TreeHouse Foods, Inc.
Q4 2007 Earnings Call Transcript

Published: 14 Feb 2008

[Operator:]

Good morning, and welcome to the TreeHouse Foods Investor Relations conference call for the fourth quarter of 2007. 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 may, should, could, expects, seeks to, anticipates, plans, believes, estimates, intends, predicts, projects, potential or continue, or the negative of such terms and other comparable terminology. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause the company or its industry's actual results, levels of activity, performance or achievement 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, 2006 and subsequent quarterly reports discuss some of the 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 information presented in this presentation. 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 its expectations with regard thereto or any other change in events, conditions, or circumstances on which any statement is based. This call is being recorded. At this time, I would like to turn the call over to the CEO of TreeHouse Foods, Mr. Sam K. Reed. Please go ahead, sir.

[Sam Reed:]

Thank you, [Cynthia]. Good morning, everyone, and welcome back to your quarterly visit to our TreeHouse. We have a great story to share with you today. It is the tale of private label progress in three chapters. First, an outstanding fourth-quarter. Next, a difficult but gratifying past year. And finally, in the year of challenges, but one of even greater promise. As is our custom, David Vermylen, Dennis Riordan and I will provide an integrated strategic, operational and financial perspective on our TreeHouse. We will, however, depart from our usual rotation and address Q4 and the past year first, before turning our full attention to the new year. This sequential chapterbychapter approach will make our story of past progress, current accomplishments, and future prospects clearer and easier to follow. To begin, let me establish our general theme and storyline. First, the fourth quarter was the best ever at TreeHouse. It marked the culmination of a hard-fought year-long campaign to regain margins in the wake of extraordinary commodity cost inflation. In doing so, we not only overcame long odds but also achieved organic top line growth in our core business. Next, 2007 was a year of recovery, redemption and expansion at TreeHouse. We stumbled early but quickly regained our balance and posted steady, quarterbyquarter margin gains throughout the year. TreeHouse achieved its original earnings guidance with a 25% increase in adjusted EPS. Operating cash flow, the most fundamental indicator of value, increased 26% to $138 million in spite of acrossthe-board commodity cost inflation. The acquisitions of San Antonio Farms and E.D. Smith upgraded our product portfolio as well as expanded our geography. We also made great strides in integrating these two major acquisitions and in generating synergies from their inclusion into our business system. Most importantly, these acquisitions expanded our horizons with strategic growth opportunities, new customers and fresh young talent. Lastly, as has just been announced, we have passed a strategic crossroads  the end of the beginning, if you will - in our longsuffering pickle category. Finally, turning to the new year, TreeHouse Foods is in the top tier of packaged food companies and projecting another year of double-digit growth in earnings. Like all of you, we are wary of the even greater escalation in commodity and input cost inflation to come. However, we expect that difficult circumstances in our industry will work to our relative advantage, especially in value-oriented private label grocery and food service products. As consumer confidence falters and both grocery and food service operators seek new solutions in troubled times, TreeHouse will offer greater value to consumers and greater economy to our customers. It is worth noting that these same customers view TreeHouse, now expanded by E.D. Smith Premium Salsa, in a new light. We are no longer the upstarts with cheap pickles to peddle, but now represent an integrated grocery products marketer that is an industry leader in six major product categories. TreeHouse is now a major presence in both retail grocery and food service across North America. In summary, you should expect - as we do - another long and challenging year. It will be marked by the steady quarterly progression of programs focused on margins and growth. Risk will be ever present, but opportunity beckons. You should also expect - as we do - that TreeHouse will once again achieve our earnings estimates for the new year. With that rather lengthy prelude, let me turn the narrative over to David and Dennis for richer detail and color commentary on the quarter, past year and then the new year. David?

[David Vermylen:]

