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.

Farha Aslam - Stephens Inc., Research Division David C. Driscoll - Citigroup Inc, Research Division Brett M. Hundley - BB&T Capital Markets, Research Division Joshua Adam Levine - JP Morgan Chase & Co, 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 Andrew Lazar - Barclays Capital, Research Division Jonathan Patrick Feeney - Athlos Research LLC Evan B. Morris - BofA Merrill Lynch, Research Division John J.

Baumgartner - Wells Fargo Securities, LLC, 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 the 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, anticipates, 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, and other filings with the SEC discuss some of the risk 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.

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

6 consecutive quarters of organic growth in our legacy private label grocery business; double-digit top line growth in value-added single-serve beverages, aseptic broth and healthy snacks; innovation and emerging premium and better-for-you private label segments; gross margin expansion in our legacy Bay Valley center-of-store categories, exceeding our 100 basis point annual target; integration of Protenergy Natural Foods into a unified soup and gravy portfolio without equal in private label; operating cash flow or adjusted EBITDA exceeding $100 million in the third quarter; and lastly, just 2 short months after the launch of the "revolutionary Keurig 2.0 brewing technology," introduction of our fully compatible private label K-Cups, which are already in grocery channels as we speak.

In-store demos started yesterday in select locations and will be followed by lobby displays next weekend. This commercialization, which will be available to all of our unique customer brand programs, offers our customers and their consumers alike national brand equivalents without compromise in quality, value, choice or technology.

This achievement, another milestone in our 3-year coffee odyssey, belies the threat of technological lockout, instead replacing it with the promise of consumer's choice in single-serve beverages. In doing so, we also confirm our resolute allegiance to our grocery customers and their private brands. Dennis, please take us through the numbers.

I'll then return with some preliminary observations on what we can expect in the new year ahead..

Thanks, Sam. In regard to the financial results for our third quarter, we continue to show strong sales growth with volume improvement in most of our product categories, which resulted in volume/mix growth in all 3 of our operating segments. First, let's focus on the North American Retail Grocery segment.

This was one of the strongest quarters we've had in a while in terms of top line growth. In fact, we had tonnage growth in 7 of our top 8 categories. Leading the way was single-serve hot beverages with year-over-year growth of over 40%.

In addition, we experienced strong growth from pickles, up 7%; soup, up 7%; salad dressings, up 3%; and our Mexican and pasta sauce category that was up about 7%. We even had a nice rebound in our hot cereal business with a volume increase of 6%. These increases more than offset flatness in our dry dinners and nondairy creamer business.

All businesses combined for a volume/mix growth rate of 4.7% in the third quarter compared to a year ago. And just to be clear, last year, we reported positive volume/mix in this segment of 2.3%, so our growth was not due to easy comps. Gross margins in the quarter decreased on a reported basis from 21.6% last year to 19.9% this year.

However, there is a bit of noise in these percentages due to acquisitions. First, 2014 and 2013 had costs associated with acquisition purchase accounting, while 2013 included restructuring costs. In addition, 2014 includes a greater mix of new products from our acquisitions, most of which have inherently lower margins than our legacy business.

I think the best way to look at our margins is to focus on the business excluding the acquisitions. In looking at the legacy businesses alone, excluding Associated Brands, Protenergy and Flagstone, none of which were included in last year's Q3 results, our North American Retail Grocery margins actually increased by 190 basis points.

Out of this growth, approximately 50 basis points came from the benefits of product mix, while the rest came from a combination of cost-savings programs within our categories.

I think it's notable that we had actually a 1% average decrease in prices to our retail customers in the quarter, showing that the margin improvement occurred despite soft pricing. As we've discussed over the last few quarters, the average gross margins on our acquired businesses is quite a bit lower than our legacy business.

On an apples-to-apples basis, the new businesses average over 700 basis points lower in gross margins. This clearly shows the dilutive effect they have when combined with our legacy products. This was factored in when we bought these businesses, and we expect to improve these margins over time. There's one additional point I want to make on mix.

Last quarter, we talked about the resurgence we are seeing in sales to traditional grocers. We believe our best customers in traditional grocery are succeeding because of their increased strategic focus on their corporate brands.

This past quarter, we did some additional analysis, and rather than classify our customers between value, traditional and premium customers, we did a more extensive review of their private-brand labels.

The reason for this change in analysis is that many of our traditional grocery customers are introducing new corporate brands that are geared towards the trend in healthy eating.

As such, they are offering more premium products with cleaner ingredient labels and formulations that cater to those looking for wellness attributes, like organic, gluten-free and GMO-free. The increased emphasis on premium and better-for-you products is positive for our overall margin mix.

But for now, this represents just under 10% of our retail sales, so the effect is still pretty small. But as we look at the growth opportunity, these products grew at over 16% for the 9 months of 2014 when compared to the same 9-month period last year.

One other point I want to make regarding our retail business is that we did see a small increase in freight cost as a percent of net sales, even though the average price paid for diesel was down about 2% to last year.

This year, we actually had a small increase in cost as a percentage of sales due to a combination of the shortage of over-the-road truck drivers and higher railroad costs, which more than offset the favorable trends in diesel fuel costs.

And finally, our legacy sales growth and gross margin improvement, combined with the new acquisitions, helped to drive our North American Retail Grocery segment's direct operating income up 32.2% to $82.4 million. Turning to the Food Away From Home segment.

Sales were up 1.9% in the quarter, with most of the increase due to sales from new acquisitions. Sales from our legacy businesses were modestly positive due to 0.3% in volume and 0.2% in pricing, but these gains were fully offset by negative foreign exchange of 0.5%.

