TreeHouse Foods, Inc.
Q4 2008 Earnings Call Transcript

Published: 13 Feb 2009

[Operator:]

Welcome to the TreeHouse Foods investor relations conference call for the fourth 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 defined by the use of the word 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. As a reminder, this call is being recorded. At this time, I would like to turn the program over to your host, Chairman and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed. Please go ahead sir.

[Sam Reed:]

Thank you, Courtney. Good afternoon everyone and welcome back to our TreeHouse. We are please that you have joined us once again, this time on the occasion of our third complete year as a public company. Much has changed since our June 2005 spin-off, virtually all to the strategic operational and financial advantage of TreeHouse. Our prospects have never been better. And we are eager to share our recent history and current outlook with you. As usual, I am joined today by David Vermylen, our President and Chief Operating Officer, and Dennis Riordan, Senior Vice President and Chief Financial Officer. They have successfully led our company to record earnings and expansion through the last year, a time of great turmoil for the packaged goods industry. They have as well developed plans for continued external growth and internal improvement for the new year, the time of great uncertainty for our economy. Before they address the most recent quarter, the year just ended and the year to come, I would like to offer an overview of our TreeHouse as it stands today. I will later return before the Q&A session to reflect upon our future plans, opportunities, challenges and prospects. First, my view of TreeHouse's past and present. A year ago on a similar conference call, we set forth a six point agenda for TreeHouse in 2008. Today a year later, after our best laid plans were disrupted by extraordinary input cost, inflation and volatility, we have kept all promises made. These were; protect margins, grow the base, reform our supply chain, strengthen our platform, change with the times, and most importantly, reaffirm our commitment to shareholders. While realizing these strategic goals, we also generated exceptional financial and operating results that far exceeded market expectations. Specifically, earnings increased $0.37 per share, sales exceeded $1.5 billion, operating cash flow grew 14% and debt was reduced $145 million. As a consequence, the market recognized our performance, as THS shares rose 18% during 2008. From every perspective 2008 was a win, a big win for TreeHouse. Before turning to David and Dennis, I acknowledge in citing these results that we did not win in 2008 simply by staying with our original game plan. Stuff happened. Commodity and cost increases were triple our original estimate, a non-dairy creamer powder plant was displayed, and the Canadian dollar, the loonie, dropped to $0.80 on the US dollar. But, we did win, and we did so in tough times, against long odds, and often with our backs to the wall. We adapted to virulent inflation and gyrating volatility; extended E.D. Smith distribution far and wide south of our northern border, and passed through pricing to offset more than $110 million in commodity and energy inflation. Treasury and tax management was superb, generating cash flow to reduce debt, and strengthened our balance sheet as liquidity evaporated elsewhere. That’s what winners do. That’s what our team of private label, food service and industrial veterans, assembled over three years and six deals, does. That’s what makes us proud of our past, sure of our present and confident of our future. David?

[David Vermylen:]