Good morning. Thank you, Sam. I will focus on two areas - first, the fourth quarter performance of the base business, and second, the first 10 weeks of our ownership of E.D. Smith. Later I will provide a perspective on 2008. Let's start with the fourth quarter. Despite the commodity headwinds, we had an excellent quarter, with strong gains in both net sales and acrosstheboard increases in our adjusted gross margins. We are very pleased that we've had three quarters of year-over-year improvement in our margins given the commodity challenges all food companies are experiencing. In terms of revenue, excluding San Antonio Farms and E.D. Smith but including DeGraffenreid, net sales were up 6.3% led by non-dairy creamer sales, which were up over 20% and pickles 8%. We had pricing and volume growth in both those segments. Soup in branded and competing sales were down 7% primarily due to an Infant Feeding customer loss. The Soup business was slightly below a year ago, as the market was flat and higher branded, ready-to-serve merchandising levels affected our ready-to-serve consumption. Our key operating financial metric - adjusted gross margin - increased by 120 basis points to 16.1% and we showed year-over-year gains in every segment. Pickle AGM increased 50 basis points to 13.1, Non-Dairy Creamer AGM increased 100 basis points to 20.2, and Soup and Infant Feeding AGM increased 180 basis points to 14.2%. These gains came in the face of year-over-year increases in key commodities such as soybean oil, up 46%, sweeteners, up 25%, caysine up 50%, and diesel fuel up 15%. We have fought these headwinds with pricing execution, our productivity programs, and our purchasing strategies. In terms of pricing, the conventional wisdom is that private label is at the mercy of branding pricing, and that brands have more pricing tools available to offset input cost increases such as reducing trade spending and couponing. We disagree. While we don't have trade spending or couponing that we can cut, we do have an excellent sales organization armed with fact-based selling that has been able to implement a remarkable level of pricing ahead of branded list pricing. But in the last few months, we've also seen a high level of branded pricing as large companies have come to grips with the realities of their cost structures. The packaged food cost basket increased over 6% in 2007 and is expected to exceed 8% in 2008. With the economy moving towards a recession, the private label consumer value equation improves. Let me now turn to E.D. Smith, which we acquired in mid-October. We have been focusing on four key areas. First, we recognized going in that E.D. Smith was a loose confederation of three separate companies with no coherent strategy or leadership. In just a couple of months we've unified the business with strong TreeHouse leadership running the company with a centralized, keepitsimple approach. Within the cost structure of the business, we keep tiering up more and more opportunities that we'll realize over the next 18 months. For example, one of our three salad dressing plants is recognized by many as being a low-cost producer, yet none of its best practices had been shared with the other plants. They are being shared today. Second, we also knew that despite two years of commodity inflation, E.D. Smith had taken very little pricing, leading to margin erosion. In addition, the lack of detailed customer P&Ls meant that we didn't know where to attack the problem. As we demonstrated last year, dealing with these issues is one of our core competencies. We completed the development of these customer P&Ls in early December and in early January rolled out a $22 million annualized pricing plan that offsets the two years of input cost increases. That pricing will be fully operational in the second quarter. The retailer acceptance has been excellent as we have brought Bay Valley's fact-based selling to bear behind private label salad dressing and other E.D. Smith products. Third, in terms of Bay Valley and E.D. Smith's integration, we have already consolidated the U.S. sales organization, reduced corporate overhead, and have generated productivity savings and synergies that in 2008 will generate almost $14 million in lower costs than in 2007. We will begin the IT integration in the second quarter of 2008. Once that integration is complete, additional savings will be realized. Finally, despite the intense efforts associated with reorganizing the business and with pricing, we are well along the path of leveraging the E.D. Smith Canadian customer penetration with Bay Valley products. High-margin salsa, condensed soup and non-dairy creamer are our biggest opportunities, and we have had excellent response from Canadian retailers to our products. In the U.S., our Food Service division has created a total sauce solutions program that combines legacy Bay Valley Cheese Sauce, San Antonio Farms Salsas, and E.D. Smith food service sauce makers into a single product development and marketing program that leverages our Canadian, Midwest and Southwest manufacturing and distribution capabilities. Keep in mind that neither San Antonio Farms nor E.D. Smith had a U.S. presence in food service. E.D. Smith will be a very good business for us. Strategically, it gives us a leading North American presence in salad dressing and opens up Canada to Bay Valley products. The E.D. Smith top line is solid, our aggressive pricing programs are in place, and we are already realizing excellent integration and productivity savings. As I look back over 2007, I'm quite proud of what we have accomplished. We completed the integration of Soup and Infant Feeding, made three acquisitions and fully integrated two of them, experienced organic growth, offset over $40 million in higher input costs through pricing and productivity gains, increased adjusted [EBITDA] by 26% and adjusted earnings per share by 25%. I'll now turn it over to Dennis.

[Dennis Riordan:]

Thank you, David. I will now cover the fourth quarter results, the headlines of which are

[David Vermylen:]

Thanks, Dennis. Let me comment briefly on some key challenges and initiatives for 2008. First, how we deal with and manage commodity inflation will again be critical. Last year, our input costs increased $40 million versus 2006. This year we expect they'll be up an additional $68 million not including E.D. Smith. The good news for us is that we learned our lesson from a year ago and are dealing with the issue every week if not every day. But let me be clear on one thing - when the commodity markets are volatile, you will often hit periods when pricing lags cost increases. You can see this across most of the food industry. We faced that last year and showed that we can recover, but it takes time and is not manageable month to month, let along quarter to quarter. For example, you cannot take price increases in the middle of soup or non-dairy creamer seasons even when costs increase. Second, we completed an EVA analysis of our business that has led to a portfolio strategy that we are building into our long-term plans. This portfolio strategy categorizes our segments into four quadrants based on size of business and return on capital employed. As we build our business plans, they will be guided by our portfolio strategy. For example, our Canadian focus on Bay Valley salsa, condensed soup and non-dairy creamer reflects their priority within the portfolio strategy. In the U.S. we are applying the strategy to our retail and food service businesses in terms of where we commit R&D, marketing and capital investment. We will continue to update and refine the strategy and measure our internal performance against it. This is the model that we utilized so successfully at Keebler. Let me describe how this will work on pickles. Pickles are a large business with a low return on capital. Pickles are capital intensive with assets utilized less than half the year. The retail pickle market has been declining 2% to 3% per year due to not having a strong category leader. It's also a business with a legacy within our company of accepting low-margin customers to cover high fixed costs. Over the next two years, we will approach this problem from three directions - customer rationalization, plant consolidation, global sourcing and strategic alliances. In terms of customer rationalization, we will either achieve acceptable margins for our customers or exit their business. We offer Incredible quality, value and customer service and should get a reasonable return. We are executing that strategy right now. With some customers, where we make little to no margin, we are taking double-digit price increases. In terms of plant consolidation, we will restructure our manufacturing base to support a smaller, more profitable business. As a first step, in June we will be closing our Portland, Oregon plant, which is a very high-cost location in terms of both crop sourcing and manufacturing. We have a very high market share in the Pacific Northwest, and we can significantly improve our returns by relocating production. Closing that plant will improve earnings almost $6 million annualized. In terms of global sourcing and alliances, we have developed an exclusive strategic alliance with Global Grain, a very large pickle manufacturer in India that in the third quarter will begin to provide us with lower-cost products where the crop needs to be hand picked and hand packed. Think of jars of small whole pickles such as gherkins. That type product is expensive to produce in the U.S. Global Grain can source crop in India 11 months of the year. In the U.S. we will focus our manufacturing on those products where we can source lower cost machine harvest crop and low cost automated packing. In combination with Global Grain, Bay Valley will be a full-line marketer but only a manufacturer of products where we can be a low-cost producer. In addition to the above moves, we are also studying how to better source cucumbers so we can produce fresh pack a greater portion of the year versus just the summer months. In tandem with our Global Grain alliance and other alliances we are working on, this will lead to a significantly better use of our assets and working capital. By the end of 2009 we will either have a smaller, higher return pickle business or a business of comparable size, but with better returns. It will not be the same old pickle business. As we execute our portfolio strategy, we are bringing the same strategic analysis to other parts of our business. With our revenue running rate at $1.4 billion and our large-scale participation in six key categories versus only two two years ago, we have a lot more opportunity to remix our portfolio through both internal strategic planning as well as external development. I'll now turn it over to Dennis.