Gross margins in Food Away From Home were down 100 basis points due to the unfavorable foreign exchange and higher input costs. The lower margins and relatively small sales growth resulted in a slight decrease in direct operating income to $12.3 million in 2014 from $13 million last year.

Our Industrial and Export business showed significant sales growth at 53.1% in the quarter, with 47.6% of that coming from new acquisitions. Still, we did show 5% of organic growth, primarily from new customers and higher ingredient sales.

Gross margins were flat compared to last year, while freight costs showed an increase due to acquisitions, higher rates and an increase in export sales. For the quarter, direct operating income in Industrial and Export grew almost 38% to $16.7 million from $12.1 million last year. Turning to our consolidated TreeHouse results.

Total sales increased $228.6 million or 40.3%, due primarily to the new acquisitions of Associated Brands, Protenergy Natural Foods and Flagstone Foods, none of which were included in last year's third quarter results.

Excluding these 3 acquisitions and unusual items for both periods, our net sales increased 2.8% and our gross margins increased by 180 basis points. This increase is nicely above our targeted gross margin increase of 100 basis points.

Moving to operating expenses, our selling, distribution, G&A and amortization increased to 13.9% of net sales compared to 13.1% of net sales last year. These expenses include the items that are removed in determining our adjusted earnings per share.

Excluding the impact of these items, the bulk of the increase is due to higher depreciation and amortization resulting from the 3 acquisitions from last year and higher noncash incentive compensation expense, as the number of participants in our stock compensation program has increased with the addition of the new acquisitions management teams and also to reflect the very good operating results so far in 2014.

The combination of organic growth and acquisitions resulted in adjusted EBITDA increasing 32.7% for the third quarter of 2013 to $103.5 million.

As we look at the nonoperating parts of the income statement, interest expense for the quarter was down $2.5 million due to lower interest rates, as we realized the benefits of our debt refinancing earlier this year. One additional item that affected earnings this quarter is the loss on foreign exchange.

In the quarter, we had a loss of $8 million compared to a loss of only $127,000 last year. Most of the exchange loss was due to convergence of intercompany notes, and we exclude that from the calculation of adjusted earnings per share.

However, just over $1.3 million of the loss is translation loss, and that had a negative impact of almost $0.02 on adjusted earnings per share when compared to last year. With regard to taxes, our effective tax rate for the quarter was 35.4%. This rate is flat to last quarter and in line with our expectations.

This rate is significantly higher than last year's third quarter rate of 22.8% because last year included the benefit of tax adjustments that were made as a result of finalizing open tax audits. Net income in the third quarter was $19.9 million compared to $22.7 million in last year's third quarter.

This equates to fully diluted earnings per share of $0.47 in the quarter compared to $0.61 last year before considering unusual items.

After adjusting for the items highlighted in our press release this morning, primarily the acquisition integrated costs -- integration costs and FX loss on intercompany notes this year, along with the acquisition and plant closure costs last year, our adjusted earnings per fully diluted share for the quarter increased 8.5% to $0.89 compared to $0.82 last year.

This increase in adjusted earnings is quite small -- quite a bit smaller than the top line growth of the company, but keep in mind the big swing in tax rates this quarter compared to last year. The difference in tax rates amounts to a nearly 16% reduction in adjusted EPS in 2014 due to the higher rate this year compared to last year.

This helps to show the real quality of our earnings this quarter. In regard to the outlook for the year, we continue to track very closely to our expectations.

We've substantially completed the various accounting and valuation work on the Flagstone acquisition and have a more definitive view on the noncash items, such as amortizable assets, including the valuation of customer lists and formulations.

We remain confident in our adjusted net income estimates and have narrowed the range of our expected earnings per share to better reflect the estimated number of shares that will be outstanding in Q4 and the full year. As such, we believe our adjusted earnings per fully diluted share will be in the range of $3.60 to $3.70.

These estimates assume that we will have approximately 43.4 million shares outstanding during the fourth quarter and the average shares outstanding for the full year will be approximately 40.6 million.

Note that these share counts include the increase in shares from the issuance of equity in July, the normal increase in shares associated with annual grants that occur at the end of June and the share awards granted to senior managers from the Protenergy and Flagstone acquisitions.

In looking at the consensus estimates of our adjusted net income and adjusted earnings per share, we're comfortable with the general range of net income estimates but believe that the share count estimates used to develop EPS did not account for either the normal equity issuances or the effect of the additional shares sold in July into the greenshoe provision of our secondary issuance.

And finally, on our last call, we discussed terming out a portion of our revolving debt to the high-yield market. We're still considering this and will 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 very close to our current high-yield notes. In terms of leverage, we're at 3.7x debt-to-EBITDA as of September 30, with expected fourth quarter cash flows delevering us to below 3.5x debt-to-EBITDA by year's end.

We still see a very active M&A market ahead of us, and we are ready, willing and able to add more good businesses to the TreeHouse family. I'll now turn it back to Sam for some closing comments..

Growing Strong, Standing Tall. Julia, you may open the lines for Q&A now..

[Operator Instructions] We'll go first to Farha Aslam with Stephens Inc..

Could you address the single-serve coffee business? We've heard of customers changing around their manufacturing partners.

As you go forward with your single-serve coffee business, how do you think about different customer wins, losses and, in particular, the growth and margins of that business?.

Well, let me start, Farha. This is Dennis. The -- one of the things we've said, in every one of our categories, there's competition, and there always will be. And we get wins and we get losses, and that is no different for coffee than it is for pickles or creamers or any other business we have. So we go with that flow.

