TreeHouse Foods, Inc.
Q2 2008 Earnings Call Transcript

Published: 5 Aug 2008

[Operator:]

Welcome to the TreeHouse Foods Investor Relations conference call for the second quarter of 2008. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words such as guidance, may, should, could, expects, seeks to, anticipates, plans, believes, estimates, 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 industries 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, 2007 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 the 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 regards thereto or any other change in events, conditions, or circumstances on which any statement is made. (Operator Instructions). At this time I would like to turn the call over to the Chief Executive Officer of TreeHouse Foods, Sam Reed.

[Sam K. Reed:]

Our mid-year report is one of steady financial performance, great strategic progress, and broad operational improvement. It is also a tale of volatility and energy costs and their immediate, but transitory, effect on margins. Finally, it is one of consumer confidence and behavior that in the face of economic uncertainty favors private label products. David Vermylen, Dennis Riordan and I will address each of these issues in turn so that all of you can more fully appreciate both the enticing opportunities and daunting challenges that lie before us, the TreeHouse. Today’s headlines include the following, operating cash flow, adjusted EBITDA increased 17% to $35.0 million in the second quarter thanks to strong sales growth and operating economies of scale, both further enhanced by acquisitions. At mid-year first-half EBITDA was up 26%, despite extraordinary inflation and volatility in input costs. Gross margins were depressed in the second quarter, albeit temporarily, as the spike in crude oil triggered a series of secondary cost increases that preceded pricing scheduled for July. Sales revenues grew more than 6.5% before acquisitions and strategically critical product categories benefited from private labels strong second quarter showing across a broad array of shelf-stable dry groceries categories. Our strategic investments to broaden and diversify our grocery products portfolio via acquisition paid handsomely in the quarter. Soup, salsa, and salad dressing all demonstrated top-line strength. The E. D. Smith acquisition performed especially well as margins improved more than 400 basis points over the first quarter. Measured on an LTM basis, adjusted gross margins at E. D. Smith have kicked up in 7 of the 8 months since its acquisition last October. That margins are improving, even as cross-border sales post double digit growth, speaks loudly and unequivocally of the strategic value of portable salad dressing in our product portfolio. While we have made much of our opportunities in difficult times, these are still difficult times. Specifically, direct input inflation of commodities and energy is now expected to increase more than 17% this year. This escalation has been accompanied by greater volatility, especially in the agricultural and energy markets, making conventional hedging strategies both more expensive and problematic. According to the Bureau of Labor Statistics food and beverage inflation is now twice that of the core Consumer Price Index, which excludes food and energy. At TreeHouse this year’s cost inflation will require pricing of 7.5% of annual revenues, twice that of last year and three times that of 2006, just to break even in terms of absolute dollar profitability. In parallel with pricing to maintain dollar margins, productivity and procurement programs must be expanded to increase cash flow from operations. At mid-year, our six month progress can be measured as follows

[David B. Vermylen:]

