TreeHouse Foods, Inc.
Q3 2008 Earnings Call Transcript

Published: 4 Nov 2008

[Operator:]

Good afternoon and welcome to the TreeHouse Foods investor relations conference call for the third 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 be generally 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 industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. TreeHouse’s Form 10-K for the period ending December 31, 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 during this conference call. The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in 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 Chairman and CEO of TreeHouse Foods, Mr. Sam K. Reed. Please go ahead sir.

[Sam K. Reed:]

Thank you Jill. Good afternoon everyone and welcome back to our TreeHouse. David Vermylen, Dennis Riordan and I have great news and substantial progress to report. We have completed another quarter of strong top line sales increases, sequential margin expansion, an acquisition fueled earnings growth. These results speak not only of our financial discipline during turbulent times but also our dedication to a superior, go to market strategy that is right for these times. Highlights for the third quarter include revenue growth before acquisitions of 9%, the best of the year, driven by unit volume increases in strategically attractive categories; accelerated pricing to recover higher input costs; and favorable private label trends in the retail grocery industry. Double digit sales growth from E.D. Smith and San Antonio Farms, coupled with operating synergies as these 2007 acquisitions expanded their distribution through the TreeHouse sales and marketing network, while enjoying the economies and scale of our supply chain. Prudent management of our financial resources and balance sheet, as is especially befitting times of economic distress and uncertainty, that we could increase quarterly cash flow by $68 million versus last year while preparing for the year ending seasonal peaks in soup and non-dairy creamer shipments is clear testimony to our relentless focus on operational excellence, productivity and procurement based cost reduction programs and skillful tax and treasury management. And finally, record EBITDA of $40 million, an increase of 19% as we slowly but surely recovered gross margin dollars lost in the commodity and energy bubble of the first half of the year. Although below Q3 of last year, margins gained sequentially on a quarter by quarter basis as realized price increases exceeded an annualized $110 million, closely approximating forecast input cost inflation for the year. While we are playing catch up south of the border, our Canadian acquisition posted a solid 240 basis point gain in adjusted gross margin during the quarter. We now enter the fourth quarter, our seasonally strongest. While an innate sense of caution requires that we curb our enthusiasm, we face the end of this year and the beginning of next with high confidence. Our principle problems, the built in lag in pricing to recovering input costs inflation and falling demand in food away from home, are matched with even greater opportunities, the high growth potential of our value oriented, retail grocery portfolio and the benefits derived from strategically sound acquisitions. David and Dennis will now guide you through the particulars of market conditions, our go to market strategy, recent performance and the outlook for the remainder of 2008. David.

[David B. Vermylen:]

