P.I. Aquino - Sam K. Reed - Executive Chairman, Chief Executive Officer and President Dennis F. Riordan - Chief Financial Officer, Principal Accounting Officer and Executive Vice President.

David C. Driscoll - Citigroup Inc, Research Division Christopher R. Growe - Stifel, Nicolaus & Company, Incorporated, Research Division Farha Aslam - Stephens Inc., Research Division William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division Robert Moskow - Crédit Suisse AG, Research Division Akshay S.

Jagdale - KeyBanc Capital Markets Inc., Research Division Kenneth Goldman - JP Morgan Chase & Co, Research Division John J. Baumgartner - Wells Fargo Securities, LLC, Research Division Jon Andersen - William Blair & Company L.L.C., Research Division Brett M. Hundley - BB&T Capital Markets, Research Division Bryan D.

Spillane - BofA Merrill Lynch, Research Division.

Welcome to the TreeHouse Foods Conference Call. This call is being recorded. At this time, I will turn the call over to TreeHouse Foods for reading of the Safe Harbor statement..

Good morning. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words such as guidance, may, should, could, expects, seeks to, anticipate, plans, believes, estimates, approximately, nearly, intends, predicts, projects, potential, promises or continue or the negative of such terms and other comparable terminology.

These statements are only predictions.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause the company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievement expressed or implied by these forward-looking statements.

TreeHouse's Form 10-K for the period ending December 31, 2013 discusses some of the risk factors that could contribute to these differences. You are cautioned to not 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.

At this time, I would like to turn the call over to the Chairman, President and Chief Executive Officer of TreeHouse Foods, Mr. Sam K. Reed..

provide value without compromise to our private-label customers and their consumers alike. Now let's turn to Dennis for both his financial observations and business insights.

Dennis?.

$400 million of high-yield notes at 4.875%, a $300 million Term Loan A, a $200 million Term Loan A and $670 million outstanding under our revolver. The average interest rate for the term loans and revolver are about 2%, so we continue to enjoy a very low interest rate on our debt.

And with only $670 million outstanding under our $900 million line of credit, we have plenty of liquidity. On our last call, we discussed terming out a portion of our revolving debt to the high-yield market. We are still considering this, and we'll take advantage of market conditions when the time is right for us.

Rates continue to be very attractive, and we believe they will stay that way for the near term. We expect that any such refinancing will directly free up revolver space for us and would be at a rate that would be close to our current high-yield notes.

In terms of leverage, we expect to have a leverage ratio of between 3.5x and 3.6x debt-to-EBITDA as of September 30, with strong fourth quarter cash flow delevering us to close to 3.2x debt-to-EBITDA by year's end. I think this demonstrates that we can and will see great companies to buy, but we'll do so with a prudent capital structure.

We know the challenges of running a growing company well and believe our approach to growth is the best way to ensure long-term shareholder value. I'll now turn it back to Sam for some closing comments..

In acquiring Flagstone and Protenergy, we have elected to follow the consumer around the grocery store and into the millennial era of private label. Flagstone bridges center-of-store staples to perimeter healthy snacks. And in crossing that divide, links their abounding innovation with our abundant capital in pursuit of double-digit growth.

We envision a healthy snacks platform that will be steadily expanded into new distribution, product adjacencies and perimeter merchandising. This growth platform in snacks will complement our commanding presence in staples. Thus, extending our TreeHouse presence across the breadth and width of grocery stores of all formats.

In a similar vein, the acquisition of Protenergy introduces us to evolving consumer preferences for convenient, resealable packaging and pantry mainstays. Aseptic packaging, which has transformed the usage of broth and stock as meal components, can readily be extended to other adjacent product categories, including soup, gravy and sauces.

When this technology is coupled with its companion, Recart processing, an entire array of products, conventionally found in bottles, cans and jars, is open to innovation through packaging technology. Such advances promise to give new meaning to the joy of cooking, especially in private-label kitchens.

My confidence in exploiting these possibilities for growth is bolstered by the high degree of performance exhibited by both our legacy operating units and integration teams.