As is my norm, I will focus on first, the top-line performance of the business, and second, cost and pricing, and third, what we see in the market place in terms of how private label is doing and what is happening in the pricing arena. Top-line performance was very strong. Total revenue was up 43.5% due primarily to acquisition revenue. Organic non-acquisition revenue was up 6.6%. If acquisitions were included in last year’s numbers, revenue would have been up 9.3% as we are generating great top-line growth from last year’s acquisitions of San Antonio Farms and E. D. Smith. I will focus the rest of my top-line comments as if revenue for recent acquisitions were in last year’s results, in order to compare apples to apples. While this will not match up with the segment data in the 10-Q, it is our best way of measuring how we, as a business, are performing. North American Grocery was up 7.1% with good growth in both the U.S. and Canada. That 7.1% growth was more than double the growth rate in the first quarter. Soup, non-dairy creamer, salsa, and salad dressing, which in our portfolio strategy are our priority segments, all had strong unit and revenue growth. We continue to make progress on new business as a vehicle for unit growth. Salsa in particular is on great growth trajectory with some major new customer wins that will affect the second half of the year. We just received final customer approval on one new salsa account that could be the largest new authorization we have had in the past year. As expected and communicated on our last call, our retail pickle business declined as we exited some zero-to-low-margin retail business as part of the execution of our portfolio strategy. While the revenue declined, our margins improved. In addition, in anticipation of this decline, in the second quarter we exited our high-cost Portland, Oregon, pickle plant and have now shifted production to more efficient plants. This pickle volume decline will continue through this year and into 2009. Our branded Infant feeding business also declines, given the loss of a key customer at the end of last year. From an asset utilization prospective, offsetting the decline in our branded Infant feeding business was very strong growth in our Infant feeding co-pack business. That business is included in our Industrial segment. Despite the pickle and infant feeding declines, North American Grocery was up over 7%. E. D. Smith, which is primarily included in North American Grocery, had an outstanding quarter despite our having taken aggressive pricing on salad dressing at the beginning of the quarter. Total unit growth was in the high single digits, with 11% unit growth in the U.S. following an integration into Bay Valley Foods. Margins have improved and we continue to see great opportunity for this business. In less than 8 months we have transformed E. D. Smith from a struggling company into a growth vehicle. We are generating new business with new customers in both the U.S. and Canada. At E. D. Smith we have broken ground on expanding our Northeast Pennsylvania salad dressing plant. This is a highly efficient plant and its expansion will allow our growth in the U.S. to be realized with higher margins. This expansion will be operational late in Q1 2009. Food Away From Home would have had top-line growth of 3.4%. This is mostly due to pricing. The food-away-from-home industry is struggling, especially in the casual dining segment. A leading food service consulting firm estimates that the industry will decline by 1.7% in 2008 as the rise in the Consumer Price Index and a decline in disposable personal income are keeping people home. Important for us, is that with the addition of salsa to our portfolio, we are offsetting category declines with new business. We are also developing a full specialty sauce program using E. D. Smith’s Canadian sauce-maker business as a new platform. Our Industrial and Export business had a solid quarter with revenue up 26% due to increases in our non-dairy creamer industrial business and co-pack revenue. Let me now turn to costs and pricing. Cost pressures continue to escalate. On our call in May we estimated year-over-year cost increases of $100.0 million, which was up approximately $20.0 million from when we developed our plan in November 2007. Those cost increases were primarily commodity driven. We now estimate that costs will be up an additional $14.0 million, principally due to escalating energy costs and how those energy costs affect key cost elements such as processing, packaging, and freight. While energy prices have come down from their mid-Q2 highs, we are still well above a year ago, well above our original budget, and still above where they were three months ago. I certainly like the current trends, but as we have all seen, they can go back up just as fast as they come down. Let me provide one simple example of how energy and global supply problems are driving total costs in ways that we haven’t seen before. In our non-dairy creamer business we use an ingredient that helps cut the acidity in coffee. This ingredient is a phosphate. It’s a minor ingredient in our non-dairy creamer, yet as of May we face a 300% cost increase, which translates to over $3.0 million, in higher costs. Dennis will provide specific commentary on how cost escalation affected the second quarter and our coverage for the remainder of the year. While we took a great deal of pricing in January, based on our planned assumption of approximately $80.0 million in cost increases, it was not enough to cover what we are now seeing as being $114.0 million in year-over-year cost increases. Thus our margins suffered in the second quarter. But on our last conference call I mentioned that when commodity markets are volatile, pricing will lag cost increases, and that when costs are volatile you cannot manage your margins month-to-month, let alone quarter-to-quarter. We took additional pricing effective in early July on most key product lines and if necessary we will take additional pricing in the fall to protect our profit dollars. We have consistently shown our determination to recover these cost increases through pricing and productivity and we continue to do so today. Let me know comment on marketing conditions. As a private label company, I would like to share some thoughts as to what we are seeing in the market place as it relates to how consumers are dealing with food inflation. First, on our last conference call in May, I said I believed that food prices had a long way to go to catch up with input cost increases. In the month of June, food prices were up over 8% annualized, which is about double the annualized rate from a few months ago. I believe we will continue to see it at that rate for the foreseeable future. In our categories we are seeing retail prices up 6%-14%. Second, while Nielsen’s syndicated data only covers part of the retail universe, in all of our key categories we saw private label share growth and analysts report private label share growth across a very large percent of the food industry. In one analysis 38 of 45 food categories showed private label share growth for the latest 12 weeks with aggregate volume up 1.9% and pricing up 10.4%. A separate analysis of 11 branded food companies showed their aggregate unit volume down 3.2% with pricing up 6.2% for the same 12-week period. Private label pricing of 10.4% and branded pricing of 6.2% should translate to comparable $0.01 per unit pricing. Third, in our internal sales, we did see above average growth in those retailers that I would define as deep-discounters, such as the limited assortment dollar-store-type formats. This could indicate that there is a customer migration taking place. Finally, from a pricing standpoint, while we have had to be aggressive in our pricing, our price gaps are generally in line with where we were a year ago on a penny-per-unit basis. Thus the share gains we are seeing are not the result of widening price gaps. While it was a good quarter, above plan cost escalation kept it from being a great quarter. Despite the margin softness, I’m really pleased with the top-line progress we are making in total, and in particular with San Antonio Farms and E. D. Smith results. I’m also very pleased with continued commitment of our sales teams to achieve the required pricing. Unlike branded companies, who issue national price lists, we have to negotiate customer-by-customer, which is a far more daunting task. In terms of our outlook for the second half of the year, I am cautiously optimistic. We have got good revenue momentum, we are covered on the majority of our key commodities, and we are moving forward to achieve the pricing we need to offset our latest estimated cost increases. Our biggest risk is energy-related. While we are covered on natural gas through the end of the year, petroleum and it’s related costs could still be volatile. I will now turn it over to Dennis.

