there a little further price reduction or is it more mix with some your new customers there?

I'll take the second one what Dennis is referring to in the gross margin reduction and I referred to in the comments is really the year over year comparative. So we have not fully lapped the pricing reductions that hit the category in late 2014 and through most of 2015. So that's what's driving the margin reduction.

We will break out the rest of the business in the 10-K, but I would say we are very pleased overall with the growth of 4% in the North American retail grocery channel. I mentioned food away from home was a little softer than I expected, I think that was a blip in the quarter.

By and large the categories that are impacted by the better for you and natural and organic space are the places that we're getting the most growth. So the more challenging categories would be in places like non-dairy creamer, aseptic cheese sauce, et cetera, where there is limited ability to innovate product that is what I would term consumer preferred at this point.

Bill just quickly on the rest of the volumes, if you were to exclude coffee, the rest of the legacy business, Chris, sorry, how soon I forget. See this is the old age kicking in.

We can see that now yes.

But the rest of the legacy volumes were positive. And as I look at the total weight shift, so it wasn't just a one trick pony here. This, we had nice results across a lot of our categories.

Okay good color. Thanks so much.

Jon Andersen with William Blair.

Good morning everybody. Congratulations Chris and Dennis. Dennis, we'll miss you.

Thanks.

I wanted to ask on the growth rates of your better for you and premium business and then the natural or organic subset were quite strong. How big are those businesses kind of a percent of your legacy business today? And as you think about the pipeline of opportunities going forward, is there still a lot of white space here? Do you expect that part of the portfolio to continue to kind of perform at the levels you've seen over the past year or so?

Yes the what we call the better for you and premium segments are a little north of 15% of the total portfolio right around 16%. And the natural and organic is slightly less than a third of that, just shy of 5% of the portfolio in total.

And yes, my point of view is that there is a lot of white space there. If you look at retailers, we still have a number of retail partners that do not have multi-tiered programs in private label. In many cases their private label program is simply a national brand equivalent.

So I think that's the biggest white space available to us is continuing to evangelize the opportunity that is in front of them both in terms of growing the business and the economic opportunity associated with shifting the business from traditionally lower margin, lower penny profit branded solutions to private label solutions, which tend to be higher margin and higher penny profit for them.

Excellent. On Private Brands, I'm just I'm trying to understand the volume decline, a little less than 4%. Sounds like it was largely as expected. Is this still, is this trend a function of lost business under ConAgra's ownership? Is there still a tail on that?

Or are there, are you seeing, are there velocity or share losses in parts of that portfolio? And what are your expectations for kind of leveling that business out? Is that a second half thing? Is it a 2017 endeavor at this point? Thanks.

Hey Jon, this is Sam. For the most part, these things are trends that are coming in on the or changes that had happened prior to the deal and kind of that momentum and we will lap those in the next year.

I think the single greatest change that will improve these matters, generally, is that as we put this organization together and as we plan for 2017, we have in all four aspects of our strategic construct category, customer, consumer and capability. And are really zeroed in on what we think are the long-term opportunities for this business operating on a combined basis.

And from an operational perspective, while we may have more than 24, two dozen product categories, there will be business teams devoted to only one sector. And every individual sales and marketing person will have a limited portfolio with regard to either the numbers of product categories they are representing or the numbers of customers they're calling on. And I think that concentration of effort, following the strategic model will pay big dividends for us in the future.

Last point, is that under Chris's leadership, we established account stewards for roughly three dozen of our largest and fastest growing customers. I've made my share of calls on those customers. And my experience is I think been paralleled by that of others that there is a ready acceptance of what we are doing, primarily because customers, grocers see it as good for their Private Brands. And we are not the only game in town, but we're clearly the best when it comes to acting as a partner to develop their in-house branded proposition.

That is helpful. Last one for me is just on the integration work with the condiments SAP transition complete, what are some of the next major milestones?