[Dennis Riordan:]

Thanks, David. I will now cover our outlook for 2008. Overall we expect net sales to grow between 27% and 28% due primarily to pricing and a full year of sales from the San Antonio Farms and E.D. Smith acquisitions. We will focus on maintaining our margins in 2008 and place more emphasis on growing unit volumes where feasible. We do expect that the first quarter and even the first half margin growth will be constrained due to a combination of very high input costs and because our pricing programs at E.D. Smith will not be fully realized until late in the second quarter. On a full year basis, we will continue to improve our operating expenses as a percent of total revenue and use those savings as a contingency against margin constraints. As a result, we expect to see earnings per share on a fully diluted basis finish between $1.50 and $1.55 in 2008, an increase of 14% to 17% compared to 2007. Regarding the first quarter of 2008, we expect that the first quarter of each year will be our lowest margin quarter due to a combination of sales seasonality and the timing of price increases. Typically, price increases are timed to the start of a shipping season for each product category. Our first quarter falls at the end of our key soup and powder seasons and precedes the summer shipping of pickles and sauces. As such, we expect first quarter EPS will be in the range of $0.24 to $0.26, a small improvement over the $0.24 in the first quarter of 2007. Beginning in the second quarter, we expect increased quarter-over-quarter earnings culminating in the full year guidance of $1.50 to $1.55. Now let me cover a few other items that are inherent in our full year estimate. First, interest expense will be higher on a year-over-year basis in 2008 due to the full year impact of holding debt associated with the 2007 acquisitions. We expect interest expense to be about $32 million next year. Our effective tax rate should stay in the range 38% in 2008 as the lower tax rates in Canada will not significantly drive down the overall tax rate due to the relatively small amount of taxable income in Canada as compared to the consolidated results. In terms of investments, we are planning to increase our capital spending levels in 2008 to roughly $50 million. The large increase in spending is related to productivity improvements and maintenance programs at our plants, which will now number 17 across the U.S. and Canada. Non-cash items for the year include depreciation and amortization, which will increase from $35 million to $45 million due to a full year of acquisitions, and that's both capital depreciation and amortization of intangibles, and the increase in capital spending. Stock option expense will again decrease, from $13.6 million in 2007 to about $12 million, with the decrease being slightly higher in the second half of the year based on our vesting schedules. In conclusion, we have demonstrated in 2007 that we can manage through inflation, and we believe that we did better than our peers. Uncertainty in commodity prices, including both ag and energy related products, will continue throughout 2008, but we expect to manage through that successfully like we did in 2007. In addition, we will be highly focused in 2008 on achieving the same margin successes at E.D. Smith that we realized in our legacy businesses this past year, although we won't see those benefits until late in the second quarter. Now I'll turn it back to Sam.

[Sam Reed:]