Thank you Sam and good afternoon everyone. Today I will focus on four areas. First a refresher on our product portfolio’s strategy though our business results can be viewed from a strategic perspective. Second the top line performance of the business, third commodity costs and pricing and how they will affect the business both short and long term and fourth an update on the private label market. First as we have discussed on prior calls, with our rapidly growing product line our portfolio strategy is the tool we use to manage the business. While we are focused on top line growth, we are more focused on the quality of revenue, the quality of revenue principally determined by EDA analysis, the return on capital employed. This summer we updated our EDA analysis including all of our 2007 acquisitions to give us a clear path to follow. Products such as non-dairy creamer, condensed soup, salad dressing, salsa, marinades and sauces are all high priority businesses on our keys to our growth. On the other hand, much of the pickle business, the branded infant feeding business along with some smaller product categories are not key to our growth and are being managed accordingly. Our third quarter top line results reflect continued execution of that portfolio’s strategy. Total revenue was up 37.7% due in large part to the addition of E.D. Smith. Importantly, non-acquisition revenue grew almost 9%. This compares to 6.6% in the second quarter. I’ll start with North American retail grocery. Total revenue was up 52% primarily due to the addition of E.D. Smith. Excluding E.D. Smith, non-acquisition revenue was up 3.3%. From a portfolio strategy perspective, we had double digit revenue growth in non-dairy creamer, soup, and salsa. That growth more than offset expected declines in pickles due to planned, low margin customer rationalization and the loss of a large infant feeding customer late last year. Not in our base growth number is the 20% growth we had in salad dressings and marinades. Along with salsa, we are getting great growth from our 2007 acquisitions and are developing a great portfolio of retail categories. Regarding E.D. Smith, today we announced the pending closing of our Cambridge, Ontario salad dressing plant and the consolidation of its manufacturing into our two other salad dressing facilities. We are expanding capacity in our U.S. plant which is a more efficient facility, thus we’ll be able to support continued salad dressing and marinade growth with improved margins. E.D. Smith continues to surpass all of our going in targets and is firing on all cylinders when it comes to top line and margin performance. Food away from home had a good quarter despite the severe affect the economy is having on out of home eating, especially the casual dining segment. Total revenue was up 17% due to the addition of E.D. Smith with base revenue up 6.5% due to pricing and very strong salsa growth as we brought on new food service customers. Our industrial and export business had a solid quarter with revenue up 25% due to higher co-pack volume and ingredient pricing. The top line summary for the third quarter is as follows, good solid revenue growth from the legacy business, particularly as it relates to the execution of our portfolio strategy and excellent growth post-integration from our 2007 acquisitions of San Antonio Farms and E.D. Smith. For the fourth quarter we are cautiously optimistic. The soup and non-dairy creamer seasons are just beginning and cool weather has taken hold. Now let me turn to commodity costs and pricing. While we are very pleased to see commodity and energy costs come off their July highs, it’ll have very little affect on us this year as we covered the majority of our 2008 costs in the second quarter in order to finalize second half pricing plans. In the fourth quarter we will have some energy benefits as it relates to freight, but the benefits will be marginal. While our margins improve versus the second quarter, they are still below year ago. As we look at next year, while we should see a decline in vegetable oil pricing versus our average buy in 2008, we expect to see pretty large increases in metal cans, corn sweeteners, fruits and vegetables. Corn sweeteners initial quoted pricing from key suppliers is up 15 to 20%. In total we expected our average input costs in ’09 will be up in the low to mid single digits versus double digit growth in 2008. While we have taken some first half ’09 commodity coverage on a couple of key inputs, the current volatility in the market has us meeting daily to gauge the right time to move in more aggressively. Strategically, our goal entering 2009 will be to have more coverage in place than when we entered 2008 in order to reduce the volatility we experienced in 2008. We have not had any pushback on our current pricing due to the recent commodity bear market except in terms of some pricing we plan to take in the fourth quarter. If there is pushback, we are fully prepared to review customer by customer where costs were three years ago, where they are today, and how our pricing compares to those costs. Our goal is to begin to recapture lost margin, but we do not expect a margin windfall as we operate in a very competitive environment. In our industrial business, where we have some costs passed through contracts, we will adjust prices next year but not at the expense of profitability. Now let me turn to the private label market. On our last call, I said that in the second quarter we were just beginning to see an acceleration in private label growth above the normal growth experienced over the last few years. That acceleration picked up in the third quarter. A [Nielsen] analysis of 45 categories indicated that for the 12 weeks ending October 4, private label had aggregate volume growth of 4.9% compared to 1.3% in the second quarter. That is a very healthy growth rate within measured channels. Excluding infant feeding and our rationalized pickle customers, our U.S. retail volume growth was comparable to the private label market as measured by Nielsen. Most categories showed private label share gains and that held true for all of our key categories. And our share gains came with our price differentials to the brand, generally consistent with last year on a penny per unit basis. Now let me comment on one major initiative that took place in the third quarter that will have a negative effect on margins in the fourth quarter but it was a great move for the business. The initiative relates to inventory management. Input cost inflation has a significant effect on the costs of inventory and return on capital. Even if your inventory is flat in terms of cases, it could be up 20% in dollars year-over-year. Earlier this year, we did some inventory and customer service modeling that indicated we could operate with lower inventories across many of our key businesses. Rather than reducing them over an extended period, back in May a task force led by Dennis put in place an ambitious inventory reduction program that led to our legacy business inventory declining in units by 25% versus September 30, 2007. Yet we did it without sacrificing customer service levels. Typically we are a user of cash in the third quarter as we build soup, pickle and powder inventory. In his comments Dennis will review how that changed this year. I’ll now turn it over to Dennis.