And as you convert individual businesses does that allow to you roll off elements of the TSA as you progress going forward? I am just thinking about understanding the timing better of some of the major milestones and some of the elimination of the duplicative costs. Thank you.

We are progressing on plan Jon. Condiments are done. We are moving on to some of the other systems that shared with the ConAgra systems themselves so we'll start looking at various pieces of the snack business and have those roll off.

We'll have a lot of that done by the end of the year, so we'll have another piece there. In terms of things like the pretzel business that will knock off another three plants by the end of the year. So it's calculated, well laid out plan that is progressing on track.

In year one, you don't see a lot of costs rolling off. What you see are costs moving from TSA to our shop. And then you'll start to see in 2017, and then more fully in 2018 the true savings of the elimination of the duplication. So that's why you tend to see this ramping low this in 2016, we start to build momentum in 2017, and then in 2018 we start to get full realization of the synergy opportunity.

Thanks guys.

Robert Moscow with Credit Suisse.

Thank you. You may have kind of answered this question in different ways already. But by saying Sam that you are ahead of the game in terms of your progress on integration, and also getting more face time with your customers, is this another way of saying look, internally, you are ahead of your synergy targets, you're ahead of the accretion targets?

There is other factors that make you not want to raise guidance at this time. But internally, do you feel like you're quantitatively ahead of the game?

Hey Rob. Good morning. My points were more holistic with regard to the state of our business and those matters that we have had to undertake with change and whether we are going to reap the benefits or get stuck with the risks. And I was not speaking specifically about quantifying either synergies or earnings in that regard.

But I will tell you, I've lost count, I think this is, I thought this was our 12th deal, I heard it was our 13th. And having been through that, I've got a good sense of those matters that here we are six months into it. And I look around at what our progress is against our plans, I look at the reaction of our customers to this, I look at the willingness of our employees to join ranks.

And in all regards here, I think we are in very fine shape. The TSA does present a different wrinkle here with regard to redundancy of expenses. But as Dennis has indicated a clear plan over the three-year period to right that very well. So take those as a more holistic general view that is more about mitigated risk than it is specific number in a specific quarter.

Okay. Great, thank you.

Amit Sharma with BMO Capital markets.

Good morning everyone.

Good morning.

Congratulations to both Dennis and Chris. Look forward to working more with you Chris and Dennis, I'll look to have you as long you can on the calls.

Just a quick question Dennis on the recall related expenses, are we expecting any more or is $15 million all of that? And you still expect to be fully indemnified for that from your suppliers?

That I believe we are pretty much there in terms of what our true out of pocket costs were. So I don't think we'll see that grow, at all.

In terms of the, I missed the second question, the second part.

Just that you still expect to be fully repaid by your suppliers for that expense right?

We do.

And then on the, on the private label, Private Brands sales conveying here your point about the fourth quarter being the bigger quarter and being on track here, we still expect this pro forma sales drum to be about $3.6 billion?

I wouldn't, I don't know if I would go to that number, only because I don't have it here. We are still looking at the guidance I think we are in about a $6.3 billion in terms of the total.

Sometimes it's hard to pull that out Amit, because we have now combined the condiment business so I don't get a look at these necessarily on a legacy basis any more. So I prefer to look at the grand total of the revenues. And yes we are about $6.3 billion total for the year.

Probably talk more offline about that. One for Sam, Sam we are hearing very good things about organic natural portfolio and better for you. Now when you are talking to your retailers, are you getting a sense from them that they want you to take a bigger role in that segment? And does that in any way influence how you look at your acquisition pipeline over the next couple of years?

I think yes I think it's a conversation Amit. It's always a two-way partnership in this space. So I think our retailers are absolutely looking for what I would call information that is less biased, in their mind. And so that will continue to be the trend. I think the opportunity for us is to forge even deeper relationships in terms of forward planning.