Thanks, Dennis. In the past half hour, we have laid out a comprehensive overview of TreeHouse Foods' strategic, operational and financial agenda. As you assess our performance and prospects, please note that our chapter-by-chapter storyline is built upon a consistent theme of six critical elements. Number one, protect margins - we will protect margins through a program of pricing, productivity and procurement. As we mark-to-market today, annualized pricing of approximately $85 million will be required to maintain gross margins across all of TreeHouse. Another $30 million in new productivity, procurement and other cost savings projects are under way. Our primary risk is in second half commodities, especially soybean and other oils, key ingredients in non-dairy creamer powder and salad dressing. We have complemented our commodity hedging programs with the fact-based selling approach that David mentioned. As costs have continued to escalate, we have established a new sense of partnership with both our customers and suppliers. We are all jointly determined to squeeze out every last penny of waste and inefficiency in our combined supply chain from farm to consumer. Number two, grow the base - we will utilize portfolio strategy, market segmentation and EVA analysis to pursue strategic growth opportunities and also upgrade our product portfolio. Strategically important product categories, especially those in high-potential, high-margin segments, will benefit from growth and innovation initiatives. We have supplemented our grocery and food service teams with additional marketing, food technology and packaging resources. These will foster more timely and innovative customer solutions, and in doing so, provide new volume opportunities. Additionally, we have revised management bonus programs to reward growth and innovation as well as margins and profitability. Number three, reform our supply chain - we will reform our supply chain to enhance asset utilization, labor productivity and the application of food service and technology. Closure of one pickle packing facility, coupled with global sourcing, is the first in a series of restructuring programs. We have also funded a salad dressing plant expansion and automation project, a distribution center to consolidate mixed product truckloads, and new direct labor productivity software. An enhanced R&D team has been reorganized apart from quality assurance so that the one can better focus on product and packaging innovation while the other concentrates on quality standards. Purchasing functions across the several acquired businesses have been consolidated to maximize procurement savings. Bay Valley Foods, which already sets the industry standard for effectiveness in customer service, will now become far more proficient. Number four, strengthen our platform - we will strengthen our business platform through a combination of acquisitions and downsizing. The San Antonio Farms and E.D. Smith acquisitions have extended our product line into attractive growth categories and opened new markets, thereby enhancing our standing with major customers in all channels of trade. Once the E.D. Smith integration is complete and financial markets stabilize, we will be well positioned for further acquisitions. While we cannot predict timing, our strategic focus, management team and capital structure remain devoted to expansion by acquisition. In the interim we will concentrate on the generation of free cash flow to pay down debt in order to prepare for the next major strategic expansion opportunity. In parallel, we will scale back our commitment and investment in non-strategic underperforming businesses. Our portfolio strategy and EVA analysis have identified those that either must be fixed or abandoned. Our strategic agenda will thus incorporate internal improvement as well as external expansion. Number five, change with the times - we will adapt our business and business methods to the fundamental changes wrought by commodity inflation, energy volatility, and economic uncertainty. At TreeHouse, we recognize that these forces represent a fundamental challenge to the food industry status quo and to business as usual. They demand more imaginative customer solutions, greater supply chain cooperation, sustained productivity gains, faster, cheaper innovation, and finally, sound strategic thinking coupled with resolute execution. We are attacking these issues on all fronts in order to establish a new internal order to cope with an environment of greater external challenge. Number six, reaffirm our commitment - finally, we will reaffirm our commitment to our investors and employees alike. TreeHouse remains fully devoted to strategic expansion, internal improvement, workplace opportunity, and most emphatically, shareholder value. While we have been sorely tested, we remain steadfast to our original vision and loyal to those who have entrusted their monies and well-being to us. That concludes our story of recent progress and future prospects at TreeHouse. Cynthia, please open the phone lines for questions and comments.

[Operator:]

Thank you, sir. (Operator Instructions) We will take our first question comes from Robert Moskow with Credit Suisse. Please go ahead.

[Robert B. Moskow:]

Hi. Good morning. Congratulations.

[Sam Reed:]

Thank you, Robert. Good morning.

[Robert B. Moskow:]

And I've got to say, that was a great presentation. I appreciate all the detail on your strategic plans. It sounds very, very well thought out. I guess my question today is going to be on productivity to begin with. Did you say you had $14 million in productivity during the year this year, and you expect 30 next year? Did the productivity come in better than you thought in '07 and, you know, what's changed since - we met with you in November, guys, and I was wondering if anything's changed regarding what you're finding in terms of cost synergies?

[David Vermylen:]

Robert, this is David. We will have for 2008 just within E.D. Smith $14 million in year-over-year savings that relate to SG&A savings from U.S. sales consolidation, reduction in E.D. Smith corporate overhead as well as in manufacturing productivity and synergies with Bay Valley. I believe the $30 million is the total productivity gains for all of TreeHouse in '08 versus '07.

[Robert B. Moskow:]

Okay, I got you. So were there any productivity improvements in '07 that you enjoyed or is this all new stuff, I guess?

[David Vermylen:]

We had in - unless Dennis has the exact figure - we had productivity savings within just the core Bay Valley business that were over $20 million, which were a big part of our margin improvement year-over-year especially in the last three quarters.

[Robert B. Moskow:]

Got it.

[Sam Reed:]

Rob, this is Sam. I think the most gratifying of these projects was the installation of new direct labor productivity software where we asked the foreman and supervisors in each factory as we rolled this software out to in fact design its implementation. And we will have that across all of our plants at the end of 2008. We have seen immediate changes in productivity ranging from 2% to 4% in the start-up phases of that new focus on the shop floor.

[Robert B. Moskow:]

Congratulations there. And then on pricing, I guess you mentioned that you think that the branded players are just now starting to realize there's been a change in their cost structures. Are you seeing that just in the categories that you're in or are you talking about everywhere, and then secondly, maybe you're not in a position to comment on how much pricing they're taking, but do you think that they are finally taking pricing up enough to meet their commodity cost inflation pressure?

[David Vermylen:]

We are definitely seeing a lot more pricing, not just in our categories but across the board, in terms of list pricing. I think that, you know, with the branded companies you can back off your trade spending, and since that operates above the net sales line, it's a way of improving your net sales without taking a list increase. But I think we're seeing it across the board, especially as you look at it as measured by either, you know, Neilson or IRI. And I think that, you know, having run branded businesses for a long time, you can back off your trade spending and your couponing activity for a certain amount of time but then it comes down to you've really got to deal with the input cost inflation, and I think we are seeing it happen. I mean, when you sit in front of a retailer and you talk to him about pricing, just about everyone is in front of them right now. And I think when you look at the price of food price inflation last year and the packaged goods food basket increase year-over-year, it's not just in changing your trade spend. It's in the list increases.

[Robert B. Moskow:]

Okay. Do you think that private label got pricing earlier than the brands in the second half of '07?