[Dennis F. Riordan:]

Since David covered the revenue growth, I will focus on other key aspects of our operating results, including 1) gross margin reductions, 2) controlled expenses, and 3) the financing and tax savings. First, overall gross margins were 18.7% for the quarter, compared to 20.9% last year, a decrease of 220 basis points as a combination of high embedded input costs, along with higher transportation costs were not fully recovered in the quarter from pricing actions. The biggest issue we had in the quarter was with energy costs. We entered the quarter with crude oil at $100 a barrel and ended it at $145. In addition, diesel was $3.50 a gallon at the end of March and $4.70 at the end of June. These increases affected nearly all aspects of our business and the suddenness and the magnitude of the changes made recovery through pricing nearly impossible in the quarter. As David mentioned, we have since gone back for additional pricings to cover these higher costs. In regard to the other direct input costs, we believe we are well situated in terms of coverage for our key inputs. We are nearly 100% covered for the balance of the year on soybean oil, corn syrup, casing, and metal cans, and substantially covered on our internal natural gas needs. And so far the cucumber crops appear to be doing fine. At E. D. Smith we initiated many of our price increases early in the quarter, resulting in their margins improving 410 basis points in the second quarter. For our legacy business price increases were presented and accepted in the second quarter but many were not effective until July 1. As a result, our legacy margins decreased by 240 basis points in the second quarter from the first quarter. David earlier mentioned the actions that were taken and our belief that we will see a reversal of the lower margin trends in Q3. One of the positives in the quarter related to pickles, where a combination of pricing and pruning unprofitable customers resulted in an improvement of 110 basis points in their AGM. In regard to operating expenses, selling, general and administrative expenses increased from $33.6 million in 2007 to $44.7 million in the second quarter of 2008 due to the overall growth in the company. As a percent of sales, SG&A costs finished the quarter at 12.2%, compared to 13.1% in last year’s second quarter, a significant improvement due to the efficiencies of adding new business later in 2007 and aggressively pursuing integration cost savings. Partially offsetting the improvement was an increase in non-cash amortization expense. The increase in amortization expense from $1.2 million in 2007 to $3.5 million in 2008 was due to an increase in amortizable intangible assets such as trademarks, trade names, and customer lists associated with the new acquisitions in 2007. Our other operating expenses totaled $900,000, nearly all of that being shut-down costs associated with the previously announced closing of our Portland, Oregon, pickle plant. Interest expense increased from $4.0 million in 2007 to $7.6 million in 2008 due to the additional bank borrowings used for acquisitions in 2007. Our effective tax rate for the quarter was very low at 30.2% compared to 38.2% last year. The much lower tax rate was due to Canadian-sourced income that carries a much lower effective tax rate. We expect the effective tax rate to remain low for the balance of the year, although higher U.S. generated income should bring the rate up somewhat from the year-to-date effective rate of 29.5%. Reported net income finished at $0.26 per share compared to $0.30 per share last year. We did have three unusual items in the quarter. First, we had additional costs associated with the closed Portland plant that lowered net income by about $0.02 per share during the quarter. Secondly, we had integration costs of $0.01 associated with the integration of the U.S-based E. D. Smith operations into our Bay Valley Foods operating company. And finally, we had an adjustment to the carrying value of a pickle licensing agreement that results in a non-cash charge to interest expense in the quarter equal to about $0.02 a share. After adjusting for these three one-time items, our adjusted earnings would have been $0.31 a share. This is a 6.9% improvement compared to last year’s second quarter of $0.29 per share after adjusting for a $0.01 gain from the sales of assets at closed locations last year. To recap the second quarter, we saw strong top-line sales growth coming primarily from new acquisitions complimented by a combination of pricing and volume increases at our legacy businesses. We finally saw a small improvement in our pickle margins and very good unit growth for many of the product lines manufactured by E. D. Smith. And finally input costs were significant, with energy-related costs in the primary driver behind our margin decline. Despite the weaknesses we saw in margins, we did a full court press on all other areas of the business in order to make up the short fall. We showed again that we can manage our operating cost structure, provide value through tax and treasury management, resulting in both earnings opportunities and real cash savings. I will now cover the outlook for 2008. As we stated last quarter and again this quarter, the seasonality of our business is such that our revenues pick up in the third quarter due to the start of the soup and powdered shipping season. We should see improvements in our margins due to both pricing and higher sales volume. We expect that the third quarter will have a nice earnings increase to a range of $0.37-$0.40 per share. With regard to the balance of the year, we are comfortable with our previously issued guidance of being in the high end of a range of $1.50-$1.55 in earnings per share for 2008. Just as we did this quarter, we believe we could manage our way through difficult times over the balance of 2008 and we will be ready to take advantage of any respites that come our way. Sam, I’ll now turn it back to you.