Thank you, Sam. Good afternoon, everyone. Today I'll focus on two areas; first, the topline performance of the business during the fourth quarter, and second, a brief recap of 2008. After Dennis reviews the financial highlights, I will provide a perspective on 2009. First, the fourth quarter topline. Our total sales were up 7.3%. North American retail sales, which account for just under 60% of the business, were up 8.6%. We continued to pursue our portfolio strategy that focuses on our growth initiatives on soup, salsa, salad dressing and non-dairy creamer in the US, along with jams, jellies and pie fillings in Canada. In North American retail, excluding the impact of pickle customer rationalization and infant feeding, we had a 3.5% unit growth with double-digit growth on salsa, pourable and spoonable salad dressings, jams and pie fillings and low single-digit growth on soup. That increase on soup came despite our having reduced our soup inventories by 29% in the third quarter. I know that there was some concern on our last call that we reduced inventories due to possible fourth quarter consumption concerns, but we had a good soup season. While our retail pickle business was well below year ago in terms of units, due to our customer rationalization strategy, operating profit was virtually equal to last year with margins up a 160 basis points. North American retail grocery operating margin increased 200 basis points due to continued improvements in our legacy Bay Valley business, as we execute our portfolio strategy, as well as continued gains from our E.D. Smith business. Our retail operating margins would have been higher, but the absorption impact from our third quarter inventory reduction flowed through our fourth quarter P&L. While I have provided a summary of our internal retail data, let me briefly turn to syndicated data. Overall, the private label market, as measured by Nielsen, had a strong quarter with volume up low to mid-single digits. While retail customers measured by syndicated data account for only about 50% of our retail business, I thought I’d provide a brief recap of how our key categories performed and our performance within those categories. Please keep in mind that syndicated market data does not capture the volume of some of the faster growing retailers. Thus we believe it understates total category growth. As measured by Nielsen, the soup category case sales were down 1% with dollars up over 5%. Our private label soup case sales were up 1%, dollars up 11% resulting in both unit and dollar share gains. The salad dressing market unit sales were down 4% with dollar sales up over 3%. Our private label salad dressing unit sales were up over 12%, with dollar sales up almost 25%, resulting in excellent unit and dollar share growth. The powdered non dairy creamer market was down 3% in unit sales, but our unit sales were slightly better than that. Non-dairy creamer commodity costs soared this year, resulting in much higher pricing, which has had an effect on market growth. While we gain both unit and dollar share, we need to reinvigorate the market. While the pickle market was down 4% in units, our unit sales were up almost 1%, dollar sales up 8%, and we gained both unit and dollar share. The disconnect between our pickle performance, as measured by Nielsen and our internal shipments is that the unprofitable business we exited last year was principally outside of measured channels. While the salsa category was flat in unit, we are up 12%, with dollar sales up over 20% and we gained both unit and dollar share. Outside of the measured channels, we had excellent growth in soup, salad dressing, and salsa. Finally, on the retail side, we did see a reduction in customer warehouse inventories, as has been reported by other manufactures. While difficult to estimate across the board, our data points to about a half week inventory reduction in terms of combined warehouse and retail. Turning to Food Away From Home, while our revenues were flat, this is the segment that is facing tough economic challenges. Decline in away from home eating affects both our Food Away From Home segment and our industrial business, where we sell ingredients to customers where the end use is away from home. Across the board we are hearing of industry declines that accelerated in November and are continuing in 2009. In particular, the casual dining segment has been hard hit, and that's a strong channel for pickle. However, despite the volume challenges, Food Away From Home operating margins increased 70 basis points due to pricing and lower transportation expense. Our Industrial and Export sales increased over 11% due to both higher volume and prices. Operating margins declined due to a mix shift to lower margin co-pack items. Now I'd like to provide a brief recap of 2008. I am thrilled we were able to exceed our original guidance and see our stock price increase despite the challenges we faced on input costs. The increase in input costs versus our original budgeting guidance had a negative $0.84 earning per share impact versus budget. With our original guidance of $1.50 to $1.55, that was a big hole to climb out of. While pricing was able to offset some of that hit, it also took cost savings, productivity gains and smart business and financial management to bridge the difference. While the input cost volatility required enormous time commitment on the part of the organization, we were also able to integrate the $300 million plus E.D. Smith into our company and increased its pro forma operating income 52%, despite facing input cost turbulence. E.D. Smith has been a great success for us and we exceeded every operating metric we established at the time of the acquisition and we have not yet fully tapped all of our cross-border opportunities, given how our priority shifted last year. We will escalate this activity in 2009. I will now turn it over to Dennis.

[Dennis 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 over quarter three, well controlled operating costs and working capital programs that performed very well. In addition we had three unusual items in the quarter

[David Vermylen:]

Thank you, Dennis. As we look ahead to 2009, we see a very different environment that creates its own set of challenges and opportunities. From a topline perspective, we are forecasting only slight revenue growth. Let me walk you through how we see the year unfolding. First, we will continue to execute our portfolio strategy, especially in North American retail. As in the past, this dampens total topline growth due to our deemphasizing of low return businesses, but improves margins, profits and our competitive position, as we grow our high-priority business. Chasing no-margin private label business to grow the topline is a real mistake in private label, as it can erode your total pricing integrity leading to long-term erosion. We are much better-off managing these businesses for cash, focusing on our winners and acquitting new businesses, a la E.D Smith that add categories with excellent growth potential. Second, on some products there will be price give-backs, either because of cost plus contracts or where a key commodity such as soybean oil has come way down off its high, and our customers are well aware of it. The key for us is maintaining or increasing our dollar profit per unit as we work through input deflation. Third, we will continue to be challenged in the Food Away From Home arena. Our goal here is to offset the underlying trends on legacy items, such as pickles, with new salsa, sauce and cheese sauce business. Fourth, we will have a foreign exchange effect from our Canadian business. Despite the lack of forecasted revenue growth, we expect a solid year as indicated by our guidance. Please keep in mind that unlike the branded world, where managing your volume and marketing spending are key earnings drivers, in our world we are managing volume and marketing spending, our key earnings drivers. In our world volume mix and attacking the center the P&L, what really drive earnings growth. Reducing our cost to sales by 3% generates about the same net income as $60 million to $70 million in incremental sales. At the same time, we are far more focused on volume growth than we were this time last year, when input costs were souring and we were focused on pricing. I know that I have personally spent more time in the first six weeks of 2009 on key customer and new product initiative discussions than I spent in the fist six months of last year. Hopefully my engagement will be viewed as a positive by the organization. Finally, from an organizational perspective we are well positioned to take our new acquisitions this year. With the integrations of San Antonio Farms and E.D. Smith behind us and both businesses on growth trajectories, we've got the internal capabilities to add a new large branch to TreeHouse. I will now turn it back to Dennis.