I think the important items to note is that we still have a very strong and active coffee business. We talked about the combination of the growth in the quarter. Frankly, we had another very strong October. And as Sam indicated, we've got -- we're looking at double-digit growth for next year.

So we're highly confident in that, especially pleased that we have a great solution to the technology with a cup that actually works and is 100% compatible with the technology as opposed to a masking agent. So we think that also is going to bode very well for next year in terms of our ability to continue to grow the coffee business..

Great, that's helpful. And then my second question relates to margins. You highlighted that your acquisitions have about 700 basis points lower gross margin than your base business.

As we look out into 2015, how should we think about the consolidated margins for TreeHouse? How quickly can you get synergies out of those businesses?.

Well, there's 2 different aspects. The Protenergy business, we think we'll be able to help that business quickly with the combination of purchasing and distribution. That will go relatively quickly. We think there's great opportunities with Flagstone as well.

But the substantial part of their cost of sales, which we don't disclose, but I'll say a very substantial part of it is the raw material input, which is not -- so it's not -- there's not a lot of synergy there.

And frankly, the -- that business is inherently a lower margin, and you can see that by looking at publicly traded other companies that are in the snack nut business. So there will be opportunity there, but the reality is that, that type of business won't approach the overall margins of the company.

But we still think there's a great opportunity, and we haven't given guidance. But I would expect we'll continue to be striving for 100 basis points or more of margin improvement as we continue into the future..

Farha, this is Sam. I'd just offer a comment about both coffee and snack -- healthy snacking. Part of what we're doing here is pursuing growth as consumers move towards premium and health and wellness. And as we do that, we will first snare the business to be had and then improve on it as we go along.

Coffee, over the last 52 weeks, single-serve coffee has grown at a slow snail's pace rate of 95%. And snack nuts, trail mix constitute the largest private label category that we are in, more than double the size of the next-largest private label category.

And that -- the snacks open up avenues for merchandising and packaging formats that allow us to upgrade that product line as we go along..

We'll go next to David Driscoll with Citi Research..

I wanted to ask a question, Dennis, regarding the guidance. So there's a $0.05 reduction on the top end. You say that the whole thing is kind of largely in line. Can you just talk to us about kind of what happened right there? I believe you completed all the share issuances before the second quarter call.

So maybe you were just talking about consensus right there. But I think, in your guidance, you already knew all the issues with the share count.

Was this, specifically, then related to the amortization of intangible assets and an increase in that noncash item?.

Most of it was in finalizing the purchase accounting items and a small amount to the effects of how the increase in shares granted to both internal people and the new acquisitions affected the counts.

There's a -- it's a fairly complicated formula, and the number of shares granted, stock price and overall performance of the company all came into play.

So what I wanted to make sure we all centered on in terms of the guidance was the share counts because as I looked at where many of the estimates were, I saw a lot of consistency around the dollars and I saw a lot of inconsistency around the shares. And I just wanted to make sure everybody was clear on the share count.

So we went into a little more detail this time to provide you with the almost exact share counts for the quarter and the year..

Okay. But just to be crystal clear, most of this reduction on that $0.05 from your guidance is a noncash charge -- or not charge, but increase related to noncash amortization..

Exactly, yes. Both the amortization and the stock comp are noncash items. Yes, absolutely..

Got it, that's really important.

And then Sam, on single-serve coffee, is it fair to say that other private label companies have either been slow to adapt to the new Keurig 2.0 tech and/or have not adapted to the 2 -- the K2.0 technology? And as a consequence, do you see TreeHouse continuing to gain share in private label single-serve coffee through 2015?.

One, the category will continue to expand at an extraordinary rate, and that is greatly dependent upon the numbers of brewers that will be sold over the fourth quarter and the holiday season, and all indications are that, that will be -- there will be a continuation of the robust growth in that sector.

The second matter is that I can see that the category from its beginnings, as it begins to mature, will end up with a category that very well fits our characteristics for good categories.

We expect it will be an extraordinary, large national brand leader and that at the private label end, which you asked about, I expect that over a period of time, there will be both a consolidation and a segmentation of those that have committed themselves, like we have, to full equivalents to the brand and others that will decide to opt for a lower segment.

What we said at the beginning, over 3 years ago, I think, was that we were going to focus on the premium end of the private label, and that is -- will be continued where we want to be and we'll continue to develop. And I hope that addresses the primary points..

Well, maybe, Sam, just to clear this up. So you're double-digit growth forecast comment about 2015 private label single-serve coffee, that would primarily relate to your expectations of just the growth of the market and doesn't require any type of heroic gain in share within private label.

Is that a fair characterization?.

There are 2 aspects of this. One, certainly, the market is going to continue to grow, and I'm talking specifically about the private label segment of the market.

The second is that as -- and you see this in other categories, as retailers try to differentiate their offerings and appeal to particular segments that might range from opening price point to super premium to organic, that creates an opportunity for private label manufacturers, like ourselves, to develop a wider array of offerings that can appeal to specific niche markets.

So we have several customers who are regional independents that regard their brands to be their supreme asset in dealing with larger competition. And in those instances, the development of the category has been quite extraordinary to include a private label presence that approaches 40% of all single-serve beverage cups in those stores.

There are others now that are seeking out premium niche or organic niche. And those -- that type of segmentation opportunity, that will allow the category to continue to not only fuel the growth but allow to find highly profitable niches for those that are committed to -- deeply to the development of the category..

We'll go next to Brett Hundley with BB&T Capital Markets..

Sam, I just wanted to stay on that topic real quick because I think it's an important point that you made as far as private label continuing to grow in the single-serve coffee space. But of course, you have to have a growing piece of that as well or stay with that growth. And I know you talked about some niche areas.