Bay Valley Foods, as Dennis has demonstrated, has coupled its simplification agenda with renewed go-to-market vigor in an -- and improving fundamentals across our broad and growing portfolio. Similarly, our integration teams are repeatedly hitting the mark as they incorporate one accretive bolt-on after another into our private-label realm.

In concert, these 2 groups show early signs of meeting their greatest integration test to date, uniting old and new alike in a common cause to reclaim our prior category leadership in soup and broth, this time, with the only competitive product portfolio that meets all private-label customer needs in the category.

Lastly, once the current brouhaha subsides, we will all find that single-serve beverages continue to offer great promise for brands and private label alike. Household penetration of brewers and their daily use, as measured by attachment rate, are both expected to multiply in the foreseeable future.

Among consumers, innovators and early adopters will soon be joined by the majority as single-serve brewers become as commonplace and convenient as microwave ovens. As CPG history has repeatedly shown, national brand equity, built upon consumer benefit and communication, propels category growth.

And in doing so, expands private-label opportunity in its wake. In closing, I foresee a not-too-distant future when single-serve beverages constitute a mega category unto itself, when we may look back upon the present as merely a tempest in a teapot or perhaps, as you like it, much ado about nothing.

With that, Christy, please open the phone lines for Q&A from the sell-side analysts..

[Operator Instructions] And we'll take our first question from David Driscoll with Citi..

I had a couple of questions. Dennis, just start off with 2 little ones, and then a bigger picture question. The 2 little ones were, previous gross margin guidance was for about 100 basis points expansion on the year, but now you got the deals coming into it, and I think those deals were margin dilutive.

So can you update us on the gross margin guidance? And the second little detail is, what's the new interest expense guidance? And then I have a question for Sam..

I don't have the consolidated one. We normally don't project forward. We will get the 100 basis points on our legacy business, David, but I'm still working through all the nuances of the margins with the new acquisitions. As you know, Flagstone, we just closed, so we're still working through those numbers there.

So I'm going to have to pass on that for right now. In terms of interest expense. I provided the numbers on those, 2% on all the debt with the exception of the high yields, which will be at 4 7/8%, and we'll have positive cash flow in Q4. So I think they'll be able to work through those numbers..

Dennis, the only trick on that one was there was an expectation of the high-yield issuance.

And so every day that, that doesn't happen -- so I was, in effect, asking you is the high-yield issuance going to happen by the end of the year or is that a 2015 event?.

I would fully expect that to be a 2014 event, but as you know, markets are soft in the month of August. They tend to open back up in September, so we'll evaluate then. But given where our interest rates are, we'd like to have that termed out. And our guidance right now reflects that, that would happen in the -- late in the third quarter..

Sam, a question for you. First off, congratulations on all this single-serve success, very exciting and these acquisitions are tremendous. So just incredible compliments from me on how you've executed versus what I've seen across the peer sector.

In single-serve, how strong was your sequential growth? Did you add any new net customers? And then finally on single-serve, do you expect -- and this might be the most interesting one.

Do you expect significant new additions because of the TreeHouse ability to make this new Keurig 2.0 compatible K-Cup?.

Well, David, first, thank you for your kind congratulations. And then with regard to the single-serve category, let me start with looking at just the last quarter. Both dollar sales and unit sales of private label across the whole of the industry increased by 90%.

And we maintained our lead at approximately 2/3 of that total as we've gotten -- the industry has achieved both new distribution, as well as expanded placement in current customers. As we look ahead, we are -- see continued growth in that regard.

I think Dennis has mentioned in the past that we've recently authorized and are installing yet another round of capital to expand our base. And we're finding that much of this growth, David, is coming outside the handful of core product flavors that maintain the center of both coffee and other hot beverages.

And so as we've been able to develop new flavor combinations and also educate our customers with regard to the category management, merchandising, price point management, consumer communication, we found that the growth prospects remain quite robust for us..

And we'll take our next question from Chris Growe with Stifel..

I have 2 questions for you, if I could. One, Dennis, you had mentioned about some pricing going through. I think it was in relation to North American Retail Grocery as well as some incremental promotion.

And there's been a lot of discussion amongst the branded companies about incremental promotions, but those not really generating very good returns for the branded -- for the brands, the branded companies.