[Dennis Riordan:]

Thanks, David. I will now cover the outlook for 2009. Unlike most companies, even many in the food industry, we believe 2009 will be a year of opportunity for TreeHouse. We also know it will be a year that requires even more focus on the operational aspects of our business. We see growth in private label because of the value it provides to both consumers and our retail customers. We also know that we need to continue our focus on profitable growth and that pricing will not be the key driver of margin expansion. We will need to keep pruning our low margin customers and SKUs while driving internal costs down, so that we can pursue new customer business at the right margin levels. Overall, we expect the topline revenue to increase only 1% in 2009 due to the carryover from our pickle rationalization program and our expectation that retailers will continue to manage down their inventories to preserve cash flow. Our outlook also considers the negative effects of the Canadian exchange rate on topline revenue compared to average exchange rates in 2008. While many of the constraints on sales are outside of our control, we can manage our cost structures and response to the external economic forces. We will redouble our efforts on margin improvement and it is expected our full year margins will increase by at least 100 basis points compared to 2008. The margin improvement will take place primarily in the second half of the year as forward contracts expire and lower input costs are fully realized. In terms of expenses, our operating costs will continue to be well controlled. We see no unusual items on the horizon that would affect our year-over-year spending levels. Overall, we expect to increase our earnings per share on a fully diluted basis by 11% to 14% and finish between a $1.80 and $1.85 in earnings per share in 2009. Now let me cover few other items that are considered in our full year outlook. First, interest expense will be quite a bit lower on a year-over-year basis due to the lower debt levels entering into 2009. Although we are enjoying very low interest rates today, we saw the wild swings that occurred in 2008 and we believe it's best to be conservative with rates in 2009. We've reduced our exposure to interest rate volatility through our senior notes that carry interest at about 6.3% and our swap of floating rate debt to fix rates that should not exceed 3.8% on $200 million of our debt in 2009. The balance of our debt will be floating rate with LIBOR and will likely have lower average rates than what we experienced in 2008. We expect total interest costs to be in the range of $22 million to $23 million next year. Our effective tax rate will increase from 2008 because the unusually low rates associated with the mark-to-market adjustments this year are not expected next year. As I stated earlier, the swap mark-to-market adjustments that contributed to the low tax rates in Q4 will partially reverse as income during the next year at a 38% tax rate. As a result we expect to have an estimated tax rate in the range of 34% in 2009. In terms of capital investments, we are planning to scale back our capital spending levels in 2009 to a more typical level of $30 million to $35 million. We made significant new investments in 2008 for water and energy improvements in our soup business and expansion of our U.S. salad dressing manufacturing footprint and these items will not recur in 2009. Non-cash items for the year include deprecation and amortization, which will be relatively flat for 2009. Stock option expense will show only a small increase in 2009 as we enter a more normalized level of expense since the initial spin grants became fully amortized. We do expect that our average shares outstanding will increase during the year as equity grants best with the full-year average outstanding shares to be approximately 32.5 million shares. Regarding the first quarter of 2009, we will still have high input costs due to the timing of our forward purchase contracts. In addition our salad plant expansion and Midwest distribution center will be coming online and there may be some incremental start-up costs. As such we expect EPS will be in the range of $0.35 to $0.37, a small improvement over the $0.34 in the first quarter of 2008. Beginning in the second quarter we expect to increase quarter-over-quarter earnings culminating in the full-year guidance of $1.80 to $1.85. In conclusion, we have shown that whether headwinds or tailwinds, recessionary depression, we have the right strategy and teams in place to navigate successfully. We see more uncertainty coming in 2009, but with success comes confidence, and we have a confident attitude for the new year. While we may not always take the original course we plan on, we do believe we are capable of making the course corrections necessary to achieve our goals. Now I will turn it back to Sam.