[David Vermylen:]

In looking at the syndicated data, it does appear that way. I saw a report that came out a couple of months ago that really showed when you take a look at  or not a couple of months ago, in the last month - when you take a look at, you know, it may have been 100 private label categories, their percent - in aggregate, their percent increase in pricing was quite a bit higher than for the branded companies. And again, the private label companies, given our margin structure, you really have to deal with that, you know, with the pricing, list pricing, because with just about all customers you are net priced. You don't have trade spend in your budget.

[Robert B. Moskow:]

Okay. Thank you very much. Congratulations again.

[David Vermylen:]

Thanks.

[Operator:]

We will take our next question from Terry Bivens with Bear, Stearns. Please go ahead.

[Terry Bivens:]

Good morning, gentlemen.

[Sam Reed:]

Good morning, Terry.

[Terry Bivens:]

A couple of things. Sam, as you look out in the M&A environment out there, with an eye to your debt, how does it look? And, you know, you had a very thoughtful strategic approach this morning. Has that pointed a searchlight at any particular categories that you may not have looked at that much before?

[Sam Reed:]

Well first of all, with regard to the outlook here, clearly the financial markets have tightened and will continue to face for a period of time uncertainty. We have determined from our models that, should the opportunity arise and that opportunity be one that is both superior strategically and one that is beneficial financially, we have the capability with our current lines of financing to enter another large dry products category along the size and dimension of the things that you've seen us do in the last several years. Internally, our E.D. Smith integration is well along the way, and we will have both the capital structure and the management capability to entertain another one before the end of the year. With regard to your comment about a thoughtful strategic approach, that's the nicest thing anyone's said to me on Valentine's Day in many years.

[Terry Bivens:]

Don't take it the wrong way.

[Sam Reed:]

I think that the important progress that we have made in the last year was best articulated by David about the portfolio strategy, and that strategy is in part dependent on the EVA analysis that Dennis and his team have undertaken. And what we now can add to our strategic acquisition filter are quantitative measures that in effect will place the new product category channel combinations that acquisition would bring into that strategic quadrant analysis of the portfolio. And we clearly look for businesses that will bring us better margins and better growth opportunities and some combination thereof. So I think that's the advance, and in its first stages it will play out - again, as David indicated - in our current portfolio, where we will significantly downsize pickles, but it also points out that there are great opportunities in salsa, soup, salad dressing, for strategic initiatives to grow those businesses beyond their current run rate.

[Terry Bivens:]

Okay. And just one more quick one. We noticed some kind of funky market share numbers with regard to your baby food business, and I'm wondering, I think someone mentioned at the outset that you'd lost a customer with regard to soup. Have you lost any customers with regard to baby food that you're aware of?

[Sam Reed:]

Where we lost a customer was in our branded baby food business, and a very large percent of our baby food business is done outside of measured channels, so if you're looking at either Neilson or IRI for our baby food business, it's not a very good measure of how the business is doing. But we did lose an IRI-measured customer.

[Terry Bivens:]

Okay. One that starts with a T?

[Sam Reed:]

No, but don't go through all the letters of the alphabet, please.

[Terry Bivens:]

Okay, I won't. I won't. Well, I won't wish you a happy Valentine's Day but it was a very nice quarter, and thanks for your answers.

[Sam Reed:]

Thanks, Terry.

[Operator:]

(Operator Instructions) And we will take our next question from Andrew Lazar with Lehman Brothers. Please go ahead.

[Andrew Lazar:]

Good morning, everyone.

[Sam Reed:]

Good morning, Andrew.

[Andrew Lazar:]

So David, I think you mentioned the need for around $85 million of incremental pricing in '08, and I guess that's around - the way I calculate it, 5% or 6% kind of price increase. I'm trying to get a sense of how similar is that to the pricing that you got through in '07, and then what's your assumption on what type of cost pressure, you know, that's going to cover. In other words, is that based on where some of your key costs are now and where you think they'll go, or is it trying to be, you know, where you can, a little anticipatory given some of your more cautionary comments around, you know, some of the oils potentially and the volatility in the second half of the year?

[David Vermylen:]

The pricing on a percent basis - and again, the 85 is slightly higher - and again, that's all inclusive for all our businesses - slightly higher than in '07. And it is really based on the costs that, you know, certain commodities, we're covered for the year; others, as Sam mentioned, there's still risk in the second half of the year in terms of soybean oil. It really will relate to different channels and different customers. With some of our customers we will literally hedge the commodity for the full year and lock in pricing for the full year. With other customers in other channels, depending on the commodity environment in the second half of the year - and again, this would really be principally focused on soybean oil - there could be additional pricing activity in the second half to deal with that. So there's no perfect single answer given the channels of business that we're in and the type of products that we have. Did that answer your question, Andrew?

[Andrew Lazar:]

Yeah.

[David Vermylen:]

Okay.

[Andrew Lazar:]

And is it fair to say that, where you can - just given, you know, there is some potential additional volatility as we go through this year - you're trying to be as aggressive and obviously sensitive to competitive sort of engagements and things, but trying to be as aggressive as you can, let's say, relative to even '07, in trying to deal with some of that, you know, sort of currently?

[David Vermylen:]

I think we are being aggressive, but with our customers we really try to be very straightforward in terms of the fact-based selling. In a nutshell, our strategy is really very simple, and this is what we communicate to our - internally here and to our customers. We want to use pricing to offset input cost increases, and we want to use our productivity improvements to really be that which enhances our margins. There's risk if we're trying to enhance our margins at the, you know, to price ahead of commodities. It puts us at risk. It's the nature of the business that we're in.