But when we look at some of the more national-type accounts out there, we've seen some instances where maybe a larger competitor has taken some of that business, but we've also heard from some other producers that maybe some of that business could come back relatively quickly to those that were producing it before.

So maybe, if you wouldn't mind, can you give your thought on how that evolved and also just the other areas of growth that you have outside of retail in that space as far as Food Away From Home, et cetera?.

Brett, as I talked about the growth being in large numbers, there are also -- it moves in several different vectors. And we should start with a proposition that this is private label and there are plenty of opportunities for us to compete, particularly when our business systems are dedicated to offering private label.

And I've used the phrase for many years, I've said value without compromise. And in this instance, what we have taken off the table is the possibility that technological superiority will shut out or lock out private label competitors from this marketplace.

At the time that decisions were made by large customers to move from one supplier to another, that period of time, although it was only a year ago, was made at a time when the perception of what would be available to any and all was highly concentrated -- concerned with the issue about technological change and the possibility of lockout and the -- tying the fortunes of one's private label to the branded allocations -- branded presence.

And that has been -- that prospect has been dispelled or swept aside. So what we're left with is a private label marketplace where the various -- what one has to do is match up with the strategy of the grocery customer. And in some instances, as I indicated, we've got people that believe that is a great way to differentiate themselves.

We've got other customers that have a fraction of their private label representation, and what we have to do is be able to adapt to the differing needs and perceptions of those grocers.

When you look at what our prospects are -- and I go back to what Dennis said at the beginning, in 7 of our 8 largest categories, we showed organic growth in the last quarter, and the numbers were not fractional. They were very solid.

And I think you can expect the same for us in both coffee and single-serve beverages and, for that matter, healthy snacks as well. In terms of going beyond Retail Grocery, we've got the capabilities.

And there are stirrings, the beginnings of stirrings in other markets, in particular, office -- coffee services, where the opportunities that have been -- come forward with brewers that -- from other competitors have -- are beginning to open that market.

And as that market is opened, that will give us and other private label manufacturers the opportunity to move into food service and hospitality settings.

And we do so with an infrastructure that measures, in Food Away From Home, in the many hundreds of millions of dollars and is across not only many product categories, but virtually every segment of food service and institutional markets. So we welcome the opening of those markets, although I think that will be an extended process..

And just to be clear, you have the resources, capabilities, et cetera, to quickly move and get behind changes in -- regarding other brewers and growth in other brewers?.

Yes. We know of those developments, and we'll happily take advantage of them..

Okay. And then just my last question. I thought another comment you made was important as well, just on flat consumer demand and flat input costs fostering continued competition going forward. We're certainly hearing that from other companies that have reported to date.

And I was wondering if you guys might want to discuss the competitiveness as you see it today and going forward in the categories that you compete in, maybe versus the competitiveness that exists overall or in other categories. You can parse out snack, et cetera.

But I'd love to just hear some thoughts on how you think you may be insulated or how you can win going forward next year. I'd appreciate it..

Let me start on this one, Brett, and just kind of reiterate what I made -- what I commented on a little bit earlier regarding what we're seeing in terms of customers and their corporate brands and the shift that they're making towards that better-for-you.

And we've seen customers make substantial progress and large sales increase as they move to their corporate brands. I know Kroger has talked about their Simple Truth and the fact that it's already a $1 billion brand and will soon be a $2 billion brand, and private label is really the maker of that.

So I think private label is in a great position relative to some of the more -- the larger center-of-the-store brands that I think have a little more difficulty in becoming relevant to the consumer with natural, better and organic products. The private label seems to be in the right place at the right time for this.

I did say it was a relatively small part of the total food business, but it's a fast-growing one. And that's what, I think, excites us as we look at the opportunities there..

We'll go next to Ken Goldman with JPMorgan..

This is Josh Levine on for Ken. Dennis, just, I guess, following up on the last question. Your pricing was down in the last quarter despite, I guess, a bit easier of a comp.

We all heard about the intense promotional environment in-store, and I know you put up some solid volume figures but, I guess, where do you see your price gaps today? And how should we think about the sustainability of the volume growth in the event that maybe some of the branded manufacturers use the more benign input cost environment next year to perhaps lower on-shelf prices?.

Sure. And that's a good question on the price gaps because we didn't really see the change that some people had expected. We measure price gaps in 2 ways. The straightaway shelf price, and last year and this year in the quarter, as we look across to our basket of products, the price gap was basically flat at 25.6%.

And when we look at the promoted price gap, the price gap last year was at 22.4% and this year's at 22.9%. So it's up only 5 -- 50 basis points. So in my mind, that's really flat.

So it tells me that there hasn't been an increase in promotional activity, which I think is a good thing because, hopefully, it says that the brands are doing what they said they would do, which is stop the heavy promotion and try to find better ways to come up with new innovation, new product formulas and such. So, so far it seems to be happening.

You never know how -- whether that will hold or not. We're entering the soup season, which has historically had a lot of promotion in Q4. But so far, promotions seem to be very consistent with where we were a year ago..

We'll go next to Bill Chappell with SunTrust..

I'll actually lead with something non-coffee.

But if -- when I look at Flagstone, now that you've owned it for a few months and especially as you look out to next year, just trying to understand, assuming that business is continuing its kind of double-digit growth trajectory, how much of that do you expect is coming from shelf space gains? I mean, what do you see in terms of white space still there? And then just trying to understand, also, how fast that snacking or healthy snacking category is growing and kind of what the base growth will be..