So I'm just curious if you're reacting to that in any way? Are you changing your promotional tactics in any way? I know you don't have full control. I'm just curious how you see that part of the promotional program..

Yes, with private label, we don't really have that much in promotion, so we're kind of reacting with the brands. You have some one-off situations. But generally, no. Our pricing that we did had a net negative, I mentioned a 0.3% in retail, and that is partly due to the some increases in certain categories where inputs demanded it.

But we're also trying to get more aggressive in gathering some new business, and it's a competitive marketplace. But overall, we've been able to take some share, but that requires some price investment and that's -- accounts for that negative 0.3% pricing impact. I think the one area where we saw it, and I mentioned, was hot cereal.

And when the brand gets highly aggressive in promoting, we've always said it doesn't drive incremental usage. It just drives the pantry low. And we think that's been happening. And there's not much you can do when the brands are pricing themselves on promotion below private label.

So generally, we're -- we've done very well throughout the categories, but we did have that in hot cereal in particular, where it's challenging..

Okay. Then I had a question for Sam, if I could. You had mentioned this sort of new branch of the tree, and I don't want to read too much into that. But I'm just curious how much opportunity you see on more of the snacking and the fresh side.

And then the capabilities that you have through Flagstone to accommodate fresh products, I'm just curious, what capabilities do you have that -- on that front..

Well, there's a confluence of 3 very significant trends here. One is the movement to kind of grazing and all-day eating, a kind of redefinition of the meal occasion.

The second are the attitudes, consumption -- attitudes and behavior of, what we call, the millennial consumer, where people are both savvy with their money and also, environmentally socially conscious and looking for health and wellness above all else. And then third is the kind of the perimeter that some have characterized as a racetrack.

And what we've seen when you put these 3 together, is that there's great opportunity beyond the traditional, conventional definition of single -- of a private-label that focuses on center-of-the-store. And we think that Flagstone offers an extraordinary opportunity to create a platform around those and focus primarily on healthy snacking.

They've pioneered the double placement of products in -- both in center-of-the-store and produce, and there's a great deal of that opportunity still in front of us. We think, secondly, that their product line lends itself to expansion into adjacent categories that will prove to be -- have very fine growth and margin opportunities.

And then thirdly, when we look around here is that, in healthy snacks in particular, there are -- it kind of reminds me of the cottage industry that we saw 9 years ago in the center-of-the-store, the staples, and that is there are a lot of small businesses that have very fine products, but limited distribution, limited capital, limited customer bases -- base.

And we can incorporate those businesses into Flagstone in the same way that we are -- will, in parallel, continue to incorporate businesses into Bay Valley Foods. Last comment is I think that when one looks at the overall consumption data, snacks are growing several times faster than food. Healthy snacks are growing several times faster than snacks.

And Flagstone itself is outpacing healthy snacks by another multiple. So we've picked the real winner in all of this, and one that's where, as I indicated, they've got abounding innovation and we've got abundant capital. We find that to be a very healthy combination..

And we'll take our next question from Farha Aslam with Stephens Inc..

You had mentioned your focus on natural and kind of organic.

What portion of your portfolio today would you categorize as natural and organic? And kind of what's your target of where you want that to go in the future?.

Farha, Dennis here. I don't have an exact number, but it's clearly less than 10%. It's growing, but it's a small segment. It's hard to say.

This is -- this kind of goes back to the coffee types of questions we got 2 years ago when people asked, "What do you think the market share of private label will be?" We don't know, but what we do think is we're well positioned to be a leader in taking advantage of however the consumers move towards those types of products.

We've got capabilities in nearly every one of our categories to do natural and organic, and we've got a strong team of R&D and food scientists working there. So whether that ever gets to 15% or 20% of food, I'm not sure, but we definitely have the capabilities to be right there, and we'll participate in that..

And so that 10% is pre-Flagstone?.

That's correct..

And so -- and then we could add Flagstone, which is going to be around 25% of your sales.

Would you consider all of that natural and organic?.

I don't think so. I've got to learn a little bit more about that. I mean, clearly, nuts have a lot of natural benefits, but not necessarily are they all organic. But that's something I've still got to learn..

Okay. Fair point.