[Dennis F. Riordan:]

Thank you David. Since David covered the revenue growth I will focus on other key aspects of our operating results, including gross margin improvement, controlled expenses and financing activities. First, overall gross margins in the quarter were 19.5% compared to 21.6% last year, a decrease of 210 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. This has been a consistent story all year. However, we did see an improvement on a sequential basis from last quarter’s gross margins of 18.7% as pricing was more fully realized in the quarter. Margin improvement from the second quarter was realized in nearly every product category in channel with the exception of our food away from home business where lower volumes and a difficult economic environment caused a consumer shift towards food at home rather than meals away. In regard to operating expenses, selling, distribution, general and administrative expenses increased from $35.2 million in 2007 to $45 million in the third quarter of 2008 due to the overall growth in the company. As a percent of sales, SG&A costs finished the quarter at 12% compared to 12.9% in last year’s third quarter as we realized synergies from the businesses acquired in 2007. Partially offsetting the improvement was an increase in non-cash amortization expense. The increase in amortization expense from $1.6 million in 2007 to $3.3 million in 2008 was due to an increase of amortizable, intangible assets such as trademarks, trade names and customer lists associated with the E.D. Smith acquisition in 2007. Our other operating expenses totaled $700,000. Nearly all of that being shutdown costs associated with the previously announced closing of our Portland, Oregon pickle plant. Interest expense increased from $5 million in 2007 to $6.5 million in 2008 due to additional bank borrowings used for acquisitions used in 2007. However, interest expense was [inaudible] on a sequential basis from last quarter due to an aggressive program to reduce working capital and generate additional cash flow. These programs were successful in driving down our finished goods inventory units and businesses by 25% compared to September 30, 2007. We were also able to improve our already low days sales outstanding ratio to 21.5 days at the end of the quarter. These working capital plans resulted in significant positive cash flow in the quarter, even though we historically have negative cash flow in the third quarter. The third quarter was the seasonal build period for soup, non-dairy creamer and reserves of cucumbers for winter processing. However, this year we actually reduced outstanding debt in the quarter by nearly $36 million to $551.8 million at September 30. This compares to last year’s third quarter when inventories rose and our outstanding debt increased by $32 million. This change is debt is the free cash flow of $68 million Sam referred to earlier. In light of the volatile interest rate environment, we have also been very focused on treasury management. As many of you know, we have two primary sources of funds, senior notes that carry a coupon rate of 6.03% and a revolving credit agreement that has a variable rate based on LIBOR plus a credit spread. We were very successful at managing interest rates this year as evidenced by the all in interest costs on over $480 million in revolving debt of only 3.54% in the second quarter. Although rates have been erratic in the third quarter, our average borrowing rate in the third quarter was only 4.05%. To help insure we minimize our exposure to significant swings in interest rates in the future, we entered into an amortizing interest rate swap agreement that will be effective beginning November 19, 2008. Under this swap, we will have a fixed LIBOR base rate of 2.9% for two years on $200 million in principal. The swap agreement will then amortize down to $50 million, also at 2.9% interest, for an additional nine months. This will coincide with the expiration of our current revolving credit agreement. This swap agreement will result in us having a maximum interest rate of 3.8% on the underlying principal based on our maximum credit spread of 90 basis points. This maximum credit spread can decrease as our debt levels decrease. We believe this very advantageous agreement will allow us to continue to take advantage of short term rate opportunities on a portion of our debt to lock in a very low fixed rate on the majority of our revolving debt. Regarding taxes, our effective tax rate for the quarter was 29.9% compared to 37.6% last year. The much lower tax rate was due to Canadian sourced income that carries a much lower effective tax rate, along with the deductible interest loss on a Canadian inter-company note. This quarter’s tax rate is consistent with the year-to-date rate of 29.7%. Reported net income finished at $0.35 per share compared to $0.34 per share last year. However, 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 in the quarter. Second, we had integration costs of $0.01 associated with the integration of the U.S. based E.D. Smith operations indoor Bay Valley Foods Operating Company. And finally, we had a non-cash revaluation loss on the inter-company note of approximately $0.03 per share. After adjusting for these three one time items, our adjusted earnings per share would have been $0.41 per share. This is a 20.6% improvement compared to last year’s third quarter of $0.34 per share. To recap the third quarter we began to see improvements in our gross margins as price increases were more fully realized and softening in the energy markets started to take some pressure off key inputs. We also saw very nice unit sales growth in most of our product categories. Finally, we took aggressive actions to better manage our working capital and derive incremental cash flow. In regard to the balance of the year outlook, we are now in the key soup and non-dairy creamer shipping season and will see seasonal growth in our top line in the fourth quarter. In addition, we expect to see continued standard gross margin improvement in the business but those improved margins will be offset by higher one time unfavorable factory variances associated with the third quarter inventory reduction program. Those unfavorable production variances will roll into the fourth quarter results. We estimate these non-recurring variances will have a negative effect on the fourth quarter results of $0.05 per share. Excluding these one time variances, adjusted earnings per share for the quarter are expected to be $0.48 to $0.50 bringing the full year adjusted earnings per share to a range of $1.55 to $1.57. Sam, I will now turn it back to you.