[Andrew Lazar:]

Yeah. And it's a good lead-in - around the facts-based selling - to my next question, which is not just with you but I think all food companies these days are being, it appears, far more transparent, right, in the way they're going to sort of retailers saying look, this is the reality around, you know, input X, Y and Z, and therefore we absolutely just need sort of this pricing relief, and that makes sense to me. But I wonder whether that transparency at some point ultimately becomes sort of a double-edged sword? You know, let's say if and when the rate of inflation moderates or, dare I say, input costs go down, although that's just maybe wishful thinking at this point, does that kind of transparency come back, do you think and make it more difficult for the industry, you know, to hold on to some of this pricing, which historically, you know, they're really had a wonderful ability to do?

[Sam Reed:]

This is Sam, Andrew.

[Andrew Lazar:]

Hi, Sam.

[Sam Reed:]

Good morning. There's always that risk. I think that what differentiates our approach here is that one, we are trying to establish a greater degree of cooperation and transparency not only with customers but also suppliers, and along the way prove ourselves to be a better partner. And if we can become more effective, more efficient and squeeze the waste out of the system, that will be recognized and appreciated. Secondly, our major focus here is where we have large - high-share in large product categories, and so that we have a leading share in a business and a long-standing business relationship with a major customer, then, while clearly there is always a negotiation over which way the last penny falls, you find that you're doing that in an atmosphere with someone who has become less of a confrontational party on the other side of the table and more of a partner. And then thirdly and last, as we have found, the degree of profitability in private label across different customers and food service, for that matter, is a far wider degree of profits than is the case in most branded companies, and the only real differentiator is the trade spend. So we are quite focused here on those major customers where we are important to them and where they are important to us, and not simply for today but for the long run. And with that, we're willing to have that double-edged sword as part of the portfolio.

[Andrew Lazar:]

Got it. Okay, thanks. And then one last thing and I'll pass it on. I know the dynamics around private label in general are a lot different in Canada just given how well developed, I guess, private label is and how consolidated, you know, the retail trade is. Has that changed the dynamic or the success that you think you'll have around pricing versus kind of what you've been able to do in the States?

[David Vermylen:]

I don't believe so. We are applying the same fact-based selling to the E.D. Smith portfolio up in Canada as we are in the U.S., and I think we're getting good acceptance. And the pricing that is required for us because of the mix of businesses in Canada is not as aggressive as we have to take in the U.S.

[Andrew Lazar:]

Got it. Got it. Thank you.

[Operator:]

We will take our next question from Jonathan Feeney with Wachovia Securities. Please go ahead.

[Jonathan Feeney:]

Good morning, and thank you.

[Sam Reed:]

Morning, Jonathan.

[Jonathan Feeney:]

I wanted to dig in just first on the $22 million cost of this plant shutdown. I've never been in the pickle business, but that seems kind of high given, you know, that have 17 plants. Could you give us a sense of how much of that is sort of cash and, you know, what's the complexities with - does that include all, like, relocating that capacity? I'd just like to understand that cost savings opportunity a little more.

[Dennis Riordan:]

Approximately $16 million of that is cash, and the key aspects of that are there are some longer-term leases and growing contracts that we have to deal with there, and that's what helped to drive that cost up higher.

[Jonathan Feeney:]

Oh, I see.

[Sam Reed:]

Jonathan, it's Sam. When the business was acquired by one of our predecessor companies, the terms of sale were effectively to reduce the initial cash purchase price by undertaking long-term agreements for crop and equipment to process the crop that were in effect deferred purchase price through higher input costs over a long period of time. It's that circumstance that provoked both the closing and the larger amount of money to, in fact, shut down the plant.

[Jonathan Feeney:]

That makes sense. It's helpful. Thank you. And David, I think you mentioned some merchandising in the Soup category. Is that right - has that hurt your private label business? Has that sort of abated or, you know, what's your outlook for that in 2008?

[David Vermylen:]

You know, so much of it will really depend on the branded players. We really saw it in ready-to-serve soup, where there was a significant increase in merchandising activity as measured both through IRI or Neilson as well as our look at some of the major non-syndicated channels. In the ready-to-serve soup, there was a big focus, especially by Progresso, on their light line that had a Weight Watchers endorsement on it. I think it did really well. I think one of the challenges for the industry this past fourth quarter was that overall the level of new news in innovation was not as high as in 2006. So, you know, [K] sales for the category were basically flat, and the battle took place in ready-to-serve and we lost some share in there because we're just, you know, the price gaps narrowed between the branded players and private label. It's hard to say. I mean, what I really hope to see in 2008 is a return to more new news and innovation to really drive the category rather than just merchandising and pricing.

[Jonathan Feeney:]

And I guess just finally, all you guys have run food businesses going into, I guess, a couple of recessions at least.

[Dennis Riordan:]

I'm not that old.

[Jonathan Feeney:]

I was counting 2004 as a recession.

[Dennis Riordan:]

Oh, okay.

[Jonathan Feeney:]

But as far as the category's response, I mean, it seems like nobody - it seems to stand to reason that we've seen people eat more meals at home, and now when you start to drill down on these categories, you're actually seeing private label take a little bit more pricing, and maybe that's delaying the downtrading effect, or would you say that - so I guess would you say - I guess I would have expected downtrading, at least more talk of it, at the retailer level, to be happening right now, you know, across private label categories. What sort of data or experience can you point to to show how the consumers usually react vis-à-vis their private label choices when money gets tight? And is anything you've seen from retailer reaction so far at all surprising in that light?