[Sam Reed:]

Thanks Dennis. As you all have just heard, once again we have an ambitious plan and aggressive goals for another new year. The plan is based upon our outlook on the economy, the food industry and the consumer, all facing the twin-specters of recession and economic uncertainty. While there are substantial risks, they are a far cry from the runaway inflation and extreme volatility of our recent past. As a marketer of customer brands, our products will be sought out by those seeking better value in hard times. Further, our plan is anchored by that which we control, our supply chain, where productivity and procurement programs generated economies of scale and efficiencies throughout our manufacturing and distribution system, Lastly, our plan is based on topline growth in strategically important product categories, as determined in the disciplined context of an approach to portfolio strategy and economic value added, rather than a tactical pursuit of volume for volume's sake. All in all, I like our chances for another big win in 2009, whatever the state of the economy, stimulus plan or bailout. This is particularly the case when in looking back to our inception, and forward to this year's end, I can trace a trend line in both earnings and cash flow, growth at a compounded rate of 22% annually from 2005 results through 2009 guidance. Let me repeat, over our four-year lifetime, TreeHouse will have posted sustained growth of greater than 20% in both profits and cash flow from our startup four years ago through this coming year-end. Few in our industry can match this record, especially when one considers that TreeHouse has doubled its size and more than tripled its category presence in only three short years. Our outlook for 2009 and beyond is no less bright than our recent past. Our past track record, present circumstance and future prospects should merit great investor confidence in our TreeHouse. Finally, allow me to provide some insight into the TreeHouse approach to further expansion via acquisition in the coming year. Total M&A deal flow is down substantially in all sectors of the economy due to a post bubble, tri-factor of credit crisis, recession and the lag in sellers’ expectations. These factors especially dominate those sectors for global demand, private equity, financial engineering and cyclicality of driven M&A markets. The New Year has also exposed all regardless of industry or sector in need of capital to difficult if not impossible credit markets. In stark contrast to many other perspective acquirors TreeHouse is in excellent condition to expand via acquisition. Notably, we have fully and successfully integrated E. D. Smith and San Antonio Farms into our shelf stable dry products platform. Again, confirming our skill in expanding the TreeHouse portfolio. Our private label grocery customers recognize the value of our portfolio strategy to their businesses and welcome its continued expansion, especially when times are tough. We have evolved from an untested upstart to a trusted partner. Our lines of credit are sufficient to expand into another large scale product category, establish another industry leading presence in private label, and do so with substantial synergies and a competitively advantaged cost of capital. And finally, our team, fully capable of creating our own opportunities is hungry for the next challenge. While I can predict neither the precise timing nor the exact category, I am sure that when the time is right, TreeHouse will be in the vanguard of the next wave of expansion and consolidation in our industry. Having weathered the storms of the past, our TreeHouse is structurally sound and equipped with all the construction permits required for further expansion. Having doubled revenues with soup, salsa and salad dressing, we are both eager and ready to resume our strategic expansion into new product categories and new markets. Coordinator we will now take questions and comments from analysts and investors on the call. Thank you.

[Operator:]

(Operator Instructions). We'll take our first question or comment today from Jonathan Feeney with Janney Montgomery Scott.

[John Teemo:]

Hello, actually this is [John Teemo] on behalf of Jon Feeney. Congratulations on a good quarter.

[Sam Reed:]

Thank you.

[David Vermylen:]

Thanks, John.

[John Teemo:]

I guess first we've seen several media reports as well as comments from retailers about how branded food companies are - I should say branded consumer goods companies more generally are getting fired by retailers for being too slow to get back some of the pricing. And most recently we saw sort of here their private-label relationships as their key bargaining tool. In that respect do you view this sort of rhetoric between brands and retailers as a positive? Is there may be a volume opportunity there or should we be more fearful of the rest that as a whole pricing can collapse to the extent your branded competitors start getting beaten up a little too badly?

[David Vermylen:]

No its - this is David, John. It's hard to comment because I haven't been listening to what all the branded people have been saying, but we have been addressing this issue with our customers since the fourth quarter when we started talking to them about commodities coming down. And that when key commodities come down we will come back to them and we laid out for them how long we had coverage and the timing and when we'll come back and talk to them about the pricing. We used very disciplined fact based selling when we took those price increases and we will use similar data as the commodities are coming down. So we have a very good relationship with the retailers, we don't see them as putting a gun to our head. We are in an industry where there are bids and that can get challenging because people will be looking at just at market prices. But we do not see it as being a highly inflammatory environment right now. So, our approach is very long-term, very direct, very straight with the customers and do it on the basis of facts and not emotion.

[John Teemo:]

Thank you. On the same point then, in the 1% revenue growth guidance, you talked about sort of the, to be expected impact on industrial, I guess just directionally if that's the best you can do. What are your assumptions for pricing across the rest of your portfolio, retail specifically?