So looking out at two and three years ahead, cycles, so that we can put to work our R&D teams, investments in capital that need to be made in our asset base, et cetera, and truly work as partners in driving a business. We have achieved that level of partnership with a cross section of our customer base. But it is the exception not the rule at this point. So that is where I believe we are headed as a Company and I believe that represents a significant opportunity in front of us.

Chris just to expand that point, is that conversation also in the direction look we understand you are not in some of these categories today, but we would love to have you in those categories given your size and scale and advantage of?

Yes at times. But I think that's bound by the realities of our, of our asset base and whether there is an investment pay back to getting into that space. So sometimes that conversation takes place with they would like to have somebody in a space where there's not a significant profit pool. And obviously that's a tough one to jump in and put capital around.

I think the richer conversations are the ones around like my example of cold brew coffee, where you could extend an existing asset into a new space. I think those lead to very rich dialogues. And as happened with that particular product led to us getting consensus from a fair number of customers and effectively as a result of that, launching a new category for us and for them.

Got it. Thank you very much.

Joshua Levine with JPMorgan.

Hey good morning thanks for the question. Dennis and Chris congrats. Going back to Akshay's question on the guidance I know you reaffirmed the $3 to $3.10 today and I guess you had said that you had always assumed EPS I guess on a GAAP basis? I guess first is that right?

Second, historically you have been you typically added back had costs to your restructuring reintegration, et cetera, so is it right to assume that your second half guidance would have some upside, assuming that those adjustments would happen? I guess I'm just trying to clarify why I sort of put in the GAAP on GAAP adjustments guidance today and input to the end of the year?

Let me clarify. What we've always done is the adjusted earnings and that's always been the basis for everything we've done. You noticed in the press release there is far more disclosure about the GAAP related items and frankly that is in response to regulatory and SEC mandates that want more disclosure on the GAAP income numbers.

So rather than only speaking to adjusted earnings they are looking for more information for shareholders on the GAAP as well. So a lot more disclosure in this press release. And it is the same Josh, we started the year with adjusted earnings where we have been, but there is a lot more now with GAAP related matters to satisfy SEC requirements or mandates.

Got it that is very helpful thank you. And then the recent plant closings I guess could you update us how much of that was actually expected in the original guidance? I guess I'm just trying to figure out whether or not you're running sort of this line with that initial thinking at least the supply chain portion of it and how any future announcements might change those expectations? Thanks.

All of the closures that we have announced, so we've closed two plants to date, one in the legacy TreeHouse system, one in the Private Brands system. And announced three other closures that will happen over the course of the next 12 months roughly, all of those, were factored into the guidance that we gave, both in terms of 2016 and any forward discussion of synergies that we put out there.

Farha Aslam with Stephens Inc.

Congratulations Chris and Dennis. My one question is related to the Private Brands portfolio. If you look back kind of this history when that was with Ralcorp the margins on that business were much, much higher than what it's delivering today. As you've gotten to know that business much more, is there any reason why we couldn't see those Ralcorp type margins over time?

Farha, this is Sam. When we take a look at the totality of the portfolio, combined with what we can do with economies of scale, we believe the aggregate will steadily grow toward that previous Ralcorp standard.

Our current plans go out for three years. We show in each one of those years that we gain at least 100 basis points on the, that portfolio. At the end of that third year period, we are within striking distance but not quite at the high level that they had had before. But I think you're going to see very steady progress, gathering momentum as I had indicated.

And that, while certain categories may be not on an individual basis back to prior standard that when you take the whole of the portfolio, and you include its effect of working in conjunction with our legacy group, I think we'll be quite pleased with the steady progression and move back to those numbers.

All right. Thank you very much.

Thanks everyone. We very much appreciate your calling in today. We look forward to posting you on progress with Dennis and his new role and Chris and his.

And we will change the deck chairs a little bit, but the crew will still be there pushing ahead in our strategic transformation. Look forward to talking to you in a couple of months. Thank you.

That concludes today's conference. Thank you for your participation, you may now disconnect.