[Sam K. Reed:]

A little over a month ago we recognized the third anniversary of TreeHouse Foods as a public company. In our short history we have transformed what had been a dormant, pickle-dominated product line into a vibrant growth-category-oriented portfolio. Expansion into soup, salsa, salad dressing has generated economies of scale as well as enhanced our standing with key private label grocery customers. The mid-point of our EPS guidance implies a second half growth rate of EBITDA of approximately 15%. San Antonio Farms and E. D. Smith are both in last year’s base, the latter for 10 weeks only. Price increases scheduled for July are all in place as planned and we are closely monitoring input markets to take more pricing if, and as, needed. Second half commodities, packaging costs, and natural gas are covered, while indirect energy costs, for example, freight charges and surcharges tied to diesel fuel represent an uncovered risk, again, principally as a timing and pass-through issue. Our up-side opportunities and down-side risks are well balanced for the remainder of the year. Recent innovation and distribution gains in salsa and salad dressings favor continued growth, especially in the North American Retail Grocery segment. Just as we have already done with pickles and low-margin customers, more pruning of the marginal components of our portfolio will be forthcoming in the second half in order to improve our long-term prospects for growth and profitability. It is also worth noting that we have already completed a marked-to-market analysis of 2009 commodity and energy requirements and have begun to enact productivity, technology, and procurement programs to contain those costs. Finally, we continue to take a strategic approach to acquisitions by pursuing those product categories that offer growth, economies of scale, and compatibility in the context of our portfolio strategy, while our immediate agenda is focused on the maintenance of absolute dollar margins to offset input inflation. And also the integration of E. D. Smith into a solid North American platform. We are also actively engaged in expanding the TreeHouse presence to additional product categories and broader channels of distribution. After our recent experiences with SAF and EDS, we should soon be ready to add to further to our alphabet soup of businesses. Thank you. Jamie will now take questions and comments.

[Operator:]

(Operator Instructions) Your first question comes from Ken Goldman with JP Morgan.