[David Vermylen:]

Well we haven't broken - I don't have a breakout by channel, but we estimate that we are looking in the area of about, say $20 million to $30 million in revenue effect from the givebacks. But as I pointed out on my comments, our objective is to maintain or increase our profit per unit, so that from a bottom line perspective, and earnings per share perspective, that revenue decline doesn't have an affect on the business.

[John Teemo:]

Got it. Thank you. And just switching gears for a one, last one please. The comments you made around acquisitions and your capability to do a deal and apparently your willingness to do a deal in another large scale product category. You specifically mentioned private label, was it deliberate that you said private label and not industrial food service, and I guess really even branded for that matter or would you be willing to do a deal outside of your wheelhouse both in category and perhaps even a big brand or something like that?

[David Vermylen:]

Our focus continues to be near-term on private label opportunities. We are very interested in Food Away From Home but the dynamics of the industry right now are challenging. Of course, when a segment is challenged that can create acquisition opportunities on its own. But I think internally our priorities are really focused on how do we add another large leg to our private label dry grocery portfolio, as we did with both San Antonio Farms and E.D. Smith. And John, in many cases when you acquire, as we did with San Antonio Farms and E.D. Smith, they have food service components as part of those businesses and as we evaluate acquisition opportunities, if there is a good food service component to a business, we see that as a positive.

[John Teemo:]

Okay. Well, thank you very much for your time and congratulations.

[David Vermylen:]

Thanks, John.

[Sam Reed:]

Thank you.

[Operator:]

We will take our next question from Bob Cummins with Shields & Company.

[Bob Cummins:]

Thank you very much and good evening everybody.

[Sam Reed:]

Bob, how are you today?

[Bob Cummins:]

Oh, just great. Thank you. Just following up on the discussion about acquisitions, I know you are not going to tell us exactly what you are looking at. But maybe in general terms you could suggest some areas that you are either not in and would like to be in, product areas I mean. Or may be some where you have a small position or there are other types of products closely related to what you have that might offer an opportunity to grow through a further one or more acquisitions. Can you just kind of give us a broad-based view on what you are interested in?

[Sam Reed:]

Bob, this is Sam and I will.

[Bob Cummins:]

Yes, Sam. Thanks.

[Sam Reed:]

First of all, let me take a step back and say that of those that we have already done, the last two in particular have been hugely successful with E. D. Smith bringing to us affordable salad dressing category in all of Canada, as well as San Antonio Farms with its entry into premium salsa. And their combined effect, as David quantified it quite well, is in growing the business it also established us as a major and much more significant supplier to our customers across both retail grocery and food service channels. And if we can do more of the same, that is our first priority, specifically that we will continue to look first at shelf-stable dry groceries that are in the center of the store that give us the highest of degree operating synergies. So that from the inception of our purchasing programs, through trade marketing, sales calls on our customers, distribution and invoicing that we are able to provide the benefits of one large organization as opposed to a splintered group of small. So that will continue to be our primary emphasis. Again shelf-stable dry grocery, highly compatible with what we have now and ones where there are significant synergies. We are also focused primarily on retail grocery private label and we were welcomed as we got in those businesses, ancillary volume in food service and industrial. And then thirdly and last, our strategic planning process is far more robust than only a few years ago and we are beginning to look beyond that core to determine how we might grow our portfolio rather than in an incremental way, in a transformative way. But those are prospects that go beyond the nearest term and ones that we will continue to appraise and apprise, but on a much longer term basis.

[Bob Cummins:]

Great. Well, I know you have been very careful in avoiding pitfalls so far and I am sure you will continue to do the same in the future and look forward to seeing you in the few weeks.

[Sam Reed:]

We do as well. Thank you.

[Bob Cummins:]

Thank you.

[Operator:]

Next to Ken Goldman with JPMorgan

[Ken Goldman:]

Good evening.

[Sam Reed:]

Ken, how are you?

[David Vermylen:]

Hi, Ken.

[Ken Goldman:]

Doing well, thanks,

[Sam Reed:]

Good.

[Ken Goldman:]

When I talk to investors about TreeHouse and I've talked to them in the last year, and obviously, I have an over weight rating. I am curious, because one of the biggest pushback I get is, "their debts are a little bit too high for me" is one of the phrases that come back to me, and clearly you paid down a lot of that. I wonder can you explain a little bit about how you think when you are doing an acquisition about maintaining that balance between gaining accretion on the bottom-line and the amount of debt you have on you balance sheet?