And then my final question is just if you look at your commodity basket in terms of inputs, any callouts in overall commodity inflation or deflation you'd point us to into the second half of this year and into next year?.

Yes, there -- I don't think so. We've seen some moderation. I think the one thing people were asking a lot about was coffee. We saw a lot of increase in that early in the year. It started to go down. When you're talking about single-serve, unlike a bagged coffee program, it represents a much smaller part of the cost of sales of that category.

So at the moment, I don't think there's any significant callout, one way or the other. Our cucumber crops are just coming through. The bulk of our crop comes from the Upper Midwest, and those harvests will be starting shortly or just kicking off. So that's always the final piece of our commodity picture. But I think, so far, things look good..

And we'll take our next question from Bill Chappell from SunTrust..

Can you just maybe break out a little bit on the core grocery sales? I'm just trying to understand, if there's a way to do this, was there organic growth, excluding coffee, and both overall, but also in the grocery channel, I'm just trying to understand like how far we've come in terms of the recovery..

Yes. Bill, there actually was. And so we saw that in this quarter, in general, throughout grocery, which we consider positive, I think it was driven more towards the -- some of the premium and specialized private label we've been doing for some of our customers. Although we also, frankly, had some good success in the value side as well.

So we kind of won on both sides of the category. I think it was interesting that we're seeing more traditional grocers doing more of what we call premium products, and they seem to be responding to some of the specialized grocers that are kind of premium only. So that still represents just over 50% of our retail sales.

So as the traditional grocer finds success, that -- I think, that still bodes pretty well for us..

And is that just, from what you can tell, largely consumers migrating to these products? Or I mean, are these largely distribution gains as well?.

Well, some of them are distribution gains, but at least my theory here is that one of the things that's been interesting is that even midsized chains have become very price competitive with the big mass merchandisers when you look at surveys of basket prices, where you take a sample of goods.

And frankly, it's difficult for somebody with 100 stores to be competitive with somebody with 4,000 stores. But I think if you've got a very strong private-label program that generates extra profits, and we know you make more penny profit on private label, you can use that to fund some other categories, where you want to be price competitive.

And it seems that, that tactic is working well for many of our customers..

Bill, this is Sam. I'll amplify Dennis' comments. What we are seeing is, in this return of the traditional grocer, is that some things have run their course and that the industry itself now is bifurcating along the lines of those that are going to support their brands. And there are only 2 that are really not.

One has elected to go back to national brands. The other big one that's on hold is in the midst of an acquisition and integration. But the other big names that we track very carefully are all moving in a positive way. And I think that the -- that goes hand-in-hand with the improvement in the fortunes of the traditional grocer.

And by the way, I was addressing a group of 200 of our suppliers earlier this week, and I reminded them that consumer surveys show that the #3 reason that all -- of all the people that shop in grocery stores, the #3 reason is the presence of customer brands in that store..

Well, that's good to hear. I don't think we've heard that on the grocery channel in a long, long time. One question on coffee.

I mean, as you've gone out to customers and told them about your compatibility for 2.0, have you heard of any competitors that have compatibility? Or does this is really differentiate you?.

Well, there are always -- in every coffee shop in America, there's conversation and rumors, and I won't comment on those or others. I will tell you that -- I go back to my earlier response to one of the first questions. I mean, the category in the second quarter grew 90% in units. Now the -- the category for private label.

And the aggregate of that category on the same IRR measure -- IRI measure, I think, was up 27% in dollars. And it demonstrates to you that this has still got legs.

The story is still resonating with customers and consumers both, and I presume that as we go into the new year, with the advent of those who produce single-serve cups and those that produce single-serve brewers, we'll bring competitive innovation to the marketplace. This is the way private label works..

Got it. And actually, go back to my last question.

Are you actually seeing negative trends over the premium channel or just a slowing trend?.

Just a slowing. It wasn't really negative..

We'll take our next question from Robert Moskow with Crédit Suisse..

Sam, things must be good when you're quoting Shakespeare in your initial remarks. So that must be a very strong year. And I guess I wanted to ask a little bit more about your comments on organic and natural and how the retailers, you said, are asking for more offerings from, I guess, private-label suppliers.