[Sam K. Reed:]

Thanks Dennis. Last February in what now seems to be an entirely different world, we set forth six critical elements for the TreeHouse plans for 2008. These included number one, protect margins; number two, grow the base; number three, reform our supply chain; number four, strengthen our platform; number five, change with the times; and number six, reaffirm our commitment. Nine months later via the world being turned on its head, we can report that even under the most hostile and volatile market conditions, we have made substantial progress on all of these strategic fronts. Importantly, we also exceeded our original financial expectations even after commodity and energy inflation across the packaged goods industry was almost triple that of preceding years. Next, our portfolio product categories marketed across three business units has been strategically strengthened by the additional salsa and salad dressing as well as access to the Canadian market. Lastly, our infrastructure be it our supply chain or balance sheet has shown great resiliency and adapted well to these new and difficult times. As the new year dawns, we see 2009 as a year of great promise for TreeHouse. Specifically, the economy while weak in general will favor those who can deliver great value to consumers and superior service including affordable innovation to customers. Input inflation will slow to low single digits, allowing us to close the remaining price cost gap caused by the ladies and gentlemen following the commodity and oil bubble. Pressure for price rollbacks should narrowly focus on only certain product categories, not the entire portfolio. Next, EVA analysis and portfolio strategy will lead us to real growth, better margins and competitive advantage as we invest in the strong and winnow the weak. It is worthy of note that our present portfolio is far more weighted toward growth categories whether large or small than our original legacy base. Internal improvement will enhance our margins through productivity, procurement and innovation. Our supply chain will benefit from consolidation of under utilized manufacturing capacity as well as the expansion of our distribution network. Lastly, external expansion will allow us to enlarge and upgrade TreeHouse portfolio by the addition of new growth opportunities. Sellers will again return to the M&A marketplace as uncertainty and volatility recede and more financing, although with less leverage, becomes available. TreeHouse reputation for strategic expansion, certainty of closing, adroit integration and prudent cash management will stand us in good stead, far ahead of our competition for acquisitions when the economy and capital markets inevitably turn for the better. In summary, while we must continue to confront operational issues and cope with significant risks in the marketplace, we at TreeHouse are confident of our future and the outlook not only for the remainder of this year but more importantly the next. Jill, we will now open the phone lines for questions and comments.

[Operator:]

(Operator Instructions) Your first question comes from Bill Chappell – Suntrust Robinson Humphrey.

[Bill Chappell:]

Can you talk a little bit I guess on the price increases versus the commodity cost increases going into next year? Do you expect gross margins to get back to the levels of a couple years ago? Will they be up year-over-year? How are you looking at it from that standpoint?

[David B. Vermylen:]

I think they’ll be – we haven’t completed all of our planning for next year, but we believe we’ll continue to see this sequential improvement as we have had over the last few quarters. Now we’d love to get back to where we were a couple of years ago, but know that we’re not going to be able to get there in one fell swoop but we will make meaningful progress.

[Bill Chappell:]

In terms of acquisitions it sounds like it’s been pushed from the end of this year to the first part of next year. With financing, with credit markets, with what have you do you see something in the first half of next year or is it probably pushed to the second half?

[Sam K. Reed:]

I won’t comment on a particular timing or a specific category but what we do see is that on an internal basis we have reached that point where we are fully capable of taking on another large scale and strategically meaningful acquisition. We’ve got a number of candidates in mind and our focus on less on the matter of exact timing than in fact the strategic value of what it is that we see.

[Bill Chappell:]

Just on a go forward basis, what are you projecting? I mean, should we project 30% tax rate? And similar in terms of currency impact on maybe the fourth quarter results?

[Dennis F. Riordan:]

Yes, I think at this point the based on the full year rate coming in at just about 30 I think that’s a fair assumption for Q4. On the exchange rates, boy, I wish I knew. We went from what 97 to 77 in about two-and-a-half weeks and then back up to 83, 84? So I think we’re just going to be watching it like everybody else.