[Dennis Riordan:]

Ken, Dennis here. Obviously, we look for accretive deals, and one of the significant advantages we have at TreeHouse is, we do have a credit facility that is a very good facility for us with excellent rates. And I know there is some wisdom out there that says, revolving credit facilities are for emergencies only, but frankly, when you look at ours, and our ability to borrow at LIBOR plus a spread, with LIBOR at 0.45% right now for 30 days, we consider that a huge asset and a huge source of capital at a very low cost. So, we have no issues whatsoever with using our debt, and to the extent it's available, we will use it to the max because it is such a cheap form of capital for us, and as long as we see good deals, frankly, we'll want to use that source. It makes for a very attractive financing.

[Ken Goldman:]

Do you then feel a sense of urgency to do a deal sooner for the possibility of LIBOR rising or it doesn’t really matter to you on the timing there?

[Dennis Riordan:]

It really doesn’t matter on the timing. It's an asset to us, but not one we feel compelled to have to use. We assess the deals on the merit of the deal, and the good news is we have good financing to back that up.

[Ken Goldman:]

One more question if I can. You talked about a 34% affective tax rate for 2009 I believe, does that last throughout 2010? I know visibility there is not exactly perfect, but I am just trying to get a sense for how long that rate is going to be with you?

[Dennis Riordan:]

To be honest we haven’t guided out the (inaudible) even in our models Ken, but one of the things that is driving that up, as I mentioned, is the mark-to-market on that interest rate swap, and as that reverses through next year that will affect the rate and depending on what happens to rates that may evaporate a lot or a little, but, that’s really what will help to primarily affect that rate and takes it the higher level to 34% from this year's average.

[Ken Goldman:]

Great. Thanks very much.

[Operator:]

(Operator Instructions). And we'll move back to Robert Moskow with Credit Suisse.

[Will Sawyer:]

Hi, this is actually Will Sawyer for Rob. Good evening guys.

[David Vermylen:]

Hello, Will.

[Will Sawyer:]

Just a housekeeping question. Can you give us an idea of how foreign exchange impacted the fourth quarter and also what you are thinking for next year?

[Dennis Riordan:]

Yeah, the rate is principally affecting us on the topline and some of the translation of the various P&L lines. So you will see a noticeable difference in terms of a year-over-year due to rates. For instance, the average exchange rate for Canada this year was in the range of $0.96 on the dollar and we are looking at - I am sorry $0.94 for the full-year rate, and we are looking at $0.82 as our target for next year. So that difference is closing in on 13%. So as you take Canadian dollar revenue this year to next year, you almost have an immediate 13% haircut on the topline. One of the advantages we have though is that from a bottom-line earnings, it has a much smaller impact on us because we are naturally hedged to a great degree in terms of our purchases of US dollar goods and our sales to US customers. So although it affects the individual line items and sales and cost of sales, the bottom-line impact will not be very significant at all.

[Will Sawyer:]

Okay. Thank you. And then just can you guys give us an update on what we are seeing competitively into, from the branded side versus private label and what do you think about your price spreads to branded?

[David Vermylen:]

Well, this is David. It was a good season for the soup industry and again within soup you have condensed and ready-to-serve and our focus is more on the condensed side. We have a very strong share of condensed and the competitive dynamics of the condensed segment are very attractive to us. In the ready-to-serve, is really where sort of the battle took place between Campbell's and Progresso and I won't quote their - or cite their results because it's in the public domain. In terms of our price gaps, we pretty much on the condensed side maintained our price gaps year-over-year with Campbell's. I think on ready-to-serve, the price gaps are narrow just because the competitive dynamics were so intense and we weren't just going to significantly discount our ready-to-serve. So I think year-over-year the bottom-line on it is it was a good season for us. The price gaps on condensed were maintained and we are very optimistic that we will exit this year and enter next year soup season in very good shape.

[Will Sawyer:]

That's great. Congrats on the quarter then.

[David Vermylen:]

Thank you.

[Sam Reed:]

Thank you.

[Operator:]

We go next to Bill Chappell with SunTrust.

[Bill Chappell:]

Good afternoon.

[Sam Reed:]

Hi, Bill.

[Bill Chappell:]

Just a quick follow up on that currency. So just on the back of the envelope does that mean your 1% growth for '09 would be 3% to 4% ex-currency?

[Dennis Riordan:]

I can't comment. I haven't done that calculation, I don't have in front of me, Bill.

[Bill Chappell:]

Okay and then pickles, the rationalization, did that hurt topline by about a percentage point this year or is it less than that?

[Dennis Riordan:]

I think in total it's probably more than that.

[Bill Chappell:]

Okay.

[David Vermylen:]

It's definitely more than that.

[Sam Reed:]

That's more.

[David Vermylen:]

But I think again the key for us, Bill, as we pointed out that our pickle profits are good, our margins are improving, the EVA on the business is getting better and will continue to as we move through this year.