But I wanted to ask you if -- you've been in the food industry a long time. You've managed branded companies before.

To what extent do you think this consumer shift or retailer shift to organic and natural presents a real structural problem for processed food, in general? And do you think that, if you look 5 years, 10 years from now, that more and more of consumer demand is just going to keep shifting away and more toward the fresh part of the store? Obviously, the acquisition of Flagstone helps you in that regard.

But do you think that you and others in processed food are going to have to do more of that in order to meet the changing demand dynamic?.

Well, I'm delighted that you picked up the notion that the bard inspired us. Dennis and I will both answer parts of this. Let me talk about the general strategic themes and ask Dennis to complement that with his great knowledge of the business.

I think the big issue for us is, it's not only health and wellness and organic -- natural and organic, but what the CPG industry is dealing with here is it's the end of the era of mass marketing.

And everybody understands how that applies to brands, but it's a little -- there's also a direct application to grocery retailers and to the suppliers of their customer brands. And it is this, that the evolution of private label is such that one has now -- has to market in a targeted series of niches, combinations of category, customer.

And then with regard to the variety or price point, we track now 6 different levels, ranging from opening price point all the way to natural organic. And what we have -- what we all have to do is identify those intersections of the category, the degree of value-add, if you will, and the customer channel to identify this.

And I think that it -- the marketplace will respond to this. There will be -- there are already, in our portfolio and that of our grocers, real significant advances. There being certain ones that you run into kind of restrictions on food or vegetable capability or just the processing, but we're all adapting to those things.

And I think what comes out of it is that you'll find, in customer brands, that the -- kind of the fragmentation here in these categories will benefit those like us and several of our customers that have made kind of real long-term commitments to developing the supply chain, the science, the operations, to do this.

And I think Dennis can kind of cite chapter and verse about specific categories, perhaps, and customers in that regard..

Just to quickly add on, Rob. I think we're well positioned. I don't think this is a fad, but I think it's going to grow over time. It's pretty clear from surveys that millennials are much more involved in the quality of their food or the type of food. Not to say that processed food does not have good quality, but it's just different.

And I think that will continue to grow. I think our retailers are finding that out and as you look at how they're reacting to it, it's no longer just the store brand that is being presented, it's now the corporate brand. And the corporate brands are getting much more focused, not only in the product themselves, but the name.

So whether you're dealing with a product that's called Open Nature or Simple Truth or Nature's Promise, Simply Balanced, I mean, these are all corporate brand names that are resonating with the -- with not only millennials, but another generation.

And we think that trend will continue, but I think it's going to be slow growth, just in part because this product is more expensive. So I don't -- you can't offer this at the same price you can the everyday mainstream food. So it'll grow, and we'll be right there to participate in that..

What specific categories, Dennis, do you see that effort being the most aggressive, like the retailers are taking the most aggressive actions to develop those brands?.

Well, at least in our categories, it's definitely in the things like the sauces, the sauces and marinades, dressings, it's in soups. All those that were cooked and processed, we're finding great opportunities, not just for natural and organic, but some really interesting flavor profiles.

And you'll see a lot of our products now that are beyond just the salsa being hot, mild and medium into the very fancy bean-and-corn combinations and fruit combinations, and all in an organic offering. So those are the -- those are interesting products. We'll never see that in our nondairy creamer. That just doesn't fit.

But I think most of our categories are still right on the trend..

We'll take our next question from Akshay Jagdale from KeyBanc..

My question, I'm going to ask about coffee, as always, but -- so first question is, can you tell me -- I'm trying to understand the decision to convert your current manufacturing to make it 2.0 compatible.

What does that -- I mean, why take that step? Is it because you have lost some customers as a result of this 2.0 strategy that Keurig is employing? Or are customers really asking you to absolutely have that option because they are confident that the 2.0 is, in fact, going to work? So that's my first question..

Akshay, with regard to your particular question about the 2.0 operations and supply chain. Last month, we celebrated our ninth anniversary. We now have over a dozen product categories.

And with the single exception of the businesses that we've acquired in the last year, I can go through that entire list and show you, in every category, where in order for us to maintain our premier position of private label in that category, we have either followed with quality packaging or product improvements, or we have led, in that case, where we've seen the opportunity as well.