[Ken Goldman:]

Can you talk a little bit about your tax rate coming down so much compared to perhaps where you were looking earlier in the year and your guidance stays flat. What’s the implication there for perhaps what’s negative in the above-the-line operations that would prevent your from raising guidance, given the lower tax rate.

[Dennis F. Riordan:]

The lower tax rate has been a very nice positive for us but it’s also driven by the strength of E. D. Smith business right now and the margin’s short fall and how the income is splitting up. We would hope there could be some up side there and we would use that as, if you would, a partial cushion, as we found in the second quarter commodity prices can spike and they can be hard and difficult to react to. So, as we look at the business in an overall, that would be one of the items that would help us to offset that.

[Ken Goldman:]

It’s fair to say, though, that you’re not incrementally more negative on operations than you were a quarter ago. You’re just maintaining a conservative stance?

[Dennis F. Riordan:]

I think that’s a fair assessment.

[Ken Goldman:]

I never though I would see the day where I’m asking about input costs coming down and how that may affect your pricing, but given what we’ve seen today and in the last week, with corn and oil and all the major inputs and how they all affect each other, how are you guys thinking about maybe pricing that hasn’t come through yet? Are you getting a little more push back from some retailers where it hasn’t gone through than you would have expected, or is it still a little bit too early to tell what the reaction will be?

[David B. Vermylen:]

It’s still too early to tell. Even though they’ve come down, they’re still far above where they were a year ago. For example, when we were buying, taking covers on, soybean oil back in November it was $0.42 lb. and right now, as of early this afternoon, you could be looking out at $0.55-$0.57 lb. So it’s come down but it’s still well north of where we were. I think with the customers we really do fact-based presentations and we show them what we’re buying at and what we’re covered at. I think right now, if they continue to come down, there likely will be more push back but as I said in my comments, we’ve got a hurricane blowing through and things could start heading north again. And it’s just been so incredibly volatile that you can go from Cy Young to Sayonara in a moment when it comes to what you’ve bought your commodities for. And I think our customers are getting used to having to deal with that.

[Ken Goldman:]

I’m sure it’s a nice problem to have. If you can’t get pricing because your costs are coming down so much, I’m sure you’ll take that.

[David B. Vermylen:]

I would just like to catch my breath for a while.

[Operator:]

Your next question comes from Robert Moskow with Credit Suisse.

[Robert Moskow:]

I wanted to understand the freight charges a little bit. You called it an uncovered risk. But you also said in the same sentence that you were taking pricing to offset higher freight, which the surcharges are going to be tied to crude. So getting back to Ken’s question, does that mean that if the crude prices are coming down, that means the surcharges are coming down and does your price have to come down, too?

[Sam K. Reed:]

As a general matter these price increases lag on the way up and then one is hopeful they stick on the way down. The experience of the second quarter indicated to us the truism that David stated in his text that in highly volatile times, one cannot price quarter-to-quarter with great precision, nor month-to-month. And so I wanted to exercise a note of caution, mainly in terms of if there is another spike like there was in the second quarter, we should realize it takes a little bit of time to catch up with it, and as I indicated, we’re hopeful that it sticks on the way back down. But it’s not penny-for-penny, day-by-day that you’re able to adjust in either way. And also consider it in a great context that I think of the several of hundreds of millions of dollars that these direct impact cost have recovered that the fact that our greatest single exposure is in this mild but volatile component indicates that there is a great deal of surety going forward that we have covered costs and covered those input costs in the context of pricing that is already in the market place.

[Robert Moskow:]

And for Dennis, just a little clarity. I think the back half implies 15% EBITDA growth and you tried to give us an apples-to-apples there, but I think it still included some of the benefit from the acquisitions. Is there any way to determine what kind of pace of growth you expect excluding those acquisitions altogether?

[Dennis F. Riordan:]

I don’t actually have that off the top of my head because at this point we would have San Antonio Farms, which was bought last year along with DeGraffenreid. They’re in for the full of the second half and E. D. Smith is in there for most of Q4. I haven’t taken a separate look like that. It gets difficult because our integrations have combined so much of the activities it’s hard to get a great comparison from last year.

[Robert Moskow:]

Maybe we could just focus on E. D. Smith then. The margins, you said, had improved from a year ago. Are they improving sequentially also from first quarter, the E. D. Smith margins?