Bill, Dennis will give you the particulars. Let me give you some general data before. The snack -- as I mentioned, snack nuts is -- and trail mix are the largest business category in which we deal now. For the last 13 weeks, the category was up in snack nuts 3.5%, and in nutritional snacks and trail mixes, the category, in units, was up 11.5%.

We've got great opportunities here as people move -- consumption moves towards snacking. And in fact, in the food and beverage universe of 102 shelf-stable categories that IRI tracks, of the top 10 increases over the last 13 weeks, 5 of the top 10 were snacks. Dennis, with that background, perhaps you can talk about the particulars..

Well, I think, Bill, the -- what we'd call the white space is still wide open.

As we track the opportunities and look at the top grocers, we look at their perimeter programs, we look at their center-of-the-store programs, and it's amazing how many large food retailers have minimal exposure to the nuts or display of nuts on their perimeter, which is really what drives a lot of the volume.

We're also far more focused now on looking at the convenience side, too, because it's such a grab-and-go type of occasion. So not only has the category grown, but we think there's a lot of white space with our retailers to continue that double-digit growth rate that Flagstone's had over the last 4 to 5 years..

Okay. And I think you've said publicly kind of the thought that building around Flagstone was kind of a key priority and -- with maybe some bolt-on acquisitions.

Is that still the case? And are there still a lot of things maybe that you've looked at in the past that could be more near term? Or from an M&A standpoint, are you still looking at some of the other categories or new kind of legs of the stool?.

Well, Bill, I said twice in our remarks that our M&A work is going to focus first on health and wellness, better-for-you snacks and to create a platform there. Secondly, we want to explore, through Protenergy, the advantages of aseptic processing and packaging to bring new life into some old categories in the center of the store.

And I'm sitting here right now looking at organic basil tomato soup in a paper carton package. And then thirdly, we will always be looking at further center-of-the-store opportunities to expand that -- those staples.

The key, with regard to the healthy snacking platform, is to understand the consumer attitudes, behavior, preferences of millennials and other high -- large-scale users of on-the-go eating, grazing, including snacking.

And that's why it's critical that we go through the consumer research that I indicated when I talked about the values because here, in the linchpin, unlike some of the things we've done in the past where we were trying to get economies of scale in, say, procurement logistics, what -- the linchpin here is to -- it's to understand the consumer and what is it that he and she is looking for differently in the perimeter of the store, in health and wellness and, in particular, in snacking as opposed to sit-down meals.

And we will do that work. It's already begun, and that will be the intellectual property that underpins this proposition of the platform.

Lastly, Dennis and I spend a lot of time directly with the team, and what we've acquired in Flagstone is very much akin to what we set up at TreeHouse going on 10 years ago when we had a $600 million business and we decided to staff it, from the very beginning, with the quality and the quantity of people to make it a business 3x that.

And today, that $600 million business has a market cap that's grown 800%. And so I see Flagstone as having the same type of characteristics with regard to its capabilities, and I'm anxious to start working on that expansion..

Okay.

And Dennis, I'm sorry, I might have missed this, but did you say what North American Grocery volume was in the quarter? And did you say what the FX impact might be in the fourth quarter, just with the Canadian dollar?.

First, in -- the growth rate of volume/mix in U.S. Retail was 4.7% in the quarter. So that's that number. We didn't put the FX in for the fourth quarter. I wish I could give you an accurate number, but I'm a firm believer that the Canadian rate moves with oil, and oil has taken a nose dive.

And if it comes back up, I think we'll see the rate shifting again, but we're doing our best to watch it..

We'll go next to Robert Moskow with Credit Suisse..

I guess, a different kind of question. I've always been an admirer of your strategy to focus on the premium end of the market, and I think that does differentiate you versus your competition.

And I wanted to know, though, with Simple Truth expanding at such a rapid rate, can you talk a little bit about your ability to procure organic ingredients and whether you think the supply of those organic ingredients is going to tighten? If everybody is doing it, I would imagine that, that would become an issue at some point.

And then, also, within your kind of heritage portfolio, do you feel like you need to develop more organic offerings? And will that create more challenges in the supply chain where you have to go to suppliers that you haven't gone to before?.

Rob, it's Sam. With regard -- well, one, I'm trying to remember the last time you told us you admired something we did, but I'm very pleased..

Oh, now. Come on, now.

That can't possibly be true, could it?.

With regard to -- as Dennis described, and I think if you take the combination of premium and better for you, I believe you said the growth rate was, what, 16% for the quarter? Yes. And we see that continuing. And clearly, there will be instances where the supply of organic materials, in particular, will have to catch up with the demand.

The important thing with the way we approach this, though, is to focus on only, really, a limited number of customers when we go to premium, when we go to health and wellness, and try to do, there, what we started several years ago with premium pasta sauce and instead of having hundreds of labels, we wanted to have 6 private brands where grocers were deeply committed to those programs.

And when that occurs, you can dramatically reduce the kind of the volatility that comes with trying to find supplies when not only is demand growing, but you're uncertain as to whether you're dealing with stop-and-start programs as opposed to deep commitments.

And we'll continue that, and it will really be the customers who will tell us how far up the scale with regard to premium and health and wellness that they want to position themselves, and we'll adapt accordingly..

Is there any way, Sam, to quantify like what percent of your customers or what percent of your business right now is getting that kind of customer request to come up with more organic offerings? I mean, is it all of your customers? Or just a small -- middle -- 50%?.

I'll do my best to answer that. I think it's most of our customers would be the way to put that.

I think inherently, you'll have some value customers who are totally focused on the value side, and that becomes less of an issue, but what is interesting is that even customers who, in the past, we've tended to think of them as more value-oriented, they're also looking for cleaner labels and they're also looking for organic products.