And this is another one of those instances. And I should tell you, there'll be more this year in other categories and the year after that. That's simply the way we differentiate ourselves from the great mass.

And from the very beginning, our premise was that we wanted to create a premium for our products beyond the kind of the RFP-based, lowest-landed cost, national-brand-equivalent model. And we're going to do that in single-serve beverages in exactly the same way we do it in salad dressings..

That's helpful. And just going back to the question, have you -- are you aware of any customers that you've lost as a result of the 2.0 strategy that Keurig is employing? Because there's some conflicting information, like there always is, so I'm hoping for some clarity.

They're out there announcing conversions from nonlicensed to licensed, especially on private label. So far, the ones that they've announced aren't, from what we know, your customers, but there are some rumors out there that some of your customers have also switched.

So I'm just -- it certainly doesn't show in your results, but I'm curious to know if you've thought of any who have made decisions to switch..

Well, Akshay, we have a corporate policy about not talking about the individual customers or the particulars. And clearly, if there's one person on the line that understands this, that policy, it's you. I go back to the second quarter numbers.

Private-label single-serve beverages increased 90% from the quarter, while the category, as measured by IRI, increased 27%. And as I'd said earlier, we've maintained our leading share of approximately 2/3 of that business in private label.

And I expect that wherever private label continues to ascend, find it -- it will settle somewhere, I presume, in the low single -- low-double digits. You'll look up and you'll find it, just as it is the case in 9 of the other 11 categories that we operate in, that we'll remain #1..

And just one last one on that same subject.

So as we look forward and just over the next year or so, should we expect the growth of this business to sort of mimic whatever happens with the category, in general, with some share gains or losses on the margins? So in other words, if the category grows 25%, 30% over time, I think that -- should we expect private label, as a percentage of that single-serve category, as well as your growth rate, to move more in line with that category growth going forward?.

I think the big determinants of growth for the category in 2015 and beyond really are going to get back to what is the consumer benefit, how is it communicated from the industry to consumers. And there's nothing more important there than having the great national brand leadership that you see in one category after another that we deal with.

That will relate to, not only a technological innovation, but it will relate to product line expansion. We found in our research that there are many forms of hot beverage outside of coffee that give us great -- extraordinary growth opportunity. And I go back to the acquisition of Associated Brands several months ago.

That was, in some quarters, seen as really as a small bolt-on of existing businesses. But the specialty tea business that we have, while it's currently primarily located -- its locus -- its focus is now in Food Away From Home. We're finding a very fine reception among our grocery customers for specialty teas.

And then our leading presence in products that are non-filtered, non-coffee hot beverages is leading us to -- our customers to ask us for other beverages that can, in fact, be shelved nearby, but meet other consumer needs. So I think this category, it -- I still believe it is in its nascent stages, as I indicated in my prepared remarks.

What you're really looking for is to have in-home placement of these -- of single-serve machines by one manufacturer or another dramatically go up and, at the same time, with offering greater variety, convenience and value, the attachment rate will go up as well, and we'll be the -- we and others will benefit from that..

And we'll take our next question from Ken Goldman from JPMorgan..

To what degree is it reasonable for us to expect that when you do launch a product compatible with 2.0 or other systems with more active patents, you will maybe see some pushback from the makers of these machines, right, whether legally or in some other form?.

Ken, Dennis. I think we've got a great history here of having introduced products that are compatible, national-brand equivalent products that don't overstep the line of -- the legal lines. We did that with our original coffee products and we'll do that with this as well.

So that's not something that is going to change our strategy because we do, we think, an excellent job of making sure we run clearly within the right legal framework to introduce these products, and that'll be the same with this one..

Okay, and then one quick one. Sam, you -- and Dennis, really, you buy a variety of food products, a lot from California, I think. At what start -- at what point do we start to worry about the drought? It seems like this summer, helped by well water and irrigation, but that safety net may not be there in 2015.

Is that the way you're looking at it, too? Or you think some of worries are maybe overdone at this point?.

The only real thing that I think we are really watching, get concerned about are the organic tomatoes. By our best information, we are the largest purchaser of organic tomatoes in the U.S. and that is clearly a California product. And so that's something we watch. We had some challenges last year on supply.