[Dennis F. Riordan:]

Yes.

[David B. Vermylen:]

We took, if you recall, on salad dressing, in particular in the U.S., a very significant price increase that went into effect at the very end of the first quarter, the beginning of the second quarter. And that, in combination with a lot of productivity programs that have been put into place at E. D. Smith, really led to very strong both year-over-year and then versus the first quarter, in terms of gross margin improvement.

[Robert Moskow:]

And then you said that you were prepared to take more pricing if necessary. What are the conditions under which you would take more pricing? Is it again energy related?

[David B. Vermylen:]

I think it’s energy and it really will come through as all of the pricing, things like corn sweetners, I mean, the pricing on that really takes effect, or you really know where it’s going to be, come October. So I think it’s as all the crops are harvested, both in the U.S. and globally, we will really have a much better fix on where we need to be as we’re exiting the year.

[Operator:]

Your next question comes from Andrew Lazar with Lehman Brothers.

[Andrew Lazar:]

In the press release I think it says, regarding the back half of the year, there would be, I think look for thriving margin growth over the second half of the year. So I’m just trying to get a sense of whether that’s on a dollar basis, or a percentage, or is it sequential, or year-over-year.

[David B. Vermylen:]

Our focus is far more on dollars, both sequentially and year-over-year. I think that while we are focused on margins, we recognize that in the period of volatility that we’ve been going through that maintaining your margins is highly challenging, not just for us, but for everyone else in the food industry. So it’s really focused on dollar profitability, both sequentially and year-over-year.

[Andrew Lazar:]

And then, David, I was hoping you could comment a little around the pricing environment in the soup segment, particularly, I guess Campbell had led with pricing earlier in the year, February or so. My sense is they’ll probably take more, but you would have a better sense of that, before the next soup season starts. I think maybe it’s General Mills or Progresso that had perhaps lagged a bit, but I’m hearing is finally taking pricing, don’t know if you’ve seen that come through yet. So just wanted to get a sense of the environment in which you find yourself, does that give you the opportunity to sort of take pricing as well and keep gaps relatively constant.

[David B. Vermylen:]

The gaps year-over-year are very constant. For example, on tomato soup it was $0.37 last year and it’s $0.38 this year. And on the ready-to-serve soups, and principally there we’re competitive, you know, Progresso, it’s very comparable. So we have been very effective at maintaining our penny gaps and that will be our objective going forward. So depending on where the branded companies go, our goal will be to maintain those penny price gaps.

[Andrew Lazar:]

And thus far have you seen the primary branding companies kind of do their part on pricing or not to the extent you think we need to?

[David B. Vermylen:]

From my perspective, I think that the branded companies were very slow last year to move on pricing as input costs went up and they got behind the curve and I think that, as I’ve watched it this year, and as I pointed out in my comments, the 11 branded food companies have shown over the most recent 12 weeks pricing of about, I think I said between around 6%-6.5%. And I think that’s where they need to be going and I think you may see it as we’re exiting the year, a little higher than that as more of the pricing rolls through. And my read from just sort of listening and the quarterly comments coming out from the branded companies, I think their days of being shy and hesitant about taking price increases are over. Because they knew they got behind and they have to play catch up. So I think the environment is very different now than it was 12 months ago.

[Andrew Lazar:]

I think, Sam, you had mentioned in your opening remarks hedging strategies have become more expensive, which I understand. And then I think you used the work problematic and I didn’t know if there was something beyond that, like something’s really changed or it’s just kind of hard to deal with the volatility in the general sense.

[Sam K. Reed:]

It’s primarily the volatility and I think the index on corn this year is triple that of the historical base. And in the great bulk of grains and oils it’s basically doubled. And what that has done is put the price the one has to pay to hedge is a greater nominal price than has been the case in the past for the seller to cover that volatility. What you will see out of us is we are expanding the techniques to be able to hedge these things. And largely we have been able to hedge those things where our suppliers were willing to take the other side and we have recently found ways to deal with embedded prices, particularly those driven by energy, that find their way into packaging, into minor ingredients, obviously into freight and transportation. And I also think David pointed out chemicals as well. And in those instances, there has not hedging in the past because it wasn’t either direct or convenient, and we are working with supplier to be able to in the coming months and the out-years be much more effective in that regard. And you’ll find us settling in on those costs with longer lead times, as another way of dealing with the volatility.