[Bill Chappell:]

But just on your full year EPS you’re assuming a similar type charge in the fourth quarter sort of like we saw in the third?

[Sam K. Reed:]

On an excluded basis that doesn’t impact things, we don’t have a guidance with the potential for the inter-company debt because that’s non-cash.

[Bill Chappell:]

Were there any additional I guess customer wins for E.D. Smith this quarter?

[David B. Vermylen:]

We have had – again I’m concerned about commenting on specific customer wins because it really relates to then our relationship with the customer and revealing that kind of information. I can tell you that with both E.D. Smith and San Antonio Farms we had at the end of the quarter some significant new customer wins that when you look at the sales growth on salsa of well into double digits that was really driven both in retail and food service by new customer wins. And with the 20% growth in salad dressings and marinades we also had customer wins there. So we’re feeling very good about those businesses and what they’re contributing to our total results and what Bay Valley has been able to do for those businesses in terms of opening up customer doors.

[Operator:]

Your next question comes from Robert Moskow – Credit Suisse.

[Robert Moskow:]

I guess my question has to do with the $0.05 charge in fourth quarter. You know, maybe this is going to be more of an editorial than anything but you made a wise choice I guess in reducing your working capital requirements during this seasonal build up because you generated some cash flow. You kind of give yourselves credit for that but then in fourth quarter you’re kind of breaking this one out and saying it’s a $0.05 charge so are you really also saying that there’s less product to sell in fourth quarter? And if demand was really good, are you leaving some demand on the table by not having that product to sell?

[David B. Vermylen:]

Let me sort of provide an operational perspective and then Dennis can add in just in terms of the financial metrics but no, as we’ve engaged the organization in an EVA and return on capital and employed metrics, we’ve expanded the operators horizons on how we can improve shareholder value via beyond just our focus on quality of revenue and operating margins. As I mentioned early in the year we took a hard look at our inventory levels, especially as they related to building inventories going to those peak consumption periods. And what we found was that we were building too much safety stock when you looked at forward inventory coverage. Now the two routes we could take with it would be to either do it over an extended period of time which would minimize any short term margin issues relating to absorption or be aggressive and make it a high priority. And with inventory value rapidly escalating due to input cost increases, we decided to be aggressive with our program as long as we could maintain those customer service levels. While we knew it would have a negative effect on margins in the fourth quarter, the cash flow opportunity was far too compelling to dissuade us. Now while we didn’t budget for it, we determined I think rightfully so that it was the right thing to do. We did not lose any sales opportunities associated with it because our customer service levels have stayed at the 98 to 99% through the whole period. So we’re very pleased on where we have netted out and we will continue to look at our inventories as we move through 2009 and see if there are additional opportunities on the inventory front to continue to improve cash flow. Dennis.

[Dennis F. Riordan:]

Yes and Rob just a couple of numbers. Last year at the end of September we had about 118 days sales and inventory and this year we’re down to about 83 days. And as David mentioned, no change in customer service levels, no lost orders, we just realized as strong as our accounts receivable was and as well as we did there we weren’t quite holding it on the inventory side. And we put a full court effort into improve that and the results were very strong but there will be a bit of a cost in Q4.

[Robert Moskow:]

So it doesn’t have any impact on leaving sales on the table or in fourth quarter?

[David B. Vermylen:]

Absolutely not. We would not – again Rob our whole goal here was how far down could we take it without jeopardizing the customer service levels. And there has been no disruption in that which indicates to me that down the road there may be additional opportunity.

[Robert Moskow:]

And then just one point of clarification on fourth quarter. You said that you’re not getting any kind of pushback on the price increases that you want to take but then you said except in terms of some actions that you wanted to do in fourth quarter, so does that mean that there’s other pricing you want to take beyond fourth quarter? Or are you not really looking at any additional pricing at all?

[David B. Vermylen:]

At this point as we’re putting together our plan, we’ll look at every business and how commodity costs are going into – input costs are going to affect each part of the portfolio. But in total we’re going to see – our estimate again is that mid single digits input cost inflation, so we’re not anticipating the kind of pricing – anywhere near the kind of pricing that we had this year. And in terms of some pushback from some customers, it was very limited. Some of it related to some pricing on the non-dairy creamer. But nothing that was of any real significance.