And it's an all-out effort for us and our R&D teams to work on the reformulations that fit these customer needs.

And I've been surprised sometimes when I've looked at some of the labels -- as you know, we don't talk about customers, but some of the labels I've seen that were traditionally purely value play, and you're looking at the labels and you're seeing things like preservative-free and organic. So it's a trend that, I think, is going to be very strong.

We have the potential, I think, to your point, to have some shortfalls in some inputs occasionally. But I think a company like TreeHouse and private label with our size, being the largest of the private -- pure-play private label producers, I think we have an advantage over others. So it should work to our advantage in the future..

One last attempt at quantifying it.

So what percent -- you probably said this before, what percent of your business is organic, natural today? And where do you think you'll be in 3 or 4 years?.

Today, it's roughly -- just a shade under 10%. That's up 16% from a year ago, and it's probably going to grow faster than that 16%, is my view. I think it's just getting going..

We'll go next to Akshay Jagdale with Keybanc..

My first question's just regarding the quarter. There's a lot of moving parts, especially with the acquisitions. So your adjusted EBITDA was generally in line with our and, I think, Street estimates. The EBIT number was slightly below, I think, partially because -- or primarily because of noncash items, share-based comp and D&A.

But then, going a little bit deeper, I also noticed that the corporate expense number on an adjusted basis was also a lot lower than we have seen in a while, especially as a percentage of sales.

So can you just help us, now that we have these acquisitions in the numbers, what should we -- how should we be thinking of the segment margin profile in North America? And how should we be thinking about the corporate expense number for the company now that we have these acquisitions sort of fully baked in? Is this quarter a good representation of a base that you'll build off of, from a margin perspective, on those 2 items?.

All right. Let me try to get a couple of those, Akshay. First, you're exactly right with the corporate expense having added roughly $1 billion worth of businesses of 2 private companies. They have a corporate expense structure that's reasonably lower than what we have as a public company, so there is some leverage there. So you will see that.

That does, of course, help to offset that roughly 700 basis point margin difference. So that's a positive. I think, as we look at next year, and we'll talk more about this in February, we don't give guidance now, but I think next year, we'll start to see some more investment in our infrastructure.

So I can't necessarily say that this quarter is indicative of where we'll go. Two large acquisitions, that means systems conversion activities going on. Rob Moskow just got done talking about investments in formula -- how we're going to be addressing the shift in consumer taste.

So I expect we'll continue to see more investments in research development to address the changing needs in formulations and packaging. So I'm not -- I wouldn't use this quarter as your base for next year, and we'll talk about that more when we do our 2015 guidance in February.

But I think you're -- but you're right on the money in terms of where the numbers are..

Okay. And then, a couple of questions on coffee. I have to go there, I guess. I'm still a little confused on your market share trains -- the trends within private label towards compatible. It seems like, from your trailing 12-month data, relative to the market, you're still at or above the growth rate of the private label single-serve category.

So I would -- my estimate is that over the last 4 quarters that you've reported, your single-serve business has grown above the rate of the category, which would imply slight share gains in a rapidly growing market.

So first, is that just at least directionally accurate? And then secondly, I mean, have you lost some share? Because there's -- it's a gray area, but we've seen some large customers where the product that you were supplying has actually now -- is now being supplied by Keurig.

So I think you've somewhat admitted that there was some share loss at some customers, but I'm not sure if that's the case and if that's actually flowing through your numbers now. So perhaps you can answer that first, then I have a follow-up..

Akshay, this is Sam. I'll be happy to try to describe -- answer several of those questions in one statement. Let me talk about what we expect as we go into 2015. We have -- we've been the pioneer in private label single-serve beverages. At one time, we were the only one.

We're now 1 of 9 by one count, and we have, in the -- over the course of the last 2 years, enjoyed about over 60% of that totality of the market, and we've said that.

With the entrance of Keurig into private label, we're going to have to deal with, as kind of the Goliath has come into our camp, I expect in 2015 that our market share -- I expect in 2015 that our market share will be such that it will be lower than what it has been as this new distribution rolls out, but we will still be the leader in private label single-serve beverages.

And in that regard, we are -- have indicated that we expect continued double-digit growth through the course of not only the remainder of this year but next year as well. And at the same time, that -- you've got the dynamic that the business is still growing substantially. You've got the entry of the national brand leader.

You've also got pressures coming on the -- those that are marginal in this industry who have not invested in the technology, don't have the business systems that we have, and I would expect you -- I think I said earlier that there'll be some type of shakeout in that regard.

In my view, the last key factor is -- has to do with the placement of brewers in-home. And we've seen, in addition to the 2.0 technology come out, we've seen that there are other manufacturers with well-known household appliance brands coming to the market in the holiday season.

And what we're -- we believe will happen is that brewer placements will continue to grow at a substantial rate, and we'll get our fair share or a little bit more of that in the private label sector.

And I think, rather than talk -- that's what I'd like you and others to take away as kind of the holistic view of what the market opportunity is and the changes in the marketplace. And it's hard for me to look at double-digit growth in -- as something other than great promise for us going forward..

No, that's hugely helpful. And I and, I think, everybody else always appreciates how forthcoming you guys are.

But just what's your expectation for category, private label single-serve category growth that's embedded in that double-digit? And I mean, is double-digit 10% or 40%?.

It's higher than one and lower than the other..

And as far as category growth?.

Again, Akshay, it is a function of in-home placement of machines. And we believe that, that is going to -- that placement trend is going to remain really quite strong and that competition among the brewer community -- the brewers will, in fact, speed it along.