[David Vermylen:]

In looking at the private label world, I saw one report about a week ago that indicated that in 2007 the measurement, I think, consisted of about 105 private label categories, and in 65% to 75% of the categories, private label showed year-over-year share growth. Now, how much of that is due to, you know, trading down versus the customers putting more emphasis on their branded programs, and one of the things we're actually trying to track down right now through the Private Label Manufacturers Association is trying to go back to those highly inflationary periods to see if they actually have the data on the kind of shifts that do take place. One of the things that is interesting just about pricing is that you step back and say when was the last time the food industry faced the kinds of input cost increases that we saw last year and we saw this year? I think you'd probably have to go back maybe, you know, 15 or 20 years. Someone gave us a very interesting perspective in that there really aren't many people on either the manufacturing side or on the retailer side who have been through a period of significant commodity cost inflation and don't have a great deal of experience in managing through and the steps that you should take. And I think what we are doing is trying to, you know, saying listen, if the old conventional wisdom was well, private label has to wait until the branded people go, we're saying that's not the way we're going to manage the business. We're going to deal with this on our own, and sooner or later everyone else will have to take the kind of steps in order to recover margins. I mean, I think, you know, if you look at the food industry in 2007, you take 25 companies, you'd know a lot better than I would about how many of them showed margin erosion versus margin gains. And I think that the food industry really has to deal with this. I may be pontificating here, but the world has really changed over the last, you know, 12 to 15 months, and the food companies need to be more aggressive in dealing with it.

[Jonathan Feeney:]

Okay. Well, thank you very much. And Sam, a special happy Valentine's Day from me, as well.

[Sam Reed:]

Thank you, Jonathan.

[Operator:]

We will take our next question from Pablo Zuanic with J.P. Morgan. Please go ahead.

[Pablo Zuanic:]

Good morning, everyone.

[Sam Reed:]

Morning, Pablo.

[Pablo Zuanic:]

A couple of questions. Dennis, on your side, on guidance, what's the net debt number you're looking at by end of the year? I mean, Sam talked about large acquisitions by end of the year. Just trying to get a feel of what this guidance is implying potential net debt is by end of '08.

[Dennis Riordan:]

The debt number at the end of the year, it's somewhere - it's hard to give you exact  I want to say about $540 million.

[Pablo Zuanic:]

Okay. But you actually calculated by end of the year you would have space there for a large transaction, like E.D. Smith-type of transaction? Is that what Sam said?

[Dennis Riordan:]

Yes. We believe that a combination of our cash flow and where we believe we will fit into the credit markets will still allow us to do another deal of size. And we're very confident in that.

[Pablo Zuanic:]

Okay. Do you want to give us a rough idea of how big are we talking about and the intention where you would find it?

[Sam Reed:]

Pablo, this is Sam. Without giving specific numbers, I think you can look back at our history and see the approximate size of an acquisition that it takes to add a significant dry products category, and to do so with a leading market share in private label and a presence in food service. And that will give you a sense of the order of magnitude of one, what the opportunity is, and two, our capability. And we're quite confident that should the opportunity arise that we have the capital spending to, in fact, accommodate that without a radical change to our current financing arrangements.

[Dennis Riordan:]

And Pablo, I think if you'll look at where the cash flow has been and you - ex acquisitions - you'll see that we do generate a fairly substantial amount of cash and that, even on an internal basis, we will have excellent cash flow again this year if you work through the guidance numbers.

[Pablo Zuanic:]

Okay, great. And then just on E.D. Smith, I'm trying to understand here the upside or downside that E.D. Smith could have to your earnings guidance for the year. And I'm trying to get a sense here, you talked about price increases and efficiencies, but are you factoring any type of organic sales growth in terms of E.D. Smith, in terms of either new products or new customers? Could you just walk us through in terms of how much risk is there to a number or how much EPS guidance is really coming from E.D. Smith?

[Sam Reed:]

Pablo, our view is that the E.D. Smith represents opportunity. We tried to factor in minimal incremental sales growth by taking our products north of the border. I think, as you know, we have leading positions in soup and powder, and frankly, we don't participate in those markets on a retail basis north of the border, so we see opportunities. We will begin the process of sell activities this year. We may get some, but for the most part those are late-season products and the selling time takes a long time. So in our view that is our contingency to be a hedge as opposed to the guidance we gave being reliant on a very strong growth at E.D. Smith.

[Pablo Zuanic:]

And the same would apply, of course, in the U.S. market in the case of the, you know, the salad dressing's portfolio being expanded in terms of either SKUs or customers. That's not really being factored into the guidance, right? That's what you're saying?

[David Vermylen:]

No, we're really not. E.D. Smith had good top line growth last year, and we're pretty much forecasting a continuation of its running rate. So really a lot of the initiatives that I spoke about early on will really be incremental opportunity for E.D. Smith and for Bay Valley.

[Pablo Zuanic:]

Okay. But just, you know, briefly, in [inaudible] salad dressings, we see Kraft, you know, being more aggressive, at least in terms of innovation and also marketing. You know, Newman's Own extending their SKU portfolio. I'm just wondering about the risk to these price increases on a product that hasn't taken any for two years, as you said, where there could be some form of volume impact.