[Bill Chappell:]

So I mean that is rather one-off whether you can kind of see organically ex-currency. It sounds like a mid single-digit type growth number.

[Sam Reed:]

Yes. For all our key product lines that's exactly the range.

[Bill Chappell:]

Okay. And then moving to gross margin, I don't know if I might have missed it. Did you say what your total kind of commodity hit was in '08 versus '07? I know it didn't rise into the year and then as I look at the 100 basis point gross margin, I was getting on the impression, you are expecting gross margin expansion in '09 even before the commodity recovery. How should we look at that as a 50-50 synergies versus client recovery or is it all client recovery, or how are you looking at that?

[Sam Reed:]

We have got it as a combination of the two, as David said there will be some natural improvement because of the input costs, but a lot of it will be driven by our internal efficiencies. As I said those are areas that we control. We can't always control what happens on the external, so our number one focus internally is to drive the margins through our center of the P&L initiatives. As David puts it looking at our plants and distribution centers to drive it, so that's something we can count on and rely on, so that's where we focus.

[David Vermylen:]

We have a philosophy which is use pricing to deal with input cost changes and productivity improvements to be the key drivers of our margin growth and that's whether input costs are going up or input costs going down. At the end of the day we really want to improve our margins through a productivity initiative, both in the plants and in our distribution system.

[Bill Chappell:]

Got it. If I look at '08 in terms of the margin hit, unexpected or unrecovered commodity cost, anyway to look at that and what the total cost was?

[Dennis Riordan:]

We have not broken it out in that regard. What we have done is talked about input costs year-over-year being up, north of $110 million, and that’s when we had to get back in pricing, but we haven’t publicly talked about a direct match of that input cost and margin effect.

[Bill Chappell:]

Got it. Well thanks a lot and a great quarter.

[Dennis Riordan:]

Thank you.

[Sam Reed:]

Thank Bill.

[Operator:]

(Operator Instructions). We'll move next to Andrew Lazar with Barclays Capital.

[Andrew Lazar:]

Good evening.

[Sam Reed:]

Hi, Andrew.

[Andrew Lazar:]

Just a couple of things. First, and if I missed this, I am sorry. In the fourth quarter, excluding acquisitions, can you just go through a couple of the key buckets around organic sales growth in terms of volume pricing and the like?

[David Vermylen:]

Andrew, I am just going to replay what some of my comments were. On North American retail, when you back out our pickle rationalization and infant feeding, out physical volume was up about 3.5%, and I don’t have the revenue calculation associated with that. I know in total we are up about 8.6% for total North American retail.

[Dennis Riordan:]

A 3.6% revenue growth in the legacy businesses, ex-acquisitions.

[David Vermylen:]

On Food Away from Home, we would have had a unit decline as the casual dining segment has been affected, and I think unit sales were up in industrial though we had a mix shift to co-pack versus our ingredient business.

[Andrew Lazar:]

Got it. And then Dennis your comments on the 3.6%, that was what again?

[Dennis Riordan:]

That’s revenue increase from legacy businesses without the acquisitions.

[Andrew Lazar:]

For US retail?

[Dennis Riordan:]

No, for total company.

[Andrew Lazar:]

Total company. Okay, I got it. And you didn’t have pricing for the US grocery piece, okay.

[Barclay Capital:]

No.

[Andrew Lazar:]

Okay. And then overall volume corporately, just for the legacy business? I am just trying to get to a kind of an overall corporate?

[Barclay Capital:]

And Andrew, you are talking about the quarter?

[Andrew Lazar:]

Correct.

[Barclay Capital:]

The legacy, because of the issues with the pickle business declines, the legacy business was down low single digits.

[Andrew Lazar:]

Got it, okay. Dave, I guess I am a little bit surprised if we pick the category numbers that you cited in terms of volume for soup and I realized this is just sort of measured channels, but this is just one of those things that you think condensed would be sort of right in the wheelhouse from kind of a value perspective of what consumers are trading down to.

[David Vermylen:]

Yeah.

[Andrew Lazar:]

Is it just that the channel shift is so dramatic in that category that volume might be up nicely otherwise or it’s just a pricing doing?

[David Vermylen:]

As I mentioned, as measured by Nielsen, our unit sales in soup were up about 1%, we were north of that with condensed and south of that with ready-to-serve just because the competitive dynamics being so intense in the ready-to-serve, but again outside of those measured channels we had good growth with the dollar retailers and the Wal-Marts of the world who are not measured there. So again Andrew, in total less than 50% of our business gets reported through the measured channels, but what I was trying to do by providing that information is to just give you a perspective on how we are doing probably more in terms of our share in the absolute unit growth or dollar growth reflected through those channels.