That's what happens in America when you're able to segment a market, differentiate it and have products for every set of demographics and every level of household income..

Okay. And just in terms of -- you're basically saying there's -- you're seeing what we're seeing, which is that the category, which has been dynamic, there's a few extra elements over the next 12 months that are going to make it even more dynamic.

So in light of that, what's your level of visibility on these growth targets in that business? And is it safe to assume that overall margins in that business, if anything, will be a little bit under pressure? Or that's not a good assumption because the category is so healthy that there's no real price competition going on?.

Well, I'll sum those up by saying that it's -- for the first -- in the -- my 10th year as CEO of this company, for the first time ever, I got to deal with double-digit growth in 3 categories, and you'll have to excuse me for not having all of the details at my beck and call.

I do think that the margins will -- it's going to be a factor of 2 -- 3 [ph] growth. Secondly, there'll be competition you can expect from, as the 9 private label suppliers get winnowed down to some small fraction of that, you're going to see a shakeout, and that will have an effect on the lower end of the marketplace with regard to bids, et cetera.

And then the other matter is the degree of sophistication that can be brought to these programs.

And when I look at where price differentials are now, they are just barely below the $2-per-unit level difference between brands and private label that, when we started this program, David Vermylen, in this same venue, indicated that we thought that a $2-per-unit spread was going to be sufficient to build a private label presence.

And here we are 3 years later at that -- at about that spread. I think we'll -- Akshay, we'll move on to other things, if we may..

And we'll go next to Andrew Lazar with Barclays..

Just 2 questions for me. One, I know a lot of the enabling factor for the underlying or legacy margin improvement that you've had has been the simplification around, I guess, variance or formulations and whatnot that you offer certain customers. I'm trying to get a sense of maybe what inning you're in on that process.

Or maybe another way to look at it is how many of the sort of 8 North American grocery areas have you put that sort of to work in? Or is it -- is there still a long way to go with that? I know it started maybe in soup, but if you could update us on that, then I've got a follow-up..

Yes. It started in soup, Andrew, and it's actually in all of the categories. It's in process. What we do -- usually wind up doing, though, is every season is your next opportunity to make a reasonable change. So it's not as if you can go in and make a change immediately, so you're selling through.

So from an inning standpoint, to use your baseball, it's probably in the third inning or so, maybe fourth inning, we're starting to get the traction we had expected to get. Soup, we went quick, but we did it right in line with a new soup season and, frankly, a closing of our plant. So we were able to maybe make a little faster headway there.

But it's now become, as Sam said, one of our key goals in terms of corporate structure, now, is to continue to work that through. And we'll talk more about that, actually, during our investor conference in 1.5 weeks or so..

Okay. And then -- and then just one additional one on coffee. Sam, you talked about there was a window of time there where you hadn't yet announced your sort of solution from a technology standpoint where retailers had to make some calls, I guess, on would you have a solution, would you not, and where to sort of go for that.

So while there have been some account shifts that worked against you that we've seen in the press, were you intimating that, I guess, there could also be some that work for you over time as some of those, maybe the life of those contracts come due and folks start to see that you do have a viable solution? Is that a fair way to think about it? And then you've been very careful around capacity, not to get ahead of yourself around the single-serve opportunity.

So I'm making the assumption that you're still in a good place regarding capacity despite some of the dynamics playing out in the category..

Well, Andrew, first of all, if you're going to talk about innings, then I'm going to have to switch from a triple-double to a Triple Crown. So with regard to the coffee business, there were commitments made the better part of a year ago, I think it was 14 months ago that 2.0 was first announced and 2 months ago, then, it was introduced.

And what -- the seismic shift in the marketplace is that the uncertainty of technological lockout has been -- that uncertainty has been totally removed. And as of yesterday, we were demonstrating our products on 2.0 machines in grocery stores.

And as of Saturday, a week from this Saturday, we'll be in displays in hundreds of stores with our product side-by-side with those machines.

And so I think that the great fear or the uncertainty has been swept aside, at least for the time being, and our customers will do what they have always done superbly, and that is think about their brands and their best interests and how to balance the interplay of brands and private label.

And for some, that will be entirely a transactional prospect. And for others, where we focus, they'll think strategically about how can they have their brand personify the store. And if -- and in that instance, they have really only one supplier to look to, and that is TreeHouse Foods, that will make the commitments that are required to do that.

And as I look out across the nation, across the industry, you see a very broad dispersion of development of private label single-serve beverages. And those that are behind are going to look at those that are ahead, and then they're going to call TreeHouse.

I think with -- and then with regard to capacity, I was really pleased to find out just this week that -- Dennis told me that the latest line to be commissioned within the first 3 weeks had better throughput rates than all of our previous ones and that what we can do is move that technology retroactively to all the others.

And what we will do is, as we see how the business develops for '15, we will make sure to continue to look at the type of investments that we need to ensure that there will always be sufficient capacity..

We'll go next to Jonathan Feeney with Athlos research..

I, too, admire both you and Rob Moskow. I wanted to -- I only had one question for -- and it doesn't relate to coffee, believe it or not, or only in a tangential way. Historically, periods of cost-decline moderation have been easier environments for private label producers like yourself and others.

And as we look at certain markets have declined fairly precipitously over the course of this year, other markets have been high, but they haven't come off those highs, there's really not too many commodities that have trended in a negative direction for you over the past 6 months.

So I guess, as you look at 2015 versus '14, is it an easier commodity environment? Is -- looking at the margin profile of your business, is this a -- and I know you've changed the mix a little bit, but is this an environment where you may be able to expand margin a bit because of what commodities you're doing and you're not constantly having to beat up people to raise price, maybe actually get to hold price in a few cases where commodities get a little bit more friendly?.