[Robert Moskow:]

On the organic sales growth in North America retail you could quantify it as 3.3%, it was about 3.7 in the second quarter. It doesn’t sound – you know it’s not terrifically robust but I guess the salad dressing business has been very robust so if you kind of took a – if you added that into your organic sales, kind of apples to apples then you would be a lot higher I’d imagine.

[David B. Vermylen:]

It would have been significantly higher and I should have calculated that out. And sooner or later I will. But the big thing, Rob, in the third quarter was that on the pickle business when we were rationalizing those customers a lot of that was really starting in the second quarter and had the full effect in the third quarter. But when you look at salsa, the whole soup business, and non-dairy creamer the top line sales on those businesses were very good. Even non-dairy creamer where we took significant price increases this year just because it was right in the sweet spot of all commodity cost increases, we had unit volume growth in the third quarter.

[Operator:]

Your next question comes from Jonathan Feeney – Wachovia Capital Markets, LLC.

[Jonathan Feeney:]

I wanted to follow up a little bit on Rob’s question. More specifically, I understand the merits of reducing days sales of inventory but it doesn’t seem like the action of a company that feels like it’s on the precipice of a volume acceleration. And maybe some of the third party data, especially if you think about how retailers have to run a private label program if they’re going to accelerate, they need inventory I guess it seems like – it doesn’t sound like you’re expecting an awfully – you know, anytime you have an acceleration volume in the fourth quarter so maybe if I could ask more specifically what can you tell us about your pipeline? About the conversations you’re having with retailers that might affirm or deny the growth potential that seemed apparent here as private label accelerates?

[David B. Vermylen:]

We are expecting continued growth of the private label market and we’re optimistic about our own business. I think as Dennis pointed out, we were sitting on levels of inventory that were significantly higher than we needed. Importantly what was going on was that as we were going into peak seasons on things such as soup, and you’re looking at days of forward coverage, we were increasing the number of days of forward coverage rather than say maintaining them at normal running rates just to have almost an obscene level of safety stock. So we’ve been able to continue to drive the business forward, even though we’ve taken 25% of the inventory out of the system. Frankly, John, we just had way too much inventory.

[Jonathan Feeney:]

And you may be pars – I mean, are there different areas where you had more inventory like pickles and more inventory reduction than some others?

[David B. Vermylen:]

I think soup was an area that we saw as a big opportunity.

[Dennis F. Riordan:]

Soup was the biggest and the others we had pretty much across the board in all the categories, but soup was definitely the number one area.

[Jonathan Feeney:]

Could you give us an idea of the sensitivity, what the puts and takes are on an operating basis for your currency exposure? Because I know you seem to have – I don’t know if you have more Canadian dollar costs or revenues and maybe just – I know it’s a wide range of performance but could you maybe give us a sensitivity analysis of what kind of cash effect it has on the business? Ignoring the non-operating asset and liability translation.

[Dennis F. Riordan:]

Yes Jonathan we are as an entity nearly wholly covered on our puts and takes on the currency so our combination of Canadian and U.S. dollar sources and uses in Canada comes very close to 50-50. It’s actually slightly more towards a 55-45 but it’s very, very tight. The decrease in the Canadian exchange rate will have a small negative impact on us. It goes slightly the other way. But it hasn’t been a big enough number to even draw attention to so far this year, despite currency going up and down quite a bit.

[Jonathan Feeney:]

What is your current availability under that oh so attractive rate liquidity facility you have in place?

[Dennis F. Riordan:]

The revolver can go up to $600 million and we have about, at the end of September we had about $451 on outstanding under it.

[Jonathan Feeney:]

So if you saw the deal of a lifetime tomorrow, you have $149 to spend?

[Dennis F. Riordan:]

Well, I guess in theory that practically doesn’t work out quite that way between the way the ratios go. Suffice to say there is some – there is availability under that line right now and with our cash flow being strong, it will only increase as we move out into the latter part of this quarter and certainly into next year’s Q1 and 2.

[Operator:]

Your next question comes from Ken Goldman – J.P. Morgan.

[Ken Goldman:]

Just wanted to clarify a couple things that I think were said on the call. Is inflation supposed to be low single digits to mid single digits or just low single digits? I think it was maybe stated a couple different ways.

[Dennis F. Riordan:]

It’s low to mid single digits.