And so far, so good, but that is the one product out there in California, Ken, that we do have to watch..

We'll take our next question from John Baumgartner from Wells Fargo..

Sam, just a big picture question.

With the consolidation underway here in the dollar channel, how do you think that impacts the long-term growth potential of consumables in the channel? Maybe distribution opportunities for private label and any of the margins for private-label suppliers going forward?.

Well, I won't comment about a particular transaction, but just our view of that category -- of that format is that we expect that it will continue to grow far greater than the industry itself. And when one looks at the kind of the model and the retail dynamics, it shows every indication of continuing to grow.

I think that what pleases me is that, at the very beginning of this, food was the #5 category in that sector, or leader. And as the format has grown, food and beverage have begun to have a slightly better offering, and that will work to our benefit.

Consumers now would rather make a second stop than kind of park their car at some mega outlet and spend the better part of an hour getting just simply to and from the store and waiting. And the dollar channel has found out how to exploit that greatly..

Great. And Dennis, just one follow-up. Thinking about the traditional channel. A few years ago, there was negative margin mix as consumers left traditional to go to the alternate channels.

Are you finding much support for gross margins now as traffic comes back to the traditional trade?.

I think what helps the margins with the traditional is the point we're talking about where their emphasis is starting to -- is growing in the premium side. And premium products generally will carry a better margin for the retailer and a little better margin for us as well, just because of the complexity and the nature of that particular product.

And so that helps in that regard, certainly, when it -- when we were dealing with opening price-point products, where there's -- it's really kind of a commodity food product, and therefore, very competitive, not only for us, but also -- in private label, but for retailers.

So I think the move towards the premium, natural, organic and better-for-you products actually bodes well for us and our customers..

We'll take our next question with Jon Andersen with William Blair..

I wanted to ask, I guess, about the -- you referenced the $1 billion -- or approximately $1 billion in sales that you've kind of recently added to the business through Protenergy and Flagstone. That, I guess, on a pro forma basis, would constitute nearly 30% of the company's sales at this point.

Do you expect -- I mean, is that piece of the business something that you think can continue to grow at a double-digit rate over the next few years? Is that your expectation, number one, I guess? And then second, does that suggest we need to kind of rethink our organic growth assumptions for the company overall in the next 2 to 3 years?.

I do think that both of those acquisitions should allow us to get to that double-digit growth. And you're right, with that representing $1 billion of a $3.5 billion business, that will have a positive impact on our organic growth assumptions. We've historically always talked about 1.5% to 2.5%.

More recently, those numbers were more like 1% due to the challenges in food. So we do think that this bodes well for us. And frankly, those are key reasons why we bought these businesses, is we see great growth prospects for them, which contrast with some of the other center-of-the-store categories we have..

Sam, with respect to Protenergy, I'd kind of love to hear your thoughts on the kind of the sequence of events in that business. I think that the carton -- cartons have really taken significant share in the broth category today, and I know private label is a significant component of that.

But as you look kind of to the next steps for Protenergy, can you talk about that over the next year or 2, kind of the go-to-market strategy, and maybe the expansion into other categories over time?.

Well, in general terms, I'd see several stages of this. One, as I indicated, is that I think the immediate growth will be in the most -- the close -- the closest adjacencies, which are soup and then sauces and gravy. And in that regard, there are 2 different technologies here.

Aseptic allows you to package items that do not have particulate matter of any size. The Recart allows you to then go into the ready-to-serve items. That'll be the first.

I think here that we're seeing that national brands have begun to address this as well, and our focus will tend to be with specified grocers, where there is really significant business to be had, particularly at the premium end. It will replicate our strategy in pasta sauce in some degree there.

And then I think beyond that, what we see is that the packaging technology itself readily lends itself to repositioning kind of some of the old mainstays. As you walk up and down that aisle, you see products in the same packages that your parents or your grandparents bought and with only graphic design changes.

And clearly, as meal occasions change and the size of household drops and you move from meal preparation to assembly, I think that offers just great opportunity here that'll be more based on packaging technology as the driver as opposed to individual categories. I see this has got legs for a long time to come..