That's a good question. And we have seen some grain inputs drop a little bit. And as I indicated, we did see some price reductions in some of our categories as a result of that. But it just doesn't seem like it's been enough because we've had some ups and downs. One of our -- the analysts talked about organics and the cost changes there.

So I think the best news of this environment has been, really, that it hasn't been wild enough, Jon, that our teams are focused on sales. And it's not like we had back in '07, '08 and again in '11 where you spend the entire year talking about pricing.

So that's kind of the key difference, but I haven't seen a lot of reaction from brands regarding input cost. And as I said, the price gaps are staying very steady and the promotional level hasn't changed. So it's -- maybe we're entering a time of rational thinking, which would be, I think, good for all of food..

And just a detail in there.

I mean, where do you stand right now? How would you characterize your cost -- as a company, your input costs? Are they a little higher next year or a little lower or about flat? Or what would you be looking at?.

At the moment, I think we're probably going to be relatively flat on an apples-to-apples basis, but we're going to have a few little pockets here and there that will be up and maybe a little bit down.

So I would -- I've used this word before, and I've gotten bit every third year I use it, but benign is kind of the word I'm thinking of right now, but we'll see what happens come February..

We'll go next to Evan Morris with Merrill Lynch..

Just a question on gross margins. It looks like it's declined sequentially despite higher volume growth in the quarter, and I know there's a lot of changes going on in terms of mix of business, other moving pieces.

I guess, one, is there an element in the gross margin of sacrificing margin to win new businesses? And Dennis, I guess, can you give a little bit of guidance how to think about the gross margin more on a reported basis over the next few quarters?.

On a reported basis, if we -- it'll look a little bit better because what'll happen is a lot of those acquisition accounting and adjustments have mostly run its course through the third quarter. I think that the underlying -- the legacy margins we talked about should hold.

We enter the fourth quarter, which, historically, has been a slightly higher-margin quarter because of mix for our winter products. So that -- you should see a little bit of a change there. The drag on that from a reported standpoint is that you'll have a full quarter of the Flagstone business in Q4, which we didn't have in Q3.

So the mix is going to bring it down. So as I indicated earlier from a consensus side, it looks like everybody's pretty much on the right track in terms of where the expectations are for the business, with the exception of, as I pointed out, the share counts seem to be the big issue.

So that's about as good -- as much as I can say, I think, at this point..

Okay. And then just a follow-up on the M&A landscape.

Can you just give us an update on your capacity to do another deal? And if the focus is going to be on the snacking natural organic segment, and we saw the negative mix impact from some of the more recent deals, just thinking about how does that reconcile with your sort of 100 basis points of gross margin expansion target going forward? Just kind of trying to think about all the pieces there..

Well, from an M&A standpoint, I think we're in great shape. We've got nice availability under existing facilities. We've got a strong cash flow quarter coming in front of us. We're delevering nicely.

We've talked a little bit that most of the businesses that we would look to focus on and categories we'd focus on will tend to be smaller as opposed to the mega size. I mean, it's just the nature of the beast with those types of businesses. So I think we'll be remaining very active.

I'm not sure there's another $1 billion of business imminent like we had this summer, but we're -- as we said, ready, willing and able, and we're ready to move if the right company comes along at the right time and the right price..

And our final question comes from John Baumgartner with Wells Fargo..

Dennis, you called out the volume strength across your various retail categories and, I guess, despite not really seeing big increases in private label industry volume, at least in the measured channel data. So I guess you're outperforming as a result of new distribution. And I know you've tried to get away from talking about the so-called big wins.

But, I mean, how sustainable is the volume growth in these categories? Are you seeing any more structural changes or improvements in terms of increasing category coverage by customer at all? Just if you could talk to that..

We had -- have had some nice wins, and that's -- we're thrilled with the way the quarter went. I'm not sure you can -- you'd -- I wouldn't personally model in 4-plus percentage volume/mix for the foreseeable future. It was obviously a good quarter.

I think the combination of getting wins and I think the combination of our retail customers who have been focusing on those corporate brands have been driving growth as well. And that's one of the challenges, I think, you have on the outside in looking at measured channel data, as you indicated it.

It gives you some unusual numbers where a customer may be shifting from a more value-oriented product to a premium-oriented product, and measured channel data will show the units being relatively steady and someone will report about price increases and price gaps tightening when the reality is they've offered now an organic product instead of the base product, and it just changes the whole mix.

So it's something difficult when you're looking at the published measured channel data. I think, when you look at the categories where we're growing, one of the things you'll notice is every one of those categories has that great opportunity to have a natural or a less-preservative product, and almost all of them play in organic.

And as I indicated, nondairy creamer was one of the ones that didn't have the big growth, and that's -- that can't be organic. So we're -- we think we, in particular, are well positioned, and we think private label is well positioned to continue to outpace maybe the norm of the food industry..

John, this is Sam. I'll just second Dennis. And as one looks at, again, the IRI database, what you see for the aggregate of private label is that it's basically been up and down and flat over the last year or so.

And then, when you take our current portfolio, including the recent acquisitions and assume you have that over the last year, that portfolio that we have today, the penetration of private label in those specific categories has increased in 8 of the last 10 rolling 13-month intervals that we track.

And I think that speaks to -- numerically, it speaks to the points that Dennis was just making. Well, thanks, everybody. It's been a real active call, and we look forward to seeing you within 2 weeks at PLMA and our Investor conference. Until then, goodbye..

And that concludes today's conference. We thank you for your participation..