[David Vermylen:]

Well, I think that there will be, you know, everyone is faced with the same input cost increases as we are, and I think we're going to see an inevitability in terms of the prices moving up across the board. And we will be very enthusiastic with Kraft investing in a lot more innovation because innovation is what drives a category. The salad dressing - private label's share in salad dressing has been growing a lot over the last few years. The category has not been growing that well, and if Kraft really starts stepping up with new products and advertising, that's good for us.

[Pablo Zuanic:]

Again, a couple of follow ups. Sam, if I understood right, you talked about great merchandising opportunities for you in terms of innovation along salsa, salad dressings, and soup. Did I understand right - and particularly in the case of soup  I mean, what are you talking about? And why is non-dairy creamer not on that list, I guess? Are the opportunities more limited there?

[David Vermylen:]

Well, in terms of our portfolio strategy, again, it really is - it's driven by, you know, size of business, and the return on invested capital. So we are not only looking at non-dairy creamer, but what we are doing on non-dairy creamer is really developing sort of both looking beyond non-dairy creamer and really looking at our powder business, which is more than just non-dairy creamer. The product's functionality, usability is much more than just as a creaming agent, but also looking at the fact that, you know, a big thing of non-dairy creamer is we have very strong spray-drying capabilities, and we're looking at those capabilities as opportunities for growth as well.

[Pablo Zuanic:]

Again, one last one if I may, Sam. I mean, from, you know - your presentation, obviously, you know, paints a great picture about the outlook for the company and about all the strategies that you're putting through of passing on higher cost to pricing. And there's all this that seems to be going in favor of private label, and then we have another company in the group like Ralcorp that's going through a transformative acquisition, you know, going into branded, [inaudible] matching my view, saying that the probably have some concerns about private label and a way for them to hedge themselves is to have a leg on branded. What are they not seeing that I guess you're seeing that makes you so excited about private label?

[Sam Reed:]

Well, I really can't comment on another competitor other than to congratulate them on their success and hope that they, along with we, arise in the same  due to the same strategic forces. We are steadfast in the belief that our current strategy is the correct one, and that is that there is a secular growth rate in food service and in private label that exceeds that of at-home consumption and branded food sales. Secondly, there is the - continues to be the crying need for consolidation in both channels of distribution, and we can see that in the customer response to our addition of premium salsa and the E.D. Smith product line to ours. We've now become an important factor in our customer's considerations. We do have branded businesses, and in fact if you took, I think, all of our - the businesses that don't fit the conventional private label grocery, bulk industrial and food service, you'd find that we have more than a dozen brands and over $100 million in revenues in those branded businesses, and we try to manage those very carefully although they are a secondary rather than a primary business. I think that the combination of our private label, food service and brands is not something that one can generalize about, but in fact has to look at a category by category market dynamics as well as one's internal capabilities. And it is, I think, to me quite significant that when a leading competitor in private label moved into brands that they did so on the basis of - in conjunction with a very fine supply chain and manufacturing and distribution capability already in that same product category. And I think that that is a telling factor from those of us looking in from the outside at that particularly acquisition.

[Pablo Zuanic:]

Thanks. That's helpful.

[Sam Reed:]

Thank you, Pablo.

[Operator:]

(Operator Instructions) And we will take our next question from [Bob Cummins] with Shield & Company. Please go ahead.

[Bob Cummins:]

Good morning, everybody.

[Sam Reed:]

Good morning, Bob.

[Bob Cummins:]

Some of the points that I was going to ask have already been covered, obviously, but let me focus on one. You commented, I thought, very astutely, on the problems you faced in the soup business this past year, but on the other hand that's an area where you see opportunities to grow. And I wonder, either using that example or some other example, tell us how you go about either picking up a new private label or food service customer or getting more shelf space in the store. Just what is the strategy in dealing with customers and getting more business? Obviously, you don't grow by advertising to consumers, so there have to be other ways you can do it.

[David Vermylen:]

Well, I think - Bob, this is David - a good example is what we're doing in Canada, where we are able to present customers with an extraordinary product line of soups and here, within Canada, we're really focusing on condensed soups given our EVA, which really shows that condensed soups are a large, high return on capital business for us. But our innovation capabilities in condensed soup, our cost position in condensed soup and our ability in Canada to link our soup business with the rest of the E.D. Smith portfolio in terms of supply chain efficiency really gives us a leg up with the customer versus them just dealing with someone who's only in the soup business. So that’s really a way for us to go after it, and it's really the way for us to go after other business in the United States where we have gaps. You know, if we have six big categories and we're dealing with a customer with four, we can really show our innovation capabilities and the supply chain efficiencies that we can create by providing a broader portfolio of products to that single customer.

[Bob Cummins:]

Right. Focusing on the U.S., are there any major chains that either don't carry private label soup or are using someone else or that represent major opportunities, say to double the shelf space or whatever?

[David Vermylen:]

I think that most retailers do carry private label soups. I think our share of private label is in the 60% to 70% area, so there's still opportunity for us.

[Bob Cummins:]

Okay. Thank you.

[Sam Reed:]

Thank you, Bob.

[Operator:]

At this time, there are no further questions. I will now turn the call over to Mr. Sam K. Reed for closing comments.

[Sam Reed:]

I thank all of you for joining us again today. As usual, you're always welcome as our guests at the TreeHouse. We'll look forward to our next visit in early May and at that time provide you with an update, not only on the first quarter but how our strategic plans are unfolding as well. Thank you.

[Operator:]

Ladies and gentlemen, this will conclude the TreeHouse Foods Investor Relations conference call for the fourth quarter of 2007. We thank you for your participation, and you may disconnect at this time.