[Andrew Lazar:]

Got it. And just you know the expectation is obviously in this sort of timeframe are that and we are seeing some of the data across a lot of different private label categories that - things are accelerating pretty nicely broadly speaking for private label both from a sales and volume perspective. And I want to know if you think the data that you see internally would be consistent with that.

[David Vermylen:]

Yes, I think I mean when we look at our private label business excluding - when you back out the customers that we rationalized the pickle business with an infant feeding. Our units roughly about 3.5% and what I am seeing in private label, when you look at all the different categories and there is one report that shows about 100 different private label categories. It's including things like pet food and other categories. But when I look at sort of the dry grocery arena, we are seeing as measured by Nielsen our [ROI] growth in the 3%, 4% to 5% real case growth rates. And that compares to all of those categories in total being down 1% or 2% as measured by the syndicated services. So private label across the board is continuing to gain share and outside those syndicated measured customers. There is a lot of growth there and we are doing quite well there.

[Andrew Lazar:]

Got it. And can you just you know, a broader question, I am trying to get a sense of what you make of kind of the industry argument that, hey, look we have priced behind inflation for the last couple of years. So, if you look at the last couple of years cumulatively in the industry we are not close to kind of covering the kind of inflation that we absorbed. And therefore on the way down that sort of argument cannot take it all the way down. Do you think there is sort of merit to that argument. I think the data would suggest that but is there really a merit to it in the real word and in the private-label universe does it become even less of a factor just because you have talked about obviously the bid business and the nature of your business is somewhat different.

[David Vermylen:]

Well, Andrew, there is no doubt that in the branded food world there have been gross margin erosion over the last few years as input costs were not recovered through pricing until you hit sort of a cataclysmic event starting at the end of 2007 and in into 2008. And what we have consistently done is really that fact-based selling where we build up our cost structure with the retailers, really show them what's going on and we prove our case. That is very different than the majority of the national brands who will generally send out price increases over a fax or an e-mail and then go in behind it to talk to the customers about. That's not the way we do it. So, in terms of the pressure that they are getting from retailers it may be in response to the approaches they take versus the approach that we take. Was that helpful for you?

[Andrew Lazar:]

Yeah. That's helpful and two just very quick things, I guess Dennis if one were to look at kind of results without sort of the mark-to-market stuff in there, does that impact the tax rate that you would have reported - would it have been as low as it was?

[Dennis Riordan:]

No, it wouldn't. It would have been much more inline with where the rates were through the third quarter.

[Andrew Lazar:]

Okay. Got it. That's why it is like this.

[Dennis Riordan:]

Yes. So, the mark-to-markets really drove Q4 down unusually and that affected the full-year rate.

[Andrew Lazar:]

Got it. So if were to then pull that out because those things are worse themselves anyway you would mean the tax rate would be higher here and lower in the - to some extent next year because if we were to exclude them from next year's results also.

[Dennis Riordan:]

If you were to do that, that's correct.

[Andrew Lazar:]

Okay.

[Dennis Riordan:]

But because the negative impact in Q4 actually will be reversing as a positive next year, so it has the opposite effect so that's why our tax rate we are expecting to be higher next year.

[Andrew Lazar:]

Got it. I guess what I am trying to get at is again, best of the liability sort of the underlying sort of earnings growth that you've got, but also anything that may have made it a lot more volatile. And on that note, if we take your guidance for all the different things that you've talked about in '09, I admit haven't worked through the math yet, but is there a way to sense what that basically gives you, on an underlying kind of EBIT basis? I mean, that 1.80 to 1.85, what does that work to from an underlying EBIT perspective?

[Dennis Riordan:]

If you go back to the items I talked, I tried to give you the interest rate, the tax rate, the earnings and the share count, so I think you can pretty much peg it without me giving you an exact number.

[Andrew Lazar:]

Okay. Thanks very much.

[Dennis Riordan:]

Sure.

[Operator:]

There are no further questions at this time. Mr. Reed, I'll turn the conference back to you for closing or additional comments.

[Sam Reed:]

Thanks all for joining us today, and we have as always welcomed you to the TreeHouse. It has been an extraordinary year for us. As I had indicated we've exceeded expectations in every important perspective. And as we look at the year 2009 going forward. While there is substantial uncertainty, we see even greater promise and we will undertake everything in our power to not only maintain but further earn more of your confidence. We look forward to talking to you again in May. Thank you.

[Operator:]

That does conclude today's program. We thank you for attending and have a great day.