[Operator:]

Your next question comes from Jonathan Feeney with Wachovia.

[Brian Scuderi for Jonathan Feeney:]

I believe last quarter you identified the additional revenue opportunity from cross-border selling, I think around $25.0 million annually. Have those assumptions changed given the pick up in your categories?

[David B. Vermylen:]

I don’t recall talking specifically about the $25.0 million. We have made great progress north of the border in salsa and soup and are moving forward with non-dairy creamer, so we’re seeing a lot of opportunity there. And we’re certainly seeing opportunity now down here with E. D. Smith, both a combination of putting it into the Bay Valley system and leveraging E. D. Smith’s innovation capabilities.

[Brian Scuderi for Jonathan Feeney:]

Just quickly on salsa. Did you guys experience any business disruption in your salsa business this quarter from the recent salmonella outbreak?

[David B. Vermylen:]

No, we did not. We were well protected in terms of our ingredients and again, everything that we’re buying has been processed or we process it at a temperature that would deal with any of those kind of issues.

[Brian Scuderi for Jonathan Feeney:]

Not sure how material it is but it caught my attention this morning. The Wall Street Journal reported that McDonald’s will be scaling certain ingredients in some of their big menu items. They specifically cited replacing one slice of cheese from two on their burgers. But to the best of your knowledge, this doesn’t include pickles, right?

[David B. Vermylen:]

No, we haven’t heard anything about them going from two pickles to one. I’m the one who is always saying if they would add a third pickle our business would go up 50%. On you comment about the $25.0 million, that really related to as we were talking about, on the last call, the execution of our portfolio strategy. We’re really focused on key segments such as salsa, soup, non-dairy creamer, and salad dressing. So I was talking about not just cross border, but the execution of the portfolio strategy specifically.

[Operator:]

Your next question is a follow up from Robert Moskow with Credit Suisse/

[Robert Moskow:]

I’m just trying to figure out the math here. If your sales, ex-acquisitions, were only up like 1.5% but non-dairy creamer was good and soup was really good, I mean, how far down was pickles? Was it down like 10% or so?

[Sam K. Reed:]

The areas that were soft were pickles. I don’t believe it was that much. We also have a softness in the Food Away From Home as casual dining has been hit hard by the decline in disposal income. And then across some of our Industrial businesses we had significant changes also in the mix of those businesses.

[David B. Vermylen:]

On the non-acquisition, revenue was up about 6.5% and in terms of pickles, we’re down mid-single digits and there was a bigger decline in the infant feeding business because we lost a very large customer a year ago. I think the 1.1% or 1.7% relates to North American Grocery and all of the pickle decline and infant feeding decline would have affected North American Grocery. But if we were to step back and look at soup, salad dressing, salsa, and non-dairy creamer, they all had very strong unit and revenue growth. I mean, the kind of unit growth that we’ve always been hoping for and now we’re beginning to see moving forward.

[Robert Moskow:]

And then you said expect more portfolio pruning in the second half. Does that go beyond pickles?

[David B. Vermylen:]

No, I think we’re really focused on pickles. We’re looking at that entire portfolio, not just retail grocery but foodservice as well. We’re really looking at what’s the optimum size and manufacturing footprint for us going forward.

[Operator:]

That does conclude our Q&A session. At this time I would like to turn the call back over to Mr. Reed for any additional or closing remarks.

[Sam K. Reed:]

Thank you, Jamie, and thank all of you on the call for joining us. We’ll next get together in November and report through the third quarter. And at the risk of offering a forward-looking sentiment, I think you’ll find another installment of progress in operational front, financially, and also in the most important context, strategically, as we continue to expand the portfolio, move it into more growth categories, have a less of an emphasis on categories like pickles, and then have our supply chain become not only more effective but more efficient as these new businesses come into the TreeHouse fold. We will look forward to talking to you in a few months and if you would, keep those matters in hand, and we will report on further progress in each dimension. Thank you.