Okay. And I guess I'd be remiss if I didn't ask one question on coffee.

With the focus on conversion and producing a K 2.0 compatible pod, will there also be an effort to offer a carafe-sized pod, which I think is part of the upgrade to that next-generation system?.

I think that the time that we'll talk about kind of the new year and its developments in more detail will be at the PLMA Investor Day. And you know that we're committed to this category. And that in addition to the base business that we have, that we're always looking either for innovation, either to copy it or develop it on our own.

So come by and bring a large mug..

Our next question comes from Brett Hundley with BB&T Capital Markets..

I apologize. I joined late, so if I replicate a question here please just sidestep it. But Dennis, just I was curious if TreeHouse can continue to -- or if the environment exists for TreeHouse to continue to acquire over the next 6-plus months.

Or do you think the company needs time to maybe delever or integrate recent assets, et cetera?.

That's a good question. Obviously, we've done 2 good-sized deals in the last 3 months, but we've got the internal capability here with integrated -- integration teams and we've got dedicated SAP teams that we can handle integrations relatively quickly. That being said, the Flagstone will be a separate branch of the tree, as we said.

So there'll be far less integration activities per se, and we see that as the new -- another platform for us for future growth through acquisitions. So with us being delevered down to 3.2x, at least that's our expectation by December 31, we believe we will still be active and are still looking for acquisitions.

You may not see the billion dollar deal in the next few months, but we certainly are continuing to look at opportunities, especially in that better-for-you category. And whether that's snacking or other parts of it, we think that's where the real growth is right now..

Okay, perfect. And then I just have one other question. A bit out of left field, but in nondairy creamer, as that industry continues to potentially contract, do you guys get to a point where you can take those assets and think about maybe doing something else with them, selling them? I don't know if this is possible.

Can you take those assets and turn them into dried milk powder production? Could you sell them for such an application? Can you just address that?.

This is Sam. And you are in left field, but you're not alone. I'm there as well. We see 2 great opportunities with our current base and are working for those.

One is Mexico, where we've got a substantial business that -- we've got a base that, we think, when we bring private label marketing to it, and that matches that market opportunity, that we'll have what is a small and highly profitable business become a substantial one.

And that will require that we take some of our capacity and make minor modifications to it to address the product needs of that market. The other matter, and it -- this is a little -- somewhat ironic.

The demands to -- government regulation to phase out partially hydrogenated oil, at first, seemed to me to be a real difficulty that our business would face.

And then as I've looked at the work in the lab and work with consumers, it seems to us and the people that run Bay Valley Foods that this will add a kind of a renewed opportunity for this product form to kind of be rejuvenated a little bit in the eyes of consumers, and we're pursuing that -- those 2 opportunities full out..

Our next question comes from Bryan Spillane from Bank of America Merrill Lynch..

Just one clarification. Dennis, you'd talked about cucumbers, I guess, earlier in the call. I guess the cost of getting the right-sized cucumbers. But that was old crop, not new crop, right? So what you're -- you weren't suggesting that cucumber costs are going higher later, but more related to just the -- last year's crop.

Is that right?.

That's correct. The Food Away From Home is more of a just-in-time crop that we get in and process. So in the spring and early summer, we're sourcing from the South, and there were weather issues down there..

Okay, great. And then, Sam, when you referenced earlier, I think I heard this, that you've already -- you've spoken to or communicated to, retailers or customers that you've produced a 2.0 compatible cup.

I guess, has it actually been used in a 2.0 machine? Or have you sort of reverse-engineered a 2.0 machine and have a cup that worked with that? I'm just trying to make sure I understood the distinction about whether or not you've actually got one that's worked in an actual machine..

Well, given the pending litigation, I really can't comment about the prototypes that are there, the process by which we reverse engineered this.

But I will stand by the statement I made also that what we've done, once again, here is we've -- in this case, we've not only earned another -- again, the trust of our consumers, but in a rare move for grocers, we've actually earned their gratitude. Thanks, everyone. We very much appreciate you joining us today.

And Dennis and I look forward to seeing you in the near -- in the coming months. Goodbye..

This concludes today's conference. Thank you for your participation..