[Ken Goldman:]

And then a similar question about guidance for the year. I think in the press release it was stated that earnings per share will still be in the guidance range you used throughout ’08 but then if I’m reading this live transcript right you guys said $1.55 to $1.57 which is, correct me if I’m wrong, it’s a little bit above where you guys were last quarter. So am I missing that or?

[David B. Vermylen:]

No, what we said on the call script, Ken, was excluding the $0.05 from that unfavorable variance that would be the $1.55 to $1.57. And in the earnings press release was not specific that that was called out. So we didn’t show that as a particular call out so if you deduct the nickel from that, you’d be in the $1.50 to $1.52 range. So it just depends on what your perspective is as to how to treat that $0.05.

[Ken Goldman:]

So if you take the mid point sort of that $1.55 to $1.57 compared to the previous, you know, the initial mid point of guidance you really have only raised it this year by 2 or 3% in terms of your earnings. That’s not a lot considering the economy’s downturn is probably going to help your top line, considering that at least since May oil and gas have come down or since the summer, lowering maybe the cost you’d expect. Your tax rate is lower. Your interest rate may be lower because you paid down debt. That’s a lot of tailwind. So I’m looking at your guidance. You’ve beaten the Street six straight times. You have all these tailwinds. The question is why wouldn’t you beat again? Why should we not assume that you’re just being very conservative on 4Q guidance?

[David B. Vermylen:]

I’m looking forward to feeling those tailwinds but we certainly have not yet, as I mentioned in my comments, the majority of our input costs for this year we contracted for in the second quarter in order that we could firm up our second half of the year pricing. So those commodities have come down . There’s been really very little benefit to us for that. One also comment on the fact that we’re heading with you’re saying the tailwinds, that our oil costs for this year, that is vegetable oil costs for this year are approximately $20 million higher than we had originally budgeted for and that $20 million in higher input costs versus budget translates to about $0.40 earnings per share. So in terms of dealing with headwinds and tailwinds, just on that single commodity alone we had a $0.40 earnings per share headwind. And adding in all of the other above budget input costs, the fact that we are heading towards our original guidance to me is a great testament to the resiliency and flexibility of the organization.

[Ken Goldman:]

I would assume then that given where commodity costs are now, you would not look for that similar $0.40 per share increase based on vegetable oil next year. It may even be – I don’t want to use the word tailwind because you’ve sort of pooh-poohed that a little bit, but it shouldn’t be nearly a headwind, right?

[David B. Vermylen:]

No I think we will see a mixed bag of input cost increases. I think that in my comments I said that we expect vegetable oil prices to be down but corn sweetener costs will be up. Tin plate and therefore metal cans costs will be up next year and crop fruits, vegetables, and cucumbers will be up. But in total we think that the input cost basket will be up in the low to mid single digits, although I will say when you look at each commodity on its own, there going to be some big increases and some big decreases that average out that low to mid single digits. So within the basket of costs there’ll be a lot of volatility but we are hopeful that in total they will be back to a more normalized running rate.

[Operator:]

Your next question comes from Bob Cummins – Shields & Company.

[Bob Cummins:]

Somebody asked earlier about your plans for acquisitions, availability of funds, etc., etc. and I think you mentioned that you were looking at some things. So let me turn that around and ask you if there are any areas of the company that you might consider divesting? I know you mentioned some large product areas earlier that are not considered your growth vehicles. Would that be something that you would consider? Or do those kinds of products play a part in the management of your business even though they’re not growing?

[Sam K. Reed:]

With regard to those portions of the portfolio where the strategy indicates that there is little in the way of growth opportunity or long term improvement, what we’re really focused on is continuing to run those as a part of the portfolio. And to date what we have done in limited instances is close excess facilities. And I won’t comment on whether there are specific plans or not with regard to divestitures. But as a general matter these are businesses that as we’ve looked at the various options, the better course again as a general matter is to continue to operate them both with a little bit of resources and very little investment and to use the positive cash flow out of those businesses to pay down debt and prepare ourselves for the future.

[Operator:]

Your next question comes from [Donald Thiessen] – Century Capital Management.

[Donald Thiessen –Century Capital Management:]

Can you give us – you’ve itemized three items that you’ve backed out of your earnings. Can you give us pre-tax amounts of those items and what line items they impacted?

[Dennis F. Riordan:]

Typically they will show up on the third page of the detail in the back in our press release. We had the reconciliation in that we showed a loss on currency translations, $1.869 million. That shows up in other expense. The acquisition integration was $234,000 –

[Donald Thiessen:]

But those are after tax numbers I’m looking at? Yes? No?

[Dennis F. Riordan:]

Those are pre-tax numbers.

[Operator:]

Your last question comes from Bill Chappell – Suntrust Robinson Humphrey.

[Bill Chappell:]

Just trying to understand the industrial ingredient category and just the growth there and how we should look at that on a go forward basis?

[David B. Vermylen:]

Well I think the ingredient business, which is principally non-dairy creamer, this year the tonnage is relatively flat compared to prior years. The revenue was up quite a bit because it has been so driven by increases in commodity costs, principally vegetable oils, casein prices and corn sweeteners. The other part of that business really is contract hacking and in general we have pretty long term agreements with our major customers where we are producing principal in the areas of soup contract agreements as well as infant feeding contract agreements.

[Bill Chappell:]

So it should at least continue at this revenue level for the next couple of quarters?

[David B. Vermylen:]

Well, I think the revenue as I mentioned on the call, some of our industrial business, the ingredient business, non-dairy creamer has cost you know passed through contracts so there could be early next year some reductions in that revenue, but it will not affect the profitability of that business. It will really be just a pass through on the reduction in the input costs and not on our margin per pound.

[Bill Chappell:]

And then one last one on the food away from home, did you see that business slow inter quarter or was it pretty steady and kind of similar to prior quarter trends?

[David B. Vermylen:]

Yes, pretty steady across the quarter. The good news for us there is that with the addition of San Antonio Farms that the – last year we really were able to start developing new customers for food away from home salsa, and that helped us to offset some of the underlying food away from home consumption decline. And with the addition of E.D. Smith and they have a in Canada a very good sauce program, all different types of cooking sauces under what they call The Saucemaker Plan, we are developing that program down here. And it has been launched but we see a lot of new customer development for that business that’ll take place in 2009. So as the fundamentals of food away from home are negative, the addition of salsa and salad dressing and sauces will help offset the fundamental decline.

[Operator:]

Your next question comes from Robert Moskow – Credit Suisse.

[Robert Moskow:]

You know consensus estimates are already baking in 11% and EPS growth for ’09 and we’re going to be laughing all the acquisitions, so I was wondering are there any benefits in ’09 that you can call out today on incremental synergies or on the cost side or even on the revenue side that make comparison a little bit easier? We already know about the cost inflation but I was wondering if there was anything else.

[Sam K. Reed:]

I think with regard to the business that we have now, we will see a continuation of some basic trends that are favorably affecting us now. As I indicated, we expect the economy will stay weak and that will at the margins favor value over luxury and we’ll get that benefit of it. With regard to lower inflation, we expect that in a couple more quarters we’ll be able to have fully closed the gap that was created on the lag time following the huge run up in commodity and oil costs. Importantly, the combined use of the EVA analysis and the portfolio’s strategy have provided us not only as David indicated a road map but frankly surprised us in a couple of instances of businesses that were kind of buried within E.D. Smith in particular that as we dug into the detail we found that there are a few small jewels there that we believe can take – be made better because of the extensive nature of our TreeHouse network and the economies that scale it and our supply chain. And then lastly the internal improvements at this business cannot be over emphasized. There is in every corner of the business a real drive to improve productivity, develop more meaningful innovation that fits the needs of our customers, and in particular, as David also indicated, from a procurement standpoint take a longer lead time and make better bets with regard to what these commodity and energy prices will do over a longer lead time. So that while we are adjusting we are not behind the eight ball trying to catch up desperately to a situation that’s running away from us. And while we have developed those programs and we’ll give you more detail in the February call, I think in their aggregate it is our sense that those are developments that in combination will lead to significant improvement, even with the base business.

[Robert Moskow:]

So does that kind of mean that you think that 11% growth you probably don’t normally guide that high, all else being equal. Does that mean you’re kind of optimistic that ’09 could be a better than base case type of year?

[Sam K. Reed:]

We’ll put a number on it in February.

[Operator:]

And we have no more questions at this time. I’d like to turn the call back to Mr. Reed.

[Sam K. Reed:]

Thanks everybody. We very much appreciate your interest in TreeHouse and we look forward to posting you on our full year’s results as well as providing guidance for 2009 when we next talk in the middle of February. Good night everyone.

[Operator:]

We thank you for your participation on today’s call and have a